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COMPILATION OF THE TAXATION LAW BAR EXAMINATIONS QUESTIONS AND SUGGESTED ANSWERS (1994-2017)

*I do not own any of the materials I’ve compiled in this pdf file. It’s all found in the internet, just have the patience to look for it since it’s scattered. Giving credits to the authors of these materials. So sharing all of it for free to all my fellow law students. - Bek

MATERIALS COMPILED: 1) 1994-2006 -> Bar Questions and Answers Taxation Law 1994 to 2006 -> https://www.academia.edu/7839128/ Bar_Questions_and_Answers_Taxation_Law_1994_to_2006 2) 2007-2013 -> Taxation Law Philippine Bar Examination Questions and Suggested Answers (JayArhSals&Ladot) -> https://www.pdfcoke.com/doc/262151615/2007-2013Taxation-Law-Philippine-Bar-Examination-Questions-andSuggested-Answers-JayArhSals-Ladot 3) 2014 -> 2014 Bar Exams Suggested Answers -> https:// www.pdfcoke.com/document/354434183/2014-Bar-ExamsSuggested-Answers 4) 2015 -> TAXATION 2015 BAR SUGGESTED ANSWERS > https://edoc.site/taxation-2015-bar-suggested-answerspdf-free.html 5) 2016 -> 2016 TAXATION BAR QUESTION With Suggested Answer -> https://www.pdfcoke.com/document/ 351860075/2016-TAXATION-BAR-QUESTION-WithSuggested-Answer 6) 2017 -> SCANNED COPY OF THE 2017 UPLC BAR SUGGESTED ANSWERS TO THE BAR EXAMINATIONS IN TAXATION LAW

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

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ANSWERS TO BAR EXAMINATION QUESTIONS IN

TAXATION LAW * ARRANGED

BY TOPIC *

(1994 – 2006) Edited and Arranged by:

ROMUALDO L. SEÑERIS II Silliman University - College of Law

From the ANSWERS TO BAR EXAMINATION QUESTIONS by the UP LAW COMPLEX & PHILIPPINE ASSOCIATION OF LAW SCHOOLS

June 3, 2007

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

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FOREWARD This work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may be freely copied and distributed, nevertheless, PERMISSION TO COPY from the editors is ADVISABLE to protect the interest of the ORIGINAL SOURCES/REFERENCES of this material….

It is primarily intended for all those who desire to have a deeper

understanding of the issues commonly touched by the Philippine Bar Examinations and its trend on specifically on Taxation Laws. It is specifically intended for law students from the provinces who, very often, are recipients of deliberately distorted notes from other unscrupulous law schools and students.

I would like to seek the indulgence of the reader for some Bar Questions which are improperly classified under a topic and for some topics which are improperly or ignorantly phrased, for the arranger is just a Bar Reviewee who has prepared this work while reviewing for the 2nd time for the Bar Exams 2007 under time constraints and within his limited knowledge of the law. I would like to seek the reader’s indulgence also for a number of typographical errors in this work.

The Arranger

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

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Detailed Table of Contents GENERAL PRINCIPLES........................................................................................................................... 8

Basic Features: Present Income Tax System (1996).................................................................................................... 8 Basic Stages or Aspects of Taxation (2006)................................................................................................................ 8 Collection of Taxes: Authority; Ordinary Courts (2001)............................................................................................... 8 Collection of Taxes: Prescription (2001) ..................................................................................................................... 8 Direct Tax vs. Indirect Tax (1994)................................................................................................................................ 8 Direct Tax vs. Indirect Tax (2000)................................................................................................................................ 8 Direct Tax vs. Indirect Tax (2001)................................................................................................................................ 8 Direct Tax vs. Indirect Tax (2006)................................................................................................................................ 9 Double Taxation (1997)............................................................................................................................................... 9 Double Taxation: What Constitutes DT? (1996)........................................................................................................... 9 Double Taxation; Indirect Duplicate Taxation (1997) ................................................................................................... 9 Double Taxation; License Fee vs. Local Tax (2004)..................................................................................................... 9 Double Taxation; Methods of Avoiding DT (1997) ....................................................................................................... 9 Imprescriptibility of Tax Laws (1997) .......................................................................................................................... 9 Power of Taxation: Equal Protection of the Law (2000) ............................................................................................ 10 Power of Taxation: Inherent in a Sovereign State (2003) ........................................................................................... 10 Power of Taxation: Legality; Local Gov’t Taxation (2003).......................................................................................... 10 Power of Taxation: Legislative in Nature (1994) ........................................................................................................ 10 Power of Taxation: Limitations of the Congress (2001) ............................................................................................. 10 Power of Taxation: Limitations: Passing of Revenue Bills (1997) .............................................................................. 11 Power of Taxation: Limitations; Power to Destroy (2000) .......................................................................................... 11 Power of Taxation: Revocation of Exempting Statutes (1997) ................................................................................... 11 Power of Taxation; Inherent in a Sovereign State (2005) ........................................................................................... 11 Power of Taxation; Legislative in Nature (1996) ........................................................................................................ 12 Purpose of Taxation; Interpretation (2004)................................................................................................................ 12 Purpose of Taxation; Legislative in Nature (2004) ..................................................................................................... 12 Rule on Set-Off or Compensation of Taxes (1996)..................................................................................................... 12 Rule on Set-Off or Compensation of Taxes (2001)..................................................................................................... 12 Rule on Set-Off or Compensation of Taxes (2005)..................................................................................................... 13 Rule on Set-Off or Compensation on Taxes (2005).................................................................................................... 13 Tax Avoidance vs. Tax Evasion (1996)...................................................................................................................... 13 Tax Avoidance vs. Tax Evasion (2000)...................................................................................................................... 13 Tax Exemptions: Nature & Coverage; Proper Party (2004) ........................................................................................ 13 Tax Laws; BIR Ruling; Non-Retroactivity of Rulings (2004) ....................................................................................... 14 Tax Pyramiding; Definition & Legality (2006) ............................................................................................................ 14 Taxpayer Suit; When Allowed (1996)......................................................................................................................... 14 Uniformity in the Collection of Taxes (1998) ............................................................................................................. 14

INCOME TAXATION................................................................................................................................ 14

Basic: Allowable Deductions vs. Personal Exemptions (2001) .................................................................................. 14 Basic: Meaning of Taxable Income (2000) ................................................................................................................. 15 Basic: Principle of Mobilia Sequuntur Personam (1994)............................................................................................ 15 Basic: Proper Allowance of Depreciation (1998) ....................................................................................................... 15 Basic: Sources of Income: Taxable Income (1998) .................................................................................................... 15 Basic: Tax Benefit Rule (2003) .................................................................................................................................. 15 Basic; Basis of Income Tax (1996) ............................................................................................................................ 16 Basic; Gross Income: Define (1995).......................................................................................................................... 16 Basic; Income vs. Capital (1995)............................................................................................................................... 16 Basic; Schedular Treatment vs. Global Treatment (1994) ......................................................................................... 16 Compensation; Income Tax: Due to Profitable Business Deal (1995) ........................................................................ 16 Corporate: Income: Donor’s tax; Tax Liability (1996) ................................................................................................ 17 Corporate; Income Tax; Reasonableness of the Bonus (2006) .................................................................................. 17 Corporate; Income: Coverage; "Off-Line" Airline (1994)............................................................................................ 17 Corporate; Income: Coverage; "Off-Line" Airline (2005)............................................................................................ 17 Dividends: Disguised dividends (1994) ..................................................................................................................... 18 Dividends; Income Tax; Deductible Gross Income (1999) ......................................................................................... 18

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Effect; Condonation of Loan in Taxation (1995) ........................................................................................................ 18 Fringe Benefit Tax: Covered Employees (2001)......................................................................................................... 18 Fringe Benefit Tax: Employer required to Pay (2003) ................................................................................................ 19 Interest: Deficiency Interest: define (1995 Bar).......................................................................................................... 19 Interest: Delinquency Interest: define (1995)............................................................................................................. 19 ITR: Personal Income; Exempted to File ITR (1997)................................................................................................... 19 ITR; Domestic Corporate Taxation (1997).................................................................................................................. 19 ITR; Domestic Corporate Taxation (2001).................................................................................................................. 20 ITR; Personal Income: Two Employment (2001) ........................................................................................................ 20 ITR; Personal Income; GSIS Pension (2000) ............................................................................................................. 20 ITR; Personal Income; Married Individual (2004) ....................................................................................................... 20 ITR; Taxpayer; Liabilities; Falsified Tax Return (2005) .............................................................................................. 20 Partnership: Income Tax (1995) ................................................................................................................................ 21 Personal; Income Tax: Non-Resident Alien (2000) .................................................................................................... 21 Personal; Income Tax: Non-Resident Citizen (1999).................................................................................................. 21 Personal; Income Tax: Tax-Free Exchange (1997)..................................................................................................... 22 Personal; Income Tax; Contract of Lease (1995) ....................................................................................................... 22 Personal; Income Tax; Married Individual (1997)....................................................................................................... 22 Personal; Income Tax; Retiring Alien Employee (2005) ............................................................................................. 23 Personal; Income Taxation: Non-Resident Citizen (1997) .......................................................................................... 23 Taxable Income: Illegal Income (1995 Bar)................................................................................................................ 23 Taxable or Non-Taxable; Income and Gains (2005) ................................................................................................... 23 Withholding Tax: Non-Resident Alien (2001)............................................................................................................. 24 Withholding Tax: Retirement Benefit (2000).............................................................................................................. 24 Withholding Tax: Retirement Benefit (2000).............................................................................................................. 24 Withholding Tax: Royalty (2002) ............................................................................................................................... 24 Withholding Tax; Coverage (2004) ............................................................................................................................ 25 Withholding Tax; Domestic Corporation; Cash Dividends (2001) .............................................................................. 25 Withholding Tax; Income subject thereto (2001) ....................................................................................................... 25 Withholding Tax; Non-Resident Alien (1994)............................................................................................................. 25 Withholding Tax; Non-Resident Corporation (1994) .................................................................................................. 26 Withholding Tax; Reader's Digest Award (1998)........................................................................................................ 26 Withholding Tax; Time Deposit Interest; GSIS Pension (1994) .................................................................................. 26

DEDUCTIONS, EXEMPTIONS, EXCLUSIONS & INCLUSIONS..................................................... 26

Deduction: Facilitation Fees or "kickback" (1998)..................................................................................................... 26 Deductions: Ordinary Business Expenses (2004) .................................................................................................... 26 Deductions: Amount for Bribe (2001)........................................................................................................................ 27 Deductions: Capital Losses; Prohibitions (2003) ...................................................................................................... 27 Deductions: Deductible Items from Gross Income (1999).......................................................................................... 27 Deductions: Income Tax: Donation: Real Property (2002) ........................................................................................ 27 Deductions: Non-Deductible Items; Gross Income (1999) ......................................................................................... 28 Deductions: Requisites; Deducibility of a Loss (1998) .............................................................................................. 28 Deductions; Income Tax: Allowable Deductions (2001)............................................................................................. 28 Deductions; Vanishing Deduction; Purpose (2006) ................................................................................................... 28 Exclusion & Inclusion; Gross Receipts (2006) .......................................................................................................... 28 Exclusion vs. Deduction from Gross Income (2001).................................................................................................. 28 Exclusions & Inclusions: Benefits on Account of Injury (1995) ................................................................................. 29 Exclusions & Inclusions: Executive Benefits (1995).................................................................................................. 29 Exclusions & Inclusions; Assets; Resident Alien (2005) ........................................................................................... 29 Exclusions & Inclusions; Benefits on Account of Death (1996) ................................................................................. 30 Exclusions & Inclusions; Benefits on Account of Injury (2005) ................................................................................. 30 Exclusions & Inclusions; Compensation for personal injuries or sickness (2003) ..................................................... 30 Exclusions & Inclusions; Facilities or Privileges; Military Camp (1995) ..................................................................... 30 Exclusions & Inclusions; Gifts over and above the Retirement Pay (1995) ................................................................ 31 Exclusions & Inclusions; ITR; 13th month pay and de minimis benefits (2005) ......................................................... 31 Exclusions & Inclusions; ITR; Dividends received by a domestic corporation (2005) ................................................ 31 Exclusions & Inclusions; ITR; Income realized from sale (2005)................................................................................ 31 Exclusions & Inclusions; ITR; Interest on deposits (2005)......................................................................................... 31 Exclusions & Inclusions; ITR; Proceeds of life insurance (2005) ............................................................................... 32 Exclusions & Inclusions; Life Insurance Policy (2003) .............................................................................................. 32

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Exemptions: Charitable Institutions (2000) ............................................................................................................... 32 Exemptions: Charitable Institutions; Churches (1996) .............................................................................................. 32 Exemptions: Educational institution (2004)............................................................................................................... 32 Exemptions: Gifts & Donations (1994) ...................................................................................................................... 32 Exemptions: Head of the Family: (1998)................................................................................................................... 33 Exemptions: Non-Profit Educational Institutions (2000) ............................................................................................ 33 Exemptions: Non-Profit Entity; Ancillary Activity & Incidental Operations (1994) ...................................................... 33 Exemptions: Non-Stock/ Non-Profit Association (2002) ............................................................................................ 34 Exemptions: Prize of Peace Poster Contest (2000).................................................................................................... 34 Exemptions: Prizes & Awards; Athletes (1996) ......................................................................................................... 34 Exemptions: Retirement Benefits: Work Separation (1999) ....................................................................................... 34 Exemptions: Separation Pay (1994) .......................................................................................................................... 35 Exemptions: Separation Pay (1995) .......................................................................................................................... 35 Exemptions: Separation Pay (2005) .......................................................................................................................... 36 Exemptions: Stock Dividends (2003) ........................................................................................................................ 36 Exemptions: Strictly Construed (1996) ..................................................................................................................... 36 Exemptions: Terminal Leave Pay (1996) ................................................................................................................... 36 Exemptions; Charitable Institutions (2006) ............................................................................................................... 36 Exemptions; Educational institution (2004)............................................................................................................... 36 Exemptions; Exemptions are Unilateral in Nature (2004)........................................................................................... 37 Exemptions; Gov’t Bonus, Gifts, & Allowances (1994) .............................................................................................. 37 Exemptions; Personal & Additional Exemption (2006) .............................................................................................. 37 Exemptions; Roman Catholic Church; Limitations (2005) ......................................................................................... 38

CAPITAL GAIN TAX................................................................................................................................ 38

Capital Asset vs. Ordinary Asset (2003).................................................................................................................... 38 Capital Gain Tax; Nature (2001) ................................................................................................................................ 38 Ordinary Sale of a Capital Asset (1994)..................................................................................................................... 38 Sales of Share of Stocks: Capital Gains Tax Return (1999) ....................................................................................... 39 Tax Basis: Capital Gains: Merger of Corporations (1994) .......................................................................................... 39 Tax Basis: Capital Gains: Tax-Free Exchange of Property (1994) .............................................................................. 39

CORPORATION & PARTNERSHIP...................................................................................................... 39

Bad Debts; Factors; Elements thereof (2004)............................................................................................................ 39 Condominium Corp.; Sale of Common Areas (1994) ................................................................................................. 40 Corporation; Sale; Creditable Withholding Tax (1994)............................................................................................... 40 Dividends: Withholding Tax (1999) ........................................................................................................................... 40 Effect: Dissolution; Corporate Existence (2004)........................................................................................................ 41 Minimum Corporate Income Tax (2001)..................................................................................................................... 41 Minimum Corporate Income Tax; Exemption (2001).................................................................................................. 41

ESTATE & DONOR’S TAXES ............................................................................................................... 41

Donor’s Tax: Election Contributions (1998) .............................................................................................................. 41 Donor’s Tax; Basis for Determining Gain (1995) ....................................................................................................... 41 Donor’s Tax; Dacion en Pago; Effect: Taxation (1997) .............................................................................................. 42 Donor’s Tax; Donation to a Sibling (2001)................................................................................................................. 42 Donor’s Tax; Donation to Non-Stock, Non-Profit Private Educational Institutions (2000)........................................... 42 Donor’s Tax; Donation to Political Candidate (2003) ................................................................................................. 43 Donor’s Tax; Donee or Beneficiary; Stranger (2000) ................................................................................................. 43 Donor’s Tax; Sale of shares of Stock & Sale of Real Property (1999)......................................................................... 43 Estate Tax: Comprehensive Agrarian Reform Law (1994).......................................................................................... 43 Estate Tax: Donation Mortis Causa (2001) ................................................................................................................ 43 Estate Tax: Donation Mortis Causa vs. Inter Vivos (1994) ......................................................................................... 44 Estate Tax: Gross Estate: Allowable Deduction (2001).............................................................................................. 44 Estate Tax: Gross Estate: Deductions (2000) ............................................................................................................ 44 Estate Tax: Inclusion: Resident Alien (1994) ............................................................................................................. 44 Estate Tax: Payment vs. Probate Proceedings (2004) ............................................................................................... 45 Estate Tax: Situs of Taxation: Non-Resident Decedent (2000) ................................................................................... 45 Estate Tax: Vanishing Deductions (1994).................................................................................................................. 45 Estate Tax; Payment vs. Probate Proceedings (2005) ............................................................................................... 45

BUSINESS TAXES .................................................................................................................................. 45

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VAT: Basis of VAT (1996).......................................................................................................................................... 45 VAT: Characteristics of VAT (1996)........................................................................................................................... 45 VAT: Exempted Transactions (1996)......................................................................................................................... 45 VAT: Liable for Payment (1996) ................................................................................................................................ 46 VAT: Transactions "Deemed Sales” (1997) ............................................................................................................... 46 VAT; Covered Transactions (1998) ........................................................................................................................... 46 VAT; Exemption: Constitutionality (2004) ................................................................................................................. 46 VAT; Non-VAT taxpayer; Claim for Refund (2006) ..................................................................................................... 47

REMEDIES IN INTERNAL REVENUE TAXES ................................................................................... 47

BIR: Assessment: Unregistered Partnership (1997) .................................................................................................. 47 BIR: Collection of Tax Deficiency (1999) ................................................................................................................... 47 BIR: Compromise; Conditions (2000)........................................................................................................................ 48 BIR: Compromise; Extent of Authority (1996) ........................................................................................................... 48 BIR: Compromise; Withholding Agent (1998)............................................................................................................ 48 BIR: Corporation: Distraint & Levy (2002) ................................................................................................................. 48 BIR: Court of Tax Appeals: Collection of Taxes; Grounds for Compromise (1996) .................................................... 49 BIR: Criminal Prosecution: Tax Evasion (1998)......................................................................................................... 49 BIR: Extinction; Criminal Liability of the Taxpayer (2002).......................................................................................... 49 BIR: Fraudulent Return; Prima Facie Evidence (1998)............................................................................................... 50 BIR: Fraudulent Return; Prima Facie Evidence (2002)............................................................................................... 50 BIR: Garnishment: Bank Account of a Taxpayer (1998)............................................................................................. 50 BIR: Pre-Assessment Notice not Necessary (2002) ................................................................................................... 51 BIR: Prescriptive Period: Civil Action (2002) ............................................................................................................. 51 BIR: Prescriptive Period; Assessment & Collection (1999)........................................................................................ 51 BIR: Prescriptive Period; Criminal Action (2002)....................................................................................................... 51 BIR: Secrecy of Bank Deposits Law (1998) ............................................................................................................... 52 BIR: Summary Remedy: Estate Tax Deficiencies (1998) ............................................................................................ 52 BIR: Unpaid Taxes vs. Claims for Unpaid Wages (1995)............................................................................................ 53 BIR; Assessment; Criminal Complaint (2005)............................................................................................................ 53 BIR; Authority; Refund or Credit of Taxes (2005) ...................................................................................................... 53 BIR; Compromise (2004)........................................................................................................................................... 53 BIR; Compromise (2005)........................................................................................................................................... 54 BIR; Deficiency Tax Assessment vs. Tax Refund / Tax Credit (2005) ......................................................................... 54 BIR; Distraint; Prescription of the Action (2002)........................................................................................................ 54 BIR; False vs. Fraudulent Return (1996).................................................................................................................... 55 BIR; Jurisdiction; Review Rulings of the Commissioner (2006)................................................................................. 55 BIR; Prescriptive Period; Assessment; Fraudulent Return (2002).............................................................................. 55 BIR; Prescriptive Period; Criminal Action (2006)....................................................................................................... 55 BIR; Taxpayer: Civil Action & Criminal Action (2002) ................................................................................................ 55 Custom: Violation of Tax & Custom Duties (2002)..................................................................................................... 56 Customs; Basis; Automatic Review (2002)................................................................................................................ 56 Delinquent Tax Return (1998) ................................................................................................................................... 57 Jurisdiction: Customs vs. CTA (2000)...................................................................................................................... 57 LGU: Collection of Taxes, Fees & Charges (1997) ..................................................................................................... 57 Tax Amnesty vs. Tax Exemption (2001) .................................................................................................................... 57 Taxpayer: Administrative & Judicial Remedies (2000)............................................................................................... 57 Taxpayer: Assessment: Protest: Claims for refund (2000)......................................................................................... 58 Taxpayer: Assessment; Injunction (2004) ................................................................................................................. 58 Taxpayer: BIR Audit or Investigation (1999).............................................................................................................. 58 Taxpayer: City Board of Assessment Decision; Where to appeal (1999).................................................................... 59 Taxpayer: Claim for Refund; Procedure (2002).......................................................................................................... 59 Taxpayer: Deficiency Income Tax (1995)................................................................................................................... 59 Taxpayer: Exhaustion of Administrative Remedies (1997)......................................................................................... 60 Taxpayer: Failure to Withheld & Remit Tax (2000)..................................................................................................... 60 Taxpayer: NIRC vs. TCC Remedies (1996)................................................................................................................. 60 Taxpayer: Overwitholding Claim for Refund (1999) ................................................................................................... 61 Taxpayer: Prescriptive Period: Suspended (2000)..................................................................................................... 61 Taxpayer: Prescriptive Period; Claim for Refund (1997) ............................................................................................ 61 Taxpayer: Prescriptive Period; Claims for Refund (1994) .......................................................................................... 61 Taxpayer: Prescriptive Period; Claims for Refund (2004) .......................................................................................... 62

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Taxpayer: Protest against Assessment (1998) .......................................................................................................... 62 Taxpayer: Protest against Assessment (1999) .......................................................................................................... 62 Taxpayer: Protest against Assessment (1999) .......................................................................................................... 62 Taxpayer: Protest; Claim of Refund (1996)................................................................................................................ 63 Taxpayer; Appeal to the Court of Tax Appeals (2005)................................................................................................ 63 Taxpayer; Claim for Tax Credits (2006) ..................................................................................................................... 63 Taxpayer; Compromise after Criminal Action (1998) ................................................................................................. 63 Taxpayer; Protest against Assessment; Donor’s Tax (1995) ..................................................................................... 64 Taxpayer; Withholding Agent; Claim of Tax Refund (2005) ....................................................................................... 64

LOCAL & REAL PROPERTY TAXES .................................................................................................. 64

Local Taxation: Actual Use of Property (2002) .......................................................................................................... 64 Local Taxation: Coverage (2002)............................................................................................................................... 64 Local Taxation: Exemption; Real Property Taxes (2002) ........................................................................................... 65 Local Taxation: Imposition of Ad Valorem Tax (2000) ............................................................................................... 65 Local Taxation: Legality/ Constitutionality; Tax Ordinance (2003) ............................................................................. 65 Local Taxation: Legality; Imposition of Real Property Tax Rate (2002) ...................................................................... 65 Local Taxation: Power to Impose (2003) ................................................................................................................... 65 Local Taxation: Remission/Condonation of Taxes (2004).......................................................................................... 66 Local Taxation: Rule of Uniformity and Equality (2003)............................................................................................. 66 Local Taxation; Situs of Professional Taxes (2005)................................................................................................... 66 Local Taxation; Special Levy on Idle Lands (2005).................................................................................................... 66 Real Property Tax: Underground Gasoline Tanks (2003)........................................................................................... 67 Real Property Tax; Requirements; Auction Sales of Property for Tax Delinquency (2006) ......................................... 67 Real Property Taxation: Capital Asset vs. Ordinary Asset (1995) .............................................................................. 67 Real Property Taxation: Capital Gains vs. Ordinary Gains (1998) .............................................................................. 67 Real Property Taxation: Coverage of Ordinary Income (1998) ................................................................................... 67 Real Property Taxation: Exchange of Lot; Capital Gain Tax (1997)............................................................................ 68 Real Property Taxation: Exemption/Deductions; Donor’s Tax (1998)......................................................................... 68 Real Property Taxation: Exemption: Acquiring New Principal Residence (2000) ....................................................... 68 Real Property Taxation: Fundamental Principles (1997) ............................................................................................ 69 Real Property Taxation: Principles & Limitations: LGU (2000)................................................................................... 69 Real Property Taxation: Property Sold is an Ordinary Asset (1998)........................................................................... 69 Real Property Taxation: Underground Gasoline Tanks (2001) ................................................................................... 69 Real Property Taxation; Exempted Properties (2006) ................................................................................................ 69

TARIFF AND CUSTOMS DUTIES ........................................................................................................ 70

Customs: “Flexible Tariff Clause” (2001) .................................................................................................................. 70 Customs: Administrative vs. Judicial Remedies (1997) ............................................................................................ 70 Customs: Importation (1995) .................................................................................................................................... 70 Customs: Jurisdiction; Seizure & Forfeiture Proceedings (1996) ............................................................................. 70 Customs: Kinds of Custom Duties (1995) ................................................................................................................. 70 Customs: Kinds of Custom Duties (1997) ................................................................................................................. 71 Customs: Remedies of an Importer (1996) ................................................................................................................ 71 Customs: Returning Residents: Tourist/Travelers (2003) .......................................................................................... 71 Customs: Seizure & Forfeiture: Effects (1994) .......................................................................................................... 71 Customs: Steps involving Protest Cases (1994)........................................................................................................ 72 Customs; Basis of Dutiable Value; Imported Article (2005) ....................................................................................... 72 Customs; Countervailing Duty vs. Dumping Duty (2005)........................................................................................... 72 Customs; Taxability; Personal Effects (2005)............................................................................................................ 72

OTHER RELATED MATTERS............................................................................................................... 73

BIR: Bank Deposits Secrecy Violation (2000)............................................................................................................ 73 BIR: Secrecy of Bank Deposit Law (2003) ................................................................................................................. 73

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

GENERAL PRINCIPLES Basic Features: Present Income Tax System (1996) What are the basic features of the present income tax system"? SUGGESTED ANSWER:

Our present income tax system can be said to have the following basic features: (a) It has adopted a COMPREHENSIVE TAX SITUS by using the nationality, residence, and source rules. This makes citizens and resident aliens taxable on their income derived from all sources while non-resident aliens are taxed only on their income derived from within the Philippines. Domestic corporations are also taxed on universal income while foreign corporations are taxed only on income from within. (b)

The individual income tax system is mainly

PROGRESSIVE IN NATURE in that it provides

a graduated rates of income tax. Corporations in general are taxed at a flat rate of thirty five percent (35%) of net income. It has retained MORE SCHEDULAR THAN GLOBAL FEATURES with respect to individual taxpayers but has maintained a more global treatment on corporations. Note: The following might also be cited by the bar candidates as features of the income tax system: a. Individual compensation income earners are taxed on modified Gross Income (Gross compensation income less personal exemptions). Self-employed and professionals are taxed on net income with deductions limited to seven items or in lieu thereof the forty percent (40%) maximum deduction plus the personal exemptions. Corporations are generally taxed on net income except for non-resident foreign corporations which are taxed on gross income.

(c)

b.

c.

The income tax is generally imposed via the selfassessment system or pay-as-you-file concept of imposing the tax although certain incomes. Including income of non-residents, are taxed on the pay-asyou-earn concept or the so called withholding tax. The corporate income tax is a one-layer tax in that distribution of profits to stockholders (except to nonresidents) are not subject to income tax.

Basic Stages or Aspects of Taxation (2006) Enumerate the 3 stages or aspects of taxation. Explain each. (5%) SUGGESTED ANSWER:

The aspects of taxation are: (1) LEVYING — the act of the legislature in choosing the persons, properties, rights or privileges to be subjected to taxation. (2) ASSESSMENT and COLLECTION — This is the act of executing the law through the administrative agencies of government. (3) PAYMENT — the act of the taxpayer in settling his tax obligations.

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Collection of Taxes: Authority; Ordinary Courts (2001) May the courts enjoin the collection of revenue taxes? Explain your answer. (2%) SUGGESTED ANSWER:

As a general rule, the courts have no authority to enjoin the collection of revenue taxes. (Sec. 218, NIRC). However, the Court of Tax Appeals is empowered to enjoin the collection of taxes through administrative remedies when collection could jeopardize the interest of the government or taxpayer. (Section 11, RA 1125). Collection of Taxes: Prescription (2001) May the collection of taxes be barred by prescription? Explain your answer. (3%) SUGGESTED ANSWER:

Yes. The collection of taxes may be barred by prescription. The prescriptive periods for collection of taxes are governed by the tax law imposing the tax. However, if the tax law does not provide for prescription, the right of the government to collect taxes becomes imprescriptible. Direct Tax vs. Indirect Tax (1994) Distinguish a direct from an indirect tax. SUGGESTED ANSWER:

A DIRECT TAX is one in which the taxpayer who pays the tax is directly liable therefor, that is, the burden of paying the tax falls directly on the person paying the tax. An INDIRECT TAX is one paid by a person who is not directly liable therefor, and who may therefore shift or pass on the tax to another person or entity, which ultimately assumes the tax burden. (Maceda v. Macaraig,

197 SCRA 771)

Direct Tax vs. Indirect Tax (2000) Among the taxes imposed by the Bureau of Internal Revenue are income tax, estate and donor's tax, valueadded tax, excise tax, other percentage taxes, and documentary stamp tax. Classify these taxes into direct and indirect taxes, and differentiate direct from Indirect taxes. (5%) SUGGESTED ANSWER:

Income tax, estate and donor's tax are considered as direct taxes. On the other hand, value-added tax, excise tax, other percentage taxes, and documentary stamp tax are indirect taxes. DIRECT TAXES are demanded from the very person who, as intended, should pay the tax which he cannot shift to another; while an INDIRECT TAX is demanded in the first instance from one person with the expectation that he can shift the burden to someone else, not as a tax but as a part of the purchase price. Direct Tax vs. Indirect Tax (2001) Distinguish direct taxes from indirect taxes, and give an example for each one. (2%) SUGGESTED ANSWER:

DIRECT TAXES are taxes wherein both the incidence (or liability for the payment of the tax) as well as the impact or burden of the tax falls on the same person. An

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

example of this tax is income tax where the person subject to tax cannot shift the burden of the tax to another person. INDIRECT TAXES, on the other hand, are taxes wherein the incidence of or the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person. Example of this tax is the value-added tax. ALTERNATIVE ANSWER:

A direct tax is a tax which is demanded from the person who also shoulders the burden of the tax. Example: corporate and individual income tax. An indirect tax is a tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, and the burden finally resting on the ultimate purchaser or consumer. Example: value added tax. Direct Tax vs. Indirect Tax (2006) Distinguish "direct taxes" from "indirect taxes." Give examples. (5%) SUGGESTED ANSWER:

DIRECT TAXES are demanded from the very person who should pay the tax and which he can not shift to another. An INDIRECT TAX is demanded from one person with the expectation that he can shift the burden to someone else, not as a tax but as part of the purchase price. Examples of direct taxes are the income tax, the estate tax and the donor's tax. Examples of indirect taxes are the value-added tax, the percentage tax and the excise tax on exciseable articles. Double Taxation (1997) Is double taxation a valid defense against the legality of a tax measure? SUGGESTED ANSWER:

No, double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the legality of a tax measure (Pepsi Cola v. Tanawan, 69 SCRA 460). However, if double taxation amounts to a direct duplicate taxation, 1. in that the same subject is taxed twice when it should be taxed but once, 2. in a fashion that both taxes are imposed for the same purpose 3. by the same taxing authority, within the same jurisdiction or taxing district, 4. for the same taxable period and 5. for the same kind or character of a tax then it becomes legally objectionable for being oppressive and inequitable. Double Taxation: What Constitutes DT? (1996) X, a lessor of a property, pays real estate tax on the premises, a real estate dealer's tax based on rental receipts and income tax on the rentals. X claims that this is double taxation? Decide. SUGGESTED ANSWER:

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There is no double taxation. DOUBLE TAXATION means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, by the same taxing authority for the same purpose and with the same kind or character of tax. The REAL ESTATE TAX is a tax on property; the REAL ESTATE DEALER'S TAX is a tax on the privilege to engage in business; while the INCOME TAX is a tax on the privilege to earn an income. These taxes are imposed by different taxing authorities and are essentially of different kind and character (Villanueva vs. City of Iloilo, 26 SCRA 578).

Double Taxation; Indirect Duplicate Taxation (1997) When an item of income is taxed in the Philippines and the same income is taxed in another country, is there a case of double taxation? SUGGESTED ANSWER:

Yes, but it is only a case of indirect duplicate taxation which is not legally prohibited because the taxes are imposed by different taxing authorities. Double Taxation; License Fee vs. Local Tax (2004) A municipality, BB, has an ordinance which requires that all stores, restaurants, and other establishments selling liquor should pay a fixed annual fee of P20.000. Subsequently, the municipal board proposed an ordinance imposing a sales tax equivalent to 5% of the amount paid for the purchase or consumption of liquor in stores, restaurants and other establishments. The municipal mayor, CC, refused to sign the ordinance on the ground that it would constitute double taxation. Is the refusal of the mayor justified? Reason briefly. (5%) SUGGESTED ANSWER:

No. The refusal of the mayor is not justified. The impositions are of different nature and character. The fixed annual fee is in the nature of a license fee imposed through the exercise of police power while the 5% tax on purchase or consumption is a local tax imposed through the exercise of taxing powers. Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article and this is not in violation of the rule against double taxation {Campania General de

Tabacos de Filipinos v. City of Manila, 8 SCRA 367 [1963]).

Double Taxation; Methods of Avoiding DT (1997) What are the usual methods of avoiding the occurrence of double taxation? SUGGESTED ANSWER:

The usual methods of avoiding the occurrence of double taxation are: 1. Allowing reciprocal exemption either by law or by treaty; 2. Allowance of tax credit for foreign taxes paid; 3. Allowance of deduction for foreign taxes paid; and 4. Reduction of the Philippine tax rate. Note: Any three of the methods shall be given full credit.

Imprescriptibility of Tax Laws (1997) Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been adopted on this score by -

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

(a) The National Internal Revenue Code; (b) The Tariff and Customs Code; and (c) The Local Government Code Answer: SUGGESTED ANSWERS:

The rules that have been adopted on prescription are as follows: (a) National Internal Revenue Code - The statute of limitation for assessment of tax if a return is filed is within three (3) years from the last day prescribed by law for the filing of the return or if filed after the last day, within three years from date of actual filing. If no return is filed or the return filed is false or fraudulent, the period to assess is within TEN YEARS from discovery of the omission, fraud or falsity. The period to collect the tax is within THREE YEARS from date of assessment. In the case, however, of omission to file or if the return filed is false or fraudulent, the period to collect is within TEN YEARS from discovery without need of an assessment. (b) Tariff and Customs Code - It does not express any general statute of limitation; it provided, however, that "when articles have entered and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of ONE (1) YEAR, from the date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of Import entry was merely tentative" (Sec 1603, TCC). (c) Local Government Code - Local taxes, fees, or charges shall be assessed within FIVE (5) YEARS from the date they became due. In case of fraud or intent to evade the payment of taxes, fees or charges the same maybe assessed within TEN YEARS from discovery of the fraud or intent to evade payment. They shall also be collected either by administrative or judicial action within FIVE (5) YEARS from date of assessment (Sec. 194, LGC). Power of Taxation: Equal Protection of the Law (2000) An Executive Order was issued pursuant to law, granting tax and duty incentives only to businesses and residents within the "secured area" of the Subic Economic Special Zone, and denying said incentives to those who live within the Zone but outside such "secured area". Is the constitutional right to equal protection of the law violated by the Executive Order? Explain. (3%) SUGGESTED ANSWER:

No. Equal protection of the law clause is subject to reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the law, (3) not be limited to existing conditions only, (4) apply equally to all members of the same class.

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There are substantial differences between big investors being enticed to the "secured area" and the business operators outside that are in accord with the equal protection clause that does not require territorial uniformity of laws. The classification applies equally to all the resident individuals and businesses within the "secured area". The residents, being in like circumstances to contributing directly to the achievement of the end purpose of the law, are not categorized further. Instead, they are similarly treated, both in privileges granted and obligations required. (Tiu, et al, v. Court of 4npeals, et al, G.R. No. 127410, January 20, 1999) Power of Taxation: Inherent in a Sovereign State (2003) Why is the power to tax considered inherent in a sovereign State? (4%) SUGGESTED ANSWER:

It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power no sovereign State can exist or endure. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent state or government. No sovereign state can continue to exist without the means to pay its expenses; and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax. (51 Am. Jur.,Taxation 40). Power of Taxation: Legality; Local Gov’t Taxation (2003) May Congress, under the 1987 Constitution, abolish the power to tax of local governments? (4%) SUGGESTED ANSWER:

No. Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local government's exercise of the power to tax (Sec. 5, Art. X, 1987 Constitution). Power of Taxation: Legislative in Nature (1994) The Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, issued a Revenue Regulation using gross income as the tax base for corporations doing business in the Philippines. Is the Revenue Regulation valid? SUGGESTED ANSWER:

The regulation establishing gross income as the tax base for corporations doing business in the Philippines (domestic as well as resident foreign) is not valid. This is no longer implementation of the law but actually it constitutes legislation because among the powers that are exclusively within the legislative authority to tax is the power to determine -the amount of the tax. (See 1 Cooley 176-184). Certainly, if the tax is limited to gross income without deductions of these corporations, this is changing the amount of the tax as said amount ultimately depends on the taxable base. Power of Taxation: Limitations of the Congress (2001) Congress, after much public hearing and consultations with various sectors of society, came to the conclusion that it will be good for the country to have only one

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

system of taxation by centralizing the imposition and collection of all taxes in the national government. Accordingly, it is thinking of passing a law that would abolish the taxing power of all local government units. In your opinion, would such a law be valid under the present Constitution? Explain your answer. (5%) SUGGESTED ANSWER:

No. The law centralizing the imposition and collection of all taxes in the national government would contravene the Constitution which mandates that: . . . "Each local government unit shall have the power to create their own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as Congress may provide consistent with the basic policy of local autonomy." It is clear that Congress can only give the guidelines and limitations on the exercise by the local governments of the power to tax but what was granted by the fundamental law cannot be withdrawn by Congress. Power of Taxation: Limitations: Passing of Revenue Bills (1997) The House of Representatives introduced HB 7000 which envisioned to levy a tax on various transactions. After the bill was approved by the House, the bill was sent to the Senate as so required by the Constitution. In the upper house, instead of a deliberation on the House Bill, the Senate introduced SB 8000 which was its own version of the same tax. The Senate deliberated on this Senate Bill and approved the same. The House Bill and the Senate Bill were then consolidated in the Bicameral Committee. Eventually, the consolidated bill was approved and sent to the President who signed the same. The private sectors affected by the new law questioned the validity of the enactment on the ground that the constitutional provision requiring that all revenue bills should originate from the House of Representatives had been violated. Resolve the issue.

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broadest scope of all the powers of government because in the absence of limitations, it is considered as unlimited, plenary, comprehensive and supreme. The two limitations on the power of taxation are the inherent and constitutional limitations which are intended to prevent abuse on the exercise of the otherwise plenary and unlimited power. It is the Court's role to see to it that the exercise of the power does not transgress these limitations.

Power of Taxation: Revocation of Exempting Statutes (1997) "X" Corporation was the recipient in 1990 of two tax exemptions both from Congress, one law exempting the company's bond issues from taxes and the other exempting the company from taxes in the operation of its public utilities. The two laws extending the tax exemptions were revoked by Congress before their expiry dates. Were the revocations constitutional? SUGGESTED ANSWER:

Yes. The exempting statutes are both granted unilaterally by Congress in the exercise of taxing powers. Since taxation is the rule and tax exemption, the exception, any tax exemption unilaterally granted can be withdrawn at the pleasure of the taxing authority without violating the Constitution (Mactan Cebu International Airport

Authority v, Marcos, G.R No. 120082, September 11, 1996).

Neither of these were issued by the taxing authority in a contract lawfully entered by it so that their revocation would not constitute an impairment of the obligations of contracts. ALTERNATIVE ANSWER:

No. The withdrawal of the tax exemption amounts to a deprivation of property without due process of law, hence unconstitutional.

SUGGESTED ANSWER:

There is no violation of the constitutional requirement that all revenue bills should originate from the House of Representatives. What is prohibited is for the Senate to enact revenue measures on its own without a bill originating from the House. But once the revenue bill was passed by the House and sent to the Senate, the latter can pass its own version on the same subject matter consonant with the latter's power to propose or concur with amendments. This follows from the co-equality of the two chambers of Congress (Tolentino v. Secretary of Finance, GR No. 115455, Oct. 30, 1995). Power of Taxation: Limitations; Power to Destroy (2000) Justice Holmes once said: The power to tax is not the power to destroy while this Court (the Supreme Court) sits." Describe the power to tax and its limitations. (5%) SUGGESTED ANSWER:

The power to tax is an inherent power of the sovereign which is exercised through the legislature, to impose burdens upon subjects and objects within its Jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. The underlying basis for its exercise is governmental necessity for without it no government can exist nor endure. Accordingly, it has the

Power of Taxation; Inherent in a Sovereign State (2005) Describe the power of taxation. May a legislative body enact laws to raise revenues in the absence of a constitutional provision granting said body the power to tax? Explain. SUGGESTED ANSWER:

Yes, the legislative body may enact laws even in the absence of a constitutional provision because the power to tax is inherent in the government and not merely a constitutional grant. The power of taxation is an essential and inherent attribute of sovereignty belonging as a matter of right to every independent government without being expressly granted by the people. (Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan, Leyte, G.R. No. L-31156, February 27,1976)

Taxation is the inherent power of a State to collect enforced proportional contribution to support the expenses of government. Taxation is the power vested in the legislature to impose burdens or charges upon persons and property in order to raise revenue for public purposes. The power to tax is so unlimited in force and so searching in extent that courts scarcely venture to declare it is

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. (Tio v.

Videogram Regulatory Board, G.R. No. L-75697, June 18, 1987) So potent is the power to tax that it was once opined

that "the power to tax involves the power to destroy."

(C.J. Marshall in McCulloch v. Maryland, 4 Wheat, 316 4 L. Ed. 579, 607)

Power of Taxation; Legislative in Nature (1996) What is the nature of the power of taxation? SUGGESTED ANSWER:

The POWER TO TAX is an attribute of sovereignty and is inherent in the State. It is a power emanating from necessity because it imposes a necessary burden to preserve the State's sovereignty (Phil Guarantee Co. vs. Commissioner, L-22074, April 30, 1965). It is inherently legislative in nature and character in that the power of taxation can only be exercised through the enactment of law. ALTERNATIVE ANSWER:

The nature of the power of taxation refers to its own limitations such as the requirement that it should be for a public purpose, that it be legislative, that it is territorial and that it should be subject to international comity. Purpose of Taxation; Interpretation (2004) Which of the following propositions may now be untenable: 1) The court should construe a law granting tax exemption strictly against the taxpayer. 2) The court should construe a law granting a municipal corporation the power to tax most strictly. 3) The Court of Tax Appeals has jurisdiction over decisions of the Customs Commissioner in cases involving liability for customs duties. 4) The Court of Appeals has jurisdiction to review decisions of the Court of Tax Appeals. 5) The Supreme Court has jurisdiction to review decisions of the Court of Appeals. Justify your answer or choice briefly. (5%) SUGGESTED ANSWER:

2. The court should construe a law granting a municipal corporation the power to tax most strictly. This proposition is now untenable. The basic rationale for the grant of tax power to local government units is to safeguard their viability and self-sufficiency by directly granting them general and broad tax powers (Manila Electric Company v. Province of Laguna et. al., 306 SCRA 750 [1999]). Considering that inasmuch as the power to tax

may be exercised by local legislative bodies, no longer by valid congressional delegation but by direct authority conferred by the Constitution, in interpreting statutory provisions on municipal fiscal powers, doubts will, therefore, have to be resolved in favor of municipal corporations (City Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 [1999]). This means that the court must adopt a liberal construction of a law granting a municipal corporation the power to tax. Note: If the examinee chose proposition no. 4 as his answer, it should be given full credit considering that the present CTA Act (R.A. No. 9282) has made the CTA a coequal judicial body of the Court of Appeals. The question "Which of the following propositions

[email protected] 12 of 73 may now be untenable" may lead the examinee to choose a proposition which is untenable on the basis of the new law despite the cut-off date adopted by the Bar Examination Committee. R.A. No. 9282 was passed on March 30, 2004.

Purpose of Taxation; Legislative in Nature (2004) Taxes are assessed for the purpose of generating revenue to be used for public needs. Taxation itself is the power by which the State raises revenue to defray the expenses of government. A jurist said that a tax is what we pay for civilization.In our jurisdiction, which of the following statements may be erroneous: 1) Taxes are pecuniary in nature. 2) Taxes are enforced charges and contributions. 3) Taxes are imposed on persons and property within the territorial jurisdiction of a State. 4) Taxes are levied by the executive branch of the government. 5) Taxes are assessed according to a reasonable rule of apportionment. Justify your answer or choice briefly. (5%) SUGGESTED ANSWER: A. 4. Taxes are levied by the executive branch of government. This statement is erroneous because levy refers to the act of imposition by the legislature which is done through the enactment of a tax law. Levy is an exercise of the power to tax which is exclusively legislative in nature and character. Clearly, taxes are not levied by the executive branch of government. (JVPC v. Albay, 186 SCRA 198 [1990]). Rule on Set-Off or Compensation of Taxes (1996) X is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot has an area of 300 square meters. On June 1, 1994, 100 square meters of said lot owned by X was expropriated by the government to be used in the widening of Quirino Avenue, for P300.000.00 representing the estimated assessed value of said portion. From 1991 to 1995, X, who is a businessman, has not been paying his income taxes. X is now being assessed for the unpaid income taxes in the total amount of P150,000.00. X claims his income tax liability has already been compensated by the amount of P300.000.00 which the government owes him for the expropriation of his property. Decide. SUGGESTED ANSWER:

The income tax liability of X can not be compensated with the amount owed by the Government as compensation for his property expropriated, taxes are of distinct kind, essence and nature than ordinary obligations. Taxes and debts cannot be the subject of compensation because the Government and X are not mutually creditors and debtors of each other and a claim for taxes is not a debt, demand, contract, or Judgment as is allowable to be set off. (Francia vs. IAC. G.R 76749, June 28. 1988)

Rule on Set-Off or Compensation of Taxes (2001) May a taxpayer who has pending claims for VAT input credit or refund, set-off said claims against his other tax liabilities? Explain your answer. (5%) SUGGESTED ANSWER:

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

No. Set-off is available only if both obligations are liquidated and demandable. Liquidated debts are those where the exact amounts have already been determined. In the instant case, the claim of the taxpayer for VAT refund is still pending and the amount has still to be determined. A fortiori, the liquidated obligation of the taxpayer to the government can not, therefore, be set-off against the unliquidated claim which the taxpayer conceived to exist in his favor. (Philex Mining Corp. v. CIR, GR No. 125704, August 29, 1998). ALTERNATIVE ANSWER:

No. Taxes and claims for refund cannot be the subject of set-off for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and a claim for refund. Claims for refunds just like debts are due from the government in its corporate capacity, while taxes are due to the government in its sovereign capacity. (Philex

Mining Corp. v. CIR, GR No. 125704, August 29, 1998). Rule on Set-Off or Compensation of Taxes (2005) May taxes be the subject of set-off or compensation? Explain. SUGGESTED ANSWER.

No, taxes cannot be the subject of set-off or compensation for the following reasons: 1) The lifeblood theory requires that there should be no unnecessary impediments to the collection of taxes to make available to the government the wherewithal to meet its legitimate objectives; and 2) The payment of taxes is not a contractual obligation but arises out of a duty to pay, and in respect of the positive acts of government, regarding the making and enforcing of taxes, the personal consent of the individual taxpayer is not required. (Republic v. Mambulao Lumber Co., G.R.

No. L-17725, February 28, 1962; Caltex v. Commission on Audit, G.R. No. 92585, May 8, 1992; and Philex v. Commissioner of Internal Revenue, G.R. No. 125704, August 28, 1998)

However, there is a possibility that set-off may arise, if the claims against the government have been recognized and an amount has already been appropriated for that purpose. Where both claims have already become overdue and demandable as well as fully liquidated. Compensation takes place by operation of law under Art. 1200 in relation to Articles 1279 and 1290 of the New Civil Code. (Domingo v. Garlitos, G.R. No. L-18994, June 29, 1963)

Rule on Set-Off or Compensation on Taxes (2005) Can an assessment for a local tax be the subject of set-off or compensation against a final judgment for a sum of money obtained by the taxpayer against the local government that made the assessment? Explain. SUGGESTED ANSWER:

No, taxes cannot be the subject of set-off even when there is a final judgment for a sum of money against the local government making the assessment. The government and the taxpayer are not the "mutual creditors and debtors" of each other who can avail of the remedy of compensation which Art. 1278 (Civil Code) is

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Mambulao Lumber Co., G.R. No. L-17725, February 28, 1962; and Francia v. Intermediate Appellate Court, G.R. No. L-67649, June 28,1998.

There is, however, legal basis to state that an assessment for a local tax may be the subject of set-off or compensation against a final judgment for a sum of money obtained by the taxpayer against the local government by operation of law where the local government and the taxpayer are in their own right reciprocally debtors and creditors of each other, and that the debts are both due and demandable. This is consistent with the ruling in Domingo v. Garlitos, G.R. No. L-18994, June 29,1963, relying upon Arts. 1278 and 1279 of the Civil Code, where these provisions were applied in relation to the national tax, and should therefore be applicable to a local tax. Tax Avoidance vs. Tax Evasion (1996) Distinguish tax evasion from tax avoidance. SUGGESTED ANSWER:

Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other hand, is a tax saving device within the means sanctioned by law, hence legal. Tax Avoidance vs. Tax Evasion (2000) Mr. Pascual's income from leasing his property reaches the maximum rate of tax under the law. He donated onehalf of his said property to a non-stock, non-profit educational institution whose income and assets are actually, directly and exclusively used for educational purposes, and therefore qualified for tax exemption under Article XIV, Section 4 (3) of the Constitution and Section 30 (h) of the Tax Code. Having thus transferred a portion of his said asset, Mr. Pascual succeeded in paying a lesser tax on the rental income derived from his property. Is there tax avoidance or tax evasion? Explain. (2%) SUGGESTED ANSWER:

There is tax avoidance. Mr. Pascual has exploited a fully permissive alternative method to reduce his income tax by transferring part of his rental income to a tax exempt entity through a donation of one-half of the income producing property. The donation is likewise exempt from the donor's tax. The donation is the legal means employed to transfer the incidence of income tax on the rental income. Tax Exemptions: Nature & Coverage; Proper Party (2004) As an incentive for investors, a law was passed giving newly established companies in certain economic zone exemption from all taxes, duties, fees, imposts and other charges for a period of three years. ABC Corp. was organized and was granted such incentive. In the course of business, ABC Corp. purchased mechanical equipment from XYZ Inc. Normally, the sale is subject to a sales tax. XYZ Inc. claims, however, that since it sold the equipment to ABC Corp. which is tax exempt, XYZ

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

should not be liable to pay the sales tax. Is this claim tenable? (5%) SUGGESTED ANSWER:

A. No. Exemption from taxes is personal in nature and covers only taxes for which the taxpayer-grantee is directly liable. The sales tax is a tax on the seller who is not exempt from taxes. Since XYZ Inc. is directly liable for the sales tax and no tax exemption privilege is ever given to him, therefore, its claim that the sale is tax exempt is not tenable. A tax exemption is construed in strictissimi juris and it can not be permitted to exist upon vague implications (Asiatic Petroleum Co., Ltd. V. Llanes, 49 Phil 466 [1926]).

Assume arguendo that XYZ had to and did pay the sales tax. ABC Corp. later found out, however, that XYZ merely shifted or passed on to ABC the amount of the sales tax by increasing the purchase price. ABC Corp. now claims for a refund from the Bureau of Internal Revenue in an amount corresponding to the tax passed on to it since it is tax exempt. Is the claim of ABC Corp. meritorious? (5%) SUGGESTED ANSWER;

B. No. The claim of ABC Corp. is not meritorious. Although the tax was shifted to ABC Corp. by the seller, what is paid by it is not a tax but part of the cost it has assumed. Hence, since ABC Corp. is not a taxpayer, it has no capacity to file a claim for refund. The taxpayer who can file a claim for refund is the person statutorily liable for the payment of the tax. Tax Laws; BIR Ruling; Non-Retroactivity of Rulings (2004) Due to an uncertainty whether or not a new tax law is applicable to printing companies, DEF Printers submitted a legal query to the Bureau of Internal Revenue on that issue. The BIR issued a ruling that printing companies are not covered by the new law. Relying on this ruling, DEF Printers did not pay said tax. Subsequently, however, the BIR reversed the ruling and issued a new one stating that the tax covers printing companies. Could the BIR now assess DEF Printers for back taxes corresponding to the years before the new ruling? Reason briefly. (5%) SUGGESTED ANSWER:

No. Reversal of a ruling shall not be given a retroactive application if said reversal will be prejudicial to the taxpayer. Therefore, the BIR can not assess DEF printers for back taxes because it would be violative of the principle of non-retroactivity of rulings and doing so would result in grave injustice to the taxpayer who relied on the first ruling in good faith (Section 246, NIRC; CIR v. Burroughs, Inc., 142 SCRA 324[1986]).

Tax Pyramiding; Definition & Legality (2006) What is tax pyramiding? What is its basis in law? (5%) SUGGESTED ANSWER:

Tax Pyramiding is the imposition of a tax upon another tax. It has no basis in fact or in law (People v. Sandiganbayan, G.R. No. 152532, August 16, 2005). There is also tax pyramiding when sales taxes are incorrectly applied to goods several times from production to final

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(NOTABENE: This concept pertains to the VAT law which is excluded from the bar coverage, Guidelines for 2006 Bar Examinations, June 15, 2006)

Taxpayer Suit; When Allowed (1996) When may a taxpayer's suit be allowed? SUGGESTED ANSWER: A taxpayer's suit may only be allowed when an act complained of, which may include a legislative enactment, directly involves the illegal disbursement of public funds derived from taxation (Pascual vs. Secretary of Public Works, 110 Phil. 331). Uniformity in the Collection of Taxes (1998) Explain the requirement of uniformity as a limitation in the imposition and/or collection of taxes. (5%| SUGGESTED ANSWER:

Uniformity in the imposition and/or collection of taxes means that all taxable articles, or kinds of property of the same class shall be taxed at the same rate. The requirement of uniformity is complied with when the tax operates with the same force and effect in every place where the subject of it is found (Churchill & Tail v. Conception, 34 Phil. 969). It does not mean that lands, chattels, securities, income, occupations, franchises, privileges, necessities and luxuries shall be assessed at the same rate. Different articles maybe taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times. Accordingly, singling out one particular class for taxation purposes does not infringe the requirement of uniformity. FIRST ALTERNATIVE ANSWER: The criteria is met when the tax laws operate equally and uniformly on all persons under similar circumstances. All persons are treated in the same manner, the conditions not being different, both in privileges conferred and liabilities imposed. Uniformity in taxation also refers to geographical uniformity. Favoritism and preference is not allowed. SECOND ALTERNATIVE ANSWER: A tax is deemed to have satisfied the uniformity rule when it operates with the same force and effect in every place where the subject maybe found. (Phil. Trust & Co. v.

Yatco, 69 Phil. 420).

INCOME TAXATION Basic: Allowable Deductions vs. Personal Exemptions (2001) Distinguish Allowable Deductions from Personal Exemptions. Give an example of an allowable deduction and another example for personal exemption. (5%) SUGGESTED ANSWER:

The distinction between allowable deductions and personal exemptions are as follows: a. As to amount — Allowable deductions generally refer to actual expenses incurred in the pursuit of trade, business or practice of profession while

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

b. c.

d.

personal exemptions are arbitrary amounts allowed by law. As to nature — Allowable deductions constitute business expenses while personal exemptions pertain to personal expenses. As to purpose — Deductions are allowed to enable the taxpayer to recoup his cost of doing business while personal exemptions are allowed to cover personal, family and living expenses. As to claimants — Allowable deductions can be claimed by all taxpayers, corporate or otherwise, while personal exemptions can be claimed only by individual taxpayers.

Basic: Meaning of Taxable Income (2000) What is meant by taxable income? (2%) SUGGESTED ANSWER:

TAXABLE INCOME means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997) Basic: Principle of Mobilia Sequuntur Personam (1994) What is the principle of mobilia sequuntur personam in income taxation? SUGGESTED ANSWER:

Principle of Mobilia Sequuntur Personam in income taxation refers to the principle that taxation follows the property or person who shall be subject to the tax. Basic: Proper Allowance of Depreciation (1998) 2. What is the proper allowance for depreciation of any property used in trade or business? [3%) 3. What is the annual depreciation of a depreciable fixed asset with a cost of P100,000 and an estimated useful life of 20 years and salvage value of P 10,000 after its useful life? SUGGESTED ANSWER:

[email protected] 15 of 73 The facts given in the problem are sufficient to compute the annual depreciation either under the decliningbalance method or sum-of-years-digit method. Any answer arrived at by using any of the recognized methods should be given full credit. It is suggested that no question requiring computation should be given in future bar examinations.

Basic: Sources of Income: Taxable Income (1998) From what sources of income are the following persons/corporations taxable by the Philippine government? 2) Citizen of the Philippines residing therein; [1%] 3) Non-resident citizen; [1%1 4) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker; [1%] 5) An alien individual, whether a resident or not of the Philippines; [1%] 6) A domestic corporation; [1%] SUGGESTED ANSWER: (Section 23, NIRC of 1997) 1) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. 2) A nonresident citizen is taxable only on income derived from sources within the Philippines. 3) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines. 4) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. 5) A domestic corporation is taxable on all income derived from sources within and without the Philippines. Basic: Tax Benefit Rule (2003) (a) What is meant by the "tax benefit rule"? SUGGESTED ANSWER:

1. The proper allowance of depreciation of any property used in trade or business refers to the reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of said property. The reasonable allowance shall include, but not limited to, an allowance computed under any of the following methods: (a) straight-line method; (b) declining-balance method; (c) sum-of-years-digit method; and (d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue (Sec. 34(F). NIRC).

(a) TAX BENEFIT RULE states that the taxpayer is obliged to declare as taxable income subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad debts were written-off and claimed as a deduction from income. It also applies to taxes previously deducted from gross income but which were subsequently refunded or credited. The taxpayer is also required to report as taxable income the subsequent tax refund or tax credit granted to the extent of the tax benefit the taxpayer enjoyed when such taxes were previously claimed as deduction from income.

2. The annual depreciation of the depreciable fixed asset may be computed on the straight-line method which will allow the taxpayer to deduct an annual depreciation of Php4,500, arrived at by dividing the depreciable value (Php l00.000-Phpl0.000) of Php90,000 by the estimated useful life (20 years).

SUGGESTED ANSWER:

NOTE: The bar candidate may give a different figure depending on the method he used in computing the annual depreciation.

(b)

Give an illustration of the application of the tax benefit rule.

(b) X Company has a business connected receivable amounting to P100,000.00 from Y who was declared bankrupt by a competent court. Despite earnest efforts to collect the same, Y was not able to pay, prompting X Company to write-off the entire liability. During the year of write-off, the entire amount was claimed as a deduction for income tax purposes reducing the taxable net income of X Company to only P1,000,000.00. Three years later, Y

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

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voluntarily paid his obligation previously written-off to X Company. In the year of recovery, the entire amount constitutes part of gross income of X Company because it was able to get full tax benefit three years earlier.

and from incidental or outside operations or sources (Sec. 43, Rev. Reg. No. 2).

Basic; Basis of Income Tax (1996) X is employed as a driver of a corporate lawyer and receives a monthly salary of P5,000.00 with free board and lodging with an equivalent value of P1,500.00. 1. What will be the basis of X's income tax? Why 2. Will your answer in question (a) be the same if X's employer is an obstetrician? Why?

SUGGESTED ANSWER:

SUGGESTED ANSWERS:

1) The basis of X’s income tax would depend on whether his employer is an employee or a practicing corporate lawyer. • If his employer is an employee, the basis of X's income tax is P6,500.00 equivalent to the total of the basic salary and the value of the board and lodging. This is so because the employer/corporate lawyer has no place of business where the free board and lodging may be given. • On the other hand, if the corporate lawyer is a "practicing lawyer (self-employed), X should be taxed only on P5,000.00 provided that the free board and lodging is given in the business premises of the lawyer and for his convenience and that the free lodging was given to X as a condition for employment. 2) If the employer is an obstetrician who is self-employed, the basis of X's income will only be P5,000.00 if it is proven that the free board and lodging is given within the business premises of said employer for his convenience and that the free lodging is required to be accepted by X as condition for employment. Otherwise, X would be taxed on P6,500.00. Basic; Gross Income: Define (1995) What is "gross Income" for purposes of the Income tax? SUGGESTED ANSWER:

GROSS INCOME means all income from whatever source derived, including (but not limited to) compensation for services, including fees, commissions, and similar items; gross income from business; gains derived from dealings in property; interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partner's distributive share of the gross income of general professional partnership (Sec. 28, NIRC). ALTERNATIVE ANSWER:

a) Gross income 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. b) Gross income means income (in the broad sense) less income which is, by statutory provision or otherwise, exempt from the tax imposed by law (Sec. 36, Rev. Reg. No. 2). Gross income from business means total sales, less cost of goods sold, plus any income from investments

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Basic; Income vs. Capital (1995) How does "Income" differ from "capital"? Explain. Income differs from capital in that INCOME is any wealth which flows into the taxpayer other than a return of capital while capital constitutes the investment which is the source of income. Therefore, capital is fund while income is the flow. Capital is wealth, while income is the service of wealth. Capital is the tree while income is the fruit (Vicente Madrigal et al v. James Rqfferty, 38 Phil. 414). Basic; Schedular Treatment vs. Global Treatment (1994) Distinguish "schedular treatment" from "global treatment" as used in income taxation. SUGGESTED ANSWER:

Under a SCHEDULER SYSTEM, the various types/items of income (compensation; business/professional income) are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. Under the GLOBAL SYSTEM, all income received by the taxpayer are grouped together, without any distinction as to the type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a fixed rate. Compensation; Income Tax: Due to Profitable Business Deal (1995) Mr. Osorio, a bank executive, while playing golf with Mr. Perez, a manufacturing firm executive, mentioned to the latter that his (Osorio) bank had just opened a business relationship with a big foreign importer of goods which Perez' company manufactures. Perez requested Osorio to introduce him to this foreign importer and put in a good word for him (Perez), which Osorio did. As a result, Perez was able to make a profitable business deal with the foreign Importer. In gratitude, Perez, in behalf of his manufacturing firm, sent Osorio an expensive car as a gift. Osorio called Perez and told him that there was really no obligation on the part of Perez or his company to give such an expensive gift. But Perez insisted that Osorio keep the car. The company of Perez deducted the cost of the car as a business expense. The Commissioner of Internal Revenue included the fair market value of the car as Income of Osorio who protested that the car was a gift and therefore excluded from income. Who is correct, the Commissioner or Osorio? Explain. SUGGESTED ANSWER:

The Commissioner is correct. The car having been given to Mr. Osorio in consideration of having introduced Mr. Perez to a foreign Importer which resulted to a profitable business deal is considered to be a compensation for

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

services rendered. The transfer is not a gift because it is not made out of a detached or disinterested generosity but for a benefit accruing to Mr. Perez. The fact that the company of Mr. Perez takes a business deduction for the payment indicates that it was considered as a pay rather than a gift. Hence, the fair market value of the car is includable in the gross income pursuant to Section 28(a)(l) of the Tax Code (See 1974 Federal Tax Handbook, p. 145). A payment though voluntary, if it is in return for services rendered, or proceeds from the constraining force of any moral or legal duty or a benefit to the payer is anticipated, is a taxable income to the payee even if characterized as a 'gift' by the payor (Commissioner vs. Duberstein, 363 U.S.

278).

ALTERNATIVE ANSWER:

Mr. Osorio is correct. The car was not payment for services rendered. There was no prior agreement or negotiations between Mr. Osorio and Mr. Perez that the former will be compensated for his services. Mr. Perez, in behalf of his company, gave the car to Mr. Osorio out of gratitude. The transfer having been made gratuitously should be treated as a gift subject to donor's tax and should be excluded from the gross income of the recipient, Mr. Osorio. The Commissioner should cancel the assessment of deficiency income tax to Mr. Osorio and instead assess deficiency donor's tax on Mr Perez' company. (Sec. 28(b)(3), NIRC; Pirovano vs. Commissioner) Corporate: Income: Donor’s tax; Tax Liability (1996) X, a multinational corporation doing business in the Philippines donated 100 shares of stock of said corporation to Mr. Y, its resident manager in the Philippines. 1) What is the tax liability, if any, of X corporation? 2) Assuming the shares of stocks were given to Mr. Y in consideration of his services to the corporation, what are the tax implications? Explain. SUGGESTED ANSWERS:

1) Foreign corporations effecting a donation are subject to donor's tax only if the property donated is located in the Philippines. Accordingly, donation of a foreign corporation of its own shares of stocks in favor of resident employee is not subject to donor's tax (BIR Ruling No. 018-87, January 26, 1987). However, if 85% of the business of the foreign corporation is located in the Philippines or the shares donated have acquired business situs in the Philippines, the donation may be taxed in the Philippines subject to the rule of reciprocity. 2) If the shares of stocks were given to Mr. Y in consideration of his services to the corporation, the same shall constitute taxable compensation income to the recipient because it is a compensation for services rendered under an employer-employee relationship, hence, subject to income tax. The par value or stated value of the shares issued also constitutes deductible expense to the corporation provided it is subjected to withholding tax on wages.

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Corporate; Income Tax; Reasonableness of the Bonus (2006) Gold and Silver Corporation gave extra 14th month bonus to all its officials and employees in the total amount of P75 Million. When it filed its corporate income tax return the following year, the corporation declared a net operating loss. When the income tax return of the corporation was reviewed by the BIR the following year, it disallowed as item of deduction the P75 Million bonus the corporation gave its officials and employees on the ground of unreasonableness. The corporation claimed that the bonus is an ordinary and necessary expense that should be allowed. If you were the BIR Commissioner, how will you resolve the issue? (5%) SUGGESTED ANSWER:

I will disallow the expense. A bonus is ordinary and necessary where said expenditure is (1) appropriate and helpful in the development of the taxpayers business (Martens, Law of Federal Income Taxation, Volume IV, p. 315) and (2) is normal in relation to the business of the taxpayer and the surrounding circumstances (p. 316, Ibid). To determine the reasonableness of the bonus it must be commensurate with services performed by the officials and employees. Other factors to consider are whether the payment was made in good faith; the character of the taxpayer's business; the volume and amount of its net earnings; its locality; the type and extent of the services rendered; the salary policy of the corporation; the size of the particular business; the employees' qualification and contributions to the business venture; and general economic conditions (Atlas Mining v. CIR, G.R. No. L26911, January 27, 1981). However, since the business suffers from a net operating loss, I will rule that the bonus is an unreasonable expense. Corporate; Income: Coverage; "Off-Line" Airline (1994) Caledonia Aircargo is an off-line international carrier without any flight operations in the Philippines. It has, however, a liaison office in the Philippines which is duly licensed with the Securities and Exchange Commission, established for the purpose of providing passenger and flight information, reservation and ticketing services. Are the revenues of Caledonia Aircargo from tickets reserved by its Philippine office subject to tax? SUGGESTED ANSWER:

The revenues in the Philippines of Caledonia Aircargo as an "off-line" airline from ticket reservation services are taxable income from "whatever source" under Sec. 28(a) of the Tax Code. This case is analogous to Commissioner v. BOAC, G.R No. No. 65773-74, April 30, 1987 where the Supreme Court ruled that the income received in the Philippines from the sale of tickets by an "off-line" airline is taxable as income from whatever source. Corporate; Income: Coverage; "Off-Line" Airline (2005) An international airline with no landing rights in the Philippines sold tickets in the Philippines for air transportation. Is income derived from such sales of tickets considered taxable income of the said international

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

air carrier from Philippine sources under the Tax Code? Explain. (5%)

1) 2)

ALTERNATIVE ANSWER:

Yes. The income derived from the sales of tickets in the Philippines is considered taxable income of the international air carrier from Philippine sources.

3)

The source of income is the property, activity or service that produced the income. The sale of tickets in the Philippines is the activity that produces the income. The absence of landing rights in the Philippines cannot alter the fact that revenues were derived from ticket sales within the Philippines. (Commissioner of Internal Revenue

4)

v. Japan Air Lines, G.R. No. 60714, October 4, 1991 reiterating British Overseas Airways Corp., Air India and American Airlines, Inc.) ALTERNATIVE ANSWER:

No, under Sec. 3 of R.R. No. 15-2002, an off-line airline having a branch office or a sales agent in the Philippines which sells passage documents for compensation or commission to cover off-line flights of its principal or head office, or for other airlines covering flights originating from Philippine ports or off-line flights, is not considered engaged in business as an international air carrier in the Philippines and is, therefore, not subject to Gross Philippine Billings Tax nor to the 3% common carrier's tax. Based on the foregoing, the international airline company is not considered as engaged in business in the Philippines and is therefore a non-resident foreign corporation. A non-resident foreign corporation is subject to the gross income tax on its income derived from sources within the Philippines. The income from sale of tickets shall not form part of taxable income because the term "taxable income" as defined under Sec. 31 of the NIRC refers only to income of those taxpayers who pay by way of the net income tax. Taxable income means the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. Dividends: Disguised dividends (1994) Disguised dividends in income taxation? Give an example. SUGGESTED ANSWER:

Disguised dividends are those income payments made by a domestic corporation, which is a subsidiary of a nonresident foreign corporation, to the latter ostensibly for services rendered by the latter to the former, but which payments are disproportionately larger than the actual value of the services rendered. In such case, the amount over and above the true value of the service rendered shall be treated as a dividend, and shall be subjected to the corresponding tax of 35% on Philippine sourced gross income, or such other preferential rate as may be provided under a corresponding Tax Treaty. Example: Royalty payments under a corresponding licensing agreement. Dividends; Income Tax; Deductible Gross Income (1999) A Co., a Philippine corporation, issued preferred shares of stock with the following features:

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Non-voting; Preferred and cumulative dividends at the rate of 10% per annum, whether or not in any period the amount is covered by earnings or projects; In the event of dissolution of the issuer, holders of preferred stock shall be paid in full or ratably as the assets of the issuer may permit before any distribution shall be made to common stockholders; and The issuer has the option to redeem the preferred stock.

A Co. declared dividends on the preferred stock and claimed the dividends as interests deductible from its gross Income for income tax purposes. The BIR disallowed the deduction. A Co. maintains that the preferred shares with their features are really debt and therefore the dividends are realty interests. Decide. (10%) SUGGESTED ANSWER:

The dividends are not deductible from gross income. Preferred shares shall be considered capital regardless of the conditions under which such shares are issued and, therefore, dividends paid thereon are not considered 'interest' which are allowed to be deducted from the gross income of the corporation. (Revenue Memorandum Circular No. 17-71, July 12, 1971). Effect; Condonation of Loan in Taxation (1995) Mr. Francisco borrowed P10,000.00 from his friend Mr. Gutierrez payable in one year without interest. When the loan became due Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable to pay because of business reverses. Mr. Gutierrez took pity on Mr. Francisco and condoned the loan. Mr. Francisco was solvent at the time he borrowed the P 10,000.00 and at the time the loan was condoned. Did Mr. Francisco derive any income from the cancellation or condonation of his indebtedness? Explain. SUGGESTED ANSWER:

No, Mr. Francisco did not derive any income from the cancellation or condonation of his indebtedness. Since it is obvious that the creditor merely desired to benefit the debtor in view of the absence of consideration for the cancellation, the amount of the debt is considered as a gift from the creditor to the debtor and need not be included in the latter's gross income. Fringe Benefit Tax: Covered Employees (2001) X was hired by Y to watch over V’s fishponds with a salary of Php 10,000.00. To enable him to perform his duties well, he was also provided a small hut, which he could use as his residence in the middle of the fishponds. Is the fair market value of the use of the small hut by X a "fringe benefit" that is subject to the 32% tax imposed by Section 33 of the National Internal Revenue Code? Explain your answer. (5%) SUGGESTED ANSWER:

No. X is neither a managerial nor a supervisory employee. Only managerial or supervisory employees are entitled to a fringe benefit subject to the fringe benefits tax. Even assuming that he is a managerial or supervisory employee, the small hut is provided for the convenience of the

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

employer, hence does not constitute a taxable fringe benefit. (Section 33, NERC). Fringe Benefit Tax: Employer required to Pay (2003) A "fringe benefit" is defined as being any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee. Would it be the employer or the employee who is legally required to pay an income tax on it? Explain. (4%) SUGGESTED ANSWER:

It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe benefit tax is imposed as a FINAL WITHHOLDING TAX placing the legal obligation to remit the tax on the employer, such that, if the tax is not paid the legal recourse of the BIR is to go after the employer. Any amount or value received by the employee as a fringe benefit is considered tax paid hence, net of the income tax due thereon. The person who is legally required to pay (same as statutory incidence as distinguished from economic incidence) is that person who, in case of non-payment, can be legally demanded to pay the tax. Interest: Deficiency Interest: define (1995 Bar) What is a "deficiency interest" for purposes of the income tax? Illustrate.

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pay on this latter date will render the tax delinquent and will require the payment of delinquency interest.

ITR: Personal Income; Exempted to File ITR (1997) A bachelor was employed by Corporation A on the first working day of January 1996 on a part-time basis with a salary of P3,500.00 a month. He then received the 13th month pay. In September 1996, he accepted another parttime Job from Corporation B from which he received a total compensation of P14,500.00 for the year 1996. The correct total taxes were withheld from both earnings. With the withholding taxes already paid, would he still be required to file an income tax return for his 1996 income? SUGGESTED ANSWER:

Yes, because what is exempt from filing are those individuals who have total compensation income not exceeding P60.000 with the taxes correctly withheld only by one employer. In this case, even if his aggregate compensation income from both his employers does not exceed P60.000 and that total withholding taxes were correctly withheld by his employers, the fact that he derives compensation income concurrently from two employers at anytime during the taxable year, does not exempt him from filing his income tax return (RA 7497, as implemented by RR No. 4-93).

SUGGESTED ANSWER:

DEFICIENCY INTEREST for purposes of the income tax is the interest due on any amount of tax due or installment thereof which is not paid on or before the date prescribed for its payment computed at the rate of 20% per annum or the Manila Reference Rate, whichever is higher, from the date prescribed for its payment until it is fully paid. If for example after the audit of the books of XYZ Corp. for taxable year 1993 there was found to be due a deficiency income tax of P125,000.00 inclusive of the 25% surcharge imposed under Section 248 of the Tax Code, the interest will be computed on the P125.000.00 from April 15, 1994 up to its date of payment. Interest: Delinquency Interest: define (1995) What is a "delinquency interest" for purposes of the income tax? Illustrate. SUGGESTED ANSWER:

Delinquency interest is the interest of 20% or the Manila Reference Rate, whichever is higher, required to be paid in case of failure to pay: (a) the amount of the tax due on any return required to be filed; or (b) the amount of the tax due for which return is required; or (c) the deficiency tax or any surcharge or interest thereon, on the due date appearing in the notice and demand of the Commissioner of Internal Revenue. If in the above illustration the assessment notice was released on December 31, 1994 and the amount of deficiency tax, inclusive of surcharge and deficiency interest were computed up to January 30, 1995 which is the due date for payment per assessment notice, failure to

ITR; Domestic Corporate Taxation (1997) During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading business; (b) interests from money placements in the banks; (c) dividends from its stock investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (e) proceeds under an insurance policy on the loss of goods. In preparing the corporate income tax return, what should be the tax treatment on each of the above items? SUGGESTED ANSWER:

The gross receipts from trading business is includible as an item of income in the corporate income tax return and subject to corporate income tax rate based on net income. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; The dividends from domestic corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. The proceeds under an insurance policy on the loss of goods is not an item of income but merely a return of capital hence not taxable. ALTERNATIVE ANSWER:

The gross receipts from trading business is includible as an item of income in the corporate income tax return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance policy on the loss of goods will be included in the corporate income tax

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

return either as a taxable gain or a deductible loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount realized) the basis of the good lost (Sec. 34(a), NIRC). The net income of the corporation shall be subject to corporate income tax rate of 35%. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from domestic corporations are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. ITR; Domestic Corporate Taxation (2001) a) How often does a domestic corporation file income tax return for income earned during a single taxable year? Explain the process. (3%) SUGGESTED ANSWER:

a) A domestic corporation is required to file income tax returns four (4) times for income earned during a single taxable year. Quarterly returns are required to be filed for the first three quarters where the corporation shall declare its quarterly summary of gross income and deductions on a cumulative basis. (Section 75, NIRC). Then, a final adjustment return is required to be filed covering the total taxable income for the entire year, calendar or fiscal. (Section 76, NIRC). b) What is the reason for such procedure? (2%) SUGGESTED ANSWER:

b) The reason for this procedure is to ensure the timeliness of collection to meet the budgetary needs of the government. Likewise, it is designed to ease the burden on the taxpayer by providing it with an installment payment scheme, rather than requiring the payment of the tax on a lump-sum basis after the end of the year. ALTERNATIVE ANSWER:

b) The reason for the quarterly filing of tax returns is to allow partial collection of the tax before the end of the taxable year and also to improve the liquidity of government ITR; Personal Income: Two Employment (2001) In the year 2000, X worked part time as a waitress in a restaurant in Mega Mall from 8:00 a.m. to 4:00 p.m. and then as a cashier in a 24-hour convenience store in her neighborhood. The total income of X for the year from the two employers does not exceed her total personal and additional exemptions for the year 2000. Was she required to file an income tax return last April? Explain your answer. (5%) SUGGESTED ANSWER:

Yes. An individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return (Sec. 51(A)(2)(b), NIRC.) ALTERNATIVE ANSWER:

It depends. An individual with pure compensation income is not required to file an income tax returns when she meets the following conditions; (1) the total gross compensation income does not exceed Php60,000.00 and (2) the income tax has been correctly withheld, meaning

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There is no mention in the problem of the amount of personal and additional personal exemption to quantify how much is that compensation income that did not exceed the personal and additional personal exemptions. There is no, mention, either, of whether or not the employers withheld taxes and that the amount withheld is equal to the tax due. Whether or not she will be required to file an income tax return last April 15 on the 2000 income will depend on her compliance with the requirements of the law. ITR; Personal Income; GSIS Pension (2000) Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS which he deposits with the PNB-Makati Branch. Is he exempt from income tax and therefore not required to file an income tax return? (5%) SUGGESTED ANSWER:

Mr. Javier is exempt from income tax on his monthly GSIS pension (Sec. 32(B)(6)(f), NIRC of 1997) but not on the interest income that might accrue on the pensions deposited with PNB which are subject to final withholding tax. Consequently, since Mr. Javier's sole taxable income would have been subjected to a final withholding tax, he is not required anymore to file an income tax return. (Sec. 51 (A) (2) (c). Ibid]. ITR; Personal Income; Married Individual (2004) RAM got married to LISA last January 2003. On November 30, 2003, LISA gave birth to twins. Unfortunately, however, LISA died in the course of her delivery. Due to complications, one of the twins also died on December 15, 2003. In preparing his Income Tax Return (ITR) for the year 2003, what should RAM indicate in the ITR as his civil status: (a) single; (b) married; (c) Head of the family; (d) widower; (e) none of the above? Why? Reason. (5%) SUGGESTED ANSWER:

RAM should indicate "(b) married" as his civil status in preparing his Income Tax Return for the year 2003. The death of his wife during the year will not change his status because should the spouse die during the taxable year, the taxpayer may still claim the same exemptions (that of being married) as if the spouse died at the close of such year (Section 35/Cj, NIRC). ITR; Taxpayer; Liabilities; Falsified Tax Return (2005) Danilo, who is engaged in the trading business, entrusted to his accountant the preparation of his income tax return and the payment of the tax due. The accountant filed a falsified tax return by underdeclaring the sales and overstating the expense deductions by Danilo. Is Danilo liable for the deficiency tax and the penalties thereon? What is the liability, if any, of the accountant? Discuss. (5%) SUGGESTED ANSWER:

Danilo is liable for the deficiency tax as well as for the deficiency interest. He should not be held liable for the

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

fraud penalty because the accountant acted beyond the limits of his authority. There is no showing in the problem that Danilo signed the falsified return or that it was prepared under his direction. {On the other hand the accountant may be held criminally liable for violation of the Tax Code when he falsified the tax return by underdeclaring the sale and overstating the expense deductions. If Danny's accountant is a Certified Public Accountant, his certificate as a CPA shall automatically be revoked or cancelled upon conviction. Partnership: Income Tax (1995) Five years ago Marquez, Peneyra, Jayme, Posadas and Manguiat, all lawyers, formed a partnership which they named Marquez and Peneyra Law Offices. The Commissioner of Internal Revenue thereafter issued Revenue Regulation No. 2-93 implementing RA. 7496 known as the Simplified Net Income Taxation Scheme (SNITS). Revenue Regulation No. 2-93 provides in part: Sec. 6. General Professional Partnership. — The general professional partnership and the partners are covered by R.A. 7496. Thus, in determining profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or Incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct costs are not deductible from his gross income. 1)

Marquez and Peneyra Law Offices filed a taxpayer's suit alleging that Revenue Regulation No. 2-93 violates the principle of uniformity in taxation because general professional partnerships are now subject to payment of income tax and that there is a difference in the tax treatment between individuals engaged in the practice of their respective professions and partners in general professional partnerships. Is this contention correct? Explain.

SUGGESTED ANSWER:

1) The contention is not correct. General professional partnerships remain to be a non-taxable entity. What is taxable are the partners comprising the same and they are obligated to report as income their share in the income of the general professional partnership during the taxable year whether distributed or not. The SNITS treat professionals as one class of taxpayer so that they shall be treated alike irrespective of whether they practice their profession alone or in association with other professionals under a general professional partnership. What are taxed differently are individuals and corporations. All individuals similarly situated are taxed alike under the regulations, therefore, the principle of uniformity in taxation is not violated. On the contrary, all the requirements of a valid classification have been complied with (Ton vs. Del Rosario et al G.R No. 109289, Octobers, 1994).

2)

Is Revenue Regulation No. 2-93 now considered as having adopted a gross income method instead of retaining the net income taxation scheme? Explain.

SUGGESTED ANSWER:

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2) No. Revenue Regulation No. 2-93 implementing RA No. 7496 have indeed significantly reduced the items of deduction by limiting it to direct costs and expenses or the 40% of gross receipts maximum deduction in cases where the direct costs are difficult to determine. The allowance of limited deductions however, is still in consonance with the net income taxation scheme rather than the gross income method. While it is true that not all the expenses of earning the income might be allowed, this can well be justified by the fact that deductions are not matters of right but are matters of legislative grace. Personal; Income Tax: Non-Resident Alien (2000) Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggregated period of more than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and from abroad? (5%) SUGGESTED ANSWER:

Mr. Cortez being a non-resident alien individual who has stayed for an aggregated period of more than 180 days during the calendar year 1999, shall for that taxable year be deemed to be a non-resident alien doing business in the Philippines. Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. [Sec. 25 (A) (1), NIRC of 1997] Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions but subject to the rule on reciprocity on the personal exemptions. (Sec. 34 (A) to (J) and (M) in relation to Sec. 25 (A) (1), Ibid, Sec. 35 (D), Ibid.] NOTE: It is suggested that full credit should be given if the examinee's answer only cover the first two paragraphs.

Personal; Income Tax: Non-Resident Citizen (1999) A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co. has a subsidiary in Hong Kong (HK Co.) and will assign P for an indefinite period to work full time for HK Co. P will bring his family to reside in HK and will lease out his residence in the Philippines. The salary of P will be shouldered 50% by A Co. while the other 50% plus housing, cost of living and educational allowances of P's dependents will be shouldered by HK Co. A Co. will credit the 50% of P's salary to P's Philippine bank account. P will sign the contract of employment in the Philippines. P will also be receiving rental income for the lease of his Philippine residence. Are these salaries, allowances and rentals subject to the Philippine income tax? (5%) SUGGESTED ANSWER:

The salaries and allowances received by P are not subject to Philippine income tax. P qualifies as a nonresident citizen because he leaves the Philippines for employment requiring him to be physically present abroad most of the time during the taxable year. (Section 22(E), NIRC). A nonresident citizen is taxable only on income derived from Philippine sources. (Section 23, NIRC). The salaries and

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

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allowances received from being employed abroad are incomes from without because these are compensation for services rendered outside of the Philippines. (Section 42, NIRC).

will erect a building on the land which will become the property of Mr. Domingo at the end of the lease without compensation or reimbursement whatsoever for the value of the building.

However, P is taxable on rental income for the lease of his Philippine residence because this is an income derived from within, the leased property being located in the Philippines. (Section 42, NIRC).

Mr. Enriquez erects the building. Upon completion the building had a fair market value of P1 Million. At the end of the lease the building is worth only P900.000.00 due to depreciation.

Personal; Income Tax: Tax-Free Exchange (1997) Three brothers inherited in 1992 a parcel of land valued for real estate tax purposes at P3.0 million which they held in co-ownership. In 1995, they transferred the property to a newly organized corporation as their equity which was placed at the zonal value of P6.0 million. In exchange for the property, the three brothers thus each received shares of stock of the corporation with a total par value of P2.0 million or, altogether, a total of P6.0 million. No business was done by the Corporation, and the property remained idle. In the early part of 1997, one of the brothers, who was in dire need of funds, sold his shares to the two brothers for P2.0 million. Is the transaction subject to any internal revenue tax (other than the documentary stamp tax)?

Will Mr. Domingo have income when the lease expires and becomes the owner of the building with a fair market value of P900.000.00? How much income must he report on the building? Explain.

SUGGESTED ANSWER:

Yes. The exchange in 1995 is a tax-free exchange so that the subsequent sale of one of the brothers of his shares to the other two (2) brothers in 1997 will be subject to income tax. This is so because the tax-free exchange merely deferred the recognition of income on the exchange transaction. The gain subject to income tax in the sale is measured by the difference between the selling price of the shares (P2 Million) and the basis of the real property in the hands of the transferor at the time of exchange which is the fair market value of his share in the real property at the time of inheritance (Section 34(b)(2), NIRC). The net gain from the sale of shares of stock is subject to the schedular capital gains tax of 10% for the first P100.000 and 20% for the excess thereof (Section 2l(d), NIRC).

SUGGESTED ANSWER:

When a building is erected by a lessee in the leased premises in pursuance of an agreement with the lessor that the building becomes the property of the lessor at the end of the lease, the lessor has the option to report income as follows: 1) The lessor may report as income the market value of the building at the time when such building is completed; or 2) The lessor may spread over the life of the lease the estimated depreciated value of such building at the termination of the lease and report as income for each year of the lease an aliquot part thereof (Sec. 49, RR No. 2). Under the first option, the lessor will have no income when the lease expires and becomes the owner of the building. The second option will give rise to an income during the year of lease expiration of P90.000.00 or 1/10 of the depreciated value of the building. The availment of the first option will require Mr. Domingo to report an income of P1.000,000.00 during the year when the building was completed. A total of P900.000.00 income will be reported under the second option but will be spread over the life of the lease or P90.000.00 per year.

ALTERNATIVE ANSWER:

The exchange effected in 1995 did not qualify as a tax-free exchange because there is no showing that the three brothers gained control of the corporation by acquiring at least 51% of the voting rights. Since the entire gain on the exchange was previously subjected to income tax, then, the sale will also be taxable if a gain results therefrom. In the instant case, the sale will not be subject to any internal revenue tax other than the documentary stamp tax, because the seller did not realize any gain from the sale. The gain is measured by the difference between the amount realized (selling price) and the basis of the property. Incidentally, the basis to him is his share in the value of the property received at the time of exchange, which is P2 Million, an amount, just equal to the amount realized from the sale. Personal; Income Tax; Contract of Lease (1995) Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriquez for ten years at a rental of P12,000.00 per year. The condition is that Mr. Enriquez

ALTERNATIVE ANSWER:

Mr. Domingo will realize an income when the lease expires and becomes the owner of the building with a fair market value of P900.000.00 because the condition for the lease is the transfer of the building at the expiration of the lease. The income to be realized by Mr. Domingo at the time of the expiration will consist of the value of the building which is P900.000.00 and any rental income that has accrued as of said date. Personal; Income Tax; Married Individual (1997) Mar and Joy got married in 1990. A week before their marriage. Joy received, by way of donation, a condominium unit worth P750.000.00 from her parents. After marriage, some renovations were made at a cost of P150.000.00. The spouses were both employed in 1991 by the same company. On 30 December 1992, their first child was born, and a second child was born on 07 November 1993. In 1994, they sold the condominium unit and bought a new unit. Under the foregoing facts, what

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

were the events in the life of the spouses that had income tax incidences? SUGGESTED ANSWER:

The events in the life of spouses. Mar and Joy, which have income tax incidences are the following: 1) Their marriage in 1990 qualifies them to claim personal exemption for married individuals; 2) Their employment in 1991 by the same company will make them liable to the income tax imposed on gross compensation income; 3) Birth of their first child in December 1992 would give rise to an additional exemption of P5,000 for taxable year 1992; 4) Birth of their second child in November 1993 would likewise entitle them to claim additional exemption of P5,000 raising their additional personal exemptions to P 10,000 for taxable year 1993; and 5) Sale of their condominium unit in 1994 shall make the spouses liable to the 5% capital gains tax on the gain presumed to have been realized from the sale. Personal; Income Tax; Retiring Alien Employee (2005) An alien employee of the Asian Development Bank (ADB) who is retiring soon has offered to sell his car to you which he imported tax-free for his personal use. The privilege of exemption from tax is granted to qualified personal use under the ADB Charter which is recognized by the tax authorities. If you decide to purchase the car, is the sale subject to tax? Explain. (5%) SUGGESTED ANSWER:

The sales transaction is subject to value added tax (VAT) under Sec. 107(B) of the NIRC, although this provision is expressly excluded from the coverage of the 2005 bar exam. The proceeds from the sale are subject to income tax. The car is considered a capital asset of the retiring alien employee because he is not engaged in the business of buying and selling cars. He therefore derived income, which should be reported in his income tax return. (Sees. 32 and 39, NIRC) Personal; Income Taxation: Non-Resident Citizen (1997) Juan, a Filipino citizen, has immigrated to the United States where he is now a permanent resident. He owns certain income-earning property in the Philippines from which he continues to derive substantial income. He also receives income from his employment in the United States on which the US income tax is paid. On which of the above income is the taxable, if at all, in the Philippines, and how, in general terms, would such income or incomes be taxed? SUGGESTED ANSWER:

Juan, shall be taxed on both his income from the Philippines and on his Income from the United States because his being a citizen makes him taxable on all Income wherever derived. For the income he derives from his property in the Philippines, Juan shall be taxed on his net income under the Simplified Net Income Taxation Scheme (SNITS) whereby he shall be considered as a self-employed individual. His Income as employee in the United States, on the other hand, shall be taxed in

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accordance with the schedular graduated rates of 1%, 2% and 3%. based on the adjusted gross income derived by non-resident citizens from all sources without the Philippines during each taxable year.

Taxable Income: Illegal Income (1995 Bar) Mr. Lajojo is a big-time swindler. In one year he was able to earn P1 Million from his swindling activities. When the Commissioner of Internal Revenue discovered his income from swindling, the Commissioner assessed him a deficiency income tax for such income. The lawyer of Mr. Lajojo protested the assessment on the following grounds: 1) The income tax applies only to legal income, not to illegal income; 2) Mr. Lajojo's receipts from his swindling did not constitute income because he was under obligation to return the amount he had swindled, hence, his receipt from swindling was similar to a loan, which is not income, because for every peso borrowed he has a corresponding liability to pay one peso; and 3) If he has to pay the deficiency income tax assessment, there will be hardly anything left to return to the victims of the swindling. How will you rule on each of the three grounds for the protest? Explain. SUGGESTED ANSWERS:

1) The contention that the income tax applies to legal income and not to illegal income is not correct. Section 28(a) of the Tax Code includes within the purview of gross income all Income from whatever source derived. Hence, the illegality of the income will not preclude the imposition of the income tax thereon. 2) The contention that the receipts from his swindling did not constitute income because of his obligation to return the amount swindled is likewise not correct. When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, he has received taxable income, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged to restore its equivalent (James vs. U.S.,366 U.S. 213, 1961). To treat the embezzled funds not as taxable income would perpetuate injustice by relieving embezzlers of the duty of paying income taxes on the money they enrich themselves with through embezzlement, while honest people pay their taxes on every conceivable type of income. (James vs. U.S.) 3) The deficiency income tax assessment is a direct tax imposed on the owner which is an excise on the privilege to earn an income. It will not necessarily be paid out of the same income that were subjected to the tax. Mr. Lajojo's liability to pay the tax is based on his having realized a taxable income from his swindling activities and will not affect his obligation to make restitution. Payment of the tax is a civil obligation imposed by law while restitution is a civil liability arising from a crime. Taxable or Non-Taxable; Income and Gains (2005)

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Explain briefly whether the following items are taxable or non-taxable: (5%) a) Income from JUETENG; SUGGESTED ANSWER:

Taxable. Gross income includes "all income derived from whatever source" (Sec. 32[A], NIRC), which was interpreted as all income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income. Thus, the income may proceed from a legal or illegal source such as from jueteng. Unlawful gains, gambling winnings, etc. are subject to income tax. The tax code stands as an indifferent neutral party on the matter of where the income comes from. (Commissioner of Internal Revenue v. Manning, G.R. No. L-28398, August 6, 1975)

b)

Gain arising from EXPROPRIATION OF

PROPERTY;

SUGGESTED ANSWER:

Taxable. Sale exchange or other disposition of property to the government of real property is taxable. It includes taking by the government through condemnation proceedings. (Gonzales v. Court of Tax Appeals, G.R. No. L-14532, May 26, 1965)

c)

TAXES paid and subsequently refunded;

SUGGESTED ANSWER:

Taxable only if the taxes were paid and claimed as deduction and which are subsequently refunded or credited. It shall be included as part of gross income in the year of the receipt to the extent of the income tax benefit of said deduction. (Sec. 34[C][1], NIRC) Not taxable if the taxes refunded were not originally claimed as deductions. d)

Recovery of BAD DEBTS previously charged off;

SUGGESTED ANSWER:

Taxable under the TAX BENEFIT RULE. Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. (Sec. 34[E][1], NIRC) This is sometimes referred as the RECAPTURE RULES. e)

Gain on the sale of a car used for personal purposes.

SUGGESTED ANSWER:

Taxable. Since the car is used for personal purposes, it is considered as a capital asset hence the gain is considered income. (Sec. 32[A][3] and Sec. 39[A][1], NIRC) Withholding Tax: Non-Resident Alien (2001) Is a non-resident alien who is not engaged in trade or business or in the exercise of profession in the Philippines but who derived rental income from the Philippines required to file an income tax return on April of the year following his receipt of said income? If not, why not? Explain your answer. (5%) SUGGESTED ANSWER:

No. The income tax on all income derived from Philippine sources by a non-resident alien who is not engaged in trade or business in the Philippines is withheld by the lessee as a Final Withholding Tax. (Section 57(A), NIRC). The government can not require persons outside

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of its territorial jurisdiction to file a return; for this reason, the income tax on income derived from within must be collected through the withholding tax system and thus relieve the recipient of the income the duty to file income tax returns. (Section 51, NIRC).

Withholding Tax: Retirement Benefit (2000) To start a business of his own, Mr. Mario de Guzman opted for an early retirement from a private company after ten (10) years of service. Pursuant to the company's qualified and approved private retirement benefit plan, he was paid his retirement benefit which was subjected to withholding tax. Is the employer correct in withholding the tax? Explain. (2%) SUGGESTED ANSWER:

(a) It depends. An employee retiring under a company's qualified and private retirement plan can only be exempt from income tax on his retirement benefits if the following requisites are met: (1) that the retiring employee must have been in service of the same employer for at least ten (10) years; (2) that he is not less than 50 years of age at the time of retirement; and (3) the benefit is availed of only once. In the instant case, there is no mention whether the employee has likewise complied with requisites number (2) and (3). Withholding Tax: Retirement Benefit (2000) Under what conditions are retirement benefits received by officials and employees of private firms excluded from gross income and exempt from taxation? (3%) SUGGESTED ANSWER:

The conditions to be met in order that retirement benefits received by officials and employees of private firms are excluded from gross income and exempt from taxation are as follows: 2. Under Republic Act No. 4917 (those received under a reasonable private benefit plan): a. the retiring official or employee must have been in service of the same employer for at least ten (10) years; b. that he is not less than fifty (50) years of age at the time of retirement; and c. that the benefit is availed of only once. 3.

Under Republic Act No. 7641 (those received from employers without any retirement plan): a. Those received under existing collective bargaining agreement and other agreements are exempt; and b. In the absence of retirement plan or agreement providing for retirement benefits the benefits are excluded from gross income and exempt from income tax if: i. retiring employee must have served at least five(5) years; and ii. that he is not less than sixty (60) years of age but not more than sixty five (65).

Withholding Tax: Royalty (2002)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

The MKB-Phils. is a BOI-registered domestic corporation licensed by the MKB of the United Kingdom to distribute, support and use in the Philippines its computer software systems, including basic and related materials for banks. The MKB-Phils. provides consultancy and technical services incidental thereto by entering into licensing agreements with banks. Under such agreements, the MKB-Phils. will not acquire any proprietary rights in the licensed systems. The MKB-Phils. pays royalty to the MKB-UK, net of 15% withholding tax prescribed by the RP-UK Tax Treaty. Is the income of the MKB-Phils. under the licensing agreement with banks considered royalty subject to 20% final withholding tax? Why? If not, what kind of tax will its income be subject to? Explain. (5%) SUGGESTED ANSWER:

Yes. The income of MKB-Phils. under the licensing agreement with banks shall be considered as royalty subject to the 20% final withholding tax. The term royalty is broad enough to include technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme. (Sec. 42(4)(f), NIRC). Accordingly, the consultancy and technical services rendered by MKB-Phils, which are incidental to the distribution, support and use of the computer systems of MKB-UK are taxable as royalty. Withholding Tax; Coverage (2004) Citing Section 10, Article VIII of the 1987 Constitution which provides that salaries of judges shall be fixed by law and that during their continuance in office their salary shall not be decreased, a judge of MM Regional Trial Court questioned the deduction of withholding taxes from his salary since it results into a net deduction of his pay. Is the contention of the judge correct? Reason briefly. (5%) SUGGESTED ANSWER:

No. The contention is incorrect. The salaries of judges are not tax-exempt and their taxability is not contrary to the provisions of Section 10, Article VIII of the Constitution on the non-diminution of the salaries of members of the judiciary during their continuance in office. The clear intent of the Constitutional Commission that framed the Constitution is to subject their salaries to tax as in the case of all taxpayers. Hence, the deduction of withholding taxes, being a manner of collecting the income tax on their salary, is not a diminution contemplated by the fundamental law. (Nitafan et. al. v. CIR, 152 SCRA 284 [1987]). Withholding Tax; Domestic Corporation; Cash Dividends (2001) What do you think is the reason why cash dividends, when received by a resident citizen or alien from a domestic corporation, are taxed only at the final tax of 10% and not at the progressive tax rate schedule under Section 24(A) of the Tax Code? Explain your answer. (5%) SUGGESTED ANSWER:

The reason for imposing final withholding tax rather than the progressive tax schedule on cash dividends received by

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a resident citizen or alien from a domestic corporation, is to ensure the collection of income tax on said income. If we subject the dividend to the progressive tax rate, which can only be done through the filing of income tax returns, there is no assurance that the taxpayer will declare the income, especially when there are other items of gross income earned during the year. It would be extremely difficult for the BIR to monitor compliance considering the huge number of stockholders. By shifting the responsibility to remit the tax to the corporation, it is very easy to check compliance because there are fewer withholding agents compared to the number of income recipients.

Likewise, the imposition of a final withholding tax will make the tax available to the government at an earlier time. Finally, the final withholding tax will be a sure revenue to the government unlike when the dividend is treated as a returnable income where the recipient thereof who is in a tax loss position is given the chance to offset such loss against dividend income thereby depriving the government of the tax on said dividend income. [Note: It is recommended that any of the foregoing answers can be given full credit because the question involves a policy issue which can only be found in the deliberations of Congress.] ALTERNATIVE ANSWER:

The reason why cash dividends received by a resident citizen or alien from a domestic corporation are subjected to the final withholding tax of 10% and not at the progressive rate tax schedule is to lessen the impact of a second layer of tax on the same income. Withholding Tax; Income subject thereto (2001) What is meant by income subject to "final tax"? Give at least two examples of income of resident individuals that is subject to the final tax. (3%) SUGGESTED ANSWER:

Income subject to final tax refers to an income wherein the tax due is fully collected through the withholding tax system. Under this procedure, the payor of the income withholds the tax and remits it to the government as a final settlement of the income tax due on said income. The recipient is no longer required to include the item of income subjected to "final tax" as part of his gross income in his income tax returns. Examples of income subject to final tax are dividend income, interest from bank deposits, royalties, etc. Withholding Tax; Non-Resident Alien (1994) Four Catholic parishes hired the services of Frank Binatra, a foreign non-resident entertainer, to perform for four (4) nights at the Folk Arts Theater. Binatra was paid P200.000.00 a night. The parishes earned P1,000,000.00 which they used for the support of the orphans in the city. Who are liable to pay taxes? SUGGESTED ANSWER:

The following are liable to pay income taxes: (a) The four catholic parishes because the income received by them, not being income earned "as such" in the performance of their religious functions and duties, is taxable income under the last paragraph of Sec. 26, in relation to Sec. 26(e) of the Tax Code. In

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

promoting and operating the Binatra Show, they engaged in an activity conducted for profit. (Ibid.) (b) The income of Frank Binatra, a non-resident alien under our law is taxable at the rate of 30%, final withholding tax based on the gross income from the show. Mr. Binatra is not engaged in any trade or business in the Philippines. Withholding Tax; Non-Resident Corporation (1994) Bates Advertising Company is a non-resident corporation duly organized and existing under the laws of Singapore. It is not doing business and has no office in the Philippines. Pilipinas Garment Incorporated, a domestic corporation, retained the services of Bates to do all the advertising of its products abroad. For said services, Bates' fees are paid through outward remittances. Are the fees received by Bates subject to any withholding tax? SUGGESTED ANSWER: The fees paid to Bates Advertising Co., a non-resident foreign corporation are not subject to withholding tax since they are not subject to Philippine tax. They are exempt because they do not constitute income from Philippine sources, the same being compensation for labor or personal services performed outside the Philippines (Sec. 36{c) (3) and Sec. 25(b)(l), Tax Code). Withholding Tax; Reader's Digest Award (1998) Is the prize of one million pesos awarded by the Reader's Digest subject to withholding of final tax? Who is responsible for withholding the tax? What are the liabilities for failure to withhold such tax? [5%] SUGGESTED ANSWER:

1)

It depends. If the prize is considered as winnings derived from sources within the Philippines, it is subject to withholding of final tax (Sec. 24[B] in relation to Sec. 57[A], NIRC). If derived from sources without the Philippines, it is not subject to withholding of final tax because the Philippine tax law and regulations could not reach out to foreign jurisdictions.

2)

The tax shall be withheld by the Reader's Digest or local agent who has control over the payment of the prize.

3)

Any person required to withhold or who willfully fails to withhold, shall, in addition to the other penalties provided under the Code, be liable upon conviction to a penalty equal to the total amount of tax not withheld (Sec. 251, NIRC). In case of failure to withhold the tax or in the case of under withholding, the deficiency tax shall be collected from the payor/withholding agent (1st par.. Sec. 2.57[A], R.R. No. 2-98).

Any person required under the Tax Code or by rules and regulations to withhold taxes at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction be punished by a fine of not less than Ten thousand pesos (Php 10.0OO) and suffer imprisonment of not less than one (1)

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year but not more than ten (10) years (1st par., Sec. 255, NIRC).

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COMMENT: It is suggested that any of the following answers to the question, "What are the liabilities for failure to withhold such a tax?" be given full credit: 1) The payor shall be liable for the payment of the tax which was not withheld. 2) The payer/withholding agent shall be liable to both civil and criminal penalties imposed by the Tax Code.

Withholding Tax; Time Deposit Interest; GSIS Pension (1994) Maribel Santos, a retired public school teacher, relies on her pension from the GSIS and the Interest Income from a time deposit of P500.000.00 with ABC Bank. Is Miss Santos liable to pay any tax on her Income? SUGGESTED ANSWER:

Maribel Santos is exempt from tax on the pension from the GSIS (Sec. 28(b((7)(F), Tax Code). However, as regards her time deposit, the interest she receives thereon is subject to 20% final withholding tax. (Sec. 21(a)(c), Tax Code).

DEDUCTIONS, EXEMPTIONS, EXCLUSIONS & INCLUSIONS Deduction: Facilitation Fees or "kickback" (1998) MC Garcia, a contractor who won the bid for the construction of a public highway, claims as expenses, facilitation fees which according to him is standard operating procedure in transactions with the government. Are these expenses allowable as deduction from gross income? [5%] SUGGESTED ANSWER:

No. The alleged facilitation fees which he claims as standard operating procedure in transactions with the government comes in the form of bribes or "kickback" which are not allowed as deductions from gross income (Section 34(A)(l)(c), NIRC). Deductions: Ordinary Business Expenses (2004) OXY is the president and chief executive officer of ADD Computers, Inc. When OXY was asked to join the government service as director of a bureau under the Department of Trade and Industry, he took a leave of absence from ADD. Believing that its business outlook, goodwill and opportunities improved with OXY in the government, ADD proposed to obtain a policy of insurance on his life. On ethical grounds, OXY objected to the insurance purchase but ADD purchased the policy anyway. Its annual premium amounted to P100,000. Is said premium deductible by ADD Computers, Inc.? Reason. (5%) SUGGESTED ANSWER:

No. The premium is not deductible because it is not an ordinary business expense. The term "ordinary" is used in the income tax law in its common significance and it has the connotation of being normal, usual or customary (Deputy v. Du Pont, 308 US 488 [1940]). Paying premiums for the insurance of a person not connected to the company is not normal, usual or customary.

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Another reason for its non-deductibility is the fact that it can be considered as an illegal compensation made to a government employee. This is so because if the insured, his estate or heirs were made as the beneficiary (because of the requirement of insurable interest), the payment of premium will constitute bribes which are not allowed as deduction from gross income (Section 34[A][l][c], NIRC). On the other hand, if the company was made the beneficiary, whether directly or indirectly, the premium is not allowed as a deduction from gross income (Section 36[A}14], NIRC). Deductions: Amount for Bribe (2001) In order to facilitate the processing of its application for a license from a government office, Corporation A found it necessary to pay the amount of Php 100,000 as a bribe to the approving official. Is the Php 100,000 deductible from the gross income of Corporation A? On the other hand, is the Php 100,000 taxable income of the approving official? Explain your answers. (5%) SUGGESTED ANSWER:

Since the amount of Phpl00.000 constitutes a bribe, it is not allowed as a deduction from gross income of Corporation A, (Section 34(A)(l)(c), NIRC). However, to the recipient government official, the same constitutes a taxable income. All income from legal or illegal sources are taxable absent any clear provision of law exempting the same. This is the reason why gross income had been defined to include income from whatever source derived. (Section 32(A), NIRC). Illegally acquired income constitutes realized income under the claim of right doctrine (Rutkin

v. US, 343 US 130).

Deductions: Capital Losses; Prohibitions (2003) What is the rationale for the rule prohibiting the deduction of capital losses from ordinary gains? Explain. SUGGESTED ANSWER:

It is to insure that only costs or expenses incurred in earning the income shall be deductible for income tax purposes consonant with the requirement of the law that only necessary expenses are allowed as deductions from gross income. The term "NECESSARY EXPENSES" presupposes that in order to be allowed as deduction, the expense must be business connected, which is not the case insofar as capital losses are concerned. This is also the reason why all non-business connected expenses like personal, living and family expenses, are not allowed as deduction from gross income (Section 36(A)(1) of the 1997 Tax Code). The prohibition of deduction of capital losses from ordinary gains is designed to forestall the shifting of deductions from an area subject to lower taxes to an area subject to higher taxes, thereby unnecessarily resulting in leakage of tax revenues. Capital gains are generally taxed at a lower rate to prevent, among others, the bunching of income in one taxable year which is a liberality in the law begotten from motives of public policy (Rule on Holding Period). It stands to reason therefore, that if the transaction results in loss, the same should be allowed only from and to the extent of capital gains and not to be deducted from

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ordinary gains which are subject to a higher rate of income tax. (Chirelstein, Federal Income Taxation, 1977 Ed.)

Deductions: Deductible Items from Gross Income (1999) Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the expense. (5%) 1) Interest on loans used to acquire capital equipment or machinery. 2) Depreciation of goodwill. SUGGESTED ANSWER:

1) Interest on loans used to acquire capital equipment or machinery is a deductible item from gross income. The law gives the taxpayer the option to claim as a deduction or treat as capital expenditure interest incurred to acquire property used in trade, business or exercise of a profession. (Section 34(B) (3), NIRC).

Depreciation for goodwill is not allowed as de2) duction from gross income. While intangibles maybe allowed to be depreciated or amortized, it is only allowed to those intangibles whose use in the business or trade is definitely limited in duration. (Basilan Estates, Inc. v, CIR, 21 SCRA 17). Such is not the case with goodwill. ALTERNATIVE ANSWER:

Depreciation of goodwill is allowed as a deduction from gross income if the goodwill is acquired through capital outlay and is known from experience to be of value to the business for only a limited period. (Section 107, Revenue Regulations No. 2). In such case, the goodwill is allowed to be amortized over its useful life to allow the deduction of the current portion of the expense from gross income, thereby paving the way for a proper matching of costs against revenues which is an essential feature of the income tax system. Deductions: Income Tax: Donation: Real Property (2002) On December 06, 2001, LVN Corporation donated a piece of vacant lot situated in Mandaluyong City to an accredited and duly registered non-stock, non-profit educational institution to be used by the latter in building a sports complex for students. A. May the donor claim in full as deduction from its gross income for the taxable year 2001 the amount of the donated lot equivalent to its fair market value/zonal value at the time of the donation? Explain your answer. (2%) SUGGESTED ANSWER:

A. No. Donations and/or contributions made to qualified donee institutions consisting of property other than money shall be based on the acquisition cost of the property. The donor is not entitled to claim as full deduction the fair market value/zonal value of the lot donated. (Sec. 34(H), NIRC). B. In order that donations to non-stock, non-profit educational institution may be exempt from the donor's gift tax, what conditions must be met by the donee? (3%) SUGGESTED ANSWER:

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

B. In order that donations to non-stock, non-profit educational institution may be exempt from the donor's gift tax, it is required that not more than 30% of the said gifts shall be used by the donee-institution for administration purposes. (Sec. 101(A)(3), NIRC).

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that they are not allowed to deduct any item from their gross income for purposes of computing their net taxable income. With the passage of the Comprehensive Tax Reform Act of 1997, is this complaint still valid? Explain your answer. (5%) SUGGESTED ANSWER:

Deductions: Non-Deductible Items; Gross Income (1999) Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the deduction. (5%) 1. Reserves for bad debts. 2. Worthless securities SUGGESTED ANSWER:

1.

2.

RESERVE FOR BAD DEBTS are not allowed as deduction from gross income. Bad debts must be charged off during the taxable year to be allowed as deduction from gross income. The mere setting up of reserves will not give rise to any deduction. (Section 34(E). NTRC). WORTHLESS SECURITIES, which are ordinary assets, are not allowed as deduction from gross income because the loss is not realized. However, if these worthless securities are capital assets, the owner is considered to have incurred a capital loss as of the last day of the taxable year and, therefore, deductible to the extent of capital gains. (Section 34(D)(4), NIRC). This deduction, however, is not allowed to a bank or trust company. (Section 34(E)(2), NIRC).

Deductions: Requisites; Deducibility of a Loss (1998) Give the requisites for deducibility of a loss. (5%1 SUGGESTED ANSWER:

The requisites for deducibility of a loss are 1) loss belongs to the taxpayer; 2) actually sustained and charged off during the taxable year; 3) evidenced by a closed and completed transaction; 4) not compensated by Insurance or other forms of indemnity; 5) not claimed as a deduction for estate tax purposes in case of individual taxpayers; and 6) if it is a casualty loss it is evidenced by a declaration of loss filed within 45 days with the BIR. COMMENT:

The question is vague. There are different kinds of losses recognized as deductible under the Tax Code. These are losses, in general (Sec. 34[D](1); net operating loss carryover (Sec. 34[D](3); capital losses (Sec. 34[D](4); Losses from wash sales of stocks or securities (Sec. 34[D](5) in relation to Sec. 38); wagering losses (Sec. 34[D](6); and abandonment losses (Sec. 34(D](7). Losses are also deductible from the gross estate (Sec. 86[A](l)(e), NIRC). Considering the time allotted for a five (5) point question is only nine (9) minutes, the candidates would not be able to write down a complete answer. It is suggested that any answer which states the requisites for the deducibility of any of the above losses be given full credit.

Deductions; Income Tax: Allowable Deductions (2001) Taxpayers whose only income consists of salaries and wages from their employers have long been complaining

No more. Gross compensation income earners are now allowed at least an item of deduction in the form of premium payments on health and/or hospitalization insurance in an amount not exceeding P2,400 per annum [Section 34(M)]. This deduction is allowed if the aggregate family income do not exceed P250.000 and by the spouse, in case of married individual, who claims additional personal exemption for dependents. Deductions; Vanishing Deduction; Purpose (2006) Vanishing deduction is availed of by taxpayers to: a. Correct his accounting records to reflect the actual deductions made b. Reduce his gross income c. Reduce his output value-added tax liability d. Reduce his gross estate Choose the correct answer. Explain. (5%) SUGGESTED ANSWER:

(D) reduce his gross estate. Vanishing deduction or property previously taxed is one of the items of deduction allowed in computing the net estate of a decedent (Section 86[A][2] and 86[B][2], NIRC). Exclusion & Inclusion; Gross Receipts (2006) Congress enacts a law imposing a 5% tax on gross receipts of common carriers. The law does not define the term "gross receipts." Express Transport, Inc., a bus company plying the Manila-Baguio route, has time deposits with ABC Bank. In 2005, Express Transport earned P1 Million interest, after deducting the 20% final withholding tax from its time deposits with the bank. The BIR wants to collect a 5% gross receipts tax on the interest income of Express Transport without deducting the 20% final withholding tax. Is the BIR correct? Explain. (5%) ALTERNATIVE ANSWER:

Yes. The term "Gross Receipts" is broad enough to include income constructively received by the taxpayer. The amount withheld is paid to the government on its behalf, in satisfaction of withholding taxes. The fact that it did not actually receive the amount does not alter the fact that it is remitted in satisfaction of its tax obligations. Since the income withheld is an income owned by Express Transport, the same forms part of its gross receipts (CIR v. Solidbank Corp., G.R. No. 148191, November 25, 2003).

ALTERNATIVE ANSWER:

No. The term "gross receipts," as applied to the business of a common carrier consists of revenues from carriage of goods, cargoes, and passengers. It does not comprehend or include interest income which is properly described as "Other Income." (NOTA BENE: This question pertains to a percentage tax on Gross Receipts which is excluded from the Bar coverage)

Exclusion vs. Deduction from Gross Income (2001)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

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Distinguish "Exclusion from Gross Income" from "Deductions From Gross Income". Give an example of each. (2%)

which are exclusions from gross income pursuant to Section 28(b)(5) of the Tax Code.

SUGGESTED ANSWER:

Exclusions & Inclusions: Executive Benefits (1995) Mr. Adrian is an executive of a big business corporation. Aside from his salary, his employer provides him with the following benefits: free use of a residential house in an exclusive subdivision, free use of a limousine and membership in a country club where he can entertain customers of the corporation. Which of these benefits, if any, must Mr. Adrian report as income? Explain.

EXCLUSIONS from gross income refer to a flow of

wealth to the taxpayer which are not treated as part of gross income, for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition of income. (Section 61, RR No. 2). DEDUCTIONS from gross income, on the other hand, are the amounts, which the law allows to be deducted from gross income in order to arrive at net income. Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net income. Exclusions are something received or earned by the taxpayer which do not form part of gross income while deductions are something spent or paid in earning gross income. Example of an exclusion from gross income is proceeds of life insurance received by the beneficiary upon the death of the insured which is not an income or 13th month pay of an employee not exceeding P30.000 which is an income not recognized for tax purposes. Example of a deduction is business rental. Exclusions & Inclusions: Benefits on Account of Injury (1995) Mr. Infante was hit by a wayward bus while on his way to work. He survived but had to pay P400.000.00 for his hospitalization. He was unable to work for six months which meant that he did not receive his usual salary of P 10,000.00 a month or a total of P60.000.00. He sued the bus company and was able to obtain a final judgment awarding him P400.000.00 as reimbursement for his hospitalization, P60.000 for the salaries he failed to receive while hospitalized, P200,000.00 as moral damages for his pain and suffering, and P 100,000.00 as exemplary damages. He was able to collect in full from the judgment. How much income did he realize when he collected on the judgment? Explain. SUGGESTED ANSWER:

None. The P200.000 moral and exemplary damages are compensation for injuries sustained by Mr. Infante. The P400.000.00 reimbursement for hospitalization expenses and the P60.000.00 for salaries he failed to receive are 'amounts of any damages received whether by suit or agreement on account of such injuries.' Section 28(b)(5) of the Tax Code specifically exclude these amounts from the gross income of the individual injured. (Section 28(b), NIRC and Sec. 63 Rev. Reg. No. 2) ALTERNATIVE ANSWER:

The income realized from the judgment is only the recovery for lost salaries. This constitutes taxable income because were it not for the injury, he could have received it from his employer as compensation income. All the other amounts received are either compensation for injuries or damages received on account of such injuries'

SUGGESTED ANSWER:

Mr. Adrian must report the imputed rental value of the house and limousine as income. If the rental value exceeds the personal needs of Mr. Adrian because he is expected to provide accommodation in said house for company guests or the car is used partly for business purpose, then Mr. Adrian is entitled only to a ratable rental value of the house and limousine as exclusion from gross income and only a reasonable amount should be reported as income. This is because the free housing and use of the limousine are given partly for the convenience and benefit of the employer (Collector vs. Henderson). ALTERNATIVE ANSWER:

Remuneration for services although not given in the form of cash constitutes compensation income. Accordingly, the value for the use of the residential house is part of his compensation income which he must report for income tax purposes. However, if the residential house given to Mr. Adrian for his free use as an executive is also used for the benefit of the corporation/employer, such as for entertaining customers of the corporation, only 50% of the rental value or depreciation (if the house is owned by the corporation) shall form part of compensation income (RAMO 1-87). The free use of a limousine and the membership in a country club is not part of Mr. Adrian's compensation income because they were given for the benefit of the employer and are considered to be necessary incidents for the proper performance of his duties as an executive of the corporation. The membership fee in the country club needs to be reported as income. It appears that the membership of Mr. Adrian to the country club is primarily for the benefit and convenience of the employer. This is to enable Mr. Adrian to entertain company guests (Collector vs. Henderson).

Exclusions & Inclusions; Assets; Resident Alien (2005) Ralph Donald, an American citizen, was a top executive of a U.S. company in the Philippines until he retired in 1999. He came to like the Philippines so much that following his retirement, he decided to spend the rest of his life in the country. He applied for and was granted a permanent resident status the following year. In the spring of 2004, while vacationing in Orlando, Florida, USA, he suffered a heart attack and died. At the time of his death, he left the following properties: (a) bank deposits with Citibank Makati and Citibank Orlando, Florida; (b) a resthouse in Orlando, Florida; (c) a condominium unit in

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Makati; (d) shares of stock in the Philippine subsidiary of the U.S. Company where he worked; (e) shares of stock in San Miguel Corp. and PLOT; (f) shares of stock in Disney World in Florida; (g) U.S. treasury bonds; and (g) proceeds from a life insurance policy issued by a U.S. corporation. Which of the foregoing assets shall be included in the taxable gross estate in the Philippines? Explain. (5%) SUGGESTED ANSWER:

All of the properties enumerated except (g), the proceeds from life insurance, are included in the taxable gross estate in the Philippines. Ralph Donald is considered a resident alien for tax purposes since he is an American Citizen and was a permanent resident of the Philippines at the time of his death. The value of the gross estate of a resident alien decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated. (Sec. 85, NIRC) The other item, (g) proceeds from a life insurance policy, may also be included on the assumption that it was Ralph Donald who took out the insurance upon his own life, payable upon his death to his estate. (Sec. 85[E], NIRC) Exclusions & Inclusions; Benefits on Account of Death (1996) X, an employee of ABC Corporation died. ABC Corporation gave X’s widow an amount equivalent to X’s salary for one year. Is the amount considered taxable income to the widow? Why? SUGGESTED ANSWER:

No. The amount received by the widow from the decedent's employer may either be a gift or a separation benefit on account of death. Both are exclusions from gross income pursuant to provisions of Section 28(b) of the Tax Code. ALTERNATIVE ANSWER:

No. Since the amount was given to the widow and not to the estate, it becomes obvious that the amount is more of a gift. In one U.S. tax case (Estate of Hellstrom vs. Commissioner, 24 T.C. 916), it was held that payments to the widow of the president of a corporation of the amount the president would have received in salary if he lived out the year constituted a gift and not an income. The controlling facts which would lead to the conclusion that the amount received by the widow is not an income are as follows: 7) the gift was made to the widow rather than the estate: 8) there was no obligation for the corporation to make further payments to the deceased; 9) the widow had never worked for the corporation; 10) the corporation received no economic benefit; and 11) the deceased had been fully compensated for his services (Estate of Sydney Carter vs. Commissioner, 453 F. 2d 61 (2dCir. 1971). Exclusions & Inclusions; Benefits on Account of Injury (2005) JR was a passenger of an airline that crashed. He survived the accident but sustained serious physical injuries which required hospitalization for 3 months. Following negotiations with the airline and its insurer, an agreement

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was reached under the terms of which JR was paid the following amounts: P500,000.00 for his hospitalization; P250,000.00 as moral damages; and P300,000.00 for loss of income during the period of his treatment and recuperation. In addition, JR received from his employer the amount of P200,000.00 representing the cash equivalent of his earned vacation and sick leaves. Which, if any, of the amounts he received are subject to income tax? Explain. (5%) SUGGESTED ANSWER:

All amounts received from the airline company are excluded from gross income. Under Sec. 32(B)(4) of the NIRC, amounts of damages received, whether by suit or agreement, on account of personal injuries or sickness are excluded from gross income. Since the amounts received from the airline company were received as damages by agreement on account of personal injuries, all shall be excluded from JR's gross income. The amount of P200,000.00, less the equivalent of not more than 10 days of vacation leave, received by JR from his employer, is subject to income tax under Sec. 2.78.1 (a) (7) of R.R. No. 2-98. Exclusions & Inclusions; Compensation for personal injuries or sickness (2003) X, while driving home from his office, was seriously injured when his automobile was bumped from behind by a bus driven by a reckless driver. As a result, he had to pay P200,000.00 to his doctor and P100, 000.00 to the hospital where he was confined for treatment. He filed a suit against the bus driver and the bus company and was awarded and paid actual damages of P300, 000.00 (for his doctor and hospitalization bills), P100,000.00 by way of moral damages, and P50,000.00 for what he had to pay his attorney for bringing his case to court. Which, if any, of the foregoing awards are taxable income to X and which are not? Explain. (8%) SUGGESTED ANSWER:

Nothing is taxable. Under the Tax Code, any amount received as compensation for personal injuries or sickness, plus the amounts for any damages received whether by suit or agreement, on account of such injuries or sickness shall be excluded from gross income. Since the entire amount of P450, 000.00 received are award of damages on account of the injuries sustained; all shall be excluded from his gross income. Obviously, these damages are considered by law as mere return of capital. (Section 32(B)(4), 1997 Tax Code) Exclusions & Inclusions; Facilities or Privileges; Military Camp (1995) Capt. Canuto is a member of the Armed Forces of the Philippines. Aside from his pay as captain, the government gives him free uniforms, free living quarters in whatever military camp he is assigned, and free meals inside the camp. Are these benefits income to Capt. Canuto? Explain. SUGGESTED ANSWER:

No, the free uniforms, free living quarters and the free meals inside the camp are not income to Capt. Canute because these are facilities or privileges furnished by the

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

employer for the employer's convenience which are necessary incidents to proper performance of the military personnel's duties. Exclusions & Inclusions; Gifts over and above the Retirement Pay (1995) Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he received retirement pay equivalent to two months' salary for every year of service as provided in the hospital BIR approved retirement plan. The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was provided for in the hospital's retirement plan in view of his loyalty and invaluable services for forty-five years; hence, it resolved to pay him a gratuity of P1 Million over and above his retirement pay. The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation income of Quiroz who protested that it was excluded from income because (a) it was a retirement pay, and (b) it was a gift. 1) Is Mr. Quiroz correct in claiming that the additional P1 Million was retirement pay and therefore excluded from income? Explain. 2) Is Mr. Quiroz correct in claiming that the additional P1 Million was gift and therefore excluded from income? Explain. SUGGESTED ANSWERS:

1) No. The additional P1 million is not a retirement pay but a part of the gross compensation income of Mr. Quiroz. This is not a retirement benefit received in accordance with a reasonable private benefit plan maintained by the employer as it was not paid out of the retirement plan. Accordingly, the amount received in excess of the retirement benefits that he is entitled to receive under the BIR-approved retirement plan would not qualify as an exclusion from gross income. 2) No. The amount received was in consideration of his loyalty and invaluable services to the company which is clearly a compensation income received on account of employment. Under the employer's 'motivation test,' emphasis should be placed on the value of Mr. Quiroz services to the company as the compelling reason for giving him the gratuity, hence it should constitute a taxable income. The payment would only qualify as a gift if there is nothing but 'good will, esteem and kindness' which motivated the employer to give the gratuity. (Stonton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein problem. ALTERNATIVE ANSWER:

Yes. The 1 million is not compensation income subject to income tax but a gift from his employer. There was no evidence presented to show that he was not fully compensated for his 45 years of service. If his services contributed in a large measure to the success of the hospital, it did not give rise to a recoverable debt. The P1 million is purely a gratuity from the company. It is a taxable gift to the transferor. Under the Tax Code, gifts are excluded from gross income therefore exempt from income tax. (Sec. 28{b)(3), NIRC; Pirovano vs. Commissioner)

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Exclusions & Inclusions; ITR; 13th month pay and de minimis benefits (2005) State with reasons the tax treatment of the following in the preparation of annual income tax returns: 13th month pay and de minimis benefits; SUGGESTED ANSWER:

The 13th month pay not exceeding P30,000.00 shall not be reported in the income tax return because it is excluded from gross income (Sec. 32[B][7], [e], NIRC) The amount of the 13th month pay in excess of P30,000.00 shall be reported in the annual income tax return.

De minimis benefits which do not exceed the ceilings

are excluded from gross income, and not to be considered for determining the P30,000.00 ceiling hence not reportable in the annual income tax return. (Sec. 2.78.1[A][3], R.R. 2-98 as amended by Sec. 2.33 [C] and further amended by R.R. No. 8-2000) Exclusions & Inclusions; ITR; Dividends received by a domestic corporation (2005) State with reasons the tax treatment of the following in the preparation of annual income tax returns: Dividends received by a domestic corporation from (i) another domestic corporation; and (ii) a foreign corporation;

SUGGESTED ANSWER:

(i) Dividends received by a domestic corporation from a domestic corporation shall not be subject to tax (Sec. 27[D][4], NIRC), hence, excluded from the income tax return. (ii) Dividends received by a domestic corporation from a foreign corporation form part of the gross income and are accordingly subject to net income tax, hence included in the annual ITR (Sec. 42[A][2][b], NIRC), hence, must be included in the income tax return. Exclusions & Inclusions; ITR; Income realized from sale (2005) State with reasons the tax treatment of the following in the preparation of annual income tax returns: Income realized from sale of: (i) capital assets; and (ii) ordinary assets. SUGGESTED ANSWER:

(i) Income realized from sale of capital assets is subject to the final withholding tax at source and therefore excluded from the Income Tax Return (Sec. 24[C] and [D], NIRC); (ii) Income realized from sale of ordinary assets is part of Gross Income, included in the Income Tax Return. (Sec. 32[A][3], NIRC) Exclusions & Inclusions; ITR; Interest on deposits (2005) State with reasons the tax treatment of the following in the preparation of annual income tax returns: Interest on deposits with: (i) BPI Family Bank; and (ii) a local offshore banking unit of a foreign bank; SUGGESTED ANSWER:

Both items are excluded from the income tax return: (i) Interest income from any currency bank deposit is considered passive income from sources within the Philippines and subject to final tax. Since it is subject to

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

final tax it is not to be included in the annual ITR. (Sec. 24[B][1], NIRC) (u) Same as No. (j). Exclusions & Inclusions; ITR; Proceeds of life insurance (2005) State with reasons the tax treatment of the following in the preparation of annual income tax returns: Proceeds of life insurance received by a child as irrevocable beneficiary; SUGGESTED ANSWER:

Not to be reported in the annual income tax returns because the proceeds of the life insurance are excluded from gross income. Proceeds of Life insurance policies paid to the heirs or beneficiaries upon the death of the insured is an exclusion from gross income. (Sec.32[B][l],NIRC) Exclusions & Inclusions; Life Insurance Policy (2003) On 30 June 2000, X took out a life insurance policy on his own life in the amount of P2,000,000.00. He designated his wife, Y, as irrevocable beneficiary to P1,000,000.00 and his son, Z, to the balance of P1,000,000.00 but, in the latter designation, reserving his right to substitute him for another. On 01 September 2003, X died and his wife and son went to the insurer to collect the proceeds of X's life insurance policy. (8%) (a) Are the proceeds of the insurance subject to income tax on the part of Y and Z for their respective shares? Explain. (b) Are the proceeds of the insurance to form part of the gross estate of X? Explain. SUGGESTED ANSWERS:

(a) No. The law explicitly provides that proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are excluded from gross income and is exempt from taxation. The proceeds of life insurance received upon the death of the insured constitute a compensation for the loss of life, hence a return of capital, which is beyond the scope of income taxation. (Section 32(B)(1) 1997 Tax Code) (b) Only the proceeds of P1,000,000.00 given to the son, Z, shall form part of the Gross Estate of X. Under the Tax Code, proceeds of life insurance shall form part of the gross estate of the decedent to the extent of the amount receivable by the beneficiary designated in the policy of the insurance except when it is expressly stipulated that the designation of the beneficiary is irrevocable. As stated in the problem, only the designation of Y is irrevocable while the insured/decedent reserved the right to substitute Z as beneficiary for another person. Accordingly, the proceeds received by Y shall be excluded while the proceeds received by Z shall be included in the gross estate of X. (Sect/on 85(E), 1997 Tax Code) Exemptions: Charitable Institutions (2000) Article VI, Section 28 (3) of the 1987 Philippine Constitution provides that charitable institutions, churches and personages or covenants appurtenant thereto, mosques, non-profit cemeteries and all lands, buildings and improvements actually, directly and

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exclusively used for religious, charitable or educational purposes shall be exempt from taxation. a) To what kind of tax does this exemption apply? (2%) SUGGESTED ANSWER: This exemption applies only to property taxes. What is exempted is not the institution itself but the lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. (Commissioner of Internal Revenue v. Court of

Appeals, et al, G.R. No. 124043, October 14, 1998).

b) Is proof of actual use necessary for tax exemption purposes under the Constitution? (3%) SUGGESTED ANSWER:

Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show that the taxpayer has complied with the requirements for exemption. Furthermore, real property taxation is based on use and not on ownership, hence the same rule must also be applied for real property tax exemptions. Exemptions: Charitable Institutions; Churches (1996) The Constitution exempts from taxation charitable institutions, churches, parsonages or convents appurtenant thereto, mosques arid non-profit cemeteries and lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. Mercy Hospital is a 100-bed hospital organized for charity patients. Can said hospital claim exemption from taxation under the above-quoted constitutional provision? Explain. SUGGESTED ANSWER:

Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only with respect to real property taxes provided that such real properties are used actually, directly and exclusively for charitable purposes. Exemptions: Educational institution (2004) Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop's family, rather than the Archdiocese, which of those above cited income and donation would be exempt from taxation? Explain briefly. (5%) SUGGESTED ANSWER:

If XYZ Colleges is a proprietary educational institution, all of its income from school related and non-school related activities will be subject to the income tax based on its aggregate net income derived from both activities (Section 27(B), NMC). Accordingly, all of the income enumerated in the problem will be taxable. The donation of lot and building will likewise be subject to the donor's tax because a donation to an educational institution is exempt only if the school is incorporated as a non-stock entity paying no dividends. Since the donee is a proprietary educational institution, the donation is taxable (Section 101(AX3), NJRC). Exemptions: Gifts & Donations (1994) In 1991, Imelda gave her parents a Christmas gift of P 100,000.00 and a donation of P50,000.00 to her parish

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

church. She also donated a parcel of land for the construction of a building to the PUP Alumni Association, a non-stock, non-profit organization. Portions of the building shall be leased to generate income for the association. 1) Is the Christmas gift of P 100,000.00 to Imelda's parents subject to tax? 2) How about the donation to the parish church? 3) How about the donation to the P.U.P, Alumni Association? SUGGESTED ANSWER:

1)

The Christmas gift of P100,000.00 given by Imelda to her parents is taxable up to P50,000.00 because under the law (Sec. 92 (a) of the Tax Code), net gifts not exceeding P50,000.00 are exempt.

2)

The donation of P50,000.00 to the parish church even assuming that it is exclusively for religious purposes is not tax-exempt because the exemption granted under Article VI, Sec. 28(3) of the Constitution applies only to real estate taxes (Lladoc

v. Commissioner, 14SCRA292).

3)

The donation to the P.U.P. Alumni Association does not also qualify for exemption both under the Constitution and the aforecited law because it is not an educational or research organization, corporation, institution, foundation or trust.

ALTERNATIVE ANSWER:

Donation to the P.U.P. Alumni Association is exempt from donor's tax if it is proven that the association is a nonstock, non-profit charitable association, paying no dividends, governed by trustees who receive no compensation, and devoting all its income to the accomplishment and promotion of the purposes enumerated in its articles of incorporation. Not more than 30% of the gift should be used for administration purposes by the donee. Exemptions: Head of the Family: (1998) Arnold, who is single, cohabits with Vilma, who is legally married to Zachary. Arnold and Vilma have six minor children who live and depend upon Arnold for their chief support. The children are not married and not gainfully employed. 1) For income tax purposes, may Arnold be considered as "head of a family?" [3%] 2) Is Arnold entitled to deduct from his gross income, an additional exemption for each of his illegitimate child? [2%] SUGGESTED ANSWER:

1)

2)

Yes. An unmarried man who has illegitimate minor children who live with him and depend upon him for their chief support is considered as "head of the family" (RR No. 2-98 implementing Section 35, NIRC). No. Arnold is only entitled to deduct additional personal exemption for four (4) out of the six (6) illegitimate children. The maximum number of dependents for purposes of the additional personal exemption is four. (Sec. 35, NIRC).

Exemptions: Non-Profit Educational Institutions (2000)

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Under Article XTV, Section 4 (3) of the 1987 Philippine Constitution, all revenues and assets of nonstock, nonprofit educational institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes and duties. Are income derived from dormitories, canteens and bookstores as well as interest income on bank deposits and yields from deposit substitutes automatically exempt from taxation? Explain. (5%) SUGGESTED ANSWER:

No. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt from taxation. There must be a showing that the incomes are included in the school's annual information return and duly audited financial statements together with: 1. Certifications from depository banks as to the amount of interest income earned from passive investments not subject to the 20% final withholding tax; 2. Certification of actual, direct and exclusive utilization of said income for educational purposes; 3. Board resolution on proposed project to be funded out of the money deposited in banks or placed in money market placements (Finance Department Order No. 149-95 issued November 24, 1995), which must be used actually, directly and exclusively for educational purposes. The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation. There is still the requirement for evidence to show actual, direct and exclusive use for educational purposes. It is to be noted that the 1987 Philippine Constitution does not distinguish with respect to the source or origin of the income. The distinction is with respect to the use which should be actual, direct and exclusive for educational purposes. Consequently, the provisions of Sec. 30 of the NIRC of 1997, that a non-stock and nonprofit educational institution is exempt from taxation only "in respect to income received by them as such" could not affect the constitutional tax exemption. Where the Constitution does not distinguish with respect to source or origin, the Tax Code should not make distinctions. Exemptions: Non-Profit Entity; Ancillary Activity & Incidental Operations (1994) The University of Bigaa, a non-stock, non-profit entity, operates a canteen for its students and a bookstore inside the campus. It also operates two dormitories for its students, one of which is in the campus. Is the University liable to pay income taxes for the operation of the: 1) canteen? 2) bookstore? 3) two dormitories? SUGGESTED ANSWER:

1) For the operation of the canteen inside the campus, the income thereon being incidental to the operations of the University as a school, is exempt (Art. XIV (4) (3), Constitution; DECS Regulations No. 137-87, Dec. 16, 1987). 2) For the same reasons, the University of Bigaa is not liable to pay income taxes for the operation of the

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

bookstore, since this is an ancillary activity the conduct of which is carried out within the school premises. 3) The University of Bigaa shall not be liable to pay income taxes for the operation of the dormitory located in the campus, for same reasons as the foregoing. However, the latter shall be liable for income taxes on income from operations of the dormitory located outside the school premises. Exemptions: Non-Stock/ Non-Profit Association (2002) XYZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social welfare purposes. Last January 3, 2000 it sold a portion of its lot used for religious purposes and utilized the entire proceeds for the construction of a building to house its free Day and Night Care Center for children of single parents. In order to subsidize the expenses of the Day and Night Care Center and to support its religious, charitable and social welfare projects, the Foundation leased the 300square meter area of the second and third floors of the building for use as a boarding house. The Foundation also operates a canteen and a gift shop within the premises, all the income from which is used actually, directly, and exclusively for the purposes for which the Foundation was organized. A. Considering the constitutional provision granting tax exemption to non-stock corporations such as those formed exclusively for religious, charitable or social welfare purposes, explain the meaning of the last paragraph of said Sec. 30 of the 1997 Tax Code which states that “Income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under this Code." (5%) SUGGESTED ANSWER:

A. The exemption contemplated in the Constitution covers real estate tax on real properties actually, directly and exclusively used for religious, charitable or social welfare purposes. It does not cover exemption from the imposition of the income tax which is within the context of Section 30 of the Tax Code. As a rule, non-stock nonprofit corporations organized for religious, charitable or social welfare purposes are exempt from income tax on their income received by them as such. However, if these religious, charitable or social welfare corporations derive income from their properties or any of their activities conducted for profit, the income tax shall be imposed on said items of income irrespective of their disposition. (Sec. 30, NIRC; CIR v, YMCA, GR No. 124043, 1998). B. Is the income derived by XYZ Foundation from the sale of a portion of its lot, rentals from its boarding house and the operation of its canteen and gift shop subject to tax? Explain. (5%) SUGGESTED ANSWER:

B. Yes. The income derived from the sale of lot and rentals from its boarding house are considered as income from properties which are subject to tax. Likewise, the income from the operation of the canteen and gift shop

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are income from its activities conducted for profit which are subject to tax. The income tax attaches irrespective of the disposition of these incomes. (Sec. 30, NIRC; CIR v. YMCA, GR No. 124043, 1998). Exemptions: Prize of Peace Poster Contest (2000) Jose Miranda, a young artist and designer, received a prize of P100,000.00 for winning in the on-the-spot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the gross income of the recipient for tax purposes? Explain. (3%) SUGGESTED ANSWER:

No. It is not includable in the gross income of the recipient because the same is subject to a final tax of 20%, the amount thereof being in excess of P10.000 (Sec. 24(B){1), NIRC of 1997). The prize constitutes a taxable income because it was made primarily in recognition of artistic achievement which he won due to an action on his part to enter the contest. [Sec. 32 (B) (7) (c), NIRC of 1997] Since it is an on-the-spot contest, it is evident that he must have joined the contest in order to earn the prize or award. Exemptions: Prizes & Awards; Athletes (1996) Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor's tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide. SUGGESTED ANSWER:

The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income tax. R.A. No. 7549 explicitly provides that 'All prizes and awards granted to athletes in local and international sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax". Neither is the BIR correct in collecting the donor's tax from Ayala Land Corporation. The law is clear when it categorically stated "That the donor's of said prizes and awards shall be exempt from the payment of the donor's tax." Exemptions: Retirement Benefits: Work Separation (1999) A Co., a Philippine corporation, has two divisions — manufacturing and construction. Due to the economic situation, it had to close its construction division and layoff the employees in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same employer at the time of retirement. There are 2 groups of employees to be laid off: 1) Employees who are at least 50 years of age and has at 10 years of service at the time of termination of employment. 2) Employees who do no meet either the age or length of service A Co. plans to give the following:

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

For category (A) employees - the benefits under the BIR approved plan plus an ex gratia payment of one month of every year of service. b. For category (B) employees - one month for every year of service. For both categories, the cash equivalent of unused vacation and sick leave credits.

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A Co. seeks your advice as to whether or not it will subject any of these payments to WT. Explain your advice. (5%) SUGGESTED ANSWER:

For category A employees, all the benefits received on account of their separation are not subject to income tax, hence no withholding tax shall be imposed. The benefits received under the BIR-approved plan upon meeting the service requirement and age requirement are explicitly excluded from gross income. The ex gratia payment also qualifies as an exclusion from gross income being in the nature of benefit received on account of separation due to causes beyond the employees' control. (Section 32(B), NIRC). The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits excluded from gross income (CIR v. Court of Appeals, GR No. 96O16, October 17, 1991). For category B employees, all the benefits received by them will also be exempt from income tax, hence not subject to withholding tax. These are benefits received on account of separation due to causes beyond the employees' control, which are specifically excluded from gross income. (Section 32(B), NIRC). ALTERNATIVE ANSWER;

All of the payments are not subject to income tax and should not also be subject to withholding tax. The employees were laid off, hence separated for a cause beyond their control. Consequently, the amounts to be paid by reason of such involuntary separation are excluded from gross income, irrespective of whether the employee at the time of separation has rendered less than ten years of service and/or is below fifty years of age. (Section 32(B), NIRC). Exemptions: Separation Pay (1994) Pedro Reyes, an official of Corporation X, asked for an "earlier retirement" because he was emigrating to Australia. He was paid P2.000.000.00 as separation pay in recognition of his valuable services to the corporation. Juan Cruz, another official of the same company, was separated for occupying a redundant position. He was given P1,000.000.00 as separation pay. Jose Bautista was separated due to his failing eyesight. He was given P500.000.00 as separation pay. All the three (3) were not qualified to retire under the BIR-approved pension plan of the corporation. 1) Is the separation pay given to Reyes subject to income tax? 2) How about the separation pay received by Cruz? 3) How about the separation pay received by Bautista?

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SUGGESTED ANSWER:

1) The separation pay given to Reyes is subject to income tax as compensation income because it arises from a service rendered pursuant to an employer-employee relationship. It is not considered an exclusion from gross income because the rule in taxation is tax construed in strictissimi juris or the rule on strict Interpretation of tax exemptions. 2) The separation pay received by Cruz is not subject to income tax because his separation from the company was involuntary (Sec. 28 b (7), Tax Code). 3) The separation pay received by Bautista is likewise not subject to tax. His separation is due to disability, hence involuntary. Under the law, separation pay received through involuntary causes are exempt from taxation. Exemptions: Separation Pay (1995) Mr. Jacobo worked for a manufacturing firm. Due to business reverses the firm offered voluntary redundancy program in order to reduce overhead expenses. Under the program an employee who offered to resign would be given separation pay equivalent to his three month's basic salary for every year of service. Mr. Jacobo accepted the offer and received P400.000.00 as separation pay under the program. After all the employees who accepted the offer were paid, the firm found its overhead still excessive. Hence it adopted another redundancy program. Various unprofitable departments were closed. As a result, Mr. Kintanar was separated from the service. He also received P400.000.00 as separation pay. 1) Did Mr. Jacobo derive income when he received his separation pay? Explain. 2) Did Mr. Kintanar derive income when he received his separation pay? Explain. SUGGESTED ANSWER:

1) Yes, Mr. Jacobo derived a taxable income when he received his separation pay because his separation from employment was voluntary on his part in view of his offer to resign. What is excluded from gross income is any amount received by an official or employee as a consequence of separation of such official or employee from the service of the employer for any cause beyond the control of the said official or employee (Sec 28, NIRC). ALTERNATIVE ANSWER:

No, Mr. Jacobo did not derive any taxable income because the separation pay was due to a retrenchment policy adopted by the company so that any employee terminated by virtue thereof is considered to have been separated due to causes beyond the employee's control. The voluntary redundancy program requiring employees to make an offer to resign is only considered as a tool to expedite the lay-off of excess manpower whose services are no longer needed by the employer, but is not the main reason or cause for the termination SUGGESTED ANSWER:

2) No, Mr. Kintanar did not derive any income when he received his separation pay because his separation from

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

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employment is due to causes beyond his control. The separation was involuntary as it was a consequence of the closure of various unprofitable departments pursuant to the redundancy program.

A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years. Upon compulsory retirement, A received the money value of his accumulated leave credits in the amount of P500.000.00. Is said amount subject to tax? Explain.

Exemptions: Separation Pay (2005) Company A decides to close its operations due to continuing losses and to terminate the services of its employees. Under the Labor Code, employees who are separated from service for such cause are entitled to a minimum of one-half month pay for every year of service. Company A paid the equivalent of one month pay for every year of service and the cash equivalent of unused vacation and sick leaves as separation benefits. Are such benefits taxable and subject to withholding tax under the Tax Code? Decide with reasons. (5%)

SUGGESTED ANSWER:

SUGGESTED ANSWER:

All of the benefits are not taxable, hence they are not subject to withholding tax under the Tax Code. Benefits received as a consequence of separation for any cause beyond the control of the employees such as closure of business are excluded from gross income. (Sec. 32[B][6][b], NIRC in relation to Sec. 2[b][2], R.R. 2-98) Exemptions: Stock Dividends (2003) On 03 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100) shares in the capital stock of Y Corporation, a domestic company. On 03 January 2000, Y Corporation declared, out of the profits of the company earned after 01 January 1998, a hundred percent (100%) stock dividends on all stockholders of record as of 31 December 1999 as a result of which X holding in Y Corporation became two hundred (200) shares. Are the stock dividends received by X subject to income tax? Explain. (8%) SUGGESTED ANSWER:

No. Stock dividends are not realized income. Accordingly, the different provisions of the Tax Code imposing a tax on dividend income only includes within its purview cash and property dividends making stock dividends exempt from income tax. However, if the distribution of stock dividends is the equivalent of cash or property, as when the distribution results in a change of ownership interest of the shareholders, the stock dividends will be subject to income tax. (Section 24(B)(2); Section 25(A)&(B); Section 28(B)(5)(b), 1997 Tax Code) Exemptions: Strictly Construed (1996) Why are tax exemptions strictly construed against the taxpayer? SUGGESTED ANSWER:

Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and may almost be said to be odious to the law (Manila Electric Company vs. Vera, 67 SCRA 351). The exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemptions they being contrary to the life-blood theory which is the underlying basis for taxes. Exemptions: Terminal Leave Pay (1996)

No. The commutation of leave credits, more commonly known as terminal leave pay, i.e., the cash equivalent of accumulated vacation and sick leave credits given to an officer or employee who retires, or separated from the service through no fault of his own, is exempt from income tax. (BIR Ruling 238-91 dated November 8, 1991;

Commissioner v. CA and Efren Castaneda, GR No. 96016, October 17, 1991).

Exemptions; Charitable Institutions (2006) The Constitution provides "charitable institutions, churches, personages or convents appurtenant thereto, mosques, and non-profit cemeteries and all lands, buildings, and improvements actually directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation." This provision exempts charitable institutions and religious institutions from what kind of taxes? Choose the best answer. Explain. (5%) a. from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax b. from local tax only c. from value-added tax d. from real property tax only e. from capital gains tax only SUGGESTED ANSWER:

The provision exemptions charitable institutions and religious institutions from (d) REAL PROPERTY TAXES only. The exemption is only for taxes assessed as property taxes, as distinguished from excise taxes (CIR v.

CA, CTA & YMCA, G.R. No. 124043, October 14, 1998; Lladoc v. Commissioner of Internal Revenue, L-19201, June 16,1965).

Exemptions; Educational institution (2004) XYZ Colleges is a non-stock, non-profit educational institution run by the Archdiocese of BP City. It collected and received the following: (a) Tuition fees (b) Dormitory fees (c) Rentals from canteen concessionaires (d) Interest from money-market placements of the tuition fees (e) Donation of a lot and building by school alumni Which of these above cited income and donation would not be exempt from taxation? Explain briefly. (5%) SUGGESTED ANSWER:

A. All of the income derived by the non-stock, nonprofit educational institution will be exempt from taxation provided they are used actually, directly and exclusively for educational purposes. The Constitution provides that all revenues and assets of non-stock, non-profit educational institution which are actually, directly and exclusively used for educational purposes are exempt from taxation (Section 4 par. 3, Article XIV, 1987 Constitution).

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

The donation is, likewise, exempt from the donor's tax if actually, directly and exclusively used for educational purposes, provided not more than 30% of the donation is used by the donee for administration purposes. The donee, being a non-stock, non-profit educational institution, is a qualified entity to receive an exempt donation subject to conditions prescribed by law (Section 4 par. 4, Art. XIV, 1987 Constitution, in relation to Section 101(AX3), NJRC). Accordingly, none of the cited income and donation collected and received by the non-stock, non-profit educational institution would not be exempt from taxation. ALTERNATIVE ANSWER:

The following receipts by the non-stock, nonprofit educational institution are not exempt from taxation, viz: (c) Rentals from Canteen Concessionaires. Rental income is considered as unrelated to the school operations; hence, taxable (DOF Order No. 137-87, Dec. 16, 1987) (d) Interest from money-market placements of the tuition fees. The interest on the placement is taxable (DOF Order No. 137-87). If however, the said interest is used actually, directly and exclusively for educational purposes as proven by substantial evidence, the same will be exempt from taxation (CIR v. CA, 298 SCRA 83 11998]}.

Exemptions; Exemptions are Unilateral in Nature (2004) A law was passed granting tax exemption to certain industries and investments for a period of five years. But three years later, the law was repealed. With the repeal, the exemptions were considered revoked by the BIR, which assessed the investing companies for unpaid taxes effective on the date of the repeal of the law. NPC and KTR companies questioned the assessments on the ground that, having made their investments in full reliance with the period of exemption granted by the law, its repeal violated their constitutional right against the impairment of the obligations and contracts. Is the contention of the companies tenable or not? Reason briefly. (5%) SUGGESTED ANSWER:

The contention is not tenable. The exemption granted is in the nature of a unilateral tax exemption. Since the exemption given is spontaneous on the part of the

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Insular Collector of Customs, 12 Phil. 146 [1915])

Exemptions; Gov’t Bonus, Gifts, & Allowances (1994) In December 1993, the Sangguniang Bayan authorized a Christmas bonus of P3,000.00, a cash gift of P5,000.00 and transportation and representation allowance of P6,000.00 for each of the municipal employees. 1) Is the Christmas bonus subject to any tax? 2) How about the cash gift? 3) How about the transportation and representation allowances? SUGGESTED ANSWER:

1)

The CHRISTMAS BONUS given by the Sangguniang Bayan to the municipal employees is taxable as additional compensation (Sec. 21 (a). Tax Code).

2)

The cash gift per employee of P5.000.00 being substantial may be considered taxable also. They partake the nature of additional compensation income as it is highly doubtful if municipal governments are authorized to make gifts in substantial sums such as this. They are not furthermore gifts of "small value" which employers might give to their employees on special occasions like Christmas - items which could be exempt under BIR Revenue Audit Memo No. 1-87.

3)

The transportation and representation allowances are actually reimbursements for expenses incurred by the employee for the employer. Said allowances spent by the employee for the employer are designed to enhance the quality of the service that the employer is supposed to perform for its clientele like the people of the municipality.

The other items of income which were all derived from school-related activities will be exempt from taxation in the hands of the recipient if used actually, directly and exclusively for educational purposes (Section 4 par. 3, Article XTV, 1987 Constitution). The donation to a non-stock, non-profit educational institution will be exempt from the donor's tax if used actually, directly and exclusively for educational purposes and provided, that, not more than 30% of the donation is used for administration purposes (Section 4, par. 4, Art. XJV, 1987 Constitution, in relation to Section 101(AM3), NJRC).

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legislature and no service or duty or other remunerative conditions have been imposed on the taxpayers receiving the exemption, it may be revoked at will by the legislature (Christ Church v. Philadelphia, 24 How. 300 [1860]). What constitutes an impairment of the obligation of contracts is the revocation of an exemption which is founded on a valuable consideration because it takes the form and essence of a contract (Casanovas v. Hord, 8 Phil. 125 [1907]; Manila Railroad Company v.

Exemptions; Personal & Additional Exemption (2006) Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who is legally married to Mario. They have a child named Jill. The children are all minors and not gainfully employed.

1. How much personal exemption can Charlie claim? Explain. (2.5%) SUGGESTED ANSWER:

Charlie can claim the personal exemption of a Head of a Family or P25,000.00 provided that, at least one of his minor and not gainfully employed children is unmarried and living with and dependent upon him for chief support (Tax Reform Act, RA 8424, Chapter VII, Section 35[A]; BIR Revenue Regulation 02-98).

2. How much additional exemption can Charlie claim? Explain. (2.5%)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) SUGGESTED ANSWER:

His children from his previous marriage who are legitimate children and his illegitimate child with Jane will all entitle him to additional personal exemption of P8,000.00 for each dependent, if apart from being minor and not gainfully employed, they are unmarried, living with and dependent upon Charlie for their chief support (Tax Reform Act, RA8424, Chapter VH, Section 35(A); BIR Revenue Regulation 02-98). Exemptions; Roman Catholic Church; Limitations (2005) The Roman Catholic Church owns a 2-hectare lot, in a town in Tarlac province. The southern side and middle part are occupied by the Church and a convent, the eastern side by a school run by the Church itself, the southeastern side by some commercial establishments, while the rest of the property, in particular the northwestern side, is idle or unoccupied. May the Church claim tax exemption on the entire land? Decide with reasons. SUGGESTED ANSWER:

No. The Church cannot claim tax exemption on the entire land. Only the southern side and middle part that are occupied by the Church and a convent and the eastern side occupied by a school run by the Church itself are exempt, because such parts of the 2-hectare lot are actually, directly and exclusively used for religious and educational purposes. (Sec. 28[3], Art. VI, 1987 Constitution; Sec. 234, Local Government Code) The southeastern side occupied by some commercial establishment is not tax exempt. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purpose but is subject to taxation. 'Solely' is synonymous with 'exclusively.' (Lung Center of

the Philippines v. Quezon City, G.R. No. 144104, June 29, 2004) The property must be exclusively (solely) used for

religious or educational purposes. Of course, it is apparent that the northwestern side, which is idle or unoccupied is not "actually, directly and exclusively" used for religious or educational purposes, hence not exempt from taxation.

CAPITAL GAIN TAX Capital Asset vs. Ordinary Asset (2003) Distinguish a "capital asset" from an "ordinary asset". SUGGESTED ANSWER:

(a) The term "capital asset" regards all properties not specifically excluded in the statutory definition of capital assets, the profits or loss on the sale or the exchange of which are treated as capital gains or capital losses. Conversely, all those properties specifically excluded are considered as ordinary assets and the profits or losses realized must have to be treated as ordinary gains or ordinary losses. Accordingly, "Capital Assets" includes property held by the taxpayer whether or not connected with his trade or business, but the term does not include any of the following, which are consequently considered "ordinary assets": (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the

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(2) property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business; (3) property used in the trade or business of a character which is subject to the allowance for depreciation provided in Section 34 (F) of the Tax Code; or (4) real property used in trade or business of the taxpayer. The statutory definition of "capital assets" practically excludes from its scope, it will be noted, all property held by the taxpayer if used in connection with his trade or business. Capital Gain Tax; Nature (2001) A, a doctor by profession, sold in the year 2000 a parcel of land which he bought as a form of investment in 1990 for Php 1 million. The land was sold to B, his colleague, at a time when the real estate prices had gone down and so the land was sold only for Php 800,000 which was then the fair market value of the land. He used the proceeds to finance his trip to the United States. He claims that he should not be made to pay the 6% final tax because he did not have any actual gain on the sale. Is his contention correct? Why? (5%) SUGGESTED ANSWER:

No. The 6% capital gains tax on sale of a real property held as capital asset is imposed on the income presumed to have been realized from the sale which is the fair market value or selling price thereof, whichever is higher. (Section 24(D), NIRC). Actual gain is not required for the imposition of the tax but it is the gain by fiction of law which is taxable. Ordinary Sale of a Capital Asset (1994) Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro-indiviso owners (Parcel A). Subsequently, they formed a partnership, duly registered with Securities and Exchange Commission, which bought another parcel of land (Parcel B). Both parcels of land were sold, realizing a net profit of P1,000,000.00 for parcel A and P500.000.00 for parcel B. The BIR claims that the sale of parcel A should be taxed as a sale by an unregistered partnership. Is the BIR correct? SUGGESTED ANSWER:

The BIR is not correct, since there is no showing that the acquisition of the property by Noel and Jovy Langit as pro indiviso owners, and prior to the formation of the partnership, was used, intended for use, or bears any relation whatsoever to the pursuit or conduct of the partnership business. The sale of parcel A shall therefore not be treated as a sale by an unregistered partnership, but an ordinary sale of a capital asset, and hence will be subject to the 5% capital gains tax and documentary

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

stamp tax on transfers of real property, said taxes to be borne equally by the co-owners. ALTERNATIVE ANSWER:

The BIR is correct in treating the gain from the sale of parcel of land by Noel and Jovy Langit at a profit of P1,000,000.00. In the case of Pascual and Dragon v. Commissioner, G.R. No. 78133, October 18, 1988, the Supreme Court ruled that the sharing of returns does not in itself establish a partnership, whether or not the persons sharing therein have a joint or common right or interest in the property. The decision in said case cannot be applied here because clearly the parties organized a partnership duly registered with the Securities and Exchange Commission. They pooled their resources together with the purpose of dividing the profit between them. Sales of Share of Stocks: Capital Gains Tax Return (1999) HK Co. is a Hong Kong corporation not doing business in the Philippines. It holds 40% of the shares of A Co., a Philippine company, while the 60% is owned by P Co., a Filipino-owned Philippine corporation. HK Co. also owns 100% of the shares of B Co., an Indonesian company which has a duly licensed Philippine branch. Due to worldwide restructuring of the HK Co. group, HK Co. decided to sell all its shares in A and B Cos. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the Philippines. The Agreement provides that the purchase price will be paid to HK Co's bank account in the U. S. and that little to A and B Cos. Shares will pass from HK Co. to P Co. in HK where the stock certificates will be delivered. P Co. seeks your advice as to whether or not it will subject the payments of purchase price to Withholding Tax. Explain your advice. (10%) SUGGESTED ANSWER:

P Co. should not subject the payments of the purchase price to withholding tax. While the seller is a non-resident foreign corporation which is not normally required to file returns in the Philippines, therefore, ordinarily all its income earned from Philippine sources is taxed via the withholding tax system, this is not the procedure availing with respect to sales of shares of stock. The capital gains tax on the sale of shares of stock of a domestic corporation is always required to be paid through a capital gains tax return filed. The sale of the shares of stock of the Indonesian Corporation is not subject to income tax under our jurisdiction because the income derived there from is considered as a foreign-sourced income. ALTERNATIVE ANSWER:

Yes, but only on the shares of stocks of A Co. and only on the portion of the purchase price, which constitutes capital gains. Under the Tax Code of 1997, the capital gains tax imposed under Section 28(B)(5)(c) is collectible via the withholding of tax at source pursuant to Section 57 of the same Code. (Note: The bar candidate might have relied on the provision of the Tax Code of 1997 which provides that the capital gains tax is imposed as withholding taxes (Section 57, NIRC). This procedure is impractical and, therefore, not followed in practice because the buyer/ withholding agent will not be in a position to determine how much income is realized by

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Tax Basis: Capital Gains: Merger of Corporations (1994) In a qualified merger under Section 34 (c) (2) of the Tax Code, what is the tax basis for computing the capital gains on: (a) the sale of the assets received by the surviving corporation from the absorbed corporation; and (b) the sale of the shares of stock received by the stockholders from the surviving corporation? SUGGESTED ANSWER:

In a qualified merger under Section 34 (c) (2) of the Tax Code, the tax basis for computing the capital gains on: (a) the sale of the assets received by the surviving corporation from the absorbed corporation shall be the original/historical cost of the assets when still in the hands of the absorbed corporation. (b) the sale of the shares of stock received by the stockholders from the surviving corporation shall be the acquisition/historical cost of assets transferred to the surviving corporation. Tax Basis: Capital Gains: Tax-Free Exchange of Property (1994) In a qualified tax-free exchange of property for shares under Section 34 (c) (2) of the Tax Code, what is the tax basis for computing the capital gains on: (a) the sale of the assets received by the Corporation; and (b) the sale of the shares received by the stockholders in exchange of the assets? SUGGESTED ANSWER:

In a qualified tax free exchange of property for shares under Section 34 (c) (2) of the Tax Code, the tax basis for computing the gain on the: (a) sale of the assets received by the corporation shall be the original/historical cost (purchase price plus expenses of acquisition) of the property/ assets given in exchange of the shares of stock. (b) sale of the shares of stock received by the stockholders in exchange of the assets shall be the original/historical cost of the property given in exchange of the shares of stock. ALTERNATIVE ANSWER:

The basis in computing capital gains tax in a qualified taxfree exchange under Sec. 34 (c) (2) is: (a) With respect to the asset received by the corporation the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer. (b) With respect to the shares received by the stockholders in exchange of the assets - the same as the basis of the property, stock or securities exchanged, decreased by the money received and the fair market value of the other property received, and increased by the amount treated as dividend of the shareholder and the amount of any gain that was recognized on the exchange.

CORPORATION & PARTNERSHIP Bad Debts; Factors; Elements thereof (2004)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

PQR Corp. claimed as a deduction in its tax returns the amount of P1,000,000 as bad debts. The corporation was assessed by the Commissioner of Internal Revenue for deficiency taxes on the ground that the debts cannot be considered as "worthless," hence they do not qualify as bad debts. The company asks for your advice on "What factors will held in determining whether or not the debts are bad debts?" Answer and explain briefly. (5%) SUGGESTED ANSWER:

In order that debts be considered as bad debts because they have become worthless, the taxpayer should establish that during the year for which the deduction is sought, a situation developed as a result of which it became evident in the exercise of sound, objective business judgment that there remained no practical, but only vaguely theoretical, prospect that the debt would ever be paid (Collector of Internal Revenue v. Goodrich International Rubber Co., 21 SCRA 1336 [1967]). "Worthless" is not determined by an

inflexible formula or slide rule calculation, but upon the exercise of sound business judgment. The factors to be considered include, but are not limited to, the following: 1. The debtor has no property nor visible income; 2. The debtor has been adjudged bankrupt or insolvent; 3. Collateral shares have become worthless; and 4. There are numerous debtors with small amounts of debts and further action on the accounts would entail expenses exceeding the amounts sought to be collected. ALTERNATIVE ANSWER:

The following are the factors to be considered in determining whether or not the debts are bad debts: 1. The debt must be valid and subsisting; 2. The debt is connected with the taxpayer's trade or business, and is not between related parties; 3. There is an actual ascertainment that the debt is worthless; and 4. The debt is charged-off within the taxable year. (PRC v. CA, 256 SCRA 667 [1996]; Revenue Regs. No. 5-99).

Condominium Corp.; Sale of Common Areas (1994) X-land Condominium Corporation was organized by the owners of units in X-land Building in accordance with the Master Deed with Declaration of Restrictions. The X-land Building Corporation, the developer of the building, conveyed the common areas in favor of the X-land Condominium Corporation. Is the conveyance subject to any tax? SUGGESTED ANSWER:

The conveyance is not subject to any tax. The same is without consideration, and not in connection with a sale made to X-land Condominium Corporation, and the purpose of the conveyance to the latter is for the management of the common areas for the common benefit of the unit owners. The same is not subject to income tax since no income was realized as a result of the conveyance, which was made pursuant to the Condominium Act (R.A. No. 4626, and the purpose of which was merely to vest title to the common areas in favor of the Land Condominium Corporation.

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There being no monetary consideration, neither is the conveyance subject to the creditable withholding tax imposed under Revenue Regulations 1-90, as amended. The second conveyance was actually no conveyance at all because when the units were sold to the various buyers, the common areas were already part and parcel of the sale of said units pursuant to the Condominium Act. However, the Deed of Conveyance is subject to documentary stamp tax. N.B. Documentary stamps tax and Condominium Law are excluded from the coverage of the Bar Examinations.

Corporation; Sale; Creditable Withholding Tax (1994) Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro-indiviso owners (Parcel A). Subsequently, they formed a partnership, duly registered with Securities and Exchange Commission, which bought another parcel of land (Parcel B). Both parcels of land were sold, realizing a net profit of P1,000,000.00 for parcel A and P500.000.00 for parcel B. The BIR also claims that the sale of parcel B should be taxed as a sale by a corporation. Is the BIR correct? SUGGESTED ANSWER:

The BIR is correct, since a "corporation" as defined under Section 20 (a) of the Tax Code includes partnerships, no matter how created or organized, except general professional partnerships. The business partnership, in the instant case, shall therefore be taxed in the same manner as a corporation on the sale of parcel B. The sale shall thus be subject to the creditable withholding tax under Revenue Regulations 1-90, as amended by 12-94, on the sale of parcel B, and the partnership shall report the gain realized from the sale when it files its income tax return. Dividends: Withholding Tax (1999) HK Co., is a Hong Kong company, which has a duly licensed Philippine branch, engaged in trading activities in the Philippines. HK Co. also invested directly in 40% of the shares of stock of A Co., a Philippine corporation. These shares are booked in the Head Office of HK Co. and are not reflected as assets of the Philippine branch. In 1998, A Co. declared dividends to its stockholders. Before remitting the dividends to HK Co., A Co. seeks your advice as to whether it will subject the remittance to WT. No need to discuss WT rates, if applicable. Focus your discussion on what is the issue. (10%) SUGGESTED ANSWER:

I will advise A Co. to withhold and remit the withholding tax on the dividends. While the general rule is that a foreign corporation is the same juridical entity as its branch office in the Philippines, when, however, the corporation transacts business in the Philippines directly and independently of its branch, the taxpayer would be the foreign corporation itself and subject to the dividend tax similarly imposed on non-resident foreign corporation. The dividends attributable to the Home Office would not qualify as dividends earned by a resident foreign corporation, which is exempt from tax. (Marubeni

Corporation v. Commissioner, GR No. 76573, September 14, 1989).

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Effect: Dissolution; Corporate Existence (2004) For failure to comply with certain corporate requirements, the stockholders of ABC Corp. were notified by the Securities and Exchange Commission that the corporation would be subject to involuntary dissolution. The stockholders did not do anything to comply with the requirements, and the corporation was dissolved. Can the stockholders be held personally liable for the unpaid taxes of the dissolved corporation? Explain briefly. (5%) SUGGESTED ANSWER:

No. As a general rule, stockholders cannot be held personally liable for the unpaid taxes of a dissolved corporation. The rule prevailing under our jurisdiction is that a corporation is vested by law with a personality that is separate and distinct from those of the persons composing it (Sunio v. NLRC, 127 SCRA 390{1984]}. NOTE: additional point should be given to the examinee if he answers in the following that: However, stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears that the corporate assets have passed into their hands (Tan Tiong Bio v. CFR, 4 SCRA 986 [1962]). Likewise, when stockholders have unpaid subscriptions to the capital of the corporation they can be made liable for unpaid taxes of the corporation to the extent of their unpaid subscriptions. Minimum Corporate Income Tax (2001) What is the rationale of the law in imposing what is known as the Minimum Corporate Income tax on Domestic Corporations? (3%) SUGGESTED ANSWER:

The imposition of the Minimum Corporate Income Tax (MCIT) is designed to forestall the prevailing practice of corporations of over claiming deductions in order to reduce their income tax payments. The filing of income tax returns showing a tax loss every year goes against the business motive which impelled the stockholders to form the corporation. This is the reason why domestic corporations (and resident foreign corporations) after the recovery period of four years from the time they commence business operations, they become liable to the MCIT whenever this tax imposed at 2% of gross income exceeds the normal corporate income tax imposed on net income. (Sponsorship Speech, Chairman of Senate Ways and Means Committee). Minimum Corporate Income Tax; Exemption (2001) Is a corporation which is exempted from the minimum corporate income tax automatically exempted from the regular corporate income tax? Explain your answer. (2%) SUGGESTED ANSWER:

No. The minimum corporate income tax is a proxy for the normal corporate income tax, not the regular corporate income tax paid by a corporation. For instance, a proprietary educational institution may be subject to a regular corporate income tax of 10% (depending on its dominant income), but it is exempt from the imposition of MCIT because the latter is not intended to substitute

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special tax rates. So is with PEZA enterprises, CDA enterprises etc.

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[Note: If what is meant by regular income tax is the 32% tax rate imposed on taxable income of corporations, the answer would be in the affirmative, because domestic corporations and resident foreign corporations are either liable for the 2% of gross income (MCIT) or 32% of net income (the normal corporate income tax) whichever is higher.] ALTERNATIVE ANSWER:

No. A corporation which is exempted from the minimum corporate income tax is not automatically exempted from the regular corporate income tax. The reason for this is that MCIT is imposed only beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations. Thus, a corporation may be exempt from MCIT because it is only on its third year of operations following its commencement of business operations.

ESTATE & DONOR’S TAXES Donor’s Tax: Election Contributions (1998) Are contributions to a candidate in an election subject to donor's tax? On the part of the contributor, is it allowable as a deduction from gross income? [5%J SUGGESTED ANSWER:

1)

No, provided the recipient candidate had complied with the requirement for filing of returns of contributions with the Commission on Elections as required under the Omnibus Election Code.

2)

The contributor is not allowed to deduct the contributions because the said expense is not directly attributable to, the development, management, operation and/or conduct of a trade, business or profession {Sec. 34[AJ(l)(a), NIRC). Furthermore, if the candidate is an incumbent government official or employee, it may even be considered as a bribe or a kickback (Sec. 34[AJ(l)(c), NIRC). COMMENT: It is suggested that full credit should be given for any answer to the first question because the answer requires an interpretation of the Election Code. Pursuant to the provisions of Section 99(C) of the NIRC, the taxability of this type of contributions/donations is governed by the Election Code.

Donor’s Tax; Basis for Determining Gain (1995) (1) Kenneth Yusoph owns a commercial lot which he bought many years ago for P1 Million. It is now worth P20 Million although the zonal value is only P15 Million. He donates one-half pro-indiviso interest in the land to his son Dino on 31 December 1994, and the other one-half pro-indiviso interest to the same son on 2 January 1995. How much is the value of the gifts in 1994 and 1995 for purposes of computing the gift tax? Explain. SUGGESTED ANSWER:

1) The value of the gifts for purposes of computing the gift tax shall be P7.5million in 1994 and P7.5million in

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

1995. In valuing a real property for gift tax purposes the property should be appraised at the higher of two values as of the time of donation which are (a) the fair market value as determined by the Commissioner (which is the zonal value fixed pursuant to Section 16(e) of the Tax Code), or (b) the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. The fact that the property is worth P20 million as of the time of donation is immaterial unless it can be shown that this value is one of the two values mentioned as provided under Section 81 of the Tax Code. (2) The Revenue District Officer questions the splitting of the donations into 1994 and 1995. He says that since there were only two (2) days separating the two donations they should be treated as one, having been made within one year. Is he correct? Explain. SUGGESTED ANSWER:

2) The Revenue District Officer is not correct because the computation of the gift tax is cumulative but only insofar as gifts made within the same calendar year. Therefore, there is no legal justification for treating two gifts effected in two separate calendar years as one gift. (3) Dino subsequently sold the land to a buyer for P 20 Million. How much did Dino gain on the sale? Explain. SUGGESTED ANSWER:

3) Dino gained an income of 19 million from the sale. Dino acquires a carry-over basis which is the basis of the property in the hands of the donor or P1 million. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain (Sec. 34(a), NIRC). Since the property was acquired by gift, the basis for determining gain shall be the same as if it would be in the hands of the donor or the last preceding owner by whom the property was not acquired by gift. Hence, the gain is computed by deducting the basis of P1 million from the amount realized which is P20 million. (4) Suppose, instead of receiving the lot by way of donation, Dino received it by inheritance. What would be his gain on the sale of the lot for P20 Million? Explain. SUGGESTED ANSWER:

4) If the commercial lot was received by inheritance the gain from the sale for P20 million is P5 million because the basis is the fair market value as of the date of acquisition. The stepped-up basis of P15 million which is the value for estate tax purposes is the basis for determining the gain (Sec. 34(b)(2), NIRC). ALTERNATIVE ANSWER:

If Dino held on to the property as a capital asset in that it is neither for sale in the ordinary course of business nor used in Dino's business, then upon sale thereof there is presumed to be realized an income of P20 million which is the gross selling price of the property. (Sec. 21(e), NIRC). The same would be subject to the 5% capital gains tax. Donor’s Tax; Dacion en Pago; Effect: Taxation (1997)

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An insolvent company had an outstanding obligation of P l00,000.00 from a creditor. Since it could not pay the debt, the creditor agreed to accept payment through dacion en pago a property which had a market value of P30.000.00. In the dacion en pago document, the balance of the debt was condoned. A. What is the tax effect on the discharge of the unpaid balance of the obligation on the debtor corporation? B. Insofar as the creditor is concerned, how is he effected tax-wise as a consequence of the transaction? SUGGESTED ANSWERS:

(a) The condonation of the unpaid balance of the obligation has the effect of a donation made on the part of the creditor. It is obvious that the creditor merely desires to benefit the debtor and without any consideration therefore cancels the debt, the amount of the debt cancelled is a gift from the creditor to the debtor and need not be included in the latter's gross income (Sec. 50, RR No. 2); (b) For the difference of P70,000 the creditor shall be subject to donor's tax at the applicable rates provided for under the National Internal Revenue Code. ALTERNATIVE ANSWER:

(a) If the discharge was prompted by the insolvency of the debtor company, then it is a clear case of a write-off of a bad debts which has no tax consequence to the debtor. (b) The write-off of the bad debt will entitle the creditor to claim the same as a deduction from its gross income. Donor’s Tax; Donation to a Sibling (2001) Your bachelor client, a Filipino residing in Quezon City, wants to give his sister a gift of Php 200,000.00. He seeks your advice, for purposes of reducing if not eliminating the donor's tax on the gift, on whether it is better for him to give all of the Php 200,000.00 on Christmas 2001 or to give Php 100,000.00 on Christmas2001 and the other Php 100,000.00 on January 1, 2002. Please explain your advice. (5%) SUGGESTED ANSWER:

I would advice him to split the donation. Giving the Php200,000 as a one-time donation would mean that it will be subject to a higher tax bracket under the graduated tax structure thereby necessitating the payment of donor's tax. On the other hand, splitting the donation into two equal amounts of Php 100,000 given on two different years will totally relieve the donor from the donor’s tax because the first Phpl00.000 donation in the graduated brackets is exempt. (Section 99, NIRC). While the donor’s tax is computed on the cumulative donations, the aggregation of all donations made by a donor is allowed only over one calendar year. Donor’s Tax; Donation to Non-Stock, Non-Profit Private Educational Institutions (2000) What conditions must occur in order that all grants, donations and contributions to non-stock, non-profit private educational institutions may be exempt from the donor's tax under Section 101 (a) of the Tax Code? (3%) SUGGESTED ANSWER:

The following are the conditions:

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

1. 2. 3. 4. 5.

Not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes; The educational institution is incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. (Sec. 101 (A) (3), NIRC of 1997]

Donor’s Tax; Donation to Political Candidate (2003) X is a friend of Y, the chairman of Political Party Z, who wants to run for President in the 2004 elections. Knowing that Y needs funds for posters and streamers, X is thinking of donating to Y P150,000.00 for his campaign. He asks you whether his intended donation to Y will be subject to the donor's tax. What would your answer be? Will your answer be the same if he were to donate to Political Party Z instead of to Y directly? (8%) SUGGESTED ANSWER:

The donation to Y, once he becomes a candidate for an elective post, is not subject to donor's tax provided that he complies with the requirement of filing returns of contributions with the Commission on Elections as required under the Omnibus Election Code. The answer would be the same if X had donated the amount to Political Party Z instead of to Y directly because the law places in equal footing any contribution to any candidate, political party or coalition of parties for campaign purposes. (Section 99(C) of the 1997 Tax Code). Donor’s Tax; Donee or Beneficiary; Stranger (2000) When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. For purposes of this tax, who is a stranger? (2%) SUGGESTED ANSWER:

A STRANGER is a person who is not a: A. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or B. Relative by consanguinity in the collateral line within the fourth degree of relationship." [Sec. 98 (B), NIRC of 1997] Donor’s Tax; Sale of shares of Stock & Sale of Real Property (1999) A, an individual, sold to B, his brother-in-law, his lot with a market value of P1,000,000 for P600.000. A's cost in the lot is P100.000. B is financially capable of buying the lot. A also owns X Co., which has a fast growing business. A sold some of his shares of stock in X Co. to his key executives in X Co. These executives are not related to A. The selling price is P3,000,000, which is the book value of the shares sold but with a market value of P5,000,000. A's cost in the shares sold is P1,000,000. The purpose of A in selling the shares is to enable his key executives to acquire a propriety interest in the business and have a personal

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stake in its business. Explain if the above transactions are subject to donor's tax. (5%)

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SUGGESTED ANSWER:

The first transaction where a lot was sold by A to his brother-in-law for a price below its fair market value will not be subject to donor's tax if the lot qualifies as a capital asset. The transfer for less than adequate and full consideration, which gives rise to a deemed gift, does not apply to a sale of property subject to capital gains tax. (Section 100, NIRC). However, if the lot sold is an ordinary asset, the excess of the fair market value over the consideration received shall be considered as a gift subject to the donor's tax. The sale of shares of stock below the fair market value thereof is subject to the donor's tax pursuant to the provisions of Section 100 of the Tax Code. The excess of the fair market value over the selling price is a deemed gift. ALTERNATIVE ANSWER:

The sale of shares of stock below the fair market value will not give rise to the imposition of the donor's tax. In determining the gain from the transfer, the selling price of the shares of stocks shall be the fair market value of the shares of stocks transferred. (Section 6, RR No. 2-82). In which case, the reason for the imposition of the donor's tax on sales for inadequate consideration does not exist. Estate Tax: Comprehensive Agrarian Reform Law (1994) Jose Ortiz owns 100 hectares of agricultural land planted to coconut trees. He died on May 30, 1994. Prior to his death, the government, by operation of law, acquired under the Comprehensive Agrarian Reform Law all his agricultural lands except five (5) hectares. Upon the death of Ortiz, his widow asked you how she will consider the 100 hectares of agricultural land in the preparation of the estate tax return. What advice will you give her? SUGGESTED ANSWER:

The 100 hectares of land that Jose Ortiz owned but which prior to his death on May 30, 1994 were acquired by the government under CARP are no longer part of his taxable gross estate, with the exception of the remaining five (5) hectares which under Sec. 78{a) of the Tax Code still forms part of "decedent's interest". Estate Tax: Donation Mortis Causa (2001) A, aged 90 years and suffering from incurable cancer, on August 1, 2001 wrote a will and, on the same day, made several inter-vivos gifts to his children. Ten days later, he died. In your opinion, are the inter-vivos gifts considered transfers in contemplation of death for purposes of determining properties to be included in his gross estate? Explain your answer. (5%) SUGGESTED ANSWER:

Yes. When the donor makes his will within a short time of, or simultaneously with, the making of gifts, the gifts are considered as having been made in contemplation of death. (Roces v. Posadas, 58 Phil. 108). Obviously, the intention of the donor in making the inter-vivos gifts is to avoid the imposition of the estate tax and since the donees are likewise his forced heirs who are called upon to inherit, it will create a presumption juris tantum that said donations were made mortis causa, hence, the properties donated shall be included as part of A's gross estate.

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Estate Tax: Donation Mortis Causa vs. Inter Vivos (1994) Are donations inter vivos and donations mortis causa subject to estate taxes? SUGGESTED ANSWER:

Donations inter vivos are subject to donor's gift tax (Sec. 91 (a). Tax Code) while donations mortis causa are subject to estate tax (Sec. 77, Tax Code). However, donations inter vivos, actually constituting taxable lifetime like transfers in contemplation of death or revocable transfers (Sec. 78 (b) and (c), Tax Code) may be taxed for estate tax purposes, the theory being that the transferor's control thereon extends up to the time of his death. ALTERNATIVE ANSWER:

Donations inter vivos are not subject to estate taxes because the transfer of the property take effect during the lifetime of the donor. The transfer is therefore subject to the donor's tax. On the other hand, donations mortis causa are subject to estate taxes since the transfer of the properties takes effect after the death of the decedent. Such donated properties, real or personal, tangible or intangible, shall form part of the gross estate. Estate Tax: Gross Estate: Allowable Deduction (2001) On the first anniversary of the death of Y, his heirs hosted a sumptuous dinner for his doctors, nurses, and others who attended to Y during his last illness. The cost of the dinner amounted to Php 50,000.00. Compared to his gross estate, the Php 50,000.00 did not exceed five percent of the estate. Is the said cost of the dinner to commemorate his one year death anniversary deductible from his gross estate? Explain your answer. (5%)

Estate Tax: Gross Estate: Deductions (2000) Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business trip to the USA. He died intestate on June 15, 2000 in New York City, leaving behind real properties situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The decedent is heavily insured with Insular Life. He had no known debts at the time of his death. As the sole heir and appointed Administrator, how would you determine the gross estate of the decedent? What deductions may be claimed by the estate and when and where shall the return be filed and estate tax paid? (3%) SUGGESTED ANSWER:

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With respect to the life insurance proceeds, the amount includible in the gross estate for Philippine tax purposes would be to the extent of the amount receivable by the estate of the deceased, his executor, or administrator, under policies taken out by decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. [Sec. 85 (E) NIRC of 1997] The DEDUCTIONS that may be claimed by the estate are: 1) The actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed two hundred thousand pesos (P200.000.00). [Sec. 86 (A) (1) (a). NIRC of 1997] 2)

The judicial expenses in the testate or intestate proceedings.(Sec. 86(A)(1)

3)

The value of the decedent's family home located in Valle Verde, Pasig City in an amount not exceeding one million pesos (P1,000,000.00), and upon presentation of a certification of the barangay captain of the locality that the same have been the decedent's family home. [Sec. 86 (A) (4), Ibid]

4)

The standard deduction of P1,000,000. (Sec. 86(A)(5)

5)

Medical expenses incurred within one year from death in an amount not exceeding P500,000.(Sec. 86(A)(6)

SUGGESTED ANSWER:

No. This expense will not fall under any of the allowable deductions from gross estate. Whether viewed in the context of either funeral expenses or medical expenses, the same will not qualify as a deduction. Funeral expenses may include medical expenses of the last illness but not expenses incurred after burial nor expenses incurred to commemorate the death anniversary. (De Guzman V. De Guzman, 83 SCRA 256). Medical expenses, on the other hand, are allowed only if incurred by the decedent within one year prior to his death. (Section 86(A)(6), NIRC).

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The gross estate shall be determined by including the value at the time of his death all of the properties mentioned, to the extent of the interest he had at the time of his death because he is a Filipino citizen. [Sec. 85 (A), NIRC of 1997]

The ESTATE TAX RETURN shall be filed within six (6) months from the decedent's death (Sec. 90 (B), NIRC of 1997], provided that the Commissioner of Internal Revenue shall have authority to grant in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return (Sec. 90 (c), Ibid] Except in cases where the Commissioner of Internal Revenue otherwise permits, the estate tax return shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of Pasig City, the City in which the decedent Mr. de la Cruz was domiciled at the time of his death. [Sec. 90 (D). NIRC of 1997] Estate Tax: Inclusion: Resident Alien (1994) Cliff Robertson, an American citizen, was a permanent resident of the Philippines. He died in Miami, Florida. He left 10,000 shares of Meralco, a condominium unit at the

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Twin Towers Building at Pasig, Metro Manila and a house and lot in Los Angeles, California. What assets shall be included in the Estate Tax Return to be filed with the BIR? SUGGESTED ANSWER:

All of Mr. Robertson's assets consisting of 10,000 shares in the Meralco, a condominium unit in Pasig, and his house and lot in Los Angeles, California are taxable. The properties of a resident alien decedent like Mr. Robertson are taxable wherever situated (Sees. 77, 78 and 98, Tax Code). Estate Tax: Payment vs. Probate Proceedings (2004) VCC is the administrator of the estate of his father NGC, in the estate proceedings pending before the MM Regional Trial Court. Last year, he received from the Commissioner of Internal Revenue a deficiency tax assessment for the estate in the amount of P1,000,000. But he ignored the notice. Last month, the BIR effected a levy on the real properties of the estate to pay the delinquent tax. VCC filed a motion with the probate court to stop the enforcement and collection of the tax on the ground that the BIR should have secured first the approval of the probate court, which had jurisdiction over the estate, before levying on its real properties. Is VCC's contention correct? (5%) SUGGGESTED ANSWER:

No. VCC's contention is not correct. The approval of the probate court is not necessary. Payment of estate taxes is a condition precedent for the distribution of the properties of the decedent and the collection of estate taxes is executive in nature for which the court is devoid of any jurisdiction. Hence, the approval of the court, sitting in probate, or as a settlement tribunal is not a mandatory requirement in the collection of estate taxes (Marcos H v. Court of Appeals, 273 SCRA 47 [1997]). Estate Tax: Situs of Taxation: Non-Resident Decedent (2000) Discuss the rule on situs of taxation with respect to the imposition of the estate tax on property left behind by a non-resident decedent. (2%) SUGGESTED ANSWER:

The value of the gross estate of a non-resident decedent who is a Filipino citizen at the time of his death shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated to the extent of the interest therein of the decedent at the time of his death [Sec. 85 (A), NIRC of 1997). These properties shall have a situs of taxation in the Philippines hence subject to Philippine estate taxes. On the other hand, in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines to the extent of the interest therein of the decedent at the time of his death shall be included in his taxable estate. Provided, that, with respect to intangible personal property, we apply the rule of reciprocity. (Ibid) Estate Tax: Vanishing Deductions (1994) Vanishing deductions in estate-taxation?

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Vanishing deductions or property previously taxed in estate taxation refers to the diminishing deducibility/ exemption, at the rate of 20% over a period of five (5) years until it is lost after the fifth year, of any property (situated in the Philippines) forming part of the gross estate, acquired by the decedent from a prior decedent who died within a period of five (5) years from the decedent's death. Estate Tax; Payment vs. Probate Proceedings (2005) Is the approval of the court, sitting as probate or estate settlement court, required in the enforcement and collection of estate tax? Explain. SUGGESTED ANSWER:

No, the approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected. (Marcos v. Court of Appeals, G.R. No. 120880, June 5, 1997)

BUSINESS TAXES VAT: Basis of VAT (1996)

What is the basis of the Value-Added Tax on taxable sales of real property? SUGGESTED ANSWER:

The basis of the Value-Added Tax on taxable sale of real property is "GROSS SELLING PRICE" which is either selling price stated in the sale document or the "Zonal Value", whichever is higher. In the absence of zonal values, the gross selling price shall refer to the market value as shown in the latest tax declaration or the consideration, whichever is higher. VAT: Characteristics of VAT (1996)

What are the characteristics of the Value-Added Tax? SUGGESTED ANSWER:

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. ALTERNATIVE ANSWER:

The value-added tax has the following characteristics: 1) It is an indirect tax where tax shifting is always presumed: 2) It is consumption-based; 3) It is imposed on the value-added in each stage of distribution; 4) It is a credit-invoice method value-added tax; and 5) It is not a cascading tax. VAT: Exempted Transactions (1996) Give at least three (3) real estate transactions which are not subject to the Value-Added Tax. SUGGESTED ANSWER:

Real estate transactions which are exempt from the valueadded tax are: (a) Sale of real property not primarily held for sale or lease in the ordinary course of trade or business;

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

(b) Sale of real property utilized for socialized housing under RA. No. 7279; (c) Sale of real property utilized under the low-cost housing under BP Big. 220. Note: The other real estate transactions which are exempt from the value-added tax which may be cited by the bar candidates are as follows: (a) Transfer of real property to a trustee if the property is to be held merely in trust for the trustor. (b) Transfer of real property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(2) of the Tax Code. (c) Advance payment by the lessee in a lease contract, when the same is actually a loan to the lessor from the lessee. (d) Security deposits for lease arrangements to insure the faithful performance of certain obligations of the lessee to the lessor. (e) Lease of residential units, boarding houses, dormitories, rooms and bed spaces offered for rent by their owners at a monthly rental not exceeding P3,950.00 per unit.

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1)

VAT exempt. Sale of agricultural products, such as fresh vegetables, in their original state, of a kind generally used as, or producing foods for human consumption is exempt from VAT. (Section 109(c), NIRC).

2)

VAT at 0%. Since Jake's Construction Company has rendered services to the World Health Organization, which is an entity exempted from taxation under international agreements to which the Philippines is a signatory, the supply of services is subject to zero percent (0%) rate. (Sec. 108[B1(3), NIRC).

3)

VAT at 10%. Tractors and other agricultural implements fall under the definition of goods which include all tangible objects which are capable of pecuniary estimation (Sec. 106[A1(1), NIRC, the sales of which are subject to VAT at 10%.

4)

This is subject to VAT at 10%. This transaction also falls under the definition of goods which include all tangible objects which are capable of pecuniary estimation (Sec. 106[A1(1), NIRC, the sales of which are subject to VAT at 10%.

5)

VAT Exempt. The monthly fee paid by each student falls under the lease of residential units with a monthly rental per unit not exceeding Php 8,000, which Is exempt from VAT regardless of the amount of aggregate rentals received by the lessor during the year. (Sec. 109(x), NIRC). The term unit shall mean per person in the case of dormitories, boarding houses and bed spaces (Sec. 4.103-1, RRNo. 7-95).

Who are liable for the payment of Value-Added Tax? SUGGESTED ANSWER:

VAT: Transactions "Deemed Sales” (1997) Under the Value Added tax (VAT), the tax is imposed on sales, barter, or exchange of goods and services. The VAT is also imposed on certain transactions "deemed-sales". What are these so-called transactions "deemed sales'?

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SUGGESTED ANSWER:

VAT: Liable for Payment (1996)

The persons liable for the value-added tax are: a. Sellers of goods and properties in the course of trade or business; b. Sellers of services in the course of trade or business, including lessors of goods and properties; c. Importers of taxable goods, whether in the course of business or not

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State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at 0%: 1) Sale of fresh vegetables by Aling Ining at the Pamilihang Bayan ng Trece Martirez. [1%] 2) Services rendered by Jake's Construction Company, a contractor to the World Health Organization in the renovation of its offices in Manila. [1%] 3) Sale of tractors and other agricultural implements by Bungkal Incorporated to local farmers. [1%] 4) Sale of RTW by Cely's Boutique, a Filipino dress designer, in her dress shop and other outlets. [1%] 5) Fees for lodging paid by students to Bahay-Bahayan Dormitory, a private entity operating a student dormitory (monthly fee PI,500). [1%]

SUGGESTED ANSWER:

The following transactions shall be deemed sale: a) Transfer, use, or consumption not in the course of business of goods originally intended for sale or for use in the course of business; b)

Distribution or transfer to: (1) Shareholders or investors as share in the profits of VAT-registered persons; or (2) Creditors in payment of debt;

c)

Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned; and

d)

Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation.

VAT; Covered Transactions (1998)

COMMENT: The problems do not call for a yes or no answer. Accordingly, a bar candidate who answered only VAT exempt. VAT at 10% or VAT at 0%. as called for in the problem without further reasons, should be given full credit.

VAT; Exemption: Constitutionality (2004) A law was passed exempting doctors and lawyers from the operation of the value added tax. Other professionals complained and filed a suit questioning the law for being discriminatory and violative of the equal protection clause of the Constitution since complainants were not given the

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

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same exemption. Is the suit meritorious or not? Reason briefly. (5%)

unapplied/unused Input VAT (Tax Reform Act, Section 112[A] [1997]).

SUGGESTED ANSWER:

ALTERNATIVE ANSWER:

B. Yes, the suit is meritorious. The VAT is designed for economic efficiency; hence, should be neutral to those who belong to the same class. Professionals are a class of taxpayers by themselves who, in compliance with the rule of equality of taxation, must be treated alike for tax purposes. Exempting lawyers and doctors from a burden to which other professionals are subjected will make the law discriminatory and violative of the equal protection clause of the Constitution. While singling out a class for taxation purposes will not infringe upon this constitutional limitation (Shell v. Vano, 94 Phil. 389 [1954]), singling out a taxpayer from a class will no doubt transgress the constitutional limitation (Ormoc Sugar Co. Inc., v. Treasurer of Ormoc City, 22 SCRA 603 [1968]). Treating doctors and lawyers as a different class of professionals will not comply with the requirements of a reasonable, hence valid classification, because the classification is not based upon substantial distinction which makes real differences. The classification does not comply with the requirement that it should be germane to the purpose of the law either. (Pepsi-Cola Bottling Co., Inc. v. City of Butuan, 24 SCRA 789 [1968]).

No. The exemption of Lily's Fashion, Inc. is only for taxes for which it is directly liable. Hence, it can not claim exemption for a tax shifted to it, which is not at all considered a tax to the buyer but a part of the purchase price. Lily's fashion is not the taxpayer in so far as the passed-on tax is concerned and therefore, it can not claim for a refund of a tax merely shifted to it (Phil. Acetylene Co., Inc. v. CIR, L-19707,Aug. 17, 1987).

ANOTHER ANSWER:

No. The suit is not meritorious. The equal protection clause of the Constitution merely requires that all persons subjected to legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed. The equality in taxation rule is not violated if classifications or distinctions are made as long as the same are based on reasonable and substantial differences. {Pepsi-Cola Bottling Co., Inc. v. City of Butuan, 24 SCRA 789 [1968]). In the instant case, the professions of doctors and lawyers are not principally aimed at earning money but for the service of the people. The exemption granted to doctors and lawyers from the operation of the VAT is justified, as it is not discriminatory against the other professionals because they have reasonable and substantial differences in the conduct of their professions. VAT; Non-VAT taxpayer; Claim for Refund (2006) Lily's Fashion, Inc. is a garment manufacturer located and registered as a Subic Bay Freeport Enterprise under Republic Act No. 7227 and a non-VAT taxpayer. As such, it is exempt from payment of all local and national internal revenue taxes. During its operations, it purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted to Lily's Fashion, Inc. the 10% VAT on the purchased items amounting to P 500,000.00. Lily's Fashion, Inc. filed with the BIR a claim for refund for the input tax shifted to it by the suppliers. If you were the Commissioner of Internal Revenue, will you allow the refund? (5%) ALTERNATIVE ANSWER:

No, I will not allow the refund. Only VAT-Registered taxpayers are entitled to a refund of their

(NOTA BENE: This concept pertains to the VAT law which is excluded from the Bar coverage, Guidelines for 2006 Bar Examinations, June 15, 2006)

REMEDIES IN INTERNAL REVENUE TAXES BIR: Assessment: Unregistered Partnership (1997) Mr. Santos died intestate in 1989 leaving his spouse and five children as the only heirs. The estate consisted of a family home and a four-door apartment which was being rented to tenants. Within the year, an extrajudicial settlement of the estate was executed from the heirs, each of them receiving his/her due share. The surviving spouse assumed administration of the property. Each year, the net income from the rental property was distributed to all, proportionately, on which they paid respectively, the corresponding income tax. In 1994, the income tax returns of the heirs were examined and deficiency income tax assessments were issued against each of them for the years 1989 to 1993, inclusive, as having entered into an unregistered partnership. Were the assessments justified? SUGGESTED ANSWER:

Yes, the assessments were justified because for income tax purposes, the co-ownership of inherited property is automatically converted into an unregistered partnership from the moment the said properties are used as a common fund with intent to produce profits for the heirs in proportion to their shares in the inheritance. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the income thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his shares to be held in common with his co-heir under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed (Lorenzo Ona, et al v. CIR, 45 SCRA 74). ALTERNATIVE ANSWER:

No, the assessments are not justified. The mere sharing of income does not of itself establish a partnership absent any clear intention of the co-owners who are only awaiting liquidation of the estate. BIR: Collection of Tax Deficiency (1999)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

A died, survived by his wife and three children. The estate tax was properly paid and the estate settled and divided and distributed among the four heirs. Later, the BIR found out that the estate failed to report the income received by the estate during administration. The BIR issued a deficiency income tax assessment plus interest, surcharges and penalties. Since the 3 children are residing abroad, the BIR sought to collect the full tax deficiency only against the widow. Is the BIR correct? (10%) SUGGESTED ANSWER:

Yes, the BIR is correct. In a case where the estate has been distributed to the heirs, the collection remedies available to the BIR in collecting tax liabilities of an estate may either (1) sue all the heirs and collect from each of them the amount of tax proportionate to the inheritance received or (2) by virtue of the lien created under Section 219, sue only one heir and subject the property he received from the estate to the payment of the estate tax. The BIR, therefore, is correct in pursuing the second remedy although this will give rise to the right of the heir who pays to seek reimbursement from the other heirs. (CIR v. Pineda, 21 SCRA 105). In no case, however, can the BIR enforce the tax liability in excess of the share of the widow in the inheritance. BIR: Compromise; Conditions (2000) Under what conditions may the Commissioner of Internal Revenue be authorized to: A. Compromise the payment of any internal revenue tax? (2%) SUGGESTED ANSWER:

The Commissioner of Internal Revenue may be authorized to compromise the payment of any internal revenue tax where: 1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or 2) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. B. Abate or cancel a tax liability? (3%) SUGGESTED ANSWER:

The Commissioner of Internal Revenue may abate or cancel a tax liability when: 1) The tax or any portion thereof appears to be unjustly or excessively assessed; or 2) The administration and collection costs involved do not justify the collection of the amount due. [Sec. 204 (B), NIRC of 1997] BIR: Compromise; Extent of Authority (1996) Explain the extent of the authority of the Commissioner of Internal Revenue to compromise and abate taxes? SUGGESTED ANSWER:

The authority of the Commissioner to compromise encompasses both civil and criminal liabilities of the taxpayer. The civil compromise is allowed only in cases 12) where the tax assessment is of doubtful validity, or 13) when the financial position of the taxpayer demonstrates a clear inability to pay the tax. The compromise of the tax liability is possible at any stage of litigation and the amount of compromise is left to the discretion of the Commissioner except with respect to

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final assessments issued against large taxpayers wherein the Commissioner cannot compromise for less than fifty percent (50%). Any compromise involving large taxpayers lower than fifty percent (50%) shall be subject to the approval of the Secretary of Finance.

All criminal violations except those involving fraud, can be compromised by the Commissioner but only prior to the filing of the information with the Court. The Commissioner may also abate or cancel a tax liability when 1. the tax or any portion thereof appears to have been unjustly or excessively assessed; or 2. the administrative and collection costs involved do not Justify collection of the amount due. (Sec. 204, NIRC) BIR: Compromise; Withholding Agent (1998) May the Commissioner of the Internal Revenue compromise the payment of withholding tax (tax deducted and withheld at source) where the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax? [5%1 SUGGESTED ANSWER:

No. A taxpayer who is constituted as withholding agent who has deducted and withheld at source the tax on the income payment made by him holds the taxes as trust funds for the government (Sec. 58[D]) and is obligated to remit them to the BIR. The subsequent inability of the withholding agent to pay/remit the tax withheld is not a ground for compromise because the withholding tax is not a tax upon the withholding agent but it is only a procedure for the collection of a tax. BIR: Corporation: Distraint & Levy (2002) On March 15, 2000, the BIR issued a deficiency income tax assessment for the taxable year 1997 against the Valera Group of Companies (Valera) in the amount of P10 million. Counsel for Valera protested the assessment and requested a reinvestigation of the case. During the investigation, it was shown that Valera had been transferring its properties to other persons. As no additional evidence to dispute the assessment had been presented, the BIR issued on June 16, 2000 warrants of distraint and levy on the properties and ordered the filing of an action in the Regional Trial Court for the collection of the tax. Counsel for Valera filed an injunctive suit in the Regional Trial Court to compel the BIR to hold the collection of the tax in abeyance until the decision on the protest was rendered. A. Can the BIR file the civil action for collection, pending decision on the administrative protest? Explain. (3%) SUGGESTED ANSWER:

A. Yes, because there is no prohibition for this procedure considering that the filing of a civil action for collection during the pendency of an administrative protest constitutes the final decision of the Commissioner on the protest (CIR v. Union Shipping Corp., 85 SCRA 548 [1990]).

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

B.

As counsel for Valera, what action would you take in order to protect the interest of your client? Explain your answer. (2%)

SUGGESTED ANSWER:

B. I will wait for the filing of the civil action for collection and consider the same as an appealable decision. I will not file an injunctive suit because it is not an available remedy. I would then appeal the case to the Court of Tax Appeals and move for the dismissal of the collection case with the RTC. Once the appeal to the CTA is filed on time, the CTA has exclusive jurisdiction over the case. Hence, the collection case in the RTC should be dismissed (Tabes v. Flojo, 115 SCRA 278 [1982]). BIR: Court of Tax Appeals: Collection of Taxes; Grounds for Compromise (1996) 1. May the Court of Tax Appeals issue an injunction to enjoin the collection of taxes by the Bureau of Internal Revenue? Explain. SUGGESTED ANSWER:

Yes. When a decision of the Commissioner on a tax protest is appealed to the CTA pursuant to Sec. 11 of RA. No. 1125 (law creating the CTA) in relation to Sec. 229 of the NIRC, such appeal does not suspend the payment, levy, distraint and/or sale of any of the taxpayer's property for the satisfaction of his tax liability. However, when in the opinion of the CTA the collection of the tax may jeopardize the interest of the Government and/or the taxpayer, the Court at any stage of the proceedings may suspend or restrain the collection of the tax and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. 2.

May the tax liability of a taxpayer be compromised during the pendency of an appeal? Explain.

SUGGESTED ANSWER:

Yes. During the pendency of the appeal, the taxpayer may still enter into a compromise settlement of his tax liability for as long as any of the grounds for a compromise i.e.; doubtful validity of assessment and financial incapacity of taxpayer, is present. A compromise of a tax liability is possible at any stage of litigation, even during appeal, although legal propriety demands that prior leave of court should be obtained (Pasudeco vs. CIR L-39387, June 29, 1982). BIR: Criminal Prosecution: Tax Evasion (1998) Is assessment necessary before a taxpayer may be prosecuted for willfully attempting in any manner to evade or defeat any tax imposed by the Internal Revenue Code? [5%) SUGGESTED ANSWER:

No. Assessment is not necessary before a taxpayer maybe prosecuted if there is a prima facie showing of a willful attempt to evade taxes as in the taxpayer's failure to declare a specific item of taxable income in his income tax returns (Ungab v. Cusi 97 SCRA 877). On the contrary, if the taxes alleged to have been evaded is computed based on reports approved by the BIR there is a presumption of regularity of the previous payment of taxes, so that unless and until the BIR has made a final determination of what is supposed to be the correct taxes, the taxpayer should not be placed in the crucible of

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criminal prosecution (CIR v. Fortune Tobacco Corp., GR No. 119322, June 4, 1996).

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BIR: Extinction; Criminal Liability of the Taxpayer (2002) Mr. Chan, a manufacturer of garments, was investigated for failure to file tax returns and to pay taxes for the taxable year 1997. Despite the subpoena duces tecum issued to him, he refused to present and submit his books of accounts and allied records. Investigators, therefore, raided his factory and seized several bundles of manufactured garments, supplies and unpaid imported textile materials. After his apprehension and based on the testimony of a former employee, deficiency income and business taxes were assessed against Mr. Chan on April 15, 2000. It was then that he paid the taxes. Criminal action was nonetheless instituted against him in the Regional Trial Court for violation of the Tax Code. Mr. Chan moved to dismiss the criminal case on the ground that he had already paid the taxes assessed against him. He also demanded the return of the garments and materials seized from his factory. How will you resolve Mr. Chan's motion? (5%) SUGGESTED ANSWER:

The motion to dismiss should be denied. The satisfaction of the civil liability is not one of the grounds for the extinction of criminal action (People v. Ildefonso Tierra, 12 SCRA 666 [1964]). Likewise, the payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provision of the Tax Code (Sec. 253[a], NIRC). However, the garments and materials seized from the factory should be ordered returned because the payment of the tax had released them from any lien that the Government has over them. Customs; Jurisdiction; Assessment; Unpaid Customs Duties/Taxes (2006) The Collector of Customs issued an assessment for unpaid customs duties and taxes on the importation of your client in the amount of P980,000.00. Where will you file your case to protect your client's right? Choose the correct courts/ agencies, observing their proper hierarchy. (5%) 1. Court of Tax Appeals 2. Collector of Customs 3. Commissioner of Customs 4. Regional Trial Court 5. Metropolitan Trial Court 6. Court of Appeals 7. Supreme Court SUGGESTED ANSWER:

1. Protest with the Collector of Customs (Sec. 2308, TCC) 2. Appeal to the Commissioner of Customs (Sec. 2313, TCC). 3. Appeal to the CTA (RA 9282) 4. Petition for Review on Certiorari Supreme Court (Rule 45 of the 1997 Rules of Civil Procedure (RA 9282). Taxpayer; Prescriptive Period; Assessment; Deficiency Income Tax (2006) The Commissioner of Internal Revenue issued an assessment for deficiency income tax for taxable year 2000 last July 31, 2006 in the amount of P 10 Million inclusive of

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

surcharge and interests. If the delinquent taxpayer is your client, what steps will you take? What is your defense? (10%) ALTERNATIVE ANSWER:

As Counsel, I shall move to cancel the Assessment because of prescription. The three (3) year period of assessment for the Income Tax Returns of 2000 starts on April 15, 2001 and ends on April 16, 2004. The assessment of July 31, 2006 is beyond the three (3) year prescriptive period and can no longer have any legal, binding effect (Tax Reform Act, Title VIII, Chapter I, Section 203 [1997]). ALTERNATIVE ANSWER:

Since my client has lost his right to protest, I will advise him to wait for a collection action by the Commissioner. Then, I will file a petition for review with the CTA to question the collection. Since the assessment was issued beyond the prescriptive period to assess, the action to collect an invalid assessment is not warranted (Phil. Jour-

nalists, Inc. v. CIR, G.R. No. 162852, December 16, 2004).

Taxpayer; Assessment; Deficiency Tax (2006) On June 1, 2003, Global Bank received a final notice of assessment from the BIR for deficiency documentary stamp tax in the amount of P5 Million. On June 30, 2003, Global Bank filed a request for reconsideration with the Commissioner of Internal Revenue. The Commissioner denied the request for reconsideration only on May 30, 2006, at the same time serving on Global Bank a warrant of distraint to collect the deficiency tax. If you were its counsel, what will be your advice to the bank? Explain. (5%) ALTERNATIVE ANSWER:

The denial for the request for reconsideration is the final decision of the CIR.. I would advise Global Bank to appeal the denial to the Court of Tax Appeals (CTA) within 30 days from receipt. I will further advise the bank to file a motion for injunction with the Court of Tax Appeals to enjoin the Commissioner from enforcing the assessment pending resolution of the appeal. While an appeal to the CTA will not suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of its tax liability, the CTA is authorized to give injunctive relief if the enforcement would jeopardize the interest of the taxpayer, as in this case, where the assessment has not become final (Lascona Land Co. v,

CIR, CTA Case No. 5777, January 4, 2000; See also Revised CTA Rules, approved by the Supreme Court on December 15, 2005). ALTERNATIVE ANSWER:

I will advice the Bank to promptly pay the deficiency documentary stamp tax and the interest charges to avoid any further increase in the tax liability. The Bank should have appealed to the Court of Tax Appeals when the BIR failed to decide on its Request for Reconsideration within thirty (30) days after the inaction of the BIR for one hundred eighty (180) days or on December 31, 2003. The Tax Assessment has already become final, executory and unappealable at that point (BPI v. CIR, G.R. No. 139736, October 17, 2005).

Taxpayer; VAT-registered; Claim for Tax Refund (2006)

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Royal Mining is a VAT-registered domestic mining entity. One of its products is silver being sold to the Bangko Sentral ng Pilipinas. It filed a claim with the BIR for tax refund on the ground that under Section 106 of the Tax Code, sales of precious metals to the Bangko Sentral ng Pilipinas are considered export sales subject to zero-rated VAT. Is Royal Mining's claim meritorious? Explain. (5%) SUGGESTED ANSWER:

No, Royal Mining's claim is not meritorious because it is the sale to the Bangko Sentral ng Pilipinas of gold and not silver which is considered export sales at Zero-rated VAT (Tax Reform Act, Title IV, Section 106[2][a][4]). (NOTA BENE: EVAT is excluded from the Bar coverage, Guidelines for 2006 Bar Examinations, June 15, 2006)

BIR: Fraudulent Return; Prima Facie Evidence (1998) What constitutes prima facie evidence of a false or fraudulent return? [2%] SUGGESTED ANSWER:

There is prima facie evidence of a false or fraudulent return when the taxpayer has willfully and knowingly filed it with the intent to evade a part or all of the tax legally due from him (Ungab v. Cusi,, 97 SCRA 877). There must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake not culpable in respect of its value would not constitute a false return. (Words and Phrases, Vol. 16, page 173). BIR: Fraudulent Return; Prima Facie Evidence (2002) What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a 50% surcharge on the deficiency tax due from a taxpayer? Explain. (5%) SUGGESTED ANSWER:

There is a prima facie evidence of false or fraudulent return when the taxpayer SUBSTANTIALLY UNDERDECLARED his taxable sales, receipts or income, or SUBSTANTIALLY OVERSTATED his deductions, the taxpayer's failure to report sales, receipts or income in an amount exceeding 30% of that declared per return, and a claim of deduction in an amount exceeding 30% of actual deduction shall render the taxpayer liable for substantial underdeclaration and overdeclaration, respectively, and will justify the imposition of the 50% surcharge on the deficiency tax due from the taxpayer. (Sec. 248, NIRC). BIR: Garnishment: Bank Account of a Taxpayer (1998) Is the BIR authorized to issue a warrant of garnishment against the bank account of a taxpayer despite the pendency of his protest against the assessment with the BIR or appeal with the Court of Tax Appeals? [5%] SUGGESTED ANSWER:

The BIR is authorized to issue a warrant of garnishment against the bank account of a taxpayer despite the pendency of protest (Yabes v. Flojo, 15 SCRA 278). Nowhere in the Tax Code is the Commissioner required to rule first on the protest before he can institute collection proceedings on the tax assessed. The legislative policy is to give the Commissioner much latitude in the speedy and prompt collection of taxes because it is in taxation that the Government depends to obtain the

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

means to carry on its operations (Republic u. Tim Tian Teng Sons, Inc., 16 SCRA 584). ALTERNATIVE ANSWER:

No, because the assessment has not yet become final, executory and demandable. The basic consideration in the collection of taxes is whether the assessment is final and unappealable or the decision of the Commissioner is final, executory and demandable, the BIR has legal basis to collect the tax liability by either administrative or judicial action. BIR: Pre-Assessment Notice not Necessary (2002) In the investigation of the withholding tax returns of AZ Medina Security Agency (AZ Medina) for the taxable years 1997 and 1998, a discrepancy between the taxes withheld from its employees and the amounts actually remitted to the government was found. Accordingly, before the period of prescription commenced to run, the BIR issued an assessment and a demand letter calling for the immediate payment of the deficiency withholding taxes in the total amount of P250,000.00. Counsel for AZ Medina protested the assessment for being null and void on the ground that no pre-assessment notice had been issued. However, the protest was denied. Counsel then filed a petition for prohibition with the Court of Tax Appeals to restrain the collection of the tax. A. Is the contention of the counsel tenable? Explain (2%) SUGGESTED ANSWER:

A. No, the contention of the counsel is untenable. Section 228 of the Tax Code expressly provides that no pre-assessment notice is required when a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent. Since the amount assessed relates to deficiency withholding taxes, the BIR is correct in issuing the assessment and demand letter calling for the immediate payment of the deficiency withholding taxes. (Sec. 228, NIRC). B.

Will the special civil action for prohibition brought before the CTA under Sec. 11 of R.A, No. 1125 prosper? Discuss your answer. (3%)

SUGGESTED ANSWER:

B. The special civil action for prohibition will not prosper, because the CTA has no jurisdiction to entertain the same. The power to issue writ of injunction provided for under Section 11 of RA 1125 is only ancillary to its appellate jurisdiction. The CTA is not vested with original jurisdiction to issue writs of prohibition or injunction independently of and apart from an appealed case. The remedy is to appeal the decision of the BIR. (Collector v. Yuseco, 3 SCRA 313 [1961]). BIR: Prescriptive Period: Civil Action (2002) On August 5, 1997, Adamson Co., Inc. (Adamson) filed a request for reconsideration of the deficiency withholding tax assessment on July 10, 1997, covering the taxable year 1994. After administrative hearings, the original assessment of P150,000.00 was reduced to P75.000.00 and a modified assessment was thereafter issued on August 05, 1999. Despite repeated demands, Adamson failed and

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refused to pay the modified assessment. Consequently, the BIR brought an action for collection in the Regional Trial Court on September 15, 2000. Adamson moved to dismiss the action on the ground that the government's right to collect the tax by judicial action has prescribed. Decide the case. (5%) SUGGESTED ANSWER:

The right of the Government to collect by judicial action has not prescribed. The filing of the request for reconsideration suspended the running of the prescriptive period and commenced to run again when a decision on the protest was made on August 5, 1999. It must be noted that in all cases covered by an assessment, the period to collect shall be five (5) years from the date of the assessment but this period is suspended by the filing of a request for reconsideration which was acted upon by the Commissioner of Internal Revenue (CIR v. Wyeth Suaco Laboratories, Inc., 202 SCRA 125 [1991]).

BIR: Prescriptive Period; Assessment & Collection (1999) A Co., a Philippine Corporation, filed its 1995 Income Tax Return (ITR) on April 15, 1996 showing a net loss. On November 10, 1996, it amended its 1995 ITR to show more losses. After a tax investigation, the BIR disallowed certain deductions claimed by A Co., putting A Co. in a net income position. As a result, on August 5, 1999, the BIR issued a deficiency income assessment against A Co. A Co. protested the assessment on the ground that it has prescribed: Decide. (5%) SUGGESTED ANSWER:

The right of the BIR to assess the tax has not prescribed. The rule is that internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return. (Section 203, NIRC), However, if the return originally filed is amended substantially, the counting of the three-year period starts from the date the amended return was filed. (CIR v. Phoenix Assurance Co., Ltd., 14 SCRA 52). There is a substantial amendment in this case because a new return was filed declaring more losses, which can only be done either (1) in reducing gross income or (2) in increasing the items of deductions, claimed. BIR: Prescriptive Period; Criminal Action (2002) TY Corporation filed its final adjusted income tax return for 1993 on April 12, 1994 showing a net loss from operations. After investigation, the BIR issued a preassessment notice on March 30, 1996. A final notice and demand letter dated April 15, 1997 was issued, personally delivered to and received by the company's chief accountant. For willful refusal and failure of TY Corporation to pay the tax, warrants of distraint and levy on its properties were issued and served upon it. On January 10, 2002, a criminal charge for violation of the Tax Code was instituted in the Regional Trial Court with the approval of the Commissioner. The company moved to dismiss the criminal complaint on the ground that an act for violation of any provision of the Tax Code prescribes after five (5) years and, in this case, the period commenced to run on March 30, 1996 when the pre-assessment was issued. How will you resolve the motion? Explain your answer. (5%)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) SUGGESTED ANSWER:

The motion to dismiss should not be granted. It is only when the assessment has become final and unappealable that the 5-year period to file a criminal action commences to run (Tupaz v. Ulop, 316 SCRA 118 [1999]). The preassessment notice issued on March 30, 1996 is not a final assessment which is enforceable by the BIR. It is the issuance of the final notice and demand letter dated April 15, 1997 and the failure of the taxpayer to protest within 30 days from receipt thereof that made the assessment final and unappealable. The earliest date that the assessment has become final is May 16, 1997 and since the criminal charge was instituted on January 10, 2002, the same was timely filed.

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P2.0 Million as the selling price. Discuss the tax implications and consequences of the action. (5%)

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ALTERNATIVE ANSWER:

The action of the parties constitutes tax evasion and exposes Josel to: (1) DEFICIENCY FINAL INCOME TAX on the sale of real property in the Philippines classified as a capital asset. Under Sec. 24(D) of the NIRC, the final tax of six percent (6%) shall be based on the gross selling price of P2.5 Million or zonal value of P2.0 Million, whichever is higher, i.e., P2.5 Million; (2) FRAUD PENALTY amounting to 50% surcharge on the amount evaded (Sec. 248[B] NIRC); and (3) DEFICIENCY INTEREST of 20% per annum on the deficiency. (Sec. 249[A][B], NIRC) ALTERNATIVE ANSWER:

BIR: Secrecy of Bank Deposits Law (1998) Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so, does this power of the Commissioner conflict with R.A. 1405 (Secrecy of Bank Deposits Law) [5%] SUGGESTED ANSWER:

The Commissioner of Internal Revenue is authorized to inquire into the bank deposits of: 1) a decedent to determine his gross estate; 2)

any taxpayer who has filed an application for compromise of his tax liability by means of financial incapacity to pay his tax liability (Sec. 6(F). NIRC).

3)

Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized representatives to Inquire into the bank deposits. (Note: This answer was not part of the answers enumerated in the UP Law Answers to the Bar in this but was later added in the recent UP Law Answers to the Bar as a result of AMLA Law of 2001)

The limited power of the Commissioner does not conflict with R.A. No. 1405 because the provisions of the Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law as embodied in a later legislation. Furthermore, in case a taxpayer applies for an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under R.A. No. 1405, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. BIR; Consequence; Taxpayer guilty of Tax Evasion (2005) Josel agreed to sell his condominium unit to Jess for P2.5 Million. At the time of the sale, the property had a zonal value of P2.0 Million. Upon the advice of a tax consultant, the parties agreed to execute two deeds of sale, one indicating the zonal value of P2.0 Million as the selling price and the other showing the true selling price of P2.5 Million. The tax consultant filed the capital gains tax return using the deed of sale showing the zonal value of

There is tax evasion because of the concurrence of the following factors: 1) The payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due. It is evident that the parties that the tax due should be computed based on the valuation of P2.5 million and not P2.0 million; 2) An accompanying state of mind which is described as being "evil" on "bad faith," "willful," or "deliberate and not accidental." Despite the above knowledge, the parties deliberately misrepresented the true basis of the sale; and 3) A course of action or failure of action which is unlawful. This is shown by the preparation of the two deeds of sale which showed different values.

(Commissioner of Internal Revenue v. The Estate ofBenigno P, Tbda, Jr., G.R. No. 147188, September 14, 2004)

The tax evasion committed should result to the imposition of a 50% fraud surcharge on the amount evaded (Sec. 248[B], NIRC) payment of the Deficiency Tax, and interest of 20% per annum on the deficiency. (Sec. 249[A][B], NIRC) The parties may likewise be subject to criminal prosecution for willfully failing to pay the tax, as well as for filing a false and fraudulent return. (Sees. 254, 255 and 257, NIRC) BIR: Summary Remedy: Estate Tax Deficiencies (1998) Is the BIR authorized to collect estate tax deficiencies by the summary remedy of levy upon and sale of real properties of the decedent without first securing the authority of the court sitting in probate over the supposed will of the decedent? SUGGESTED ANSWER:

Yes. The BIR is authorized to collect estate tax deficiency through the summary remedy of levying upon and sale of real properties of a decedent, without the cognition and authority of the court sitting in probate over the supposed will of the deceased, because the collection of estate tax is executive in character. As such the estate tax is exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the government (Marcos v. CIR, G.R. No. 120880, June 5, 1997). ALTERNATIVE ANSWER:

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Yes, if the tax assessment has already become final, executory and enforceable. The approval of the court sitting in probate over the supposed will of the deceased is not a mandatory requirement for the collection of the estate tax. The probate court is determining issues which are not against the property of the decedent, or a claim against the estate as such, but is against the interest or property right which the heir, legatee, devisee, etc. has in the property formerly held by the decedent. (Marcos v. CIR, G.R, No. 120880, June 5, 1997). BIR: Unpaid Taxes vs. Claims for Unpaid Wages (1995) For failure of Oceanic Company, Inc. (OCEANIC), to pay deficiency taxes of P20 Million, the Commissioner of Internal Revenue issued warrants of distraint on OCEANIC's personal properties and levied on its real properties. Meanwhile, the Department of Labor through the Labor Arbiter rendered a decision ordering OCEANIC to pay unpaid wages and other benefits to its employees. Four barges belonging to OCEANIC were levied upon by the sheriff and later sold at public auction. The Commissioner of Internal Revenue filed a motion with the Labor Arbiter to annul the sale and enjoin the sheriff from disposing the proceeds thereof. The employees of OCEANIC opposed the motion contending that Art. 110 of the Labor Code gives first preference to claims for unpaid wages. Resolve the motion. Explain. SUGGESTED ANSWER:

The motion filed by the Commissioner should be granted because the claim of the government for unpaid taxes are generally preferred over the claims of laborers for unpaid wages. The provision of Article 110 of the Labor Code, which gives laborers' claims for preference applies only in case of bankruptcy or liquidation of the employer's business. In the instant case, Oceanic is not under bankruptcy or liquidation at the time the warrants of distraint and levy were issued hence, the opposition of the employees is unwarranted. (CIR vs. NLRC et al G.R. No. 74965, November 9, 1994).

BIR; Assessment; Criminal Complaint (2005) In 1995, the BIR filed before the Department of Justice (DOJ) a criminal complaint against a corporation and its officers for alleged evasion of taxes. The complaint was supported by a sworn statement of the BIR examiners showing the computation of the tax liabilities of the erring taxpayer. The corporation filed a motion to dismiss the criminal complaint on the ground that there has been, as yet, no assessment of its tax liability; hence, the criminal complaint was premature. The DOJ denied the motion on the ground that an assessment of the tax deficiency of the corporation is not a precondition to the filing of a criminal complaint and that in any event, the joint affidavit of the BIR examiners may be considered as an assessment of the tax liability of the corporation. Is the ruling of the DOJ correct? Explain. (5%) SUGGESTED ANSWER:

The DOJ is correct in ruling that an assessment of the tax deficiency of the corporation is not a precondition to the filing of a criminal complaint. There is no need for an

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assessment so long as there is a prima facie showing of violation of the provisions of the Tax Code. After all, a criminal charge is instituted not to demand payment, but to penalize the tax payer for violation of the Tax Code. (Commissioner of Internal Revenue v. Pascor

Realty and Development Corporation, G.R. No. 128315, June 29, 1999) Furthermore, there is nothing in the

problem that shows that the BIR in filing the case is also interested in collecting the tax deficiency. However, it is in error when it ruled that the joint affidavit of the BIR examiners may be considered as an assessment of the tax liability of the corporation. The joint affidavit showing the computation of the tax liabilities of the erring taxpayer is not a tax assessment because it was not sent to the taxpayer, and does not demand payment of the tax within a certain period of time. An assessment is deemed made only when the BIR releases, mails or sends such notice to the taxpayer. (Commissioner of Internal Revenue

v. Pascor Realty and Development Corporation, G.R. No. 128315, June 29, 1999) Notes and Comments: A plea is made for liberality in correcting the examinees answers because the examination is very long.

BIR; Authority; Refund or Credit of Taxes (2005) State the conditions required by the Tax Code before the Commissioner of Internal Revenue could authorize the refund or credit of taxes erroneously or illegally received. SUGGESTED ANSWER:

Under Sec. 204(C), NIRC, the following conditions must be met: 1. There must be a written claim for refund filed by the taxpayer with the Commissioner. 2. The claim for refund must be a categorical demand for reimbursement. 3. The claim for refund must be filed within two (2) years from date of payment of the tax or penalty regardless of any supervening cause. BIR; Compromise (2004) After the tax assessment had become final and unappealable, the Commissioner of Internal Revenue initiated the filing of a civil action to collect the tax due from NX. After several years, a decision was rendered by the court ordering NX to pay the tax due plus penalties and surcharges. The judgment became final and executory, but attempts to execute the judgment award were futile. Subsequently, NX offered the Commissioner a compromise settlement of 50% of the judgment award, representing that this amount is all he could really afford. Does the Commissioner have the power to accept the compromise offer? Is it legal and ethical? Explain briefly. (5%) SUGGESTED ANSWER:

Yes. The Commissioner has the power to accept the offer of compromise if the financial position of the taxpayer clearly demonstrates a clear inability to pay the tax (Section 204, NIRC).

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

As represented by NX in his offer, only 50% of the judgment award is all he could really afford. This is an offer for compromise based on financial incapacity which the Commissioner shall not accept unless accompanied by a waiver of the secrecy of bank deposits (Section 6[F}, NIRC). The waiver will enable the Commissioner to ascertain the financial position of the taxpayer, although the inquiry need not be limited only to the bank deposits of the taxpayer but also as to his financial position as reflected in his financial statements or other records upon which his property holdings can be ascertained. If indeed, the financial position of NX as determined by the Commissioner demonstrates a clear inability to pay the tax, the acceptance of the offer is legal and ethical because the ground upon which the compromise was anchored is within the context of the law and the rate of compromise is well within and far exceeds the minimum prescribed by law which is only 10% of the basic tax assessed. BIR; Compromise (2005) State and discuss briefly whether the following cases may be compromised or may not be compromised: a) Delinquent accounts; b) Cases under administrative protest, after issuance of the final assessment notice to the taxpayer, which are still pending; c) Criminal tax fraud cases; d) Criminal violations already filed in court; e) Cases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the required agreement form. (5%) SUGGESTED ANSWERS:

The following cases may still be compromised (R.R. 30-02 [2002]) because of the taxpayer's financial incapacity to pay the tax due or the assessment's doubtful validity: a) DELINQUENT ACCOUNTS may be compromised because there is no showing that there is a duly-approved schedule of installment payments; and b) Cases under administrative protest, after issuance of the final assessment notice to the taxpayer, which are still pending. The following cases MAY NO LONGER BE COMPROMISED (R.R. 30-02 [2002]) because the taxpayer has not paid his taxes for reasons other than his financial incapacity or the doubtful validity of the assessment: a) CRIMINAL TAX FRAUD cases as may be determined by the Commissioner or his authorized agents may not be compromised; b) CRIMINAL VIOLATIONS ALREADY FILED IN COURT so that the taxpayer will not profit from his fraud which would encourage tax evasion; and c) Cases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the required agreement form. The taxpayer is estopped from applying for a compromise.

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BIR; Deficiency Tax Assessment vs. Tax Refund / Tax Credit (2005) Is a deficiency tax assessment a bar to a claim for tax refund or tax credit? Explain. SUGGESTED ANSWER:

Yes, the deficiency tax assessment is a bar to a tax refund or credit. The Taxpayer cannot be entitled to a refund and at the same time liable for a tax deficiency assessment for the same year. The deficiency assessment creates a doubt as to the truth and accuracy of the Tax Return. Said Return cannot therefore be the basis of the refund

(Commissioner of Internal Revenue v. Alltel [2002], citing Commissioner of Internal Revenue v. Court of Appeals, City Trust Banking Corporation and Court of Tax Appeals, G.R. No. 106611, July 21, 1994)

BIR; Distraint; Prescription of the Action (2002) Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on March 15, 1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the sum of P250.000.00, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19, 2001 warrants of distraint and levy to enforce collection of the tax. A. What is the rule of income taxation with respect to Mr. Sebastian's income in 1997 as a seaman on board the Norwegian vessel engaged in international shipping? Explain your answer. (2%) SUGGESTED ANSWER:

A. The income of Mr. Sebastian as a seaman is considered as income of a non-resident citizen derived from without the Philippines. The total gross income, in US dollars (or if in other foreign currency, its dollar equivalent) from without shall be declared by him for income tax purposes using a separate income tax return which will not include his income from business derived within (to be covered by another return). He is entitled to deduct from his dollar gross income a personal exemption of $4,500 and foreign national income taxes paid to arrive at his adjusted income during the year. His adjusted income will be subject to the graduated tax rates of 1% to 3%. (Sec. 21 (b), Tax Code of 1986[PD 1158], as amended by PD 1994). [Note: The bar candidates are not expected to be familiar with tax history. Considering that this is already the fourth year of implementation of the Tax Code of 1997, bar candidates were taught and prepared to answer questions based on the present law. It is therefore requested that the examiner be more lenient in checking the answers to this question. Perhaps, an answer based on the present law be given full credit.]

B.

If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary remedies of warrants of distraints and levy? Explain your answer. (3%)

SUGGESTED ANSWER:

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

B. I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tax returns when the said return is filed on time. (Section 203, NIRC). The last day for filing the 1997 income tax return is April 15, 1998. Since the assessment was issued only on April 20, 2001, the BIR's right to assess has already prescribed. BIR; False vs. Fraudulent Return (1996) Distinguish a false return from a fraudulent return. SUGGESTED ANSWER:

The distinction between a false return and a fraudulent return is that the first merely implies a deviation from the truth or fact whether intentional or not, whereas the second is intentional and deceitful with the sole aim of evading the correct tax due (Aznar us. Commissioner, L-20569, August 23, 1974). ALTERNATIVE ANSWER:

A false return contains deviations from the truth which may be due to mistakes, carelessness or ignorance of the person preparing the return. A fraudulent return contains an intentional wrongdoing with the sole object of avoiding the tax and it may consist in the intentional underdeclaration of income, intentional overdeclaration of deductions or the recurrence of both. A false return is not necessarily tainted with fraud because the fraud contemplated by law is actual and not constructive. Any deviation from the truth on the other hand, whether intentional or not, constitutes falsity. (Aznar vs. Commissioner, L-20569, August 23, 1974) BIR; Jurisdiction; Review Rulings of the Commissioner (2006) Mr. Abraham Eugenio, a pawnshop operator, after having been required by the Revenue District Officer to pay value added tax pursuant to a Revenue Memorandum Order (RMO) of the Commissioner of Internal Revenue, filed with the Regional Trial Court an action questioning the validity of the RMO. If you were the judge, will you dismiss the case? (5%) SUGGESTED ANSWER:

Yes. The RMO is in reality a ruling of the Commissioner in implementing the provisions of the Tax Code on the taxability of pawnshops. Jurisdiction to review rulings of the Commissioner is lodged with the Court of Tax Appeals and not with the Regional Trial Court (CIR v.

Josefina Leal, G.R. No. 113459, November 18, 2002; Tax Reform Act, RA 8424, Title I, Sec. 4 [1997]). (NOTA BENE: This concept pertains to the VAT law

which is excluded from the bar coverage, Guidelines for 2006 Bar Examinations, June 15, 2006)

BIR; Prescriptive Period; Assessment; Fraudulent Return (2002) Mr. Castro inherited from his father, who died on June 10, 1994, several pieces of real property in Metro Manila. The estate tax return was filed and the estate tax due in the amount of P250.000.00 was paid on December 06, 1994. The Tax Fraud Division of the BIR investigated the case on the basis of confidential information given by Mr. Santos on January 06, 1998 that the return filed by Mr. Castro was fraudulent and that he failed to declare all

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properties left by his father with intent to evade payment of the correct tax. As a result, a deficiency estate tax assessment for P1,250,000.00, inclusive of 50% surcharge for fraud, interest and penalty, was issued against him on January 10, 2001. Mr. Castro protested the assessment on the ground of prescription. A. Decide Mr. Castro's protest. (2%) SUGGESTED ANSWER:

A. The protest should be resolved against Mr. Castro. What was filed is a fraudulent return making the prescriptive period for assessment ten (10) years from discovery of the fraud (Section 222, NIRC). Accordingly, the assessment was issued within that prescriptive period to make an assessment based on a fraudulent return. B. What legal requirement/s must Mr. Santos comply with so that he can claim his reward? Explain. (3%) SUGGESTED ANSWER:

The legal requirements that must be complied by Mr. Santos to entitle him to reward are as follows: 1) He should voluntarily file a confidential information under oath with the Law Division of the Bureau of Internal Revenue alleging therein the specific violations constituting fraud; 2) The information must not yet be in the possession of the Bureau of Internal Revenue, or refer to a case already pending or previously investigated by the Bureau of Internal Revenue; 3) Mr. Santos should not be a government employee or a relative of a government employee within the sixth degree of consanguinity; and 4) The information must result to collections of revenues and/or fines and penalties. (Sec. 282, NIRC) BIR; Prescriptive Period; Criminal Action (2006) Gerry was being prosecuted by the BIR for failure to pay his income tax liability for Calendar Year 1999 despite several demands by the BIR in 2002. The Information was filed with the RTC only last June 2006. Gerry filed a motion to quash the Information on the ground of prescription, the Information having been filed beyond the 5-year reglementary period. If you were the judge, will you dismiss the Information? Why? (5%) SUGGESTED ANSWER:

No. The trial court can exercise jurisdiction. Prescription of a criminal action begins to run from the day of the violation of the law. The crime was committed when Gerry willfully refused to pay despite repeated demands in 2002. Since the information was filed in June 2006, the criminal case was instituted within the five-year period required by law (Tupaz v. Ulep, G.R. No. 127777, October 1, 1999; Section 281, NIRC).

BIR; Taxpayer: Civil Action & Criminal Action (2002) Minolta Philippines, Inc. (Minolta) is an EPZA-registered enterprise enjoying preferential tax treatment under a special law. After investigation of its withholding tax returns for the taxable year 1997, the BIR issued a deficiency withholding tax assessment in the amount of P150.000.00. On May 15, 1999, because of financial difficulty, the deficiency tax remained unpaid, as a result of which the assessment became final and executory. The

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

BIR also found that, in violation of the provisions of the National Internal Revenue Code, Minolta did not file its final corporate income tax return for the taxable year 1998, because it allegedly incurred net loss from its operations. On May 17, 2002, the BIR filed with the Regional Trial Court an action for collection of the deficiency withholding tax for 1997. A. Will the BIR's action for collection prosper? As counsel of Minolta, what action will you take? Explain your answer. (5%) SUGGESTED ANSWER:

A. Yes, BIR's action for collection will prosper because the assessment is already final and executory, it can already be enforced through judicial action. As counsel of Minolta, I will introduce evidence that the income payment was reported by the payee and the income tax was paid thereon in 1997 so that my client may only be allowed to pay the civil penalties for nonwithholding pursuant to RMO No. 38-83. [Note: It is not clear whether this is a case of nonwithholding/ underwithholding or non-remittance of tax withheld. As such, the tax counsel may be open to other remedies against the assessment.] B.

May criminal violations of the Tax Code be compromised? If Minolta makes a voluntary offer to compromise the criminal violations for nonfiling and non-payment of taxes for the year 1998, may the Commissioner accept the offer? Explain (5%)

SUGGESTED ANSWER:

B. All criminal violations of the Tax Code may be compromised except those already filed in court or those involving fraud (Section 204, NIRC). Accordingly, if Minolta makes a voluntary offer to compromise the criminal violations for non-filing and non-payment of taxes for the year 1998, the Commissioner may accept the offer which is allowed by law. However, if it can be established that a tax has not been paid as a consequence of non-filing of the return, the civil liability for taxes may be dealt with independently of the criminal violations. The compromise settlement of the criminal violations will not relieve the taxpayer from its civil liability. But the civil liability for taxes may also be compromised if the financial position of the taxpayer demonstrates a clear inability to pay the tax. Custom: Violation of Tax & Custom Duties (2002) The Collector of Customs of the Port of Cebu issued warrants of seizure and detention against the importation of machineries and equipment by LLD Import and Export Co. (LLD) for alleged nonpayment of tax and customs duties in violation of customs laws. LLD was notified of the seizure, but, before it could be heard, the Collector of Customs issued a notice of sale of the articles. In order to restrain the Collector from carrying out the order to sell, LLD filed with the Court of Tax Appeals a petition for review with application for the issuance of a writ of prohibition. It also filed with the CTA an appeal for refund of overpaid taxes on its other importations of raw materials which has been pending

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with the Collector of Customs. The Bureau of Customs moved to dismiss the case for lack of jurisdiction of the Court of Tax Appeals. A. Does the Court of Tax Appeals have jurisdiction over the petition for review and writ of prohibition? Explain (3%) SUGGESTED ANSWER:

A. No, because there is no decision as yet by the Commissioner of Customs which can be appealed to the CTA. Neither the remedy of prohibition would lie because the CTA has not acquired any appellate jurisdiction over the seizure case. The writ of prohibition being merely ancillary to the appellate jurisdiction, the CTA has no jurisdiction over it until it has acquired jurisdiction on the petition for review. Since there is no appealable decision, the CTA has no jurisdiction over the petition for review and writ of prohibition. (Commissioner of Customs v. Alikpala, 36 SCRA 208 [1970]). B. Will an appeal to the CTA for tax refund be possible? Explain (2%) SUGGESTED ANSWER:

B. No, because the Commissioner of Customs has not yet rendered a decision on the claim for refund. The jurisdiction of the Commissioner and the CTA are not concurrent in so far as claims for refund are concerned. The only exception is when the Collector has not acted on the protested payment for a long time, the continued inaction of the Collector or Commissioner should not be allowed to prejudice the taxpayer. (Nestle Phils., Inc. v. Court of Appeals, GR No. 134114, July 6, 2001). Customs; Basis; Automatic Review (2002) Whenever the decision of the Collector of Customs is adverse to the government, it is automatically elevated to the Commissioner for review and, if it is affirmed by him, it is automatically elevated to the Secretary of Finance for review. What is the basis of the automatic review procedure in the Bureau of Customs? Explain your answer. (5%) SUGGESTED ANSWER:

Automatic review is intended to protect the interest of the Government in the collection of taxes and customs duties in seizure and protest cases. Without such automatic review, neither the Commissioner of Customs nor the Secretary of Finance would know about the decision laid down by the Collector favoring the taxpayer. The power to decide seizure and protest cases may be abused if no checks are instituted. Automatic review is necessary because nobody is expected to appeal the decision of the Collector which is favorable to the taxpayer and adverse to the Government. This is the reason why whenever the decision of the Collector is adverse to the Government, the said decision is automatically elevated to the Commissioner for review; and if such decision is affirmed by the Commissioner, the same shall be automatically elevated to and be finally reviewed by the Secretary of Finance (Yaokasin v. Commissioner of Customs, 180 SCRA 591 [1989]).

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Delinquent Tax Return (1998) When is a revenue tax considered delinquent? [3%) SUGGESTED ANSWER:

A revenue tax is considered delinquent when it is unpaid after the lapse of the last day prescribed by law for its payment. Likewise, it could also be considered as delinquent where an assessment for deficiency tax has become final and the taxpayer has not paid it within the period given in the notice of assessment. Jurisdiction: Customs vs. CTA (2000) a) On the basis of a warrant of seizure and detention issued by the Collector of Customs for the purpose of enforcing the Tariff and Customs Laws, assorted brands of cigarettes said to have been illegally imported into the Philippines were seized from a store where they were openly offered for sale. Dissatisfied with the decision rendered after hearing by the Collector of Customs on the confiscation of the articles, the importer filed a petition for review with the Court of Tax Appeals. The Collector moved to dismiss the petition for lack of Jurisdiction. Rule on the motion. (2%) SUGGESTED ANSWER:

Motion granted. The Court of Tax Appeals has jurisdiction only over decisions of the Commissioner of Customs in cases involving seizures, detention or release of property affected. (Sec. 7, R.A. No. 1125). There is no decision yet of the Commissioner which is subject to review by the Court of Tax Appeals. ALTERNATIVE ANSWER:

Motion granted. The Court of Tax Appeals has no jurisdiction because there is no decision rendered by the Commissioner of Customs on the seizure and forfeiture case. The taxpayer should have appealed the decision rendered by the Collector within fifteen (15) days from receipt of the decision to the Commissioner of Customs. The Commissioner’s adverse decision would then be the subject of an appeal to the Court of Tax Appeals. b) Under the same facts, could the importer file an action in the Regional Trial Court for replevin on the ground that the articles are being wrongfully detained by the Collector of Customs since the importation was not illegal and therefore exempt from seizure? Explain. (3%) SUGGESTED ANSWER:

No. The legislators intended to divest the Regional Trial Courts of the jurisdiction to replevin a property which is a subject of seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De la Fuente v. De Veyra, et. al, 120 SCRA 455) There should be no unnecessary hindrance on the government's drive to prevent smuggling and other frauds upon the Customs. Furthermore, the Regional Trial Court do not have Jurisdiction in order to render effective and efficient the collection of Import and export duties due the State, which enables the government to carry out the

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functions It has been Instituted to perform. (Jao,

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et al, Court of Appeals, et al, and companion case, 249 SCRA 35, 43) LGU: Collection of Taxes, Fees & Charges (1997) Give the remedies available to local government units to enforce the collection of taxes, fees, and charges? SUGGESTED ANSWER:

The remedies available to the local government units to enforce collection of taxes, fees, and charges are: 1) ADMINISTRATIVE REMEDIES of distraint of personal property of whatever kind whether tangible or intangible, and levy of real property and interest therein; and 2) JUDICIAL REMEDY by institution of an ordinary civil action for collection with the regular courts of proper jurisdiction. Tax Amnesty vs. Tax Exemption (2001) Distinguish a tax amnesty from a tax exemption. (3%) SUGGESTED ANSWER:

Tax amnesty is an immunity from all criminal, civil and administrative liabilities arising from nonpayment of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive application. (People v. Costonedo, G.R. No. L-46881, 1988). Tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 ME 365). It is generally prospective in application. Taxpayer: Administrative & Judicial Remedies (2000) Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels. (5%) SUGGESTED ANSWER:

The legal remedies of an aggrieved taxpayer under the Tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and refund. The procedures for the ADMINISTRATIVE REMEDIES for ASSESSMENT are as follows: a. After receipt of the Pre-Assessment Notice, he must within fifteen (15) days from receipt explain why no additional taxes should be assessed against him. b.

If the Commissioner of Internal Revenue issues an assessment notice, the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within thirty (30) days from receipt of the notice of assessment. (4th par.. Sec. 228, NIRC of 1997)

c.

Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting documents.

The JUDICIAL REMEDIES of an aggrieved taxpayer relative to an ASSESSMENT NOTICE are as follows:

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

a.

Where the Commissioner of Internal Revenue has not acted on the taxpayer's protest within a period of one hundred eighty (180) days from submission of all relevant documents, then the taxpayer has a period of thirty (30) days from the lapse of said 180 days within which to interpose a petition for review with the Court of Tax Appeals.

b.

Should the Commissioner deny the taxpayer's protest, then he has a period of thirty (30) days from receipt of said denial within which to interpose a petition for review with the Court of Tax Appeals.

In both cases the taxpayer must apply with the Court of Tax Appeals for the Issuance of an Injunctive writ to enjoin the Bureau of Internal Revenue from collecting the disputed tax during the pendency of the proceedings. NOTE: A 2004 Amendment - The decision of the division of CTA is in turn appeallable within fifteen (15) days to the CTA en banc. The decision of the CTA en banc is directly appeallable to the Supreme Court on question of law on certiorari. The employment by the Bureau of Internal Revenue of any of the Administrative Remedies for the collection of the tax like distraint, levy, etc. may be administratively appealed by the taxpayer to the Commissioner whose decision is appealable to the Court of Tax Appeals under other matter arising under the provisions of the National Internal Revenue Code. The judicial appeals starts with the Court of Tax Appeals, and continues in the same manner as shown above. Should the Bureau of Internal Revenue decide to utilize its Judicial tax remedies for collecting the taxes by means of an ordinary suit filed with the regular courts for the collection of a sum of money, the taxpayer could oppose the same going up the ladder of judicial processes from the Municipal Trial Court (as the case may be) to the Regional Trial Court, to the Court of Appeals, thence to the Supreme Court. The remedies of an aggrieved taxpayer on a claim for refund is to appeal the adverse decision of the Commissioner to the CTA in the same manner outlined above. Taxpayer: Assessment: Protest: Claims for refund (2000) On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the Estate of Jose de la Cruz a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise penalty. The Executor of the Estate of Jose de la Cruz (Executor) filed a timely protest against the assessment and requested for waiver of the surcharge, interest and penalty. The protest was denied by the Commissioner of Internal Revenue (Commissioner) with finality on September 13, 1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997. The following day, the Executor filed a Petition with the Court of Tax Appeals (CTA) praying for

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the refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case and ordered the Commissioner to make a refund. The Commissioner filed a Petition for Review with the Court of Appeals assailing the jurisdiction of the CTA and the Order to make refund to the Estate on the ground that no claim for refund was filed with the BIR. A. Is the stand of the Commissioner correct? Reason. (2%) SUGGESTED ANSWER:

Yes. There was no claim for refund or credit that has been duly filed with the Commissioner of Internal Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229. NIRC of 1997). The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals jurisdiction over the refund case should the taxpayer decide to appeal on time. B. Why is the filing of an administrative claim with the BIR necessary? (3%) SUGGESTED ANSWER:

The filing of an administrative claim for refund with the BIR is necessary in order: 1) To afford the Commissioner an opportunity to consider the claim and to have a chance to correct the errors of subordinate officers (Gonzales v. CTA, et al, 14 SCRA 79); and 2) To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue available for expenditures. (Bermejo v. Collector, G.R. No. L3028. July 29, 1950) Taxpayer: Assessment; Injunction (2004) RR disputed a deficiency tax assessment and upon receipt of an adverse decision by the Commissioner of Internal Revenue, filed an appeal with the Court of Tax Appeals. While the appeal is pending, the BIR served a warrant of levy on the real properties of RR to enforce the collection of the disputed tax. Granting arguendo that the BIR can legally levy on the properties, what could RR do to stop the process? Explain briefly. (5%) SUGGESTED ANSWER:

RR should file a motion for injunction with the Court of Tax Appeals to stop the administrative collection process. An appeal to the CTA shall not suspend the enforcement of the tax liability, unless a motion to that effect shall have been presented in court and granted by it on the basis that such collection will jeopardize the interest of the taxpayer or the Government (Pirovano v. CIR, 14 SCRA 832 [1965]). The CTA is empowered to suspend the collection of internal revenue taxes and customs duties in cases pending appeal only when: (1) in the opinion of the court the collection by the BIR will jeopardize the interest of the Government and/or the taxpayer; and (2) the taxpayer is willing to deposit the amount being collected or to file a surety bond for not more than double the amount of the tax to be fixed by the court (Section 11, JR.A. No. 1125). Taxpayer: BIR Audit or Investigation (1999)

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

A Co., a Philippine corporation, is a big manufacturer of consumer goods and has several suppliers of raw materials. The BIR suspects that some of the suppliers are not properly reporting their income on their sales to A Co. The CIR therefore: 1) Issued an access letter to A Co. to furnish the BIR information on sales and payments to its suppliers. 2) Issued an access letter to a bank (CX Bank) to furnish the BIR on deposits of some suppliers of A Co. on the alleged ground that the suppliers are committing tax evasion. A Co., X Bank and the suppliers have not been issued by the BIR letter of authority to examine. A Co. and X Bank believe that the BIR is on a "fishing expedition" and come to you for counsel. What is your advice? (10%) SUGGESTED ANSWER:

I will advise A Co. and B Co. that the BIR is justified only in getting information from the former but not from the latter. The BIR is authorized to obtain information from other persons other than those whose internal revenue tax liability is subject to audit or investigation. However, this power shall not be construed as granting the Commissioner the authority to inquire into bank deposits. (Section 5. NIRC). Taxpayer: City Board of Assessment Decision; Where to appeal (1999) A Co., a Philippine corporation, is the owner of machinery, equipment and fixtures located at its plant in Muntinlupa City. The City Assessor characterized all these properties as real properties subject to the real property tax. A Co. appealed the matter to the Muntinlupa Board of Assessment Appeals. The Board ruled in favor of the City. In accordance with RA 1125 (An Act creating the Court of Tax Appeals). A Co. brought a petition for review before the CTA to appeal the decision of the City Board of Assessment Appeals. Is the Petition for Review proper? Explain. (5%) SUGGESTED ANSWER:

No. The CTA’s devoid of jurisdiction to entertain appeals from the decision of the City Board of Assessment Appeals. Said decision is instead appealable to the Central Board of Assessment Appeals, which under the Local Government Code, has appellate jurisdiction over decisions of Local Board of Assessment Appeals. (Caltex Phils, foe. v. Central Board of Assessment Appeals, L50466, May 31, 1982).

Taxpayer: Claim for Refund; Procedure (2002) A. What must a taxpayer do in order to claim a refund of, or tax credit for, taxes and penalties which he alleges to have been erroneously, illegally or excessively assessed or collected? (3%) SUGGESTED ANSWER:

The taxpayer must comply with the following procedures in claiming a refund of, or tax credit for, taxes and penalties which he alleges to have been erroneously, illegally or excessively assessed or collected: 2. He should file a written claim for refund with the Commissioner within two years after the date of payment of the tax or penalty (Sec. 204, NIRC);

3.

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The claim filed must state a categorical demand for reimbursement (Bermejo v. Collector, 87

Phil. 96 [1950]).

4.

The suit or proceeding for recovery must be commenced in court within two years from date of payment of the tax or penalty regardless of any supervening event that will arise after payment (Sec. 229, NIRC). [Note: If the answer given is only number 1, it is suggested that the same shall be given full credit considering that this is the only requirement for the Commissioner to acquire jurisdiction over the claim.]

B. Can the Commissioner grant a refund or tax credit even without a written claim for it? (2%) SUGGESTED ANSWER:

B. Yes. When the taxpayer files a return which on its face shows an overpayment of the tax and the option to refund/ claim a tax credit was chosen by the taxpayer, the Commissioner shall grant the refund or tax credit without the need for a written claim. This is so, because a return filed showing an overpayment shall be considered as a written claim for credit or refund. (Sees. 76 and 204, NIRC). Moreover, the law provides that the Commissioner may, even without a written claim therefor, refund or credit any tax where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Sec. 229, NIRC). Taxpayer: Deficiency Income Tax (1995) Businessman Stephen Yang filed an income tax return for 1993 showing business net income of P350,000.00 on which he paid an income tax of P61,000.00. After filing the return he realized that he forgot to include an item of business income in 1993 for P50.000.00. Being an honest taxpayer, he included this income in his return for 1994 and paid the corresponding income tax thereon. In the examination of his 1993 return the BIR examiner found that Stephen Yang failed to report this item of P50.000.00 and assessed him a deficiency income tax on this item, plus a 50% fraud surcharge. 1) Is the examiner correct? Explain. 2) If you were the lawyer of Stephen Yang, what would you have advised your client before he included in his 1994 return the amount of P50.000.00 as 1993 income to avoid the fraud surcharge? Explain. 3) Considering that Stephen Yang had already been assessed a deficiency income tax for 1993 for his failure to report the P50.000.00 income, what would you advise him to do to avoid the penalties for tax delinquency? Explain. 4) What would you advise Stephen Yang to do with regard to the income tax he paid for the P50.000.00 in his 1994 return? In case your remedy fails, what is your other recourse? Explain. SUGGESTED ANSWERS:

1) The examiner is correct in assessing a deficiency income tax for taxable year 1993 but not in imposing the 50% fraud surcharge. The amount of all items of gross income must be included in gross income during the year in which received or realized (Sec. 38, NIRC). The 50%

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

fraud surcharge attaches only if a false or fraudulent return is willfully made by Mr. Yang (Sec.248, NIRC). The fact that Mr. Yang included the income in his 1994 return belies any claim of willfulness but is rather indicative of an honest mistake which was sought to be rectified by a subsequent act, that is the filing of the 1994 return. 2) Mr. Yang should have amended his 1993 Income tax return to allow for the inclusion of the P50.000 income during the taxable period it was realized. 3) Mr. Yang should file a protest questioning the 50% surcharge and ask for the abatement thereof. ALTERNATIVE ANSWER:

Mr. Yang should pay the deficiency income tax on or before the day prescribed for its payment per notice of demand. After payment and within two years thereafter, he should file a claim for refund of taxes erroneously paid to recover the excessive surcharge imposed. 4) Mr. Yang should file a written claim for refund with the Commissioner of Internal Revenue of the taxes paid on the P50.000 income included in 1994 within two years from payment pursuant to Section 204(3) of the Tax Code. Should this remedy fail in the administrative level, a judicial claim for refund can be instituted before the expiration of the two year period. Taxpayer: Exhaustion of Administrative Remedies (1997) (a) A taxpayer received, on 15 January 1996 an assessment for an internal revenue tax deficiency. On 10 February 1996, the taxpayer forthwith filed a petition for review with the Court of Tax Appeals. Could the Tax Court entertain the petition? (b) Under the above factual setting, the taxpayer, instead of questioning the assessment he received on 15 January 1996 paid, on 01 March 1996 the "deficiency tax" assessed. The taxpayer requested a refund from the Commissioner by submitting a written claim on 01 March 1997. It was denied. The taxpayer, on 15 March 1997, filed a petition for review with the Court of Appeals. Could the petition still be entertained? SUGGESTED ANSWER:

(a) No. Before taxpayer can avail of Judicial remedy he must first exhaust administrative remedies by filing a protest within 30 days from receipt of the assessment. It is the Commissioner's decision on the protest that give the Tax Court jurisdiction over the case provided that the appeal is filed within 30 days from receipt of the Commissioner's decision. An assessment by the BIR is not the Commissioner's decision from which a petition for review may be filed with the Court of Tax Appeals. Rather, it is the action taken by the Commissioner in response to the taxpayer's protest on the assessment that would constitute the appealable decision (Section 7, RA 1125). (b) No, the petition for review can not be entertained by the Court of Appeals, since decisions of the

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Commissioner on cases involving claim for tax refunds are within the exclusive and primary jurisdiction of the Court of Tax Appeals (Section 7.RA1125). Taxpayer: Failure to Withheld & Remit Tax (2000) A domestic corporation failed to withhold and remit the tax on income received from Philippine sources by a nonresident foreign corporation. In addition to the civil penalties provided for under the Tax Code, a compromise penalty was imposed for violation of the withholding tax provisions. May the Commissioner of Internal Revenue legally enforce the collection of compromise penalty? (5%) SUGGESTED ANSWER:

No. There is no showing that the compromise penalty was imposed by the Commissioner of Internal Revenue with the agreement and conformity of the taxpayer. (Wonder

Mechanical Engineering Corporation u. Court of Tax Appeals, et. al., 64 SCRA 555).

Taxpayer: NIRC vs. TCC Remedies (1996) Compare the taxpayer's remedies under the National Internal Revenue Code and the Tariff and Customs Code. SUGGESTED ANSWER:

The taxpayer's remedies under the NATIONAL INTERNAL REVENUE CODE may be categorized into remedies before payment and remedies after payment. The remedy BEFORE PAYMENT consists of (a) Administrative Remedy which is the filing of protest within 30 days from receipt of assessment, and (b) Judicial Remedy which is the appeal of the adverse decision of the Commissioner on the protest with the Court of Tax Appeals, and finally with the Supreme Court. The remedy AFTER PAYMENT is availed of (c) by paying the assessed tax within 30 days from receipt of assessment and (d) the filing of a claim for refund or tax credit of these taxes on grounds that they are erroneously paid within two years from date of payment. (e) If there is a denial of the claim, appeal to the CTA shall be made within 30 days from denial but within two years from date of payment. If the Commissioner fails to act on the claim for refund or tax credit and the two-year period is about to expire, the taxpayer should consider the continuous inaction of the Commissioner as a denial and elevate the case to the CTA before the expiration of the two-year period. Under the Tariff and Customs Code, taxpayer's remedies arise only after payment of duties. 4) The administrative remedies consist of filing a claim for refund which may take the form of abatement or drawback. 5) The taxpayer can also file a protest within 15 days from payment if he disagrees with the ruling or decision of the Collector of Customs regarding the legality or correctness of the assessment of customs duties.

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

6)

If the decision of the Collector is adverse to the taxpayer, he can notify the Collector within 15 days from receipt of said decision of his desire to have his case reviewed by the Commissioner. The decision of the Collector on the taxpayer's protest, if adverse to the Government, is automatically elevated to the Commissioner for review; and if such decision is affirmed by the Commissioner, the same shall be automatically elevated to and finally reviewed by the Secretary of Finance. Resort to judicial relief can be had by the taxpayer by appealing the decision of the Commissioner or of the Secretary of Finance (for cases subject to automatic review) within 30 days from the promulgation of the adverse decision to the CTA.

Taxpayer: Overwitholding Claim for Refund (1999) A Co. is the wholly owned subsidiary of B Co., a nonresident German company. A Co. has a trademark licensing agreement with B Co. On Feb. 10, 1995, A Co. remitted to B Co. royalties of P 10,000,000, which A Co. subjected to a withholding tax of 25% or P2,500,000. Upon advice of counsel, A Co. realized that the proper withholding tax rate is 10%. On March 20, 1996, A Co. filed a claim for refund of P2.500.000 with the BIR. The BIR denied the claim on Nov. 15, 1996. On Nov. 28, 1996, A Co. filed a petition for review with the CTA. The BIR attacked the capacity of A Co., as agent, to bring the refund case. Decide the issue. (5%) SUGGESTED ANSWER:

A Co., the withholding agent of the non-resident foreign corporation is entitled to claim the refund of excess withholding tax paid on the income of said corporation in the Philippines. Being a withholding agent, it is the one held liable for any violation of the withholding tax law should such a violation occur. In the same vein, it should be allowed to claim a refund in case of overwitholding.

(CIR v. Wander Phils. Inc., GR No. 68378, April 15, 1988, 160 SCRA 573; CIR v. Procter & Gamble PMC, 2O4 SCRA 377).

Taxpayer: Prescriptive Period: Suspended (2000) Mr. Reyes, a Filipino citizen engaged in the real estate business, filed his 1994 income tax return on March 20, 1995. On December 15, 1995, he left the Philippines as an immigrant to join his family in Canada. After the investigation of said return/the BIR issued a notice of deficiency income tax assessment on April 15, 1998. Mr. Reyes returned to the Philippines as a balikbayan on December 8, 1998. Finding his name to be in the list of delinquent taxpayers, he filed a protest against the assessment on the ground that he did not receive the notice of assessment and that the assessment had prescribed. Will the protest prosper? Explain. (5%) SUGGESTED ANSWER:

No. Prescription has not set in because the period of limitations for the Bureau of Internal Revenue to issue an assessment was SUSPENDED during the time that Mr. Reyes was out of the Philippines or from the period

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December 15, 1995 up to December 8, 1998. (Sec. 223 in relation to Sec. 203, both of the NIRC of 1997)

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Taxpayer: Prescriptive Period; Claim for Refund (1997) A corporation files its income tax return on a calendar year basis. For the first quarter of 1993, it paid on 30 May 1993 its quarterly income tax in the amount of P3.0 million. On 20 August 1993, it paid the second quarterly income tax of P0.5 million. The third quarter resulted in a net loss, and no tax was paid. For the fourth and final return for 1993, the company reported a net loss for the year, and the taxpayer indicated in the income tax return that it opted to claim a refund of the quarterly income tax payments. On 10 January 1994, the corporation filed with the Bureau of Internal Revenue a written claim for the refund of P3.5 million. BIR failed to act on the claim for refund; hence, on 02 March 1996, the corporation filed a petition for review with the Court of Tax Appeals on its claim for refund of the overpayment of its 1993 quarterly income tax. BIR, in its answer to the petition, alleged that the claim for refund was filed beyond the reglementary period. Did the claim for refund prescribe? SUGGESTED ANSWER:

The claim for refund has prescribed. The counting of the

two-year prescriptive period for filing a claim for refund is counted not from the date when the quarterly

income taxes were paid but on the date when the final adjustment return or annual income tax return was filed

(CIR v. TMX Sales Inc., G.R. No. 83736, January 15, 1992; CIR v. Phi/Am Life Insurance Co., Inc., G.R. No. 105208, May 29, 1995). It is obvious that the annual income tax

return was filed before January 10, 1994 because the written claim for refund was filed with the BIR on January 10, 1994. Since the two-year prescriptive period is not only a limitation of action in the administrative stage but also a limitation of action for bringing the case to the judicial stage, the petition for review filed with the CTA on March 02, 1996 is beyond the reglementary period. Taxpayer: Prescriptive Period; Claims for Refund (1994) XCEL Corporation filed its quarterly income tax return for the first quarter of 1985 and paid an income tax of P500.000.00 on May 15, 1985. In the subsequent quarters, XCEL suffered losses so that on April 15, 1986 it declared a net loss of P1,000,000.00 in its annual income tax return. After failing to get a refund, XCEL filed on March 1, 1988 a case with the Court of Tax Appeals to recover the P500.000.00 in taxes paid on May 15, 1985. Is the action to recover the taxes filed timely? SUGGESTED ANSWER:

The action for refund was filed in the Court of Tax Appeals on time. In the case of Commissioner v. TMX Sales, Inc., 205 SCRA 184, which is similar to this case, the Supreme Court ruled that in the case of overpaid quarterly corporate income tax, the two-year period for filing claims for refund in the BIR as well as in the institution of an action for refund in the CTA, the two-year prescriptive period for tax refunds (Sec. 230, Tax Code) is counted from the filing of the final, adjustment return under Sec. 67 of the Tax Code, and not from the filing of the

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

quarterly return and payment of the quarterly tax. The CTA action on March 1, 1988 was clearly within the reglementary two-year period from the filing of the final adjustment return of the corporation on April 15, 1986. Taxpayer: Prescriptive Period; Claims for Refund (2004) On March 12, 2001, REN paid his taxes. Ten months later, he realized that he had overpaid and so he immediately filed a claim for refund with the Commissioner of Internal Revenue. On February 27, 2003, he received the decision of the Commissioner denying REN's claim for refund. On March 24, 2003, REN filed an appeal with the Court of Tax Appeals. Was his appeal filed on time or not? Reason. (5%) SUGGESTED ANSWER:

The appeal was not filed on time. The two-year period of limitation for filing a claim for refund is not only a limitation for pursuing the claim at the administrative level but also a limitation for appealing the case to the Court of Tax Appeals. The law provides that "no suit or proceeding shall be filed after the expiration of two years from the date of the payment of the tax or penalty regardless of any supervening cause that may arise after payment (Section 229, JVZRCJ. Since the appeal was only made on March 24, 2003, more than two years had already elapsed from the time the taxes were paid on March 12, 2003. Accordingly, REN had lost his judicial remedy because of prescription. Taxpayer: Protest against Assessment (1998) CFB Corporation, a domestic corporation engaged in food processing and other allied activities, received a letter from the BIR assessing it for delinquency income taxes. CFB filed a letter of protest. One month after, a warrant of distraint and levy was served on CFB Corporation. If you were the lawyer engaged by CFB Corporation to contest the assessment made by the BIR, what steps will you take to protect your client? (5%) SUGGESTED ANSWER:

I shall immediately file a motion for reconsideration of the issuance of the warrant of distraint and levy and seek from the BIR Commissioner a denial of the protest "in clear and unequivocal language." This is so because the issuance of a warrant of distraint and levy is not considered as a denial by the BIR of the protest filed by CFB Corporation (CIR v. Union Shipping Corp., 185 SCRA 547). Within thirty (30) days from receipt of such denial "in clear and unequivocal language," I shall then file a petition for review with the Court of Tax Appeals. ALTERNATIVE ANSWER: Within thirty (30) days from receipt of the warrant of distraint and levy, I shall file a petition for review with the Court of Tax Appeals with an application for issuance of a writ of preliminary injunction to enjoin the Bureau of Internal Revenue from enforcing the warrant. This is the action I shall take because I shall consider the issuance of the warrant as a final decision of the Commissioner of Internal Revenue which could be the

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subject of appeal to the Court of Tax Appeals (Yobes u. Flojo, 15 SCRA 278). The CTA may, however, remand the case to the BIR and require the Commissioner to specifically rule on the protest. The decision of the Commissioner, if adverse to my client, would then constitute an appealable decision. Taxpayer: Protest against Assessment (1999) A Co., a Philippine corporation, received an income tax deficiency assessment from the BIR on May 5, 1995. On May 31, 1995, A Co. filed its protest with the BIR. On July 30, 1995, A Co. submitted to the BIR all relevant supporting documents. The CIR did not formally rule on the protest but on January 25, 1996, A Co. was served a summons and a copy of the complaint for collection of the tax deficiency filed by the BIR with the Regional Trial Court (RTC). On February 20, 1996, A Co. brought a Petition for Review before the CTA. The BIR contended that the Petition is premature since there was no formal denial of the protest of A Co. and should therefore be dismissed. 1. Has the CTA jurisdiction over the case? SUGGESTED ANSWER;

Yes, the CTA has jurisdiction over the case because this qualifies as an appeal from the Commissioner's decision on disputed assessment. When the Commissioner decided to collect the tax assessed without first deciding on the taxpayer's protest, the effect of the Commissioner’s action of filing a judicial action for collection is a decision of denial of the protest, in which event the taxpayer may file an appeal with the CTA. (Republic v. Lim Tian Teng &

Sons, Inc., 16 SCRA 584; Dayrit v. Cruz, L-39910, Sept. 26, 1988). 2.

Has the RTC jurisdiction over the collection case filed by the BIR? Explain.

SUGGESTED ANSWER;

The RTC has no jurisdiction over the collection case filed by the BIR. The filing of an appeal with the CTA has the effect of divesting the RTC of jurisdiction over the collection case. At the moment the taxpayer appeals the case to the Court of Tax Appeals in view of the Commissioner's filing of the collection case with the RTC which was considered as a decision of denial, it gives a justifiable basis for the taxpayer to move for dismissal in the RTC of the Government's action to collect the tax liability under dispute. (Yabes v. Flojo, 15 SCRA 278; San Juan v. Vasquez, 3 SCRA 92). There is no final, executory and demandable assessment which can be enforced by the BIR, once a timely appeal is filed. Taxpayer: Protest against Assessment (1999) A Co., a Philippine corporation, received an income tax deficiency assessment from the BIR on November 25, 1996. On December 10, 1996, A Co. filed its protest with the BIR On May 20, 1997, the BIR issued a warrant of distraint to enforce the assessment. This warrant was served on A Co. on May 25, 1997. In a letter dated June 4, 1997 and received by A Co. 5 days later, the CIR formally denied A Co.'s protest stating that it constitutes his final decision on the matter. On July 6, 1997, A Co. filed a Petition for Review with the CTA. The BIR moved to

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

dismiss the Petition on the ground that the CTA has no jurisdiction over the case. Decide. (10%) SUGGESTED ANSWER:

The CTA has jurisdiction over the case. The appealable decision is the one which categorically stated that the Commissioner's action on the disputed assessment is final and, therefore, the reckoning of the 30-day period to appeal was on June 9, 1999. The filing of the petition for review with the CTA was timely made. The Supreme Court has ruled that the CIR must categorically state that his action on a disputed assessment is final; otherwise, the period to appeal will not commence to run. That final action cannot be implied from the mere issuance of a warrant "of distraint and levy. (CIR v. Union Shipping Corporation, 185 SCRA 547). Taxpayer: Protest; Claim of Refund (1996) Is protest at the time of payment of taxes and duties a requirement to preserve the taxpayers' right to claim a refund? Explain. SUGGESTED ANSWER:

For TAXES imposed under the NIRC, protest at the time of payment is not required to preserve the taxpayers' right to claim refund. This is clear under Section 230 of the NIRC which provides that a suit or proceeding maybe maintained for the recovery of national internal revenue tax or penalty alleged to have been erroneously assessed or collected, whether such tax or penalty has been paid under protest or not. For DUTIES imposed under the Tariff and Customs Code, a protest at the time of payment is required to preserve the taxpayers' claim for refund. The procedure under the TCC is to the effect that when a ruling or decision of the Collector of Customs is made whereby liability for duties is determined, the party adversely affected may protest such ruling or decision by presenting to the Collector, at the time when payment is made, or within 15 days thereafter, a written protest setting forth his objections to the ruling or decision in question (Sec. 2308. TCC). Taxpayer; Appeal to the Court of Tax Appeals (2005) A taxpayer received a tax deficiency assessment of P1.2 Million from the BIR demanding payment within 10 days, otherwise, it would collect through summary remedies. The taxpayer requested for a reconsideration stating the grounds therefor. Instead of resolving the request for reconsideration, the BIR sent a Final Notice before Seizure to the taxpayer. May this action of the Commissioner of Internal Revenue be deemed a denial of the request for reconsideration of the taxpayer to entitle him to appeal to the Court of Tax Appeals? Decide with reasons. (5%) SUGGESTED ANSWER:

Yes, the final notice before seizure was in effect a denial of the taxpayer's request for reconsideration, not only was the notice the only response received, its nature, content and tenor supports the theory that it was the BIR's final act regarding the request for reconsideration. (CIR v.

Isabela Cultural Corporation, G.R. No. 135210, July 11, 2001)

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Taxpayer; Claim for Tax Credits (2006) Congress enacts a law granting grade school and high school students a 10% discount on all school-prescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the discount as a tax credit. 1. If in a taxable year a bookstore has no tax due on which to apply the tax credits, can the bookstore claim from the BIR a tax refund in lieu of tax credit? Explain. (2.5%) SUGGESTED ANSWER:

No, the bookstore cannot claim from the BIR a tax refund in lieu of tax credit. There is nothing in the law that grants a refund when the bookstore has no tax liability against which the tax credit can be used (CIR v. Central Luzon Drug, G.R. No 159647, April 15, 2005). A tax credit is in the nature of a tax exemption and in case of doubt, the doubt should be resolved in strictissimi juris against the claimant. 2. Can the BIR require the bookstores to deduct the amount of the discount from their gross income? Explain. (2.5%) SUGGESTED ANSWER:

No. Tax credit which reduces the tax liability is different from a tax deduction which merely reduces the tax base. Since the law allowed the bookstores to claim in full the discount as a tax credit, the BIR is not allowed to expand or contract the legislative mandate (CIR v. Bicolandia

Drug Corp., G.R. No. 148083, July 21, 2006; CIR v. Central Luzon Drug Corp., G.R. No. 159647, April 15, 2005).

3. If a bookstore closes its business due to losses without being able to recoup the discount, can it claim reimbursement of the discount from the government on the ground that without such reimbursement, the law constitutes taking of private property for public use without just compensation? Explain. (5%) SUGGESTED ANSWER:

A bookstore, closing its business due to losses, cannot claim reimbursement of the discount from the government. If the business continues to operate at a loss and no other taxes are due, thus compelling it to close shop, the credit can never be applied and will be lost altogether (CIR v. Central Luzon Drug, G.R. No. 159647, April 15, 2005). The grant of the discount to the taxpayer is a mere privilege and can be revoked anytime. Taxpayer; Compromise after Criminal Action (1998) An information was filed in court for willful non-payment of income tax the assessment of which has become final. The accused, through counsel, presented a motion that he be allowed to compromise his tax liability subject of the information. The prosecutor indicated his conformity to the motion. Is this procedure correct? [5%] SUGGESTED ANSWER:

No. Criminal violations, if already filed in court, may not be compromised (Sec. 204[B], NIRC). Furthermore, the payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provisions of the Tax Code (Sec. 247(a), NIRC). Finally, there is no showing that the prosecutor in the problem is a legal officer of the Bureau of Internal

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Revenue to whom the conduct of criminal actions are lodged by the Tax Code. ALTERNATIVE ANSWER:

No. If the compromise referred to is the civil aspect, the procedure followed is not correct. Compromise for the payment of any internal revenue tax shall be made only by the Commissioner of Internal Revenue or in a proper case the Evaluation Board of the BIR (Sec. 204, NIRC). Applying the law to the case at bar, compromise settlement can only be effected by leave of Court. Taxpayer; Protest against Assessment; Donor’s Tax (1995) Mr. Rodrigo, an 80-year old retired businessman, fell in love with 20-year old Tetchie Sonora, a night club hospitality girl. Although she refused to marry him she agreed to be his "live-in" partner. In gratitude, Mr. Rodrigo transferred to her a condominium unit, where they both live, under a deed of sale for P10 Million. Mr. Rodrigo paid the capital gains tax of 5% of P10 Million.

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Local Taxation: Actual Use of Property (2002) The real property of Mr. and Mrs Angeles, situated in a commercial area in front of the public market, was declared in their Tax Declaration as residential because it had been used by them as their family residence from the time of its construction in 1990. However, since January 1997, when the spouses left for the United States to stay there permanently with their children, the property has been rented to a single proprietor engaged in the sale of appliances and agri-products. The Provincial Assessor reclassified the property as commercial for tax purposes starting January 1998. Mr. and Mrs. Angeles appealed to the Local Board of Assessment Appeals, contending that the Tax Declaration previously classifying their property as residential is binding. How should the appeal be decided? (5%) SUGGESTED ANSWER:

The Commissioner of Internal Revenue found that the property was transferred to Tetchie Sonora by Mr. Rodrigo because of the companionship she was providing him. Accordingly, the Commissioner made a determination that Sonora had compensation income of P10 Million in the year the condominium unit was transferred to her and issued a deficiency income tax assessment.

The appeal should be decided against Mr. and Mrs. Angeles. The law focuses on the actual use of the property for classification, valuation and assessment purposes regardless of ownership. Section 217 of the Local Government Code provides that "real property shall be classified, valued, and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it".

Tetchie Sonora protests the assessment and claims that the transfer of the condominium unit was a gift and therefore excluded from income. How will you rule on the protest of Tetchie Sonora? Explain.

Local Taxation: Coverage (2002) Aside from the basic real estate tax, give three (3) other taxes which may be imposed by provincial and city governments as well as by municipalities in the Metro Manila area. (3%)

SUGGESTED ANSWER:

I will grant the protest and cancel the assessment. The transfer of the property by Mr. Rodrigo to Ms. Sonora was gratuitous. The deed of sale indicating a P10 million consideration was simulated because Mr. Rodrigo did not receive anything from the sale. The problem categorically states that the transfer was made in gratitude to Ms. Sonora's companionship. The transfer being gratuitous is subject to donor's tax. Mr. Rodrigo should be assessed deficiency donor's tax and a 50% surcharge imposed for fraudulently simulating a contract of sale to evade donor's tax. (Sec. 91(b), NIRC). Taxpayer; Withholding Agent; Claim of Tax Refund (2005) Does a withholding agent have the right to file an application for tax refund? Explain. SUGGESTED ANSWER:

Yes. A taxpayer is "any person subject to tax." Since, the withholding tax agent who is "required to deduct and withheld any tax" is made "personally liable for such tax" should the amount of the tax withheld be finally found to be less than that required to be withheld by law, then he is a taxpayer. Thus, he has sufficient legal interest to file an application for refund, of the amount he believes was illegally collected from him. (Commissioner of Internal

Revenue v. Procter & Gamble, G.R. No. 66838, December 2, 1991)

SUGGESTED ANSWER:

The following real property taxes aside from the basic real property tax may be imposed by provincial and city governments as well as by municipalities in the Metro Manila area: 1. Additional levy on real property for the Special Education Fund (Sec. 235, LGC); 2. Additional Ad-valorem tax on Idle lands (Sec. 23§, LGC); and 3. Special levy (Sec. 240). [Note: The question is susceptible to dual interpretation because it is asking for three other taxes and not three other real property taxes. Accordingly, an alternative answer should be considered and given full credit] A. The following taxes, aside from basic real estate tax, may be imposed by: 1. Provincial Government a. Printer's or publisher's tax b. Franchise Tax c. Professional tax 2. City Government - may levy taxes which the province or municipality are authorized to levy (Sec. 151, LGC) a. Printer's or publisher's tax b. Franchise tax c. Professional tax

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

3. Municipalities in the Metro Manila Area - may levy taxes at rates which shall not exceed by 50% the maximum rates prescribed in the Local Government Code. a. Annual fixed tax on manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers and compounders of liquors, distilled spirits, and wines or manufacture of any article of commerce of whatever kind or nature; b. Annual fixed tax on wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature; c. Percentage tax on retailers [Note: Other taxes may comprise the enumeration because many other taxes are authorized to be imposed by LGUs.]

Local Taxation: Exemption; Real Property Taxes (2002) Under the Local Government Code, what properties are exempt from real property taxes? (5%) SUGGESTED ANSWER:

The following properties are exempt from real property taxes: (Sec. 234, LGC). 1. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person; 2.

All lands, buildings and improvements actually, directly, and exclusively used for religious, charitable or educational purposes by charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries;

3.

All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power;

4.

All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and

5.

Machinery and equipment used for pollution control and environmental protection.

Local Taxation: Imposition of Ad Valorem Tax (2000) May local governments impose an annual realty tax in addition to the basic real property tax on idle or vacant lots located in residential subdivisions within their respective territorial jurisdictions? (3%) SUGGESTED ANSWER:

Not all local government units may do so. Only provinces, cities, and municipalities within the Metro Manila area (Sec. 232, Local Government Code) may impose an ad valorem tax not exceeding five percent (5%) of the assessed value (Sec. 236, Ibid.) of idle or vacant residential lots in a subdivision, duly approved by proper authorities regardless of area. (Sec.237, Ibid.)

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Local Taxation: Legality/ Constitutionality; Tax Ordinance (2003) X, a taxpayer who believes that an ordinance passed by the City Council of Pasay is unconstitutional for being discriminatory against him, want to know from you, his tax lawyer, whether or not he can file an appeal. In the affirmative, he asks you where such appeal should be made: the Secretary of Finance, or the Secretary of Justice, or the Court of Tax Appeals, or the regular courts. What would your advice be to your client, X? (8%) SUGGESTED ANSWER:

The appeal should be made with the Secretary of Justice. Any question on the constitutionality or legality of a tax ordinance may be raised on appeal with the Secretary of Justice within 30 days from the effectivity thereof. (Sec.

187, LGC; Hagonoy Market Vendor Association v. Municipality of Hagonoy, 376 SCRA 376 [2002]).

Local Taxation: Legality; Imposition of Real Property Tax Rate (2002) An Ordinance was passed by the Provincial Board of a Province in the North, increasing the rate of basic real property tax from 0.006% to 1 % of the assessed value of the real property effective January 1, 2000. Residents of the municipalities of the said province protested the Ordinance on the ground that no public hearing was conducted and, therefore, any increase in the rate of real property tax is void. Is there merit in the protest? Explain your answer. (2%) SUGGESTED ANSWER:

The protest is devoid of merit. No public hearing is required before the enactment of a local tax ordinance levying the basic real property tax (Art. 324, LGC Regulations). ALTERNATIVE ANSWER:

Yes, there is merit in the protest provided that sufficient proof could be introduced for the non-observance of public hearing. By implication, the Supreme Court recognized that public hearings are required to be conducted prior to the enactment of an ordinance imposing real property taxes. Although it was concluded by the highest tribunal that presumption of validity of a tax ordinance can not be overcome by bare assertions of procedural defects on its enactment, it would seem that if the taxpayer had presented evidence to support the allegation that no public hearing was conducted, the Court should have ruled that the tax ordinance is invalid. (Belen

Figuerres v. Court of Appeals, GRNo. 119172, March 25, 1999).

Local Taxation: Power to Impose (2003) In order to raise revenue for the repair and maintenance of the newly constructed City Hall of Makati, the City Mayor ordered the collection of P1.00, called "elevator tax", every time a person rides any of the high-tech elevators in the city hall during the hours of 8:00 a.m. to 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the "elevator tax" a valid imposition? Explain. (8%) SUGGESTED ANSWER:

No. The imposition of a tax, fee or charge or the generation of revenue under the Local Government Code, shall be exercised by the SANGUNIAN of the local government unit concerned through an appropriate

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

ordinance (Section 132 of the Local Government Code). The city mayor alone could not order the collection of the tax; as such, the "elevator tax" is an invalid imposition. Local Taxation: Remission/Condonation of Taxes (2004) RC is a law-abiding citizen who pays his real estate taxes promptly. Due to a series of typhoons and adverse economic conditions, an ordinance is passed by MM City granting a 50% discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the late payment. Arguing that the ordinance rewards delinquent taxpayers and discriminates against prompt ones, RC demands that he be refunded an amount equivalent to one-half of the real taxes he paid. The municipal attorney rendered an opinion that RC cannot be reimbursed because the ordinance did not provide for such reimbursement. RC files suit to declare the ordinance void on the ground that it is a class legislation. Will his suit prosper? Explain your answer briefly. (5%)

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two professions. He has his main office in Makati City and maintains a branch office in Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati City and his professional tax as a lawyer in Pasig City. (5%) a) May Makati City, where he has his main office, require him to pay his professional tax as a lawyer? Explain. SUGGESTED ANSWER:

No. Makati City where Mr. Fermin has his main office may not require him to pay his professional tax as a lawyer. Mr. Fermin has the option of paying his professional tax as a lawyer in Pasig City where he practices law or in Makati City where he maintains his principal office. (Sec. 139[b], Local Government Code) b) May Quezon City, where he has his residence and where he also practices his two professions, go after him for the payment of his professional tax as a CPA and a lawyer? Explain. SUGGESTED ANSWER:

The suit will not prosper. The remission or condonation of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of taxes is a class by itself and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike (Juan Luna Subdivision,

Inc., v. Sarmiento, 91 Phil. 371 [1952]).

No, the situs of the professional tax is the city where the professional practices his profession or where he maintains his principal office in case he practices his profession in several places. The local government of Quezon City has no right to collect the professional tax from Mr. Fermin as the place of residence of the taxpayer is not the proper situs in the collection of the professional tax.

Local Taxation: Rule of Uniformity and Equality (2003) The City of Makati, in order to solve the traffic problem in its business districts, decided to impose a tax, to be paid by the driver, on all private cars entering the city during peak hours from 8:00 a.m. to 9:00 a.m. from Mondays to Fridays, but exempts those cars carrying more than two occupants, excluding the driver. Is the ordinance valid? Explain. (8%)

Local Taxation; Special Levy on Idle Lands (2005) A city outside of Metro Manila plans to enact an ordinance that will impose a special levy on idle lands located in residential subdivisions within its territorial jurisdiction in addition to the basic real property tax. If the lot owners of a subdivision located in the said city seek your legal advice on the matter, what would your advice be? Discuss. (5%)

SUGGESTED ANSWER:

SUGGESTED ANSWER:

The ordinance is in violation of the Rule of Uniformity and Equality, which requires that all subjects or objects of taxation, similarly situated must be treated alike in equal footing and must not classify the subjects in an arbitrary manner. In the case at bar, the ordinance exempts cars carrying more than two occupants from coverage of the said ordinance. Furthermore, the ordinance only imposes the tax on private cars and exempts public vehicles from the imposition of the tax, although both contribute to the traffic problem. There exists no substantial standard used in the classification by the City of Makati.

SUGGESTED ANSWER:

I would advise the lot owners that a city, even if it is outside Metro Manila, may levy an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed value of the property which shall be in addition to the basic real property tax. (Sec. 236, Local Government Code) I would likewise advise them that the levy may apply to residential lots, regardless of land area, in subdivisions duly approved by proper authorities, the ownership of which has been transferred to individual owners who shall be liable for the additional tax. (Last par., Sec. 237)

Another issue is the fact that the tax is imposed on the driver of the vehicle and not on the registered owner of the same. The tax does not only violate the requirement of uniformity, but the same is also unjust because it places the burden on someone who has no control over the route of the vehicle. The ordinance is, therefore, invalid for violating the rule of uniformity and equality as well as for being unjust.

The term "Idle Lands" means, land not devoted directly to any crop or to any definite purpose for at least one year prior to the notice of expropriation, except for reasons other than force majeure or any fortuitous event, but used to be devoted or is suitable to such crop or is contiguous to land devoted directly to any crop and does not include land devoted permanently or regularly to other essential and more productive purpose. (Philippine Legal Encyclopedia, by Sibal, 1986 Ed.)

Local Taxation; Situs of Professional Taxes (2005) Mr. Fermin, a resident of Quezon City, is a Certified Public Accountant-Lawyer engaged in the practice of his

Finally, I would advise them to construct or place improvements on their idle lands by making valuable additions to the property or ameliorations in the land's

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

conditions so the lands would not be considered as idle. (Sec. 199[m]) In this manner their properties would not be subject to the ad valorem tax on idle lands.

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2. Assuming Joachin is a registered owner, will your answer be the same? (2.5%) SUGGESTED ANSWER:

Real Property Tax: Underground Gasoline Tanks (2003) Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, the pieces must be placed by the owner of the land and, in addition, must tend to directly meet the needs of the industry or works carried on by the owner. Oil companies install underground tanks in the gasoline stations located on land leased by the oil companies from the owners of the land where the gasoline stations [are] located. Are those underground tanks, which were not placed there by the owner of the land but which were instead placed there by the lessee of the land, considered real property for purposes of real property taxation under the local Government Code? Explain. (8%) SUGGESTED ANSWER:

Yes. The properties are considered as necessary fixtures of the gasoline station, without which the gasoline station would be useless. Machinery and equipment installed by the lessee of leased land is not real property for purposes of execution of a final judgment only. They are considered as real property for real property tax purposes as "other improvements to affixed or attached real property under the Assessment Law and the Real Property Tax Code.

(Caltex v. Central Board of Assessment Appeals, 114 SCRA 296 [1982]).

Yes. The law requires that a notice of the auction sale must be properly sent to Joachin and not merely through publication (Tan v. Bantegui, G.R. No, 154027, October

24,2005; Estate of Mercedes Jacob v. CA, G.R. No. 120435, Dec. 22, 1997).

Real Property Taxation: Capital Asset vs. Ordinary Asset (1995) In 1990, Mr. Naval bought a lot for P1,000,000.00 In a subdivision with the intention of building his residence on it. In 1994, he abandoned his plan to build his residence on it because the surrounding area became a depressed area and land values in the subdivision went down; instead, he sold it for P800.000.00. At the time of the sale, the zonal value was P500.000.00. 1) Is the land a capital asset or an ordinary asset? Explain. 2) Is there any income tax due on the sale? Explain. SUGGESTED ANSWERS:

1) The land is a capital asset because it is neither for sale in the ordinary course of business nor a property used in the trade or business of the taxpayer. (Sec. 33. NIRC). 2) Yes, Mr. Naval is liable to the 5% capital gains tax imposed under Section 21(e) of the Tax Code based on the gross selling price of P800.000.00 which is an amount higher than the zonal value.

Real Property Tax; Requirements; Auction Sales of Property for Tax Delinquency (2006) Quezon City published on January 30, 2006 a list of delinquent real property taxpayers in 2 newspapers of general circulation and posted this in the main lobby of the City Hall. The notice requires all owners of real properties in the list to pay the real property tax due within 30 days from the date of publication, otherwise the properties listed shall be sold at public auction.

Real Property Taxation: Capital Gains vs. Ordinary Gains (1998) What is the difference between capital gains and ordinary gains? [3%]

Joachin is one of those named in the list. He purchased a real property in 1996 but failed to register the document of sale with the register of Deeds and secure a new real property tax declaration in his name. He alleged that the auction sale of his property is void for lack of due process considering that the City Treasurer did not send him personal notice. For his part, the City Treasurer maintains that the publication and posting of notice are sufficient compliance with the requirements of the law. 1. If you were the judge, how will you resolve this issue? (2.5%)

Real Property Taxation: Coverage of Ordinary Income (1998) What does the term "ordinary income" include? [2%]

SUGGESTED ANSWER:

I will resolve the issue in favor of Joachin. In auction sales of property for tax delinquency, notice to delinquent landowners and to the public in general is an essential and indispensable requirement of law, the non-fulfillment of which vitiates the same (Tiongco v. Phil. Veterans Bank, G.R. No. 82782, Aug. 5, 1992). The failure to give notice to the right person i.e., the real owner, will render an auction sale void (Tan v. Bantegui, G.R. No, 154027, October 24,

2005; City Treasurer of Q.C. v. CA, G.R. No. 120974, Dec. 22, 1997).

SUGGESTED ANSWER:

CAPITAL GAINS are gains realized from the sale or exchange of capital assets, while ORDINARY GAINS refer to gains realized from the sale or disposition of ordinary assets.

SUGGESTED ANSWER:

The term ordinary income includes any gain from the sale or exchange of property which is not a capital asset. These are the gains derived from the sale or exchange of property such as stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the course of his trade or business, or property used in trade or business of a character which is subject to the allowance for depreciation, or real property used in trade or business of the taxpayer. (Sec. 22 [Z] in relation to Sec. 39[A](1), both of the NIRC). ALTERNATIVE ANSWER:

The term ordinary income includes income from performance of services, whether professional or personal, gains accruing from business, and profit arising from the sale or exchange of ordinary assets.

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

Real Property Taxation: Exchange of Lot; Capital Gain Tax (1997) A corporation, engaged in real estate' development, executed deeds of sale on various subdivided lots. One buyer, after going around the subdivision, bought a corner lot with a good view of the surrounding terrain. He paid P1.2 million, and the title to the property was issued. A year later, the value of the lot appreciated to a market value of P1.6 million, and the buyer decided to build his house thereon. Upon inspection, however, he discovered that a huge tower antennae had been erected on the lot frontage totally blocking his view. When he complained, the realty company exchanged his lot with another corner lot with an equal area but affording a better view. Is the buyer liable for capital gains tax on the exchange of the lots? SUGGESTED ANSWER:

Yes, the buyer is subject to capital gains tax on the exchange of lots on the basis of prevailing fair market value of the property transferred at the time of the exchange or the fair market value of the property received, whichever is higher (Section 21(e), NIRC). Real property transactions subject to capital gains tax are not limited to sales but also exchanges of property unless exempted by a specific provision of law. ALTERNATIVE ANSWER:

No. The exchange is not subject to capital gains tax because it is merely done to comply with the intentions of the parties to the previous contract regarding the sale and acquisition of a property with a good view. This is a simple substitution of the object of sale and since the previous transaction was already subjected to tax, no new tax should be imposed on the exchange (BIR Ruling No. 21(e) 053-89 008-95). Real Property Taxation: Exemption/Deductions; Donor’s Tax (1998) Ace Tobacco Corporation bought a parcel of land situated at Pateros and donated it to the Municipal Government of Pateros for the sole purpose of devoting the said land as a relocation site for the less fortunate constituents of said municipality. In accordance therewith, the Municipal Government of Pateros issued to the occupants/beneficiaries Certificates of Award giving to them the respective areas where their houses are erected. Through Ordinance No. 2, Series of 1998, the said municipal government ordained that the lots awarded to the awardees/donees be finally transferred and donated to them. Determine the tax consequence of the foregoing dispositions with respect to Ace Tobacco Corporation, the Municipal Government of Pateros, and the occupants/beneficiaries. [5%] SUGGESTED ANSWER:

The donation by Ace Tobacco Corporation is exempt from the donor's tax because it qualifies as a gift to or

for the use of any political subdivision of the National Government (Section 101(2), NIRC). The conveyance is likewise exempt from documentary stamp tax because it is a transfer without consideration. Since the donation is to be used as a relocation site for the less fortunate constituents of the municipality. It may be considered as an undertaking for human settlements,

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hence the value of the land may be deductible in full from the gross income of Ace Tobacco Corporation if in accordance to a National Priority Plan determined by the National Economic Development Authority. (Sec. 34{H](2)(a), NIRC). If the utilization is not in accordance to a National Priority Plan determined by the National Economic Development Authority, then Ace Tobacco Corporation may deduct the value of the land donated only to the extent of five (5%) percent of its taxable income derived from trade or business as computed without the benefit of the donation. (Sec. 34[H](2)(a) in relation to Sec. 34[H](1), NIRC). The Municipality of Pateros is not subject to any donor's tax on the value of land it subsequently donated, it being exempt from taxes as a political subdivision of the National Government. The occupants/beneficiaries are subject to real property taxes because they now own the land. ALTERNATIVE ANSWER on Taxability of Municipality and

Awardees:

The awarding by the Municipal Government of lots to specific awardees or donees is likewise exempt from the donor's tax because it is only an implementation of the purpose for which the property was given by Ace Tobacco Corporation. The purpose of the first donation is to devote the land as a relocation site for the less fortunate constituents. If later on the Municipality gives out Certificates of Award over specific lots occupied by the qualified occupants/beneficiaries, this is intended to perpetuate the purpose of the previous donor, the Municipality acting merely as a conduit and not the true donor. This is simply a donation by the Municipality in form but not in substance. The receipt by the occupant beneficiaries of their respective lots through the Certificate of Award has no tax implications. They are, however, liable for real property taxes. Real Property Taxation: Exemption: Acquiring New Principal Residence (2000) Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their principal residence situated in Tandang Sora, Quezon City for Ten Million Pesos (P10,000,000.00) with the intention of using the proceeds to acquire or construct a new principal residence in Aurora Hills, Baguio City. What conditions must be met in order that the capital gains presumed to have been realized from such sale may not be subject to capital gains tax? (5%) SUGGESTED ANSWER:

The conditions are: 1. The proceeds are fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the sale or disposition of the principal residence or eighteen (18) months from July 12, 2000.

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

2.

The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired.

3.

The Commissioner of Internal Revenue must have been informed by Mr. & Mrs. Peter Camacho within thirty (30) days from the date of sale or disposition on July 12, 2000 through a prescribed return of their intention to avail of the tax exemption.

4.

That the said exemption can only be availed of once every ten (10) years.

5.

If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax [Sec. 24 (D) (2), NIRC of 1997]

Real Property Taxation: Fundamental Principles (1997) State the fundamental principles underlying real property taxation in the Philippines. SUGGESTED ANSWER:

The following are the fundamental principles governing real property taxation: 1) Real property shall be appraised at its current and fair market value; 2) Real property shall be classified for assessment purposes on the basis of its actual use: 3) Real property shall be assessed on the basis of a uniform classification within each local government unit; 4) The appraisal, assessment, levy, and collection of real property tax shall not be let to any private person; and 5) The appraisal and assessment of real property shall be equitable. Real Property Taxation: Principles & Limitations: LGU (2000) Give at least two (2) fundamental principles governing real property taxation, which are limitations on the taxing power of local governments insofar as the levying of the realty tax is concerned. (2%) SUGGESTED ANSWER:

Two (2) fundamental principles governing real property taxation are: 1) The appraisal must be at the current and fair market value; and 2) Classification for assessment must be on the basis of actual use. (Sec. 198, Local Government Code) ALTERNATIVE ANSWER:

The examinee should be given credit if he chooses the above two (2) or any two (2) of those enumerated below: 1) Assessment must be on the basis of uniform classification; 2) Appraisal, assessment, levy and collection shall not be let to private persons; and 3) Appraisal and assessment must be equitable. (Sec. 198, Local Government Code)

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Real Property Taxation: Property Sold is an Ordinary Asset (1998) An individual taxpayer who owns a ten (10) door apartment with a monthly rental of P10,000 each residential unit, sold this property to another individual taxpayer. Is the seller liable to pay the capital gains tax? [5%] SUGGESTED ANSWER:

No. The seller is not liable to pay the capital gains tax because the property sold is an ordinary asset, i.e. real property used in trade or business. It is apparent that the taxpayer is engaged in the real estate business, regularly renting out the ten (10) door apartment. Real Property Taxation: Underground Gasoline Tanks (2001) Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real property, they must be placed by the owner of the land and, in addition, must tend to directly meet the needs of the industry or works carried on by the owner. Oil companies, such as Caltex and Shell, install underground tanks in the gasoline stations located on land leased by the oil companies from others. Are those underground tanks which were not placed there by the owner of the land but which were instead placed there by the lessee of the land, considered real property for purposes of real property taxation under the Local Government Code? Explain your answer. (5%) SUGGESTED ANSWER:

Yes. The underground tanks although installed by the lessee, Shell and Caltex, are considered as real property for purposes of the imposition of real property taxes. It is only for purposes of executing a final judgment that these machinery and equipment, installed by the lessee on a leased land, would not be considered as real property. But in the imposition of the real property tax, the underground tanks are taxable as necessary fixtures of the gasoline station without which the gasoline station would not be operational. (Caltex Phils., Inc v. CBAA, 114 SCRA. 296). Real Property Taxation; Exempted Properties (2006) What properties are exempt from the real property tax? (5%) SUGGESTED ANSWER:

The following properties are exempt from the real property tax (Section 234, Local Government Code): (1) Real property owned by the REPUBLIC OF THE PHILIPPINES or any of its political subdivisions except when the beneficial use thereof has been granted for consideration or otherwise to a taxable person; (2) CHARITABLE INSTITUTIONS, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes; (3) All machineries and equipment that are actually, directly and exclusively used by LOCAL WATER UTILITIES and government-owned or controlled corporations engaged in the supply and distribution

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

of water and/or generation and transmission of electric power; (4) All real property owned by duly REGISTERED COOPERATIVES as provided for under R.A. 6938; and (5) Machinery and equipment used for POLLUTION CONTROL and ENVIRONMENTAL PROTECTION.

TARIFF AND CUSTOMS DUTIES Customs: “Flexible Tariff Clause” (2001) What do you understand by the term "flexible tariff clause" as used in the Tariff and Customs Code? (5%) SUGGESTED ANSWER: The term "flexible tariff clause "refers to the authority given to the President to adjust tariff rates under Section 401 of the Tariff and Customs Code, which is the enabling law that made effective the delegation of the taxing power to the President under the Constitution. [Note: It is suggested that if the examinee cites the entire provision of Sec. 401 of the Tariff &, Customs Code, he should also be given full credit.] Customs: Administrative vs. Judicial Remedies (1997) The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as by enforcing the tax lien on the imported article, and to the judicial remedy of filing an action in court. When does the Bureau of Customs normally avail itself; (a) of the administrative, instead of the judicial remedy, or (b) of the latter, instead of the former, remedy? SUGGESTED ANSWER:

(a) The Bureau of Customs normally avails itself of the ADMINISTRATIVE REMEDY of seizure, such as by enforcing the tax lien on the imported articles, instead of the judicial remedy when the goods to which the tax lien attaches, regardless of ownership, is still in the custody or control of the Government. In the case, however, of importations which are prohibited or undeclared, the remedy of seizure and forfeiture may still be exercised by the Bureau of Customs even if the goods are no longer in its custody. (b) On the other hand, when the goods are properly released and thus beyond the reach of tax lien, the government can seek payment of the tax liability through judicial action since the tax liability of the importer constitutes a personal debt to the government, therefore, enforceable by action. In this case judicial remedy is normally availed of instead of the administrative remedy. Customs: Importation (1995) When does importation begin and when does it end? SUGGESTED ANSWER:

IMPORTATION begins from the time the carrying vessel or aircraft enters Philippine territorial jurisdiction with the intention to unload therein and ends at the time the goods are released or withdrawn from the customhouse upon

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payment of the customs duties or with legal permit to withdraw (Viduya vs. Berdiago, 73 SCRA 553).

Customs: Jurisdiction; Seizure & Forfeiture Proceedings (1996) On January 1, 1996, armed with warrants of seizure and detention issued by the Bureau of Customs, members of the customs enforcement and security services coordinated with the Quezon City police to search the premises owned by a certain Mr. Ho along Kalayaan Avenue, Quezon City, which allegedly contained untaxed vehicles and parts. While inside the premises, the member of the customs enforcement and security services noted articles which were not included in the list contained in the warrant. Hence, on January 15, 1996, an amended warrant and seizure was issued. On January 25, 1996, the customs personnel started hauling the articles pursuant to the amended warrant. This prompted Mr. Ho to file a case for injunction and damages with a prayer for a restraining order before the Regional Trial Court of Quezon City against the Bureau of Customs on January 27, 1996. On the same date, the Trial Court issued a temporary restraining order. A motion to dismiss was filed by the Bureau of Customs on the ground that the Regional Trial Court has no jurisdiction over the subject matter of the complaint claiming that it was the Bureau of Customs that has exclusive jurisdiction over it. Decide. SUGGESTED ANSWER:

The motion to dismiss should be granted. Seizure and forfeiture proceedings are within the exclusive jurisdiction of the Collector of Customs to the exclusion of regular Courts. Regional Trial Courts are devoid of competence to pass upon the validity or regularity of seizure and forfeiture proceedings conducted by the Bureau of Customs and to enjoin or otherwise interfere with these proceedings (Republic vs. CFI of Manila [Branch

XXII], G.R. No. 43747, September 2, 1992; Jao vs. CA, G.R. No. 104604, October 6, 1995). Customs: Kinds of Custom Duties (1995) Under the Tariff and Customs Code, what are a) dumping duties b) countervailing duties c) marking duties d) discriminatory duties? SUGGESTED ANSWER:

6)

Dumping duties are special duties imposed by the

Secretary of Finance upon recommendation of the Tariff Commission when it is found that the price of the imported articles is deliberately or continually fixed at less than the fair market value or cost of production, and the importation would cause or likely cause an injury to local industries engaged in the manufacture or production of the same or similar articles or prevent their establishment.

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

7)

Countervailing duties are special duties imposed

by the Secretary of Finance upon prior investigation and report of the Tariff Commission to offset an excise or inland revenue tax upon articles of the same class manufactured at home or subsidies to foreign producers or manufacturers by their respective governments.

8)

9)

Marking duties are special duties equivalent to 5% ad valorem imposed on articles not properly marked. These are collected by the Commissioner of Customs except when the improperly marked articles are exported or destroyed under customs supervision and prior to final liquidation of the corresponding entry. These duties are designed to prevent possible deception of the customers. Discriminatory duties are special duties collected

in an amount not exceeding 100% ad valorem, imposed by the President of the Philippines against goods of a foreign country which discriminates against Philippine commerce or against goods coming from the Philippines and shipped to a foreign country.

Customs: Kinds of Custom Duties (1997) Explain briefly each of the special customs duties authorized under the Tariff and Customs Code. SUGGESTED ANSWER:

The following are the Special Duties imposed under the Tariff and Customs Code: (a) Dumping Duty - This is a duty levied on imported goods where it appears that a specific kind or class of foreign article is being imported into or sold or is likely to be sold in the Philippines at a price less than its fair value; (b) Countervailing Duty - This is a duty equal to the ascertained or estimated amount of the subsidy or bounty or subvention granted by the foreign country on the production, manufacture, or exportation into the Philippines of any article likely to injure an industry in the Philippines or retard or considerable retard the establishment of such industry; (c) Marking Duty - This is a duty on an ad valorem basis imposed for improperly marked articles. The law requires that foreign importations must be marked in any official language of the Philippines the name of the country of origin of the article; (d) Discriminatory or Retaliatory Duty - This is a duty imposed on imported goods whenever it is found as a fact that the country of origin discriminates against the commerce of the Philippines in such a manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. Customs: Remedies of an Importer (1996) Discuss briefly the remedies of an importer during the pendency of seizure proceedings.

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During the pendency of seizure proceedings the importer may secure the release of the imported property for legitimate use by posting a bond in an amount to be fixed by the Collector, conditioned for the payment of the appraised value of the article and/or any fine, expenses and costs which may be adjudged in the case; provided, that articles the importation of which is prohibited by law shall not be released under bond. The importer may also offer to pay to the collector a fine imposed by him upon the property to secure its release or in case of forfeiture, the importer shall offer to pay for the domestic market value of the seized article, which offer subject to the approval of the Commissioner may be accepted by the Collector in settlement of the seizure case, except when there is fraud. Upon payment of the fine or domestic market value, the property shall be forthwith released and all liabilities which may or might attach to the property by virtue of the offense which was the occasion of the seizure and all liability which might have been incurred under any bond given by the importer in respect to such property shall thereupon be deemed to be discharged. Customs: Returning Residents: Tourist/Travelers (2003) X and his wife, Y, Filipinos living in the Philippines, went on a three-month pleasure trip around the world during the months of June, July and August 2002. In the course of their trip, they accumulated some personal effects which were necessary, appropriate and normally used in leisure trips, as well as souvenirs in non-commercial quantities. Are they "returning residents" for purposes of Section 105 of the Tariff and Customs Code? Explain. (8%) SUGGESTED ANSWER:

No. The term "returning residents" refers to nationals who have stayed in a foreign country for a period of at least six (6) months. (Section 105(f) of the Tariff and Customs Code). Due to their limited duration of stay abroad X and Y are not considered as "returning residents" but they are merely considered as travelers or tourists who enjoy the benefit of conditionally free importation. [Note: Credit must likewise be given if the candidate answered in the affirmative, considering that travelers or tourists are given the same tax treatment as that of returning residents, treating their personal effects, not in commercial quantities, as conditionally free importation.]

Customs: Seizure & Forfeiture: Effects (1994) In smuggling a shipment of garlic, the smugglers used an eight-wheeler truck which they hired for the purpose of taking out the shipment from the customs zone. Danny, the truck owner, did not have a certificate of public convenience to operate his trucking business. Danny did not know that the shipment of garlic was illegally imported. Can the Collector of Customs of the port seize and forfeit the truck as an instrument in the smuggling? SUGGESTED ANSWER:

Yes, the Collector of Customs of the port can seize and forfeit the truck as an instrument in the smuggling activity, since the same was used unlawfully in the importation of

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)

smuggled articles. The mere carrying of such articles on board the truck (in commercial quantities) shall subject the truck to forfeiture, since it was not being used as a duly authorized common carrier, which was chartered or leased as such. (Sec. 2530 [a], TCC) Moreover, although forfeiture of the vehicle will not be effected if it is established that the owner thereof had no knowledge of or participation in the unlawful act, there arises a prima facie presumption or knowledge or participation if the owner is not in the business for which the conveyance is generally used. Thus, not having a certificate of public convenience to operate a trucking business, he is legally deemed not to have been engaged in the trucking business. (Sec. 2531, Tariff and Customs Code) Customs: Steps involving Protest Cases (1994) The Collector of Customs instituted seizure proceedings against a shipment of motor vehicles for having been misdeclared as second-hand vehicles. State the procedure for the review of the decision up to the Supreme Court of the Collector of Customs adverse to the importer. SUGGESTED ANSWER:

The procedure in seizure cases may be summarized as follows: (a) The collector issues a warrant for the detention or forfeiture of the imported articles; (Sec. 2301, Tariff and Customs Code) (b) The Collector gives the importer a written notice of the seizure and fixes a hearing date to give the importer an opportunity to be heard; (Sec. 2303, TCC) (c) A formal hearing is conducted; (Sec. 2312, TCC) (d) The Collector renders a declaration of forfeiture; (Sec. 2312, TCC) (e) The Importer aggrieved by the action of the Collector in any case of seizure may appeal to the Commissioner for his review within fifteen (15) days from written notice of the Collector's decision; (Sec. 2313, TCC) (f) The importer aggrieved by the action or ruling of the Commissioner in any case of seizure may appeal to the Court of Tax Appeals; (Sec. 2402, TCC) (g) The importer adversely affected by the decision of the Court of Tax Appeals (Division) may appeal to the Court of Tax Appeals (en banc) within fifteen (15) days which may be extended for another fifteen (15) days or such period as the Court of Tax Appeals may decide. Customs; Basis of Dutiable Value; Imported Article (2005) State and explain the basis of dutiable value of an imported article subject to an ad valorem tax under the Tariff and Customs Code. ALTERNATIVE ANSWER:

The basis of dutiable value of an imported article subject to an ad valorem tax under the Tariff and Customs Code is its TRANSACTION VALUE. (Sec. 201[A], Tariff and Customs Code, as amended by R.A. No. 9135) If such value could not be determined, then the following values are to be utilized in their sequence: Transaction value of identical goods (Sec. 201[B]); Transaction value of

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similar goods (Sec. 201[C]); Deductive value (Sec. II.E.1, CA.O. No. 4-2004); Computed value (Sec., II.F.l, C.A.O. No. 1-20040) and Fallback value. (Sec. 201[F])

ALTERNATIVE ANSWER:

The basis of dutiable value of an imported article subject to an ad valorem tax under the Tariff and Customs Code is its transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines, adjusted by adding certain cost elements to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods. (Sec. 201[A], Tariff and Customs Code, as amended by R.A. 9135) If such value could not be determined, then the following values are to be utilized in their sequence: Transaction value of identical goods (Sec. 201[B]); Transaction value of similar goods (Sec. 201[C]); Deductive value (Sec. II.E.1, CA.O. No. 4-2004); Computed value (Sec. II.F.l, C.A.O. No. 1-20040) and Fallback value. (Sec. 201[F]) Customs; Countervailing Duty vs. Dumping Duty (2005) Distinguish countervailing duty from dumping duty. (5%) SUGGESTED ANSWER:

The distinctions between countervailing duty and dumping duty are the following: (1) Basis: The countervailing duty is imposed whenever there is granted upon the imported article by the country of origin a specific subsidy upon its production, manufacture or exportation and this results or threatens injury to local industry while the basis for the imposition of dumping duty is the importation and sale of imported items at below their normal value causing or likely to cause injury to local industry. (2) Amount: The countervailing duty imposed is equivalent to the value of the specific subsidy while the dumping duty is equivalent to the margin of dumping which is equal to the difference between the export price to the Philippines and the normal value of the imported article. Customs; Taxability; Personal Effects (2005) Jacob, after serving a 5-year tour of duty as military attache in Jakarta, returned to the Philippines bringing with him his personal effects including a personal computer and a car. Would Jacob be liable for taxes on these items? Discuss fully. (5%) SUGGESTED ANSWER:

No, Jacob is not liable for taxes on his personal computer and the car because he is tax-exempt by law. He has met the following requirements for exemption under P.D. No. 922 (1976): a) He was a military attache assigned to Jakarta; b) He has served abroad for not less than two (2) years; c) He is returning to the Philippines after serving his tour of duty; and d) He has not availed of the tax exemption for the past four (4) years. He is entitled to tax exemption on his personal and household effects including a car; provided,

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a)

The car must have been ordered or purchased prior to the receipt by the Philippine mission or consulate in Jakarta of Jacob's recall order; b) the car is registered in Jacob's name; c) the exemption shall apply to the value of the car; d) the exemption shall apply to the aggregate value of his personal and household effects (including the personal computer) not exceeding thirty per centum (30%) of the total amount received by Jacob as salary and allowances during his assignment in Jakarta, but not to exceed four (4) years; e) Jacob must not have availed of the exemption more oftener than one every four years. (Last par., Sec. 105, Tariff and Customs Code)

c)

OTHER RELATED MATTERS

SUGGESTED ANSWER:

BIR: Bank Deposits Secrecy Violation (2000) A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud. May the examiner be allowed to look into the taxpayer's bank deposits? In what cases may the Commissioner or his duly authorized representative be allowed to inquire or look into the bank deposits of a taxpayer? (5%) SUGGESTED ANSWER:

No. as this would be violative of Republic Act No. 1405, the Bank Deposits Secrecy Law. The Commissioner of Internal Revenue or his duly authorized representative may be allowed to inquire or look into the bank deposits of a taxpayer in the following cases: a) For the purpose of determining the gross estate of a decedent; b) Where the taxpayer has filed an application for compromise of his tax liability by reason of financial incapacity to pay such tax liability. (Sec. 6 (F), NIRC of 1997]

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Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized representatives to Inquire into the bank deposits.

BIR: Secrecy of Bank Deposit Law (2003) X dies in year 2000 leaving a bank deposit of P2,000,000.00 under joint account with his associates in a law office. Learning of X's death from the newspapers, the Commissioner of Internal Revenue wrote to every bank in the country asking them to disclose to him the amount of deposits that might be outstanding in his name or jointly with others at the date of his death. May the bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law? Explain. (8%) No. The Commissioner of Internal Revenue has the authority to inquire into bank deposit accounts of a decedent to determine his gross estate notwithstanding the provisions of the Bank Secrecy Law. Hence, the banks holding the deposits in question may not refuse to disclose the amount of deposits on the ground of secrecy of bank deposits. (Section 6(F) of the 1997 Tax Code). The fact that the deposit is a joint account will not preclude the Commissioner from inquiring thereon because the law mandates that if a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon have been paid. (Section 97 of the 1997 Tax Code). Hence, to be able to give the required certification, the inclusion of the deposit is imperative, which may be made possible only through the inquiry made by the Commissioner.

Taxation Law Q&As (2007-2013)

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A Compilation of the Questions and Suggested Answers In the PHILIPPINE BAR EXAMINATIONS 2007-2013 In

TAXATION LAW Compiled and Arranged By: Baratbate-Ladot, Delight Salise, Hector Christopher “Jay-Arh” Jr. M. (University of San Jose-Recoletos School of Law)

ANSWERS TO BAR EXAMINATION QUESTIONS by the UP LAW COMPLEX (2007-2013) & PHILIPPINE ASSOCIATION OF LAW SCHOOLS (2008)

“Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

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FOREWORD This work is a compilation of the ANSWERS TO BAR EXAMINATION QUESTIONS by the UP LAW COMPLEX , Philippine Association of Law Schools from 2007-2010 and local law students and lawyers‟ forum sites from 2011-2013 and not an original creation or formulation of the author. The authors were inspired by the work of Silliman University‟s College of Law and its students of producing a very good material to everyone involved in the legal field particularly the students and the reviewees for free. Hence, this work is a freeware. Everyone is free to distribute and mass produce copies of this work, however, the author accepts no liability for the content of this reviewer, or for the consequences of the usage, abuse, or any actions taken by the user on the basis of the information given. The answers (views or opinions) presented in this reviewer are solely those of the authors in the given references and do not necessarily represent those of the authors of this work. The Authors.

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TABLE OF CONTENTS (Titles are based on Silliman’s Compilation [Arranged by Topic])

General Principles BIR Rulings; “Rulings of First Impression” (2007)..................................................... 10 Power of Taxation: Equal Protection of the Law; Rational Basis Test (2010).............. 11 Power of Taxation: Limitations: Inherent Limitations (2009)..................................... 11 Power of Taxation: Limitations: Tax Treaties (2009)................................................. 12 Principle of Administrative Feasibility (2009)........................................................... 12 Set-off; “Doctrine of Equitable Recoupment” (2009)................................................. 12 Tax Avoidance; Exchange of Real Property and Shares of Stock (2008)..................... 13 Taxes considered as NIRC Taxes (2007).................................................................... 14

Income Taxation Basic: Closed and Complete Transaction (2012) ...................................................... 14 Charitable Institutions: Income from Profit-Driven Activities (2013) ...................... 14 Corporate Income Tax: Accumulated Profits; “Immediacy Test” (2010) .................... 15 Corporate Income Tax: Accumulated Profits; Capitalization Rules (2010) ................ 15 Corporate Income Tax: Carry-Over Option is Irrevocable (2012) .............................. 15 Corporate Income Tax: Carry-Over Option is Irrevocable (2013) .............................. 16 Corporate Income Tax: Joint Venture (2007) .......................................................... 17 Corporate Income Tax: Sale of Real Property by a Real Estate Broker (2008)……..…

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Corporate Income Tax: Who is a Contractor (2013)........................................................18 Final Withholding Tax: Informer’s Reward (2010) .........................................................18 Final Withholding Tax: Royalties Paid to Non-Resident Corporation (2010)....................18 Foreign Corporate Tax: Local Agent for a Foreign Airline (2009)....................................19 Foreign Corporate Tax: “Single Entity Concept”; Branch Remittances (2012)................20 Foreign Corporate Tax: Situs of Taxation (2012)............................................................21 Fringe Benefit Tax: De Minimis Benefits (2007).............................................................22 Partnership: Income Tax (2013).....................................................................................22 Personal Income Tax: Accounting Period (2010).............................................................23 Personal Income Tax: Passive Income (Interest Income); Situs of Taxation (2007).........23 Personal Income Tax: Passive Income (Rental Income); Situs of Taxation (2008)............23 Personal Income Tax: Payment by Installment (2010)....................................................24 Personal Income Tax: Personal Exemptions of a Non-resident Alien (2010)....................24 Trust: Income from Trust (2009)....................................................................................24

Deductions, Exemptions, Exclusions & Inclusions

Deductions: “All-events Test” (2009)......................................................................... 25 Deductions: “All Events Test” (2010)......................................................................... 25 Deductions: Claimed by a Partner (2013)................................................................... 25 Deductions: Income Tax Withheld by US Government (2010).........................................26 Deductions: Non-deductible; Casualty Loss (2010).........................................................26 Deductions: Non-deductible; Maintenance of Goodwill (2009)........................................26 Deductions: Optional Standard Deduction (2010)...........................................................27 Deductions: Optional Standard Deductions; Irrevocability of Election (2009).................27

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Deductions: Premiums for Health Insurance (2010).................................................. ....27 Deductions: Premiums for Life Insurance (2007)........................................................ ....27 Deductions: Vanishing Deductions (2008).................................................................. ....28 Exemptions: Gains from Redemption of Shares of Stock in Mutual Fund Company (2010)............................................................... ....28 Exemptions: Gifts, Bequests and Devises (2008)........................................................ ....29 Exemptions: Income Abroad by Non-Resident Filipino (2010)................................... ....29 Exemptions: Income from Religious Activities (2009)................................................ ....29 Exemptions: Pensions from Foreign Government Agencies and other Institutions (2007)...................................................................29 Exemptions: Personal & Additional Exemptions (2012)............................................. ....30 Exemptions: Proceeds from Accident Insurance (2007)............................................. ....31 Exemptions: Proceeds from Life Insurance (2007)..................................................... ....31

Capital Gains Tax

Exemption of Family Home; Conditions (2013)............................................................32 Exchange of Real Property by an Individual and Domestic Corporation (2008)...............33 Fair Market Value (2007)...............................................................................................33 Nature of Real Properties: Capital or Ordinary Asset (2008)...........................................34 Purchase of Condominium (2007)..................................................................................35 Sale of a Capital Asset (2010)......................................................................................35 Sale of Shares of Stock Not Traded in the Local Stock Exchange (2008).........................36 Tax Rate; Period to File Return (2012)...........................................................................37

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Other Percentage Taxes

Sale of Shares of Stock Traded through the Local Stock Exchange (2008)......................37

Estate & Donor’s Taxes Donor’s Tax: Capital or Ordinary Asset (2012)........................................................... ....38 Donor’s Tax: Donation to Relatives (2008) ....................................................................39 Donor’s Tax: Dowry Exclusion (2009) ............................................................................39 Donor’s Tax: Exemptions; Properties used by Religious Institutions (2007)....................39 Donor’s Tax: “Reciprocity Rule” (2009) ........................................................................40 Donor’s Tax: Renunciation of Shares (2010) ..................................................................40 Donor’s Tax: Renunciation of Shares (2013) ..................................................................40 Estate Tax (2007) .........................................................................................................41 Estate Tax: Basis of Computation (2007) ......................................................................41 Estate Tax: Basis of Computation (2008) ......................................................................41 Estate Tax: CIR’s Power to Extend Payment; Basis of Computation (2007).....................42 Estate Tax: Composition of Gross Estate (2008) ............................................................43 Estate Tax: Composition of Gross Estate (2009) ............................................................43 Estate Tax: Deductions Allowed to Estate of a Resident or Citizen (2008)......................44 Estate Tax: Deductions Allowed to Estate of a Resident or Citizen (2008)....................45 Estate Tax: Exemptions; Transfer with Sufficient Consideration (2013).........................45 Estate Tax; Exemptions; Transmission from the First Heir, Legatee or Donee in favor of another beneficiary (2009)...............................................45 Estate Tax: Period for Filing and Payment (2010)..........................................................46 Estate Tax: Vanishing Deductions (2009).....................................................................46

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Business Taxes VAT: Exempted Transactions; Importation and Use within SBMA (2008)........................47 VAT: Exempted Transactions; Residential Units for Lease (2009)...................................48 VAT: Liable for VAT (2008) ............................................................................................48 VAT: Rates (2010)..........................................................................................................49 VAT: Sale of a Capital Asset (2010) ...............................................................................49 VAT: Zero-rated; Services Rendered to Business Outside the Country (2012).................49 VAT: Zero-rated; Services Rendered to Business Outside the Country (2013).................50

Remedies in Internal Revenue Taxes BIR: Assessment; Exemption to Examine Once a Year (2013) ........................................51 BIR: Assessment; Requisites (2008)...............................................................................51 BIR: Assessment; Sale of Real Properties (2008)............................................................52 BIR: Compromise; Financial Incapacity (2009)..............................................................52 BIR: Criminal Prosecution; Duty to Pay Tax despite Acquittal (2012).............................53 BIR: Criminal Prosecution; Tax Evasion; Bribery (2013).................................................53 BIR: False Return v. Fraudulent Return (2009)..............................................................54 BIR: Failure to File Return; Collection Without Assessment (2012)……..........................54 BIR: Failure to File Return; Criminal Actions in RTC (2010)..........................................54 BIR: Prescription: Construction in Criminal Cases (2010)..............................................55 CTA: Jurisdiction of the CTA (2010)..............................................................................55 CTA: Jurisdiction of the CTA (2010)..............................................................................55 CTA: Jurisdiction; Appeals from Decisions of the Collector of Customs (2010)...............55 CTA: Jurisdiction; Power to Review Compromise Agreements (2010).............................56

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CTA: Proceedings in the CTA (2010)..............................................................................56 CTA: Suspension of the Collection of NIR Taxes (2010)..................................................56 Customs: Prescription Period to Assess (2013)...............................................................57 Taxpayer: Claim for Refund; Carry-Over Option is Irrevocable (2013).............................57 Taxpayer: Claim for Refund; Substantiation Requirement (2009)...................................57 Taxpayer: Claim for Refund; Withholding Agent as a Proper Party (2009).......................58 Taxpayer: Claim for Tax Credit; Off-Setting (2007).........................................................58 Taxpayer: Claim for Tax Credit; Prescription (2008).....................................................59 Taxpayer: Petition for Review; Tenor of Finality of Assessment (2012)........................60 Taxpayer: Prescription; Construction in Civil Cases (2010)............................................61 Taxpayer: Prescription; Effect of Prescription to File Protest (2009)..............................61 Taxpayer; Prescription; Effect of Waiver of Statute of Limitations (2010)......................61 Taxpayer: Protest against Final Assessment Notice (2010).............................................61 Taxpayer: Protest; Remedies Against BIR’s Inaction to a Protest (2009)........................62 Taxpayer: Request for Reconsideration vs. Request for Reinvestigation (2012)..............62

Local & Real Property Taxes Local Taxation: Business Tax: Taxable Period, Payment in Installment (2008).............63 Local Taxation: Business Tax on Contractors (2010)......................................................64 Local Taxation: Legality/Constitutionality; Legislative Franchise (2008).......................64 Local Taxation: Legality/Constitutionality; Professional/Occupation Taxes (2009).......65 Local Taxation: Legality/Constitutionality; Regulatory Measures (2009)......................65 Local Taxation: Legality/Constitutionality; Tax Rate (2007)..........................................66 Local Taxation; Principal Office and Branches; Situs of Taxation (2010)........................66 Local Taxation: Retiring Business (2010).......................................................................67 Local Taxation; Taxing Power; Limitation (2010)...........................................................67 “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

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Local Taxation: Taxing Power; Nature (2007).................................................................67 Real Property Taxation: Beneficial Use of the Property (2013).......................................68 Real Property Tax: Exemption; Religious Activities (2010).............................................68 Real Property Taxation; Liable for Payment; Taxpayer (2009)........................................69 Real Property Taxation: Liable for Payment; Period (2012).............................................69

Remedies in Local Taxes Taxpayer: Local Tax; Period to File Protest and Appeal (2010).......................................70

Tariff And Customs Duties Customs: Exempted Transactions; Importation and Use within SBMA (2008).................70 Customs: Forfeiture Proceeding, Nature (2008)..............................................................71 Customs: Jurisdiction; Issuance of Warrant of Search and Seizure (2009)......................71

Other Related Matters BIR: Bank Deposits Secrecy Violation (2012) ................................................................72

MULTIPLE CHOICE QUESTIONS 2013 Taxation Law Exam MCQ (October 13, 2013)...….………………………………………....73 2012 Taxation Law Exam MCQ (October 14, 2012).….……………………………………...........78 2011 Taxation Law Exam MCQ (November 13, 2011).………………………………….…….....101 2010 Taxation Law Exam MCQ (September 12, 2010)….………………………………...........123 2009 Taxation Law Exam MCQ (September 13, 2009).………………………………...…….....124

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General Principles

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have held that they do not prevent an entire change of front at any time and

BIR

Rulings;

“Rulings

of

First

Impression” (2007)

are

merely

information

IV. XYZ Corporation, an export-oriented company, was able to secure a Bureau of Internal Revenue (BIR) ruling in June 2005

advisory service

–

to

sort the

of

an

taxpayer.

(Aban, Law of Basic Taxation in the Philippines, p. 149 citing Quiazon and Lukban).

that exempts from tax the importation of

(B) What is required to make a BIR

some of its raw materials. The ruling is of

ruling or first impression a valid one?

first

impression,

which

means

the

interpretations made by the Commissioner of

Internal

established

Revenue

is

precedents.

one

without

Subsequently,

however, the BIR issued another ruling which in effect would subject to tax such kind of importation. XYZ Corporation is concerned that said ruling may have a retroactive effect, which means that all their importations done before the issuance of

SUGGESTED ANSWER: A BIR ruling of first impression to be valid must not be against the law and it must

be

issued

Commissioner

of

only

by

Internal

the

Revenue.

(Philippine Bank of Communications v. CIR, 302 SCRA 241 [1999]; Section 7, NIRC).

the second ruling could be subject to tax.

(C) Does a BIR ruling have a retroactive

(10%)

effect, considering the principle that tax

(A) What are BIR rulings?

exemptions

should

be

interpreted

strictly against the taxpayer?

SUGGESTED ANSWER: SUGGESTED ANSWER: BIR rulings are administrative opinions issued by the Commissioner of Internal Revenue interpretative of a provision of a tax law. ALTERNATIVE ANSWER: They are the best guess of the moment

No.

A

BIR

retroactive application

ruling effect is

cannot if

its

be

given

retroactive

prejudicial

to

the

taxpayer. (Section 246, NIRC; CIR v. Court of Appeals et. Al. 267 SCRA 557 [1997]).

and incidentally often contain such wellconsidered and sound law, but the courts

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ANOTHER ALTERNATIVE ANSWER: The general rule is that a BIR ruling does not have a retroactive effect if giving it a retroactive application is prejudicial to the taxpayer. However, if the first ruling is tainted with either of the following: (1) misstatement or omission of materials facts, (2) the facts gathered by the BIR are materially different from the facts upon which the ruling is based, or (3) the taxpayer acted in bad faith, a subsequent ruling can have a retroactive application. (ABS-CBN Broadcasting Co. v. CTA & CIR, 08 SCRA 142 [1981]; Sec 246, NIRC). Power of Taxation: Equal Protection of the Law; Rational Basis Test (2010) (IIc) What is the "rational basis" test? Explain briefly. (2%) SUGGESTED ANSWER: The “rational basis test” is applied to gauge the constitutionality of an assailed law in the face of an equal protection challenge. It has been held that “in areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes constitutional rights must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification.” Under the rational basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate State interest (British American Tobacco v. Camacho and Parayno, G.R. No. 163583, April 5, 2009).

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Power of Taxation: Limitations: Inherent Limitations (2009) (II) Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (4%) SUGGESTED ANSWER: The inherent limitations on the power to tax are: 1. Taxation is for public purpose. – The proceeds of the tax must be used (a) for the support of the State or (b) for some recognized objective of the government or to directly promote the welfare of the community. 2. Taxation is inherently legislativeOnly the legislature has the full discretion as to the persons, property, occupation or business to be axed provided these are all within the State’s territorial jurisdiction. IT can also finally determine the amount or rate of tax, the kind of tax to be imposed and the method of collection (1 Cooley 176-184). 3. Taxation is territorial- Taxation may be exercised only within the territorial jurisdiction, the taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may determine the “place of taxation” or “tax situs”. 4. Taxation is subject to international comity. – This is a limitation which is founded on reciprocity designed to maintain harmonious and productive relationships among the various state. Under international comity, a state must recognize the generallyaccepted tenets of international law, among which are the principles of sovereign equality among states and of their freedom from suit without their consent, that limits that authority of a government to effectively impose taxes in a sovereign state and its instrumentalities,, as well as in its

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property held, and activities undertaken in that capacity. Power of Taxation: Treaties (2009)

Limitations:

Tax

X(B) ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.-based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income --- 30% for individual and 35% for corporate non-resident stockholders --- was deducted at source and remitted to the BIR.

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(Hawaiian-Philippine Company v. CIR, CTA Case No. 3887, May 31, 1988). ANOTHER SUGGESTED ANSWER: The contention of ABCD Corporation that it overpaid the withholding tax is correct provided it can establish: (1) The existence of RP-US Tax Treaty imposing a lower rate of tax of 25%; (2) The said tax treaty is applicable to its case; and (3) Its payment with the BIR of a tax based on a higher rate of 30% and 35%, respectively.

On May 15, 1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. The Commissioner denied the claim.

Principle of Administrative Feasibility (2009)

On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund.

True. There is no law which requires payment of taxes in cash only. However, a law allowing payment of taxes in kind, although valid, may pose problems of valuation, hence, will violate the principle of administrative feasibility.

Is the contention of ABCD Corporation correct? Why or why not? (3%) SUGGESTED ANSWER: Yes. The provision of a treaty must take precedence over and above the provisions of the local taxing statute consonant with the principle of international comity. Tax treaties are accepted limitations to the power of taxation. Thus, the CTA should apply the treaty provision so that the claim for refund representing the difference between the amount actually withheld and paid to the BIR and the amount due and payable under the treaty, should be granted

I(A) True or False. Explain your answer in not more than two (2) sentences. A law that allows taxes to be paid either in cash or in kind is valid. (5%) SUGGESTED ANSWER:

Set-off; “Doctrine Recoupment” (2009)

of

Equitable

I(C ) True or False. Explain your answer in not more than two (2) sentences. The doctrine of equitable recoupment allows a taxpayer whose claim for refund has prescribed to offset tax liabilities with his claim of overpayment. (5%)

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Taxation Law Q&As (2007-2013)

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SUGGESTED ANSWER:

EIP Corporation for P300 million. In view of

True. The doctrine arose from common law allowing offsetting of a prescribed claim for refund against a tax liability arising from the same transaction on which an overpayment is made and underpayment is due. The doctrine finds no application to cases where the taxes involved are totally unrelated, and although it seems equitable, it is not allowed in our jurisdiction (CIR v. UST, 104 Phil 1062 (1958)) Tax Avoidance; Exchange of Real Property and Shares of Stock (2008) V.

Maria

Suerte,

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a

Filipino

citizen,

purchased a lot in Makati City in 1980 at a

the tax advice, Maria Suerte paid only the capital gains tax of P29,895,000 (P100,000 x 5% plus P298,900,000 x 10%), instead of the corporate income tax of P104,650,000 (35% on P299 million gain from sale of real property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax evasion. Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to? Explain. (6%)

price of P1 million. Said property has been leased to MAS Corporation, a domestic

SUGGESTED ANSWER:

corporation

No. The exchange of the real state

engaged

in

manufacturing by Maria

property for the shares of stocks is

Suerte. In October 2007, EIP Corporation, a

considered as a legitimate tax avoidance

real estate developer, expressed its desire to

scheme (Sec. 40 [C2 b] NIRC). The sale of

buy the Makati property at its fair market

the

value of P300 million, payable as follows: (a)

corporation, which is a capital asset, is

P60 million down payment; and (b) balance,

subject to a final tax of 5% on the first

payable equally in twenty four (24) monthly

P100,000 and 10% on the amount in

consecutive instalments. Upon the advice of

excess of P100,000 (Sec. 24[C] NIRC).

paper products, owned 99%

shares

of

stocks

of

domestic

a tax lawyer, Maria Suerte exchanged her Makati property for shares of stocks of MAS

ALTERNATIVE ANSWER:

Corporation. A BIR ruling, confirming the

Yes. the RDO’s contention, that Maria

tax-free exchange of property for shares of

Suerte committed tax evasion and not

stock, was secured from the BIR National

tax avoidance, is tenable. Suerte’s sale of

Office

Authorizing

her property to MAS Corporation was an

Registration was issued by the Revenue

intermediary transaction aimed more at

District Officer (RDO) where the property

reducing Suerte’s tax liabilities than for

was located. Subsequently, she sold her

MAS Corporation’s legitimate business

entire stockholdings in MAS Corporation to

purposes (CIR v. Norton Harrison Co.,

and

a

Certificate

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Income Taxation

120 Phil. 684, 691 [1964]). Said sale was merely a tax ploy, a sham and without business

purpose

and

economic

substance (CIR v. Toda’s Estate, G.R. No. 147188, 14 September 2004).

Basic:

Closed

and

Completed

Transaction (2012) III. Mr. Jose Castillo is a resident Filipino citizen. He purchased a parcel of land in

Taxes considered as NIRC Taxes (2007) III. What kind of taxes, fees and charges are considered as National Internal Revenue Taxes under the National Internal Revenue Code (NIRC)? (5%)

Revenue

Taxes

Million.

In

2011,

the

land,

which

remained undeveloped and idle had a fair market value of P20 Million. Mr. Antonio Ayala, another Filipino citizen, is very much buy the same for P20 Million. The Assessor

The following taxes, fees and charges are to

P1

interested in the property and he offered to

SUGGESTED ANSWER:

considered

Makati City in 1970 at a consideration of

be

National

under

the

Internal National

Internal Revenue Code: (A) Income tax; (B) Estate and donor’s taxes; (C) Value-added tax; (D) Other percentage taxes; (E) Excise taxes; (F) Documentary stamp taxes; and Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue. (Section 21, NIRC)

of Makati City re-assessed in 2011 the property at P10 Million. (B) Is Mr. Castillo liable for income tax in 2011 based on the offer to buy by Mr. Ayala? Explain your answer. (3%) SUGGESTED ANSWER: No. Mr. Castillo is not liable for income tax

in

2011

because

no

income

is

realized by him during that year. Tax liability for income tax attaches only if there is a gain realized resulting from a closed

and

complete

transaction

(Madrigal v. Rafferty, G.R. No. L-12287, August 7, 1918). Charitable Institutions: Income Tax for Profit-Driven Activities (2013) (II) A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to provide medical services to the

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poor. The hospital also accepted paying patients although none of its income accrued to any private individual; all income were plowed back for the hospital's use and not more than 30% of its funds were used for administrative purposes. Is the hospital subject to tax on its income? If it is, at what rate? (6%) SUGGESTED ANSWER: Yes. Although a non-stock non-profit hospital organized for charitable purposes, is generally exempt from income tax, it becomes taxable on income derived from activities conducted for profit. Services rendered to paying patients are considered activities conducted for profit which are subject to income tax, regardless of the disposition of said income. The hospital is subject to income tax of 10% of its net income derived from the paying patients considering that the income earned appears to be derived solely from hospital-related activities (CIR v. St. Luke’s Medical Center, Inc., G.R. Nos. 195909 & 195960, Sept 26, 2012). ANOTHER SUGGESTED ANSWER: No. The hospital is organized exclusively for charitable purposes and since no part of its income inures to the benefit of any private individual, it should not lose its exempt character by simply admitting paying patients. The revenues derived from paying patients are necessary to maintain “its head above the waters” and allow it to sustain its charitable activities (YMCA v. CA & CIR, 298 SCRA 83, 91 [Oct 14, 1998, G.R. NO. 124043).

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SUGGESTED ANSWER: The “immediacy test” is applied to determine whether the accumulation of after tax profits by a domestic or resident foreign corporation is really for the reasonable needs of the business. Under this test, the reasonable needs of the business are construed to mean the immediate needs of the business, including reasonably anticipated needs. The corporation should be able to prove an immediate need for the accumulation of earnings and profits, or the direct correlation of anticipated needs to such accumulation of profits to justify the said accumulation (Sec 3, RR No. 2-2001; Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 103, cited in Manila Wine Merchants, Inc. v. CIR, G.R. No. L-26145, Feb. 20, 1984)

Corporate Income Tax: Accumulated Profits; Capitalization Rules (2010) (Xf) The capitalization rules may be resorted to by the BIR in order to compel corporate taxpayers to declare dividends to their stockholders regularly. SUGGESTED ANSWER: True. (Sec 244, NIRC; Rev. Reg. No. 22001 implementing Sec 29, NIRC)

Corporate Income Tax: Option is Irrevocable (2012)

Carry-Over

IX. On April 16, 2012, the corporation filed its annual corporate income tax return for 2011 showing an overpayment of income

Corporate Income Tax: Accumulated Profits; “Immediacy Test” (2010) (IIb) What is the "immediacy test"? Explain briefly. (2%)

tax of P1 Million, which is to be carried over to the succeeding year(s). On May 15, 2012, the corporation sought advice from you and said that it contemplates to file an amended return for 2011, which shows that instead

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Taxation Law Q&As (2007-2013)

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of carryover of the excess income tax

succeeding years, considering that there is

payment, the same shall be considered as a

no prescriptive period provided for in the

claim for tax refund and the small box

income tax law with respect to carry over of

shown as “refund” in the return will be

excess income tax payments? Explain your

filled up. Within the year, the corporation

answer. (5%)

will file the formal request for refund for the excess payment.

SUGGESTED ANSWERS:

(A) Will you recommend to the corporation

Yes. The carry-over of excess income tax

such a course of action and justify that the

payments is no longer limited to the

amended return is the latest official act of

succeeding

the corporation as to how it may treat such

excess income tax payments may now be

overpayment of tax or should you consider

carried over to the succeeding taxable

the

as

years until fully utilized. In addition, the

irrevocable, once previously exercised by it?

option to carry-over excess income tax

Explain your answer. (5%)

payments is now irrevocable. Hence,

option

granted

to

taxpayers

taxable

year.

Unutilized

unutilized excess income tax payments SUGGESTED ANSWERS:

may no longer be refunded (Belle Corp. v. CIR,

Once the option to carry-over and apply

G.R.

No.

181298,

January

10,

2011).

the excess quarterly income tax against income tax against income tax due for the taxable quarters of the succeeding taxable years has been made such option shall be considered IRREVOCABLE for the

taxable

year

period

and

no

application for tax refund or issuance of tax credit certificate shall be allowed therefore (Section 76, NIRC).

Corporate Income Tax: Option is Irrevocable (2013)

Carry-Over

(I)In its final adjustment return for the 2010 taxable year, ABC Corp. had excess tax credits arising from its over-withholding of income payments. It opted to carry over the excess tax credits to the following year. Subsequently, ABC Corp. changed its mind and applied for a refund of the excess tax credits. Will the claim for refund prosper? (6%)

(B) Should the petition for review filed with the CTA on the basis of the amended tax return be denied by the BIR and the CTA, could the corporation still carry over such excess payment of income tax in the

SUGGESTED ANSWER: No. The claim for refund will not prosper. While the law gives the taxpayer an option to whether carry-over or claim as refund the excess tax credits shown

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on its final adjustment return, once the option to carry-over has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed. (Sec 76, NIRC; CIR v. PL Management International Phils., Inc., April 4, 2011, 647 SCRA 72 (2011) G.R. No. 160949). Corporate Income Tax: Joint Venture

(B) Are the allocation and distribution of the saleable lots to Weber and Prime subject to income tax and to expanded withholding tax? Explain briefly. SUGGESTED ANSWER: No. The allocation and distribution of the saleable lots to Weber and Prime is a mere return of their capital contribution.

(2007)

The IX. Weber Realty Company which owns a three-hectare land in Antipolo entered into a Joint Venture Agreement (JVA) with Prime

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Development

Company

for

the

income

tax

and

the

expanded

withholding tax is not due on a capital transaction

because

no

income

is

realized from it. (BIR Ruling No. DA-1922001, October 17, 2011).

development of said parcel of land. Weber

(C) Is the sale by Weber or Prime of their

Realty as owner of the land contributed the

respective shares in the saleable lots to

land to the Joint Venture and Prime

third parties subject to income tax and to

Development agreed to develop the same

expanded withholding tax? Explain briefly.

into a residential subdivision and construct residential houses thereon. They agreed that they would divide the lots between them. (10%)

SUGGESTED ANSWER: Yes. The sale by Weber and Prime of their respective shares to third parties is

(A) Does the JVA entered into by and

a

closed

between Weber and Prime create a separate

resulting in the realization of income,

taxable entity? Explain briefly.

subject

to

and

completed

income

tax

transaction and

to

the

expanded withholding tax. (BIR Ruling SUGGESTED ANSWER:

DA-228-2006).

The JVA entered into between Weber and Prime does not create a separate taxable entity. The joint venture is formed for

Corporate Income Tax: Sale of Real Property by a Real Estate Broker (2008)

the purpose of undertaking construction

I. In January 1970, Juan Gonzales bought

projects; hence, is not considered as a

one hectare of agricultural land in Laguna

corporation for income tax purposes.

for P100,000. This property has a current

(Section 22 (B), NIRC).

fair market value of P10 million in view of

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Taxation Law Q&As (2007-2013)

the

construction

of

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a

concrete

road

traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. (C) Is Alpha Corporation subject to income

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consists essentially in the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or its employees. To be considered as a contractor, the corporation must derive income from doing active business of selling services and not from deriving purely passive income. Accordingly, a mere holding company cannot be assessed by the City of Makati as a contractor (Sec 131 (h), LGC). Final Withholding Reward (2010)

Tax:

Informer’s

tax on the exchange property? If so, what is the tax base and rate? Explain (3%)

(Xg) Informer‟s reward is subject to a final withholding tax of 10%.

SUGGESTED ANSWER:

SUGGESTED ANSWER: True. (Sec 282, NIRC)

Yes. Alpha must pay corporate income tax at the rate of 35% of the residential property’s

fair

market

value

of

P10

million (Sec. 27[A] NIRC).

Final Withholding Tax: Royalties Paid to Non-Resident Corporation (2010) (XVIII)

Corporate Income Contractor (2013)

Tax:

Who

is

a

ABC,

a

domestic

corporation,

entered into a software license agreement with

XYZ,

a

non-resident

foreign

(III)ABC Corporation is registered as a holding company and has an office in the City of Makati. It has no actual business operations. It invested in another company and its earnings are limited to dividends from this investment, interests on its bank deposits, and foreign exchange gains from its foreign currency account. The City of Makati assessed ABC Corporation as a contractor or one that sells services for a fee. Is the City of Makati correct? (6%)

corporation based in the U.S. Under the

SUGGESTED ANSWER:

apply the program in the Philippines.

No. the corporation cannot be considered as a contractor because it does not render services for others for a fee. A contractor is one whose activity

agreement which the parties forged in the U.S., XYZ granted ABC the right to use a computer system program and to avail of technical

know-how

relative

to

such

program. In consideration for such rights, ABC agreed to pay 5% of the revenues it receives from customers who will use and

Discuss the tax transaction. (5%)

implication

of

the

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SUGGESTED ANSWER: The amount payable under the agreement is in the nature of royalty. The term royalty is broad enough to include compensation for the use of an intellectual property and supply of technical know-how as a means of enabling application or enjoyment of any such property or right (Sec 42(4), NIRC). The royalties paid to the non-resident U.S. corporation, equivalent to 5% of the revenues derived by ABC for the use of the program in the Philippines, is subject to a 30% final withholding tax, unless a lower tax rate is prescribed under an existing tax treaty. (Sec 28(B)(1), NIRC). Foreign Corporate Tax; Local Agent for a Foreign Airline (2009) (VII) Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. Its commercial airplanes do not operate within Philippine territory, or service passengers embarking from Philippine airports. The firm is represented in the Philippines by its general agent, Philippine Airlines (PAL), a Philippine corporation. KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA's airline ticket sales constituted income derived from sources within the Philippines. KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory.

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Is the position of KIA tenable? Reasons. (4%) SUGGESTED ANSWER: No, KIA’s position is not tenable. The revenue it derived in 1997 from sales of airplane tickets in the Philippines, through its agent PAL, is considered as income from within the Philippines, subject to 35% tax based on its taxable income pursuant to Sec 25(a)(1) of the Tax Code of 1997. The transacting of business in the Philippines through its local sales agent, makes KIA a resident foreign corporation despite the absence of landing rights, thus, it is taxable on income derived within. The source of an income is the property, activity or service that produced the income. In the instant case, it is the sale of tickets in the Philippines which is the activity that produced the income. KIA’s income being derived from within is subject to Philippine income tax (CIR v. British Overseas Airways Corporation, 149 SCRA 395, (1987)). Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the applicable provision of the old Tax Code (National Internal Revenue Code of 1997) then in effect and the prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code of 1997 (RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested that an answer based on the provisions of the New tax Code shall be given full credit. Accordingly, an answer framed in his wise should also be considered as a correct answer, viz: ALTERNATIVE ANSWER: Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA

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as an international air carrier is derived from the sale of transportation services. Compensation for services is an income from within if the sources are performed in the Philippines (Sec 42(A)(3), NIRC). The origination of the flight is determinative of the sources of income of the international carrier. If the flight originated from the Philippines to a foreign destination, the income is an income from within; if it originated in a foreign country to any destination, the income is from without. In the case at bar, no flight will originate from the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the Philippines (Sec 28(A)(3), NIRC).

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transactions were done in Shanghai, these incomes are not taxable in the Philippines. (A) Is the bank correct in excluding the net income of its Shanghai Branch in the computation of its annual corporate income tax for 2010? Explain your answer. (5%) SUGGESTED ANSWER: No. A Domestic Corporation is taxable on all income derived from sources within and without the Philippines (Section 23,

Foreign Corporate Tax: “Single Entity Concept”; Branch Remittances (2012) I. Anchor Banking Corporation, which was organized in 2000 and existing under the laws of the Philippines and owned by the Sy Family of Makati City, set up in 2010 a branch office in Shanghai City, China, to take advantage of the presence of many Filipino workers in that area and its booming economy. During the year, the bank management decided not to include the P20 Million net income of the Shanghai Branch in the annual Philippine income tax return filed with the BIR, which showed a net taxable income of P30 Million, because the Shanghai Branch is treated as a foreign corporation and is taxed only on income from sources within the Philippines, and since

the

loan

and

other

business

NIRC). The income of the foreign branch and that of the Home Office will be summed up for income tax purposes following the “single entity” concept and will all be included in the gross income of

the

domestic

corporation

in

the

annual Philippine income tax return. (B) Should the Shanghai Branch of Anchor bank remit profit to its Head Office in the Philippines in 2011, is the branch liable to the

15%

branch

profit

remittance

tax

imposed under Section 28 (A)(5) of the Tax Code? Explain your answer. (5%) SUGGESTED ANSWER: No. The branch profit remittance tax is imposed

only

on

remittances

by

branches of Foreign Corporation in the Philippines to their Home Office abroad. It is the outbound branch profits that is

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subject to the tax not the inbound (A) Is FC liable to Philippine income tax,

profits (Section 28(A)(5), NIRC).

and if so, how much revenue shall be reported by it in 2010 and in 2011? Explain Foreign Corporate Tax: Situs of Taxation

your answer (5%)

(2012) SUGGESTED ANSWER: II. Foster Corporation (FC) is a Singaporebased

foreign

corporation

engaged

in

construction and installation projects. In 2010,

Global

Oil

petroleum

products,

awarded an anti-pollution project to Foster Corporation,

whereby

FC

shall

design,

supply machinery and equipment, provided that the installation part of the project may be sub-contracted to a local construction company. Pursuant to the contract, the design and supply contracts were done in Singapore by FC, while the installation works were sub-contracted by FC with Philippine Construction Corporation (PCC), a domestic corporation. The project with a total cost of P100 Million was completed in 2011 at the following cost components: (design

-

P20

Million;

machinery

No. FC is not liable to Philippine income tax. The revenues from the design and supply contracts having been all done in Singapore hence,

are

not

income taxable

from to

without,

a

foreign

corporation in the Philippines (Section 42, NIRC; CIR v. Marubeni Corporation, G.R. No. 137377, December 18, 2001). Also, With respect to the installation of the project which are services performed within, the same is sub-contracted to PCC, a domestic corporation. Since FC has

no

branch

establishment

in

or

permanent

the

Philippines,

business profits earned by it pursuant to our treaty with Singapore are exempt from income tax.

and

equipment - P50 Million; and installation P30 Million). Assume that the project was 40% complete in 2010 and 100% complete in 2011, based on the certificates issued by the architects and engineers working on the project. GOC paid FC as follows: P60 Million in 2010 and P40 Million in 2011 and FC paid PCC in foreign currency

[Note: if the examinee answered that the offshore portion of the contract (design and supply) is not taxable in the Philippines while the onshore portion (installation) is taxable invoking the source rules, it should be given full credit. The question might be too technical for students and expected new entrants to tax practice to discern.]

through a Philippine bank as follows: P10 Million in 2010 and P20 Million in 2011.

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Fringe Benefit Tax: De Minimis Benefits

NIRC as implemented by RR No. 10-

(2007)

2000).

VIII. Nutrition Chippy Corporation gives all its employees (rank and file, supervisors and managers) one sack of rice every month valued at P800 per sack. During an audit investigation

made

by

the

Bureau

of

Internal Revenue (BIR), the BIR assessed the company for failure to withhold the corresponding

withholding

tax

on

the

amount equivalent to the one sack of rice received by all the employees, contending that the sack of rice is considered as additional compensation for the rank and file employees and additional fringe benefit for

the

supervisors

and

managers.

Therefore, the value of the one sack of rice every month should be considered as part of the compensation of the rank and file subject to tax. For the supervisors and managers, the employer should be the one assessed pursuant to Section 33 (a) of the NIRC.

Is

there

a

legal

basis

for

the

assessment made by the BIR? Explain your answer.(5%) SUGGESTED ANSWER: There

is

no

legal

basis

for

the

The one sack of rice per month given to the rank and file employees is, likewise, not

subject

to

tax

as

part

of

compensation income. This is a benefit of relatively small value intended to promote

the

contentment employee

and

which

health,

goodwill,

efficiency will

not

of

the

constitute

taxable income of the recipient. (Section 2.78.1 (A)(3) of RR No. 2-98). Partnership: Income Tax (2013) (VII) XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer, received a query by e-mail from Gainsburg Corporation, a corporation organized under the laws of Delaware, but the e-mail came from California where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business in the Philippines. XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the opinion. Gainsburg remitted its payment through Citibank which converted the remitted US$1 ,000 to pesos and deposited the converted amount in the XYZ Law Offices account. What are the tax implications of the payment to XYZ Law Offices in terms of VAT and income taxes? (7%)

assessment. The one sack of rice given to the supervisors and managers are considered de minimis fringe benefits considering that the value per sack does not

exceed

P1,000,

hence

exempted

from the fringe benefits tax. (Section 33,

SUGGESTED ANSWER: For income tax purposes, the compensation for services is part of the gross income of the law partnership. From its total gross income derived within and without, it has to compute its

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net income in the same manner as a corporation. The net income of the partnership whether distributed or not will be declared by the partners as part of their gross income who are to pay the income tax thereon in their individual capacity. (Sec 26, NIRC) Personal Income Tax: Accounting Period (2010) (Xe) True or False. An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his income tax return. (1%)

The interest income of Renato, who is a non-resident, is exempt from income tax under Sec. 27(D3)(2) NIRC. Any bank interest

of

expanded

non-residents

foreign

from

currency

an

deposit

system is exempt from income tax (Sec. 24[B1]

NIRC).

An

expanded

foreign

currency deposit refers to any bank authorized

by

the

Central

Bank

to

foreign currencies.

False. (Sec 43, NIRC)

Judy Garcia, who is a resident of the

Personal Income Tax: Passive Income; Income);

SUGGESTED ANSWER:

transact business in local and acceptable

SUGGESTED ANSWER:

(Interest

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Situs

of

Taxation

(2007)

Philippines,

is

liable

for

7.5%

final

income tax on interest income (Sec. 24[B1] NIRC).

XV. In 2007, spouses Renato and Judy

(B) Is the bank correct in withholding the

Garcia opened peso and dollar deposits at

20% final tax on the entire interest income?

the Philippine branch of the Hong Kong

Explain. (4%)

Bank in Manila. Renato is an overseas worker in Hong Kong while Judy lives and

SUGGESTED ANSWER:

works in Manila. During the year, the bank

No, The bank should withhold only 7.5%

paid interest income of P10,000 on the peso

on the final interest income of the wife.

deposit and US$1,000 on the dollar deposit.

The husband is exempt.

The

bank

withheld

final

income

tax

equivalent to 20% of the entire interest income and remitted the same to the BIR.

Personal Income Tax: Passive Income; (Rental Income); Situs of Taxation (2008)

(A) Are the interest incomes on the bank deposits

of

spouses

Renato

and

Judy

Garcia subject to income tax? Explain. (4%)

(C) Will Z, a non-resident citizen, be liable to pay income tax on the P45,000 monthly rental income? Reason briefly.

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SUGGESTED ANSWER: Yes. The rental income from property located in the Philippines is considered as income derived from within. Z, a nonresident citizen is taxable on income derived

from

sources

within

instrument Santino, Johnny's 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to P720,000.00. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. a. What advice will you trustee? Explain. (3%)

the

Philippines. (Section 42 in relation to Section 23, NIRC). Personal Income Instalment (2010)

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give

the

SUGGESTED ANSWER: Tax:

Payment

by

(Xd) True or False. The Tax Code allows an individual taxpayer to pay in two equal instalments, the first instalment to be paid at the time the return is filed, and the second on or before July 15 of the same year, if his tax due exceeds P2,000. (1%)

I will advise the trustee that she has nothing to pay in annual income taxes because the trust’s taxable income is zero. This is so because the amount of income to be distributed annually to the beneficiary is a deduction from the gross income of the trust but must be reported as income of the beneficiary (Sec 61(A), NIRC). b. Will your advice be the same if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority? Why or why not? (3%)

SUGGESTED ANSWER: True. (Sec 56 (A)(2), NIRC) Personal Income Tax: Personal Exemptions of a Non-resident Alien (2010) (Xh) A non-resident alien who stays in the Philippines for less than 180 days during the calendar year shall be entitled to personal exemption not to exceed the amount allowed to citizens of the Philippines by the country of which he is subject or citizen. SUGGESTED ANSWER: False. (Sec 25 (A)(1) in relation to Sec 35, NIRC)

SUGGESTED ANSWER: No. The trustee has to pay the income tax in the trust’s net income determined annually is the income is required to be accumulated. Once a taxable trust is established, its net income is either taxable to the trust, represented by the trustee, or to the beneficiary depending on

the

provision

for

distribution

of

income following the one-layer taxation Trust: Income from Trust (2009)

scheme (Sec 61 (A), NIRC).

(XIX) Johnny transferred a valuable 10door commercial apartment to a designated trustee, Miriam, naming in the trust

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Taxation Law Q&As (2007-2013)

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Deductions, Exemptions, Exclusions & Inclusions

Deductions: “All-events Test” (2009) (XII) YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to defend the corporation's title over a property used in the business. For the legal services rendered in 2007, the law firm billed the corporation only in 2008. The corporation duly paid. YYY Corporation claimed this expense as a deduction from gross income in its 2008 return, because the exact amount of the expense was determined only in 2008. Is YYY's claim of deduction proper? Reasons. (4%) SUGGESTED ANSWER: No. The expense is deductible in the year it complies with the all-events test. The test is considered met if the liability is fixed, and the amount of such liability to pay is already fixed in 2007 when the services were rendered, and the amount of such liability is determinable with reasonable accuracy in the same year. Hence the deduction should have been claimed in 2007 and not in 2008 (CIR v. Isabela Cultural Corporation, 515 SCRA 556 (2007)).

Deductions: “All Events Test” (2010) (IIa) What is the "all events test"? Explain briefly. (2%) SUGGESTED ANSWER: The “all events test” is a test applied in the realization of income and expense by an accrual-basis taxpayer. The test

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requires (1) the fixing of a right to the income or liability to pay; and (2) the availability of reasonably accurate determination of such income or liability, to warrant the inclusion of the income or expense in the gross income or deductions during the taxable year. (CIR v. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007)

Deductions; Claimed by a Partner (2013) (IV) Atty. Gambino is a partner in a general professional partnership. The partnership computes its gross revenues, claims deductions allowed under the Tax Code, and distributes the net income to the partners, including Atty. Gambino, in accordance with its articles of partnership. In filing his own income tax return, Atty. Gambino claimed deductions that the partnership did not claim, such as purchase of law books, entertainment expenses, car insurance and car depreciation. The BIR disallowed the deductions. Was the BIR correct? (6%) SUGGESTED ANSWER: No. The BIR is wrong in disallowing the deductions claimed by Atty. Gambino. It appears that the general professional partnership (GPP) claimed itemized deductions from its gross revenues in arriving at its distributable net income. The share of a partner in the net income of the GPP must be reported by him as part of his gross income from practice of profession and he is allowed to claim further deductions which are reasonable, ordinary and necessary in the practice of profession and were not claimed by the partnership in computing its net income (Sec 26, NIRC; RR No. 16-2008; 2-2010).

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ALTERNATIVE ANSWER: The BIR is wrong in disallowing the deductions because if the partnership claims itemized deductions. The partner can further claim deductions from his share in the net income of the partnership provided these are ordinary, reasonable and necessary, duly substantiated and not yet claimed by the partnership in computing its distributable net income. Consonant with the requirements of deductibility, the purchase of law books can be considered as a capital outlay, hence not deductible outright but subject to depreciation. Insofar as entertainment expenses are concerned only an amount not exceeding 1% of gross income shall be allowed. For the car insurance and car depreciation, they are allowed as deductions but only to the extent that the car is used in the practice of profession. (Sec 26, NIRC; RR No. 162008; RR No. 2-2010; Sec 34 (A) as implemented by RR No. 10-2002).

Deductions: Income Tax Withheld by US Government (2010) (XVII) In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-resident alien like Caruso. a. What will be your advice to Caruso in order to lessen the impact of possible double taxation on the same income? (3%) SUGGESTED ANSWER: Caruso has the option either to claim the amount of income tax withheld in U.S. as deduction from his gross income

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in the Philippines, or to claim it as a tax credit (Sec 34 (C )(1)(b), NIRC). Deductions: Loss (2010)

Non-deductible;

Casualty

(XVI) A is a travelling salesman working full time for Nu Skin Products. He receives a monthly salary plus 3% commission on his sales in a Southern province where he is based. He regularly uses his own car to maximize his visits even to far flung areas. One fine day a group of militants seized his car. He was notified the following day by the police that the marines and the militants had a bloody encounter and his car was completely destroyed after a grenade hit it. A wants to file a claim for casualty loss. Explain the legal basis of your tax advice. (3%) SUGGESTED ANSWER: A is not entitled to claim a casualty loss because all of his income partake the nature of compensation income. Taxpayers earning compensation income arising from personal services under an employee-employer relationship are not allowed to claim deduction except that allowed under Sec 34(M) referring only to the P2,400 health and/or hospitalization insurance premium; perforce the claim of casualty loss has no legal basis (Sec 34, NIRC).

Deductions: Non-deductible; Maintenance of Goodwill (2009) (XX) Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its brand franchise for one of its line products. In its income tax return, MFC included the advertising expense as deduction from gross income, claiming it as an ordinary business expense. Is MFC correct? Explain. (3%)

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SUGGESTED ANSWER:

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year for which the return is made (Sec

No. The protection of taxpayer’s brand franchise is analogous to the maintenance of goodwill or title to one’s property which is in the nature of a capital expenditure. An advertising expense as, of such nature does not qualify as an ordinary business expense, because the benefit to be enjoyed by the taxpayer goes beyond one taxable year (CIR v. General Foods Inc., 401 SCRA 545 (2003)).

34(L), NIRC). Deductions: Premiums Insurance (2010)

for

Health

(Xc) True or False. Premium payment for health insurance of an individual who is an employee in an amount of P2,500 per year may be deducted from gross income if his gross salary per year is not more than P250,000. (1%) SUGGESTED ANSWER:

Deductions; Optional Deduction (2010)

Standard

(Xb) True or False. A corporation can claim the optional standard deduction equivalent to 40% of its gross sales or receipts, as the case may be. (1%) SUGGESTED ANSWER: False. (Sec 34 (L), NIRC, as amended by RA No. 9504) Deductions; Deductions; (2009)

Optional Irrevocability

Standard of Election

False. (Sec 34 (M), NIRC)

Deductions: Premiums for Life Insurance (2007) X. Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard. To entice him to accept the offer of employment,

he

was

the

arrangement that part of his compensation

(XVI) Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return for 2007 claiming optional standard deductions. Realizing that he has enough documents to substantiate his professionconnected expenses, he now plans to file an amended income tax return for 2007, in order to claim itemized deductions, since no audit has been commenced by the BIR on the return he previously filed. Will Ernesto be allowed to amend his return? Why or why not? (4%) SUGGESTED ANSWER:

would be an insurance policy with a face value of P20 Million. The parents of Noel are made the beneficiaries of the insurance policy. (10%) (B) Can the company deduct from its gross income

the

amount

of

the

premium?

Reason briefly. SUGGESTED ANSWER: Yes. The premiums paid are ordinary and

No. Since Ernesto has elected to claim

necessary

business

optional

company.

They

standard

offered

deduction,

said

expenses

are

allowed

of as

the a

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deduction from gross income so long as

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SUGGESTED ANSWER:

the employer is not a direct or indirect beneficiary insurance.

under (Section

the 36

policy (A)(4),

of

No.

In

order

to

claim

a

vanishing

NIRC).

deduction, Sec. 86(A2) NIRC requires

Since the parents of the employee were

that the estate tax of the property from

made the beneficiaries, the prohibition

Jaime to Assunta has already been paid.

for their deduction does not exist.

However, in this case, it is unlikely that the estate tax has been paid because of the difference of only one day between

Deductions: Vanishing Deductions (2008) VI. While driving his car to Baguio last

the respective times of death. ALTERNATIVE ANSWER:

month, Pedro Asuncion, together with his wife Assunta, and only son, Jaime, met an accident that caused that instantaneous death of Jaime. The following day, Assunta also died in the hospital. The spouses and their son had the following assets and liabilities at the time of death:

Yes. Provided that the estate tax of the property

of

Jaime

was

paid

before

Assunta died, as provided for in Sec. 86(A2) NIRC. Vanishing deduction equal to 100% is applicable to Assunta’s estate as regards ½ of the cash she inherited from her son Jaime. Assunta died within

Properties

Assunta

Jaime

one (1) year after receiving her share of Jaime’s estate.

Exclusive Cash

Conjugal

Exclusive

P 10M

P 1.2M

Cars

P 2M

P 500K

Land

P 5M

P 2M

Residential

P 4M

house Mortgage

P 2.5M

payable Funeral

P 300K

expenses

Exemptions: Gains from Redemption of Shares of Stock in Mutual Fund Company (2010) (Xa) True or False. Gains realized by the investor upon redemption of shares of stock in a mutual fund company are exempt from income tax. (1%) SUGGESTED ANSWER: True. (Sec 32 (B)(7)(h), NIRC)

(B) Is vanishing deduction applicable to the Estate of Assunta Asuncion? Explain (4%)

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Exemptions: Gifts, Bequests and Devises (2008) XIV. Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential house and lot in Quezon City. After the recent wedding of their son, Mario, to Maria, the spouses donated said real property to them. At the time of donation, the real property has a fair market value of P2 million. (A) Are Mario and Maria subject to income

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SUGGESTED ANSWER: No. The income from abroad of a nonresident citizen is exempt from the Philippine income tax; hence, there is no international double taxation on said income (Sec 23, NIRC). Exemptions: Income Activities (2009)

from

Religious

I (D) True or False. Explain your answer in not more than two (2) sentences. A law imposing a tax on income of religious institutions derived from the sale of religious articles is valid. (5%)

tax for the value of the real property

SUGGESTED ANSWER:

donated to them? Explain. (4%)

False. Congress can pass a law taxing income of religious institutions from its property or activities used for profit but not for their income from exercise of religious activities. The imposition of a tax on income of a religious institution from sale of religious articles is an infringement of religious freedom which is not allowed under the fundamental law (American Bible Society v. City of Manila, 101 Phil. 385 (1957)).

SUGGESTED ANSWER: No.

The

law

classifies

the

donated

property as an exclusion from income tax, and therefore exempt from income tax (Sec. 32[B3] NIRC).

Exemptions: Income Abroad by Resident Filipino (2010)

Non-

(XVII) In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-resident alien like Caruso. a. Would your answer in A be the same if Caruso became a U.S. immigrant in 2008 and had become a non-resident Filipino citizen? Explain the difference in treatment for Philippine income tax purposes. (3%)

Exemptions: Pensions from Foreign Government Agencies and other Institutions (2007) VI. Z is a Filipino immigrant living in the United States for more than 10 years. He is retired and he came back to the Philippines as a balikbayan. Every time he comes back to the Philippines, he stays here for about a month. He regularly receives a pension from his former employer in the United States, amounting to US$1,000 a month. While in the Philippines, with his pension pay

from

his

former

employer,

he

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purchased three condominium units in

during their marriage a residential house

Makati which he is renting out for P15,000

and lot located in Makati City, which is

a month each.(5%)

being leased to a tenant for a monthly

(A) Does the US$1,000 pension become taxable because he is now residing in the Philippines? Reason briefly.

rental of P100,000.00. Mr. Pablo Gonzales is the President of PG Corporation and he receives P50,000.00 salary per month. The spouses have only one (1) minor child. In late

SUGGESTED ANSWER:

June

2010,

he

was

immediately

brought to the hospital because of a heart The pension is not taxable. The law provides

that

pensions

received

by

resident or nonresident citizens of the Philippines from foreign governments

attack and he was pronounced dead on June 30, 2010. With no liabilities, the estate of the late Pablo Gonzales was settled extra-judicially in early 2011.

agencies and other institutions, private or

public,

are

excluded

from

gross

income. (Section 32 (B)(6)(c), NIRC).

(A) Is Mr. Pablo Gonzales required to file income tax return for 2010? IF so, how much income must he declare for the year?

ALTERNATIVE ANSWER:

How

much

personal

and

additional

Z is still considered as a nonresident

exemption is he entitled to? Explain your

Filipino citizen who is subject to tax

answer. (5%)

only

on

income

derived

from

the

Philippine sources. (Section 23, NIRC).

SUGGESTED ANSWER:

His pension from U.S. is an income from

Yes. Income to be declared: P600,000

without

(Rental

being

in

the

nature

of

Income

P300,000

&

Salary

compensation for past services rendered

P300,000);

outside the Philippines. (Section 42,

Exemption P75,000 (Basic of P50,000 &

NIRC). Accordingly, the pension is not

P25,000 for one minor child)

Personal

and

Additional

subject to the Philippine income tax. (B) Is Mrs. Teresita Gonzales required to file income tax return for 2010? IF so, how Exemptions:

Personal

&

Additional

Exemptions (2012) V. Spouses Pablo Gonzales and Teresita

much income must she declare for the year? How much personal exemption is she entitle to? Explain your answer. (5%)

Gonzales, both resident citizens, acquired

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Taxation Law Q&As (2007-2013)

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SUGGESTED ANSWER:

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were able to agree to a total settlement of P10 Million. This is what Antonia would

Yes. Rental Income P600,000 (P300,000

have

share

gainfully employed. Edgardo was her only

for

January

to

June

2010

&

P300,000 representing his interest in the

income

from

the

properties

comprising the estate for the period July to December). The share of the minor child in the rental income (P300,000) earned after death is not included in the

earned

as

somebody

who

was

heir. (10%) (B) Should Edgardo report the P10 Million as his income being Antonia‟s only heir? Reason briefly. SUGGESTED ANSWER:

return of the parent pursuant to Section The P10M should not be reported by

51(E) of the Tax Code.

Edgardo as his income. The amount (C) Is the Estate of the late Pablo Gonzales required to file income tax return for 2010? If so, how much income must it declare for the year? How much personal exemption is it entitled to? Explain your answer. (5%)

received in a settlement agreement with the

airline

company

and

insurance

company is an amount received from the accident amount

insurance received

company

from

the

is

an

accident

insurance covering the passengers of the airline company and is in the nature of

SUGGESTED ANSWER:

compensation for personal injuries and No. It has acquired no tax personality because the estate is not under judicial settlement. The income of the properties is taxable to the heirs in their individual capacity

in

accordance

with

their

for damages sustained on a account of such injuries, which is excluded from the gross income of the recipient. (Section 32(B)(4), NIRC). ALTERNATIVE ANSWER:

respective interest in the inheritance. No. The P10M having been received for Exemptions:

Proceeds

from

Accident

Insurance (2007) VII. Antonia Santos, 30 years old, gainfully employed, is the sister of Eduardo Santos. She died in an airplane crash. Edgardo is a lawyer and he negotiated with the Airline Company and insurance company and they

the loss of life, is compensatory in nature, hence, is not considered as an income but a mere return of capital. Income is any wealth which flows to the taxpayer other than a mere return of capital. (Madrigal v. Rafferty 38 Phil. 414 [1918]).

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Taxation Law Q&As (2007-2013)

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Exemptions: Life Insurance (2007) X. Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard. To entice him to accept the offer of employment,

he

was

offered

the

arrangement that part of his compensation would be an insurance policy with a face value of P20 Million. The parents of Noel are made the beneficiaries of the insurance

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residence. It is now year 2013 and he is thinking of selling the property to buy a new one. He seeks your advice on how much income tax he would pay if he sells the property. The total zonal value of the property isP5,000,000 and the fair market value per the tax declaration is P2,500,000. He intends to sell it for P6,000,000. What material considerations will you take into account in computing the income tax? Please explain the legal relevance of each of these considerations. (7%)

policy. (10%)

SUGGESTED ANSWER:

(A) Will the proceeds of the insurance form

Since the planned sale involves a real property classified as a capital asset, the material considerations to take into account to compute the income tax are:

part of the income of the parents of Noel and be subject to income tax? Reason briefly. SUGGESTED ANSWER: No.

The

proceeds

of

life

insurance

policies paid to the heirs of beneficiaries upon the death of the insured are not included as part of the gross income of the recipient. (Section 32 (B)(1), NIRC). There is no income realized because

1. The current fair market value of the property to be sold. The current fair market value is the higher between the zonal value and the fair market value per tax declaration. 2. The gross selling price of the property. 3. Determination of the tax base which is the higher between the gross selling price and the current fair market of the property.

nothing flows to Noel’s parents other than a mere return of capital, the capital being the life of the insured.

Capital Gain Tax Exemption of Family Home; Conditions (2013) (XI) In 2000, Mr. Belen bought a residential house and lot for P1,000,000. He used the property as his and his family's principal

The income tax is computed as 6% of the tax base which is in the nature of a final capital gains tax. (Sec 24 (D)(1), NIRC). However, since the property to be sold is a principal residence and the purpose is to buy a new one, I will advise Mr. Belen that the sale can be exempt from 6% capital gains tax if he is willing to comply with the following conditions: a. He must utilize the proceeds of sale acquiring a new principal residence within 18

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Taxation Law Q&As (2007-2013)

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months from the date of disposition; b. He should notify the Commissioner of his intention to avail of the exemption within 30 days from date of sale; c. He should open an escrow account with a bank and deposit the 6% capital gains tax due on the sale. If he complies with the utilization requirement he will be entitled to get back his deposit; otherwise, the deposit will be applied against the capital gains tax due. (Sec 24 (D)(2), NIRC) Exchange

of

Individual

and

Real

SUGGESTED ANSWER: Yes. Juan must pay final income tax of 6% of the gross selling price or the fair market value, whichever is higher (Sec. 24[D1], NIRC; and RR No. 13-99). Fair Market Value (2007) V. ABC Corporation sold a real property in Malolos, Bulacan to XYZ Corporation. The property has been classified as residential and with a zonal valuation of P1,000 per square meter. The capital gains tax was

an

paid based on the zonal value. The Revenue

Corporation

District Officer (RDO), however, refused to

Property

Domestic

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by

issue

(2008)

the

Certificate

Authorizing

Registration for the reason that based on I. In January 1970, Juan Gonzales bought

his ocular inspection the property should

one hectare of agricultural land in Laguna

have a higher zonal valuation determined

for P100,000. This property has a current

by the Commissioner of Internal Revenue

fair market value of P10 million in view of

because the area is already a commercial

the

road

area. Accordingly, the RDO wanted to make

traversing the property. Juan Gonzales

a recomputation of the taxes due by using

agreed to exchange his agricultural lot in

the fair market value appearing in a nearby

Laguna for a one-half hectare residential

bank‟s valuation list which is practically

property located in Batangas, with a fair

double the existing zonal value. The RDO

market value of P10 million, owned by

also wanted to assess a donor‟s tax on the

Alpha Corporation, a domestic corporation

difference between the selling price based

engaged in the purchase and sale of real

on the zonal value and the fair market

property. Alpha Corporation acquired the

value

property in 2007 for P9 million.

valuation list. (10%)

construction

of

a

concrete

(B) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain (3%)

appearing

in

a

nearby

bank‟s

(A) Does the RDO have the authority or discretion

to

unilaterally

use

the

fair

market value as the basis for determining

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Taxation Law Q&As (2007-2013)

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the capital gains tax and not the zonal value as determined by the Commissioner of Internal Revenue? Reason briefly.

value

other

than

that

prescribed in the Tax Code. The fair market

value

prescribed

for

the

computation of any internal revenue tax shall be, whichever is the higher of: (1) The fair market value as determined by the Commissioner (referred to as zonal value); or (2) the fair market value as shown in the schedule of values of the provincial and city assessors (FMV per tax declaration). (Section 6(E), NIRC). The

use

of

the

fair

market

value

appearing in a nearby bank’s valuation list,

therefore,

is

The difference in value is not subject to an insufficient consideration. A deemed

No. The RDO has no authority to use a market

ALTERNATIVE ANSWER:

donor’s tax, because the sale is not for

SUGGESTED ANSWER:

fair

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not

allowed

gift subject to tax arises only if a tax is avoided as a result of selling a property at a price lower than its fair market value. In a sale subject to the 6% capital gains tax, the tax is always based on the gross selling price or fair market value, whichever is higher, and therefore, the seller cannot avoid any tax by selling his property below its fair market value. This

means

that

the

deemed

gift

provision provided for under the Tax Code will not apply to a sale of real property subject to the 6% capital gains tax. (Section 100, NIRC).

for

purposes of computing internal revenue

Nature of Real Properties; Capital or

taxes.

Ordinary Asset (2008)

(B) Should the difference in the supposed taxable value be legally subject to donor‟s tax? Reason briefly.

I. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for P100,000.This property has a current fair market value of P10 million in view of

SUGGESTED ANSWER:

the No.

The

difference

in

the

supposed

taxable value cannot be legally subject to the donor’s tax, because the use of a fair market value other than that prescribed by the Tax Code is not allowed for computing any internal revenue tax. (Section 6(E), NIRC).

construction

of

a

concrete

road

traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged in the purchase and sale of real

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Taxation Law Q&As (2007-2013)

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Is

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property. Alpha Corporation acquired the

(B)

his

purchase

of

the

three

property in 2007 for P9 million.

condominium units subject to any tax? Reason briefly.

(A) What

is the

properties

nature of

exchanged

the for

real tax

SUGGESTED ANSWER:

purposes - capital asset or ordinary

Yes. The purchase will be subject to the

asset? Explain. (3%)

capital gains tax imposed on the sale of real

property

and

the

documentary

SUGGESTED ANSWER:

stamp

With regard to the Laguna property, it is

property, if these units are acquired

a capital asset because it is agricultural

from individual unit owners or domestic

land. The Batangas property, in contrast,

corporations who hold them as capital

is an ordinary asset because it is either

assets. (Section 24(D), 27(D)(5) and 196,

(1) held for sale to customers in the

NIRC). If these properties, however were

ordinary course of business or (2) real

acquired from dealers and/or lessors of

property used in the trade of business of

real property the purchase will give rise

a realtor like Alpha Corp (Secs. 24[D1],

to the imposition of the regular income

39[A1]2 NIRC; and RR No. 7-2003).

tax, value added tax and documentary

tax

on

conveyance

of

real

stamp tax. (Section 24-28 and 196, NIRC). Purchase of Condominium (2007) ALTERNATIVE ANSWER: VI. Z is a Filipino immigrant living in the

Yes,

United States for more than 10 years. He is

condominium units is subject to the

retired and he came back to the Philippines

following taxes:

the

purchase

of

the

three

as a balikbayan. Every time he comes back to the Philippines, he stays here for about a

i.

Capital

month. He regularly receives a pension

capital

from his former employer in the United

(Section

States, amounting to US$1,000 a month.

NIRC),

While in the Philippines, with his pension

income

pay

NIRC);

from

his

former

employer,

he

purchased three condominium units in Makati which he is renting out for P15,000

ii.

gains

tax,

assets 24(D)

by

held

the

and

otherwise, tax

if

as

seller

27(D)(5),

the

regular

(Section

24-28,

Documentary stamp tax (Section 196, NIRC);

a month each.(5%)

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Taxation Law Q&As (2007-2013)

iii.

Local

transfer

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tax

(Section

135,LGC); and iv.

Value-added tax if acquired from real estate developers or lessors of real property.

[Note: Value-added tax and documentary stamp taxes are outside the coverage of

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SUGGESTED ANSWER: Yes. The capital gains tax is 6% of the higher value between the selling price (P600,000.00) and fair market value of the real property (P900,000.00) or a tax in the amount if P54,000.00. The capital gains tax is due on the sale if a real property classified as a capital asset (Sec 24(d)(1), NIRC).

the BAR Examination. It is requested that full credit be given even if these two taxes are not mentioned in the answer.]

Sale of Shares of Stock Not Traded in the Local Stock Exchange (2008)

ANOTHER ALTERNATIVE ANSWER: X. John McDonald, a U.S. citizen residing The purchase is only subject to the documentary stamp tax, a tax that is imposed indifferently on the parties to a transaction (Section 173 and 196, NIRC). Other taxes that may be due on the transaction, other than the documentary stamp tax, are the legal liabilities of the seller which cannot be considered as a tax on the purchase but a tax on the sale. To the purchaser, these taxes are not taxes but merely part of the purchase price if, by the nature of the tax, the economic incidence can be shifted to him. Sale of a Capital Asset (2010) III (A) Melissa inherited from her father a 300-square-meter lot. At the time of her father's death on March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold the lot for P600,000.00, on cash basis. The prevailing market value of the property at the time of the sale was P3,000.00 per square meter. Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not, why not? (4%)

in Makati City, bought shares of stock of a domestic corporation whose shares are listed and traded in the Philippine Stock Exchange

at

the

price

of

P2

million.

Yesterday, he sold the shares of stock through his favorite Makati stockbroker at a gain of P200,000. (B) If John McDonald directly sold the shares to his best friend, who is another

U.S.

citizen

residing

in

Makati, at a gain of P200,000, is he liable for Philippine income tax? If so, what is the tax base and rate? (3%) SUGGESTED ANSWER: Yes, He is liable for a final income tax of 5% on first P100,000 net capital gain, and 10% for any amount in excess of P100,000

net

capital

gain

(Sec.24[C]

NIRC).

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Taxation Law Q&As (2007-2013)

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Tax Rate; Period to File Return (2012) III. Mr. Jose Castillo is a resident Filipino citizen. He purchased a parcel of land in Makati City in 1970 at a consideration of P1

Million.

In

2011,

the

land,

which

remained undeveloped and idle had a fair market value of P20 Million. Mr. Antonio Ayala, another Filipino citizen, is very much interested in the property and he offered to buy the same for P20 Million. The Assessor of Makati City re-assessed in 2011 the property at P10 Million.

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ANOTHER SUGGESTED ANSWER: The income tax due on the transaction is P1,276,595.74 which is computed as 6% of the Gross Selling Price (GSP). The tax base of the 6% capital gains tax (CGT) is the higher between the GSP and the fair market value (FMV). The GSP is P20 Million plus the CGT to be assumed by the buyer, following the doctrine of constructive receipt of income or a total of

P21,276,595.74,

which

amount is

higher than the FMV of P20 Million.

(C) Should Mr. Castillo agree to sell the land to Mr. Ayala in 2012 for P20 Million,

Other Percentage Taxes

subject to the condition as stated in the Deed of Sale that the buyer shall assume the capital gains tax thereon, how much is

Sale of Shares of Stock Traded through

the income tax due on the transaction and

the Local Stock Exchange (2008)

when must the tax return be filed and the tax be paid by the taxpayer? Explain your answer. (5%) SUGGESTED ANSWER: He shall be liable to pay the 6% capital gains tax (CGT) based on the Gross Selling Price of the Property which is P20 Million plus the CGT assumed by the buyer. He should file the return within 30 days from date of the sale (date of notarization) and shall pay the tax as he files the return (Section 24(D), NIRC).

X. John McDonald, a U.S. citizen residing in Makati City, bought shares of stock of a domestic corporation whose shares are listed and traded in the Philippine Stock Exchange

at

the

price

of

P2

million.

Yesterday, he sold the shares of stock through his favorite Makati stockbroker at a gain of P200,000. (A) Is John McDonald subject to Philippine income tax on the sale of his shares through his stockbroker? Is he liable for any other tax? (3%)

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Taxation Law Q&As (2007-2013)

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SUGGESTED ANSWER:

SUGGESTED ANSWERS:

No. R.A. 7717, now incorporated in Sec.

P700,000. The basis of the property in

127 of the NIRC, provides that the sale

the hands of the donee is the carry-over

of shares of stock traded in the local

basis (Section 40 (B)(3), NIRC)

stock

exchange

is

subject

to

a

percentage tax on the sales of shares, in

(B) What is the nature of the old car –

lieu of any kind of income tax.

capital asset or ordinary asset? Explain your answer. (3%)

Estate & Donor’s Taxes SUGGESTED ANSWERS: Donor’s Tax: Capital or Ordinary Asset (2012)

The old car is a capital asset. It is

IV. Mr. Pedro Aguirre, a resident citizen, is working for a large real estate development company in the country and in 2010, he was promoted to Vice-President of the company. With more responsibilities comes higher pay. In 2011, he decided to buy a new car worth P2 Million and he traded in his

old

car

with

a

market

value

of

P800,000.00, and paid the difference of P1.2 Million to the car company. The old car, which was bought three (3) years ago by the father of Mr. Pedro Aguirre at a price of P700,000.00, was donated by him and registered in the name of his son. The corresponding donor‟s tax thereon was duly paid by the father. (A) How much is the cost basis of the old car to Mr. Aguirre? Explain your answer.

property held by the taxpayer (whether or not connected with his trade or business), but is not stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation; or real property used in trade

or

business

of

the

taxpayer

(Section 39, NIRC). (C) Is Mr. Aguirre liable to pay income tax on the gain from the sale of his old car? Explain your answer. (5%)

(2%)

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SUGGESTED ANSWERS: Yes,

Capital

gain

is

Donor’s Tax: Dowry Exclusion (2009) P100,000.

The

amount of the taxable gain is subject to the holding period of the asset (Section 39, NIRC)

Donor’s

Tax:

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Donation

to

XV Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks in Barack Motors Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property.

Relatives (a) Is Miguel entitled to claim a dowry exclusion? Why or why not? (3%)

(2008) XIV. Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential house and lot in Quezon City. After the recent wedding of their son, Mario, to Maria, the spouses

SUGGESTED ANSWER: Miguel, a non-resident alien, is not allowed any dowry exclusion. The dowry applies only to a donor who is either a citizen or resident of the Philippines (Sec 101(A)(1), NIRC).

donated said real property to them. At the time of donation, the real property has a fair market value of P2 million.

Donor’s Tax: Exemptions; Donations for Religious Institutions (2007)

(B) Are Jose and Clara subject to donor‟s

XI.

tax? If so, how much is the taxable gift of

Immaculate donated a land and a dormitory

each spouse and what rate shall be applied

building located along España St. in favor

to the gift? Explain. (4%)

of the Sisters of the Holy Cross, a group of

The

Congregation

of

the

Mary

nuns operating a free clinic and high school SUGGESTED ANSWER:

teaching basic spiritual values. Is the donation subject to donor‟s tax? Reason

Yes,

because

the

value

of

the

gift

exceeds P10,000 (Sec. 101 [A1] NIRC). However, they are each entitled to a

briefly. (5%) SUGGESTED ANSWER:

deduction of P100,000 for the net value

No. Gifts in favor of an educational

of the gift (Sec.99[B] NIRC). Each spouse

and/or

shall be liable for a taxable gift worth

welfare

P890,000 each at the progressive rate of

institution, accredited non-government

2-15%, since the donee is a relative.

organization,

charitable,

religious,

corporation, trust

or

or

social cultural

philanthropic

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Taxation Law Q&As (2007-2013)

organization

are

exempt

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from

the

donor’s tax, provided, that, not more than 30% of the gifts are used for administration purposes. The donation being in the nature of a real property complies

with

the

utilization

requirement. (Section 101 (A)(3). NIRC). Donor’s Tax: “Reciprocity Rule” (2009) (XV) Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks in Barack Motors Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property. (b) Is Miguel entitled to the rule of reciprocity in order to be exempt from the Philippine donor's tax? Why or why not? (3%) SUGGESTED ANSWER: No. The donation is not subject to the Philippine donor’s tax because the donor is non-resident alien and the property donated is a property not situated in the Philippines. The rule of reciprocity applies only if the property transferred by a non-resident alien is an intangible personal property situated in the Philippines. This is designed to reciprocate the exemption from donor’s tax granted by a foreign country to Filipinos who are not residing thereat. (Sec 104, NIRC). Donor’s Tax: Renunciation of Shares (2010) (XV)(d) If X, one of the compulsory heirs, renounces his share in the inheritance in favor of the other co-heirs, is there any tax

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implication of X‟s renunciation? What about the other co-heirs? (2.5%) SUGGESTED ANSWER: If the renunciation is a general renunciation such that the share of the heir who waives his right to the inheritance goes to the other co-heirs in accordance with their respective interest in the inheritance, the law on accretion applies and the property waived is considered to pass through the other coheirs by inheritance; hence, it has no tax implication. Undoubtedly, when the compulsory heir renounced his share in the inheritance, he did not donate the property which did not become his. Such being the case, the renunciation is not subject to the donor’s tax. If it is not a general renunciation in favor of the other co-heirs, the heir renouncing his right is considered to have made a donation and the renunciation is subject to donor’s tax. In both cases, however, the renunciation has no tax implication to the other co-heirs (BIR Ruling No. DA (DT-039) 396-09, dated July 23, 2009). Donor’s Tax: Renunciation of Shares (2013) (IX) In the settlement of the estate of Mr. Barbera who died intestate, his wife renounced her inheritance and her share of the conjugal property in favor of their children. The BIR determined that there was a taxable gift and thus assessed Mrs. Barbera as a donor. Was the BIR correct? (7%) SUGGESTED ANSWER: The BIR is correct that there was taxable gift only insofar as the renunciation of the share of the wife in the conjugal property is concerned. This is a transfer if property without consideration which takes effect during the lifetime of the transferor/wife and this qualifies as a taxable gift. (RR Mo. 2-2003).

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Taxation Law Q&As (2007-2013)

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But the renunciation of the wife‟s share it the inheritance during the settlement of the estate is not a taxable gift considering that the property is automatically transferred to the other heirs by operation of law due to her repudiation of her inheritance. (BIR Ruling DA No. 333-07)

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Law and Jurisprudence, Third Revised Edition). Estate Tax: Basis of Computation (2007) XII. Remedios, a resident citizen, died on November 10, 2006. She died leaving three

Estate Tax (2007)

condominium units in Quezon City valued VII. Antonia Santos, 30 years old, gainfully

at P5 Million each. Rodolfo was her only

employed, is the sister of Eduardo Santos.

heir. He reported her death on December 5,

She died in an airplane crash. Edgardo is a

2006 and filed the estate tax return on

lawyer and he negotiated with the Airline

March 30, 2007. Because he needed to sell

Company and insurance company and they

one unit of the condominium to pay for the

were able to agree to a total settlement of

estate tax, he asked the Commissioner of

P10 Million. This is what Antonia would

Internal Revenue to give him one year to

have

was

pay the estate tax due. The Commissioner

gainfully employed. Edgardo was her only

approved the request for extension of time

heir.(10%)

provided that the estate tax be computed

earned

as

somebody

who

(A) Is the P10 Million subject to estate tax? Reason briefly.

on the basis of the value of the property at the time of payment of the tax. (10%) (B) Does the condition that the basis of the

SUGGESTED ANSWER:

estate tax will be the value at the time of

No. The estate tax is a tax on the

the payment have legal basis? Reason

privilege enjoyed by an individual in

briefly.

controlling

the

disposition

of

her

properties to take effect upon her death.

SUGGESTED ANSWER:

The P10M is not a property existing as of

No.

the time of decedent’s death; hence, it

comprising the estate of a decedent is

cannot be said that she exercised control

the fair market as of the time of death.

over its disposition. Since the privilege

No other valuation date is allowed by

to transmit the property is not exercised

law. (Section 88, NIRC).

The

valuation

of

properties

by the decedent, the estate tax cannot be imposed thereon. (Definition of Estate Tax p. 184, Vitug, Compendium of Tax

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Estate Tax: Basis of Computation (2008) II. Jose Cernan, Filipino citizen, married to Maria Cernan, died in a vehicular accident in NLEX on July 10, 2007. The spouses owned,

among

others,

a

100-hectare

agricultural land in Sta. Rosa, Laguna with current fair market value of P20 million, which was the subject matter of a Joint Venture

Agreement

about

to

be

implemented with Star Land Corporation (SLC), a well-known real estate development company. He bought the said real property for P2 million fifty years ago. On January 5,

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which was the value at the time of the death of Jose Cernan (Sec. 88[A] NIRC). (B) If you disagree, what is the correct value to use for estate tax purposes? Explain (3%) SUGGESTED ANSWER: For purposes of computing the estate tax, the value should have been P20 million because that was the value of the property at the time of death (Sec. 88[A] NIRC).

2008, the administrator of the estate and

Estate

SLC jointly announced their big plans to

Payment (2007)

start conversion and development of the agricultural lands in Sta. Rosa, Laguna, into first-class residential and commercial centers. As a result, the prices of real properties in the locality have doubled. The Administrator of the Estate of Jose Cernan filed the estate tax return on January 9, 2008, by including in the gross estate the real property at P2 million. After 9 months, the BIR issued deficiency estate tax

assessment,

by

valuing

the

real

property at P40 million. 43(A) Is the BIR correct in valuing the real property at P40 million? Explain (3%) SUGGESTED ANSWER:

Tax:

CIR’s

Power

to

Extend

XII. Remedios, a resident citizen, died on November 10, 2006. She died leaving three condominium units in Quezon City valued at P5 Million each. Rodolfo was her only heir. He reported her death on December 5, 2006 and filed the estate tax return on March 30, 2007. Because he needed to sell one unit of the condominium to pay for the estate tax, he asked the Commissioner of Internal Revenue to give him one year to pay the estate tax due. The Commissioner approved the request for extension of time provided that the estate tax be computed on the basis of the value of the property at the time of payment of the tax. (10%) (A) Does the Commissioner of Internal

No. The BIR is not correct. The property

Revenue have the power to extend the

valuation should be fixed at P20 million,

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payment of estate tax? If so, what are the requirements to allow such extension?

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Estate Tax: Composition of Gross Estate (2008)

Yes. The Commissioner may allow an

(XV(a)) What are the properties and interests that should be included in the computation of the gross estate of the decedent? Explain. (2.5%)

extension of time to pay the estate tax if

SUGGESTED ANSWER:

SUGGESTED ANSWER:

the payment on the due date would impose undue hardship upon the estate or any of the heirs. The extension, in any case, will not exceed two years if the estate is not under judicial settlement of five

years

if

it

is

under

judicial

settlement. The Commissioner may also require the posting of a bond to secure the payment of the tax. (Section 91(B), NIRC). ALTERNATIVE ANSWER: Yes. The requirements to be complied with

so

that

an

extension

may

be

allowed are: (1) a request for extension must be filed before the expiration of the original period to pay which is within 6 months from death; (2) there must be a finding that the payment on the due date of the estate tax would impose undue hardship upon the estate or any of the heirs; (3) the extension must be for a period of not exceeding 5 years if the estate is settled judicially or 2 years if settled extra judicially; and (4) the Commissioner may require the posting of a bond in an amount not exceeding double the amount of tax to secure the payment thereof. (Section 91 (B), NIRC).

All the properties and interests enumerated in the problem should be included in the gross estate if the decedent. The composition of a gross estate of a decedent who is a citizen of the Philippines includes all properties, tangible or intangible, wherever situated and to the extent of the interest that he has thereon at the time of his death (Sec 85, NIRC). Estate Tax: Composition of Gross Estate (2009) XIII (A) In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting at the time of the purchase was P1-million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth P1.5-million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro's death. Zandro died in 2007, and Wilma succeeded to the property. Should the painting be included in the gross estate of Xavier in 2001 and thus, be subject to estate tax? Explain. (3%) SUGGESTED ANSWER: Yes. The transmission of the property from Xavier to Zandro is subject to the estate tax because this is a property within Xavier’s control to dispose upon his death. The composition of the gross estate pertains to properties owned and existing as of the time of death and to be

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transferred by the owner by death (Sec 85, NIRC).

Estate Tax: Deductions Allowed to Estate

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enterprise The expenses and charges on the estate are as follows:

of a Resident or Citizen (2008)

Funeral Expenses

(XV) Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on November 15, 2009. He left the following properties and interests:

Legal fees for the settlement of the estate 500,000

House and lot (family home) in Pasig

P 800,000

Vacation house and lot in Florida, USA

1,500,000

Agricultural land in Naic, Cavite which he 2,000,000 inherited from his father Car which is being used by his brother in Cavite

P 250,000

Medical expenses of last illness

600,000

Claims against the estate

300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of his estate for which they have agreed to the above-stated professional fees. Specifically, they request you to explain and discuss with them the following questions. You oblige: (B) What is the net taxable estate of the decedent? Explain. (2.5%)

500,000

Proceeds of life insurance where he named his estate as irrevocable beneficiary

1,000,000

Household furniture and appliances

1,000,000

Claims against a cousin who has assets of P10,000 and liabilities of P100,000

100,000

Shares of stock in ABC Corp, a domestic

100,000

SUGGESTED ANSWER: The net taxable extent of the decedent is P3,700,000.00. From the gross estate of P7 million the following deductions are allowed: (1) funeral expenses of P 200,000 which is the maximum allowed by law; (2) legal fees amounting to P500,000; (3) medical expenses not to exceed P500,000; (4) Claims against the estate of P300,000; (5) family home equivalent to its fair market value (not to exceed P1 million) of P800,000; and (6) standard deduction of P1 million, or a total allowable deduction of P3,300,000.00 (Sec 86, NIRC). The claim against the cousin amounting to P100, 000, although included in the gross estate, cannot be claimed as a deduction because the debtor is not yet declared insolvent. Likewise, the

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inherited property cannot give rise to a vanishing deduction for want of sufficient factual basis (Sec 86, NIRC).

Estate Tax: Deductions Allowed to Estate of a Resident or Citizen (2008)

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NIRC); funeral expenses not exceeding P200,000 and in no case, to exceed 5% of the gross estate (Sec. 86[A1a] NIRC); and medical expenses not more than P500,000 (Sec. 86[A6] NIRC), the result is a negative net estate. Therefore, there

VI. While driving his car to Baguio last month, Pedro Asuncion, together with his wife Assunta, and only son, Jaime, met an

is no estate tax liability. Estate Tax: Exemptions; Transfer with Sufficient Consideration (2013)

accident that caused that instantaneous death of Jaime. The following day, Assunta also died in the hospital. The spouses and their son had the following assets and liabilities at the time of death: Properties

Assunta Exclusive

Cash

Jaime Conjugal

Exclusive

P 10M

P 1.2M

Cars

P 2M

P 500K

Land

P 5M

P 2M

Residential house

P 2.5M

payable Funeral

In the settlement of Mr. Agustin's estate, the BIR argued that the house and lot were transferred in contemplation of death and should therefore form part of the gross estate for estate tax purposes. Is the BIR correct? (7%) SUGGESTED ANSWER:

P 4M

Mortgage

(V) Mr. Agustin, 75 years old and suffering from an incurable disease, decided to sell for valuable and sufficient consideration a house and lot to his son. He died one year later.

P 300K

expenses (A) Is the Estate of Jaime Asuncion liable

No. The house and lot were not transferred in contemplation of death therefore, these properties should not form part of the decedent’s gross estate. To qualify as a transfer in contemplation of death, the transfer must be either without consideration or for insufficient consideration. Since the house and lot were sold for valuable and sufficient consideration, there is no transfer in contemplation of death for estate tax purposes. (Sec 85 (B), NIRC).

for estate tax? Explain. (4%) Estate Tax; Exemptions; Transmission from the First Heir, Legatee or Donee in favor of another beneficiary (2009)

SUGGESTED ANSWER: No.

By

availing

of

the

standard

deduction of P1 million (Sec. 86 [A5]

XIII (B) In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting

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at the time of the purchase was P1-million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth P1.5-million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro's death. Zandro died in 2007, and Wilma succeeded to the property. Should the painting be included in the gross estate of Zandro in 2007 and thus, be subject to estate tax? Explain. (3%) SUGGESTED ANSWER: No. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor is an exempt transfer (Sec 87, NIRC). Zandro has no control over the disposition of the property at the time of his death; hence, the estate tax which imposed the privilege of transmitting properties upon his death will not apply. ALTERNATIVE ANSWER: No. The property passes from Zandro to Wilma by virtue of the special power of appointment granted by Xavier. The law includes as part of the gross estate of the decedent a property passing under general (not special) power of appointment. The grantee of the power to appoint, Zandro, has no control over the disposition of the property because it is the desire of the grantor of the power that the property will go to a specific person. This being so, the painting should not be included in the gross estate of Zandro, hence, it is not subject to estate tax (Sec 85(D), NIRC).

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Estate Tax: Period Payment (2010)

for

Filing

and

(XV)(c)When is the due date for filing and payment of the applicable tax return and tax? Are these dates extendible? If so, under what conditions or requirements? (2.5%) SUGGESTED ANSWER: The filing of the return and payment of the tax is within 6 months from date of death following the pay-as-you-file concept. The period to file return is extendible for a maximum of 30 days under meritorious cases as maybe determined by the Commissioner. The payment of the estate tax may also be extended when the Commissioner finds that the payment of the tax on the due date would impose undue hardship on the estate or any of the heirs. The period of extension to pay shall not exceed 5 years if the estate is settled through the courts, or shall not exceed 2 years if settled extrajudicially. The Commissioner may require the executor, or administrator, or the beneficiary to furnish a bond in an amount not more than double the amount of estate tax due (Sec 91, NIRC).

Estate Tax: Vanishing Deductions (2009) XIII (C) In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting at the time of the purchase was P1-million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth P1.5-million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro's death. Zandro died in 2007, and Wilma succeeded to the property.

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May a vanishing deduction be allowed in either or both of the estates? Explain. (3%)

(A) Are the importations of motor vehicles

SUGGESTED ANSWER:

value added taxes? Explain. (4%)

Vanishing deduction shall be allowed to the estate of Xavier but only to the extent of ½ of the property which is the portion acquired by gifts (Sec 100, NIRC). The donation took place within 5 years (1999 to 2001) from the death of Xavier; hence, there is a vanishing deduction. However, Zandro’s estate will not be entitled to claim because, first and foremost, the property previously taxed is not includable in his gross estate and second, even if it is includable, the present decedent died more than 5 years from the death of the previous decedent, and that a vanishing deduction is already claimed by the previous estate involving the same property.

from abroad subject to customs duties and

SUGGESTED ANSWER: No.

because

domestic

corporations

importing used vehicles that are “stored, used or traded” within the Subic Naval Base Area enjoy an exemption from customs duties and VAT, provided they are registered with the SBMA (R.A. 7096; Executive Secretary v. Southwing Heavy Industries, G.R. No. 164171, 20 February 2006). (B) If they are taxable, when must the duties and taxes be paid? What are the

Business Taxes

bases VAT:

Exempted

Transactions;

for

and

purposes

of

computing

customs duties and VAT? To whom must the duties and VAT be paid? Explain. (3%)

Importation and Use within SBMA (2008) IV.

JKL

Corporation

is

a

domestic

SUGGESTED ANSWER:

corporation engaged in the importation and sale of motor vehicles in the Philippines and

Duties and taxes must be paid upon

is duly registered with the Subic Bay

release of the vehicle from Customs’

Metropolitan

custody.

Authority

(SBMA).

In

Custom

duties

for

motor

December 2007, it imported several second-

vehicles are based on the value being

hand motor vehicles from Japan and Korea,

used

which it stores in a warehouse in Subic

customs duties. VAT is also based on the

Bay. It sold these motor vehicles in April

value being used by the Bureau for motor

2008, to persons residing in the customs

vehicles (Sec. 107[A] NIRC). Duties must

territory.

be paid to the Bureau of Customs. VAT

by

the

Bureau

for

assessing

must be paid to the Bureau of Internal Revenue.

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VAT: Exempted Transactions; Residential Units for Lease (2009)

SUGGESTED ANSWER:

(XIV) Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The monthly rental for each unit ranges from P8,000.00 to P10,000.00. His gross rental income for one year is P1,650,000.00. He consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him, and why? (4%)

No. Under RR No. 16-2005, liability for

SUGGESTED ANSWER:

casual transaction.

I will advise Emiliano that he is not required to register as a VAT taxpayer. His transactions of leasing residential units for an amount not exceeding P10,000.00 per unit per month are exempt from VAT irrespective of the aggregate amount of rentals received annually (Sec 109 (1)(Q), NIRC).

VAT arises only if the annual gross receipts exceed P1.5 million. Secondly, under Sec. 106(A1a) NIRC, the lease must be pursuant to the ordinary course of trade or business of the taxpayer. The lease of the ground floor to the bank is a

The Association is liable for the business tax of 3% of the gross receipt if the gross receipts of the taxpayer do not exceed P1.5 million per annum (Sec. 116 NIRC). (B) Will the association be liable for value added tax in 2008 if it increases the rental

VAT: Liable for VAT (2008)

to P150,000 a month beginning January XII. Greenhills Condominium Corporation

2008? Explain. (3%)

incorporated in 2001 is a non-stock, nonprofit

association

of

unit

owners

in

SUGGESTED ANSWER:

Greenhills Tower, San Juan City. To be able to

reduce

the

association

dues

being

collected from the unit owners, the Board of

Yes, because the gross receipts will exceed P1.5 million (RR No. 16-2005).

Directors of the corporation agreed to lease part of the ground floor of the condominium

ALTERNATIVE ANSWER:

building to DEF Savings Bank for P120,000 a month or P1.44 million for the year,

No. Although the gross receipts will

starting January 2007.

exceed P1.5 million, the lease of the ground floor is not part of the ordinary

(A) Is the non-stock, non-profit association

course

liable for value added tax in 2007? If your

association (RR No. 16-2005).

of

trade

or

business

of

the

answer is in the negative, is it liable for another kind of business tax? (4%)

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VAT: Rates (2010) (XI) Are the following transactions subject to VAT? If yes, what is the applicable rate for each transaction? State the relevant authority/ies for your answer. (XIa) Construction by XYZ Construction Co. of concrete barriers for the Asian Development Bank in Ortigas Center to prevent car bombs from ramming the ADB gates along ADB Avenue in Mandaluyong City. (3%) SUGGESTED ANSWER: The transaction is subject to VAT at the rate of zero percent (0%). ADB is exempt from direct and indirect taxes under a special law, thereby making the sale of services to it by a VAT-registered construction company, effectively zerorated (Sec 108 (B)(3), NIRC). (XIb) Call Center operated by a domestic enterprise in Makati that handles exclusively the reservations of a hotel chain which are all located in North America. The services are paid for in US$ and duly accounted for with the Bangko Sentral ng Pilipinas. (3%) SUGGESTED ANSWER: The transaction is subject to VAT at the rate of zero percent (0%). Zero-rated sale of services includes services rendered to a person engaged in business outside the Philippines and the consideration is paid in acceptable foreign currency duly accounted for by the Bangko Sentral ng Pilipinas (Sec 108 (B)(2), NIRC). (XIc) Sale of orchids by a flower shop which raises its flowers in Tagaytay. (3%)

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is no longer one of the exempt transactions (Sec 109, NIRC, as amended by RA 9337). VAT: Sale of a Capital Asset (2010) III (B) Melissa inherited from her father a 300-square-meter lot. At the time of her father's death on March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold the lot for P600,000.00, on cash basis. The prevailing market value of the property at the time of the sale was P3,000.00 per square meter. Is Melissa liable to pay Value Added Tax (VAT) on the sale of the property? If so, how much and why? If not, why not? (4%) SUGGESTED ANSWER: No. The real property sold, being in the nature of a capital asset, is not subject to VAT. The sale is subject to VAT only if the real property sold is held primarily for sale to customers or held for lease in the ordinary course of trade or business. A real property classified as a capital asset does not include a real property held for sale or for lease, hence, its sale is not subject to VAT (Sec 39 and 106, NIRC). ALTERNATIVE ANSWER: No. Melissa is not liable to pay the VAT because she is not in the real estate business. A sale of real property not in the course of trade or business is not subject to VAT (Sec 105 and 109,(1)(P), NIRC).

SUGGESTED ANSWER:

VAT: Zero-rated; Services Rendered to Business Outside the Country (2012

The sale of orchids is subject to VAT at 12%. This is a sale of agricultural nonfood product in its original state which

II. Foster Corporation (FC) is a Singaporebased

foreign

corporation

engaged

in

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construction and installation projects. In 2010,

Global

Oil

petroleum

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SUGGESTED ANSWER:

products,

awarded an anti-pollution project to Foster

Yes, PCC is liable to the VAT as seller of

Corporation,

design,

services for a fee. However, the sale of

supply machinery and equipment, provided

services to FC is subject to VAT at zero

that the installation part of the project may

percent rate. Services rendered to a

be sub-contracted to a local construction

person engaged in business conducted

company. Pursuant to the contract, the

outside

design and supply contracts were done in

resident person not engaged in business

Singapore by FC, while the installation

who is outside the Philippines when the

works were sub-contracted by FC with

services are performed paid in foreign

Philippine Construction Corporation (PCC),

currency inwardly remitted through the

a domestic corporation. The project with a

banking system are zero-rated sales of

total cost of P100 Million was completed in

services (Section 108(B)(2), NIRC)

whereby

FC

shall

the

Philippines

or

to

non-

2011 at the following cost components: (design

-

P20

Million;

machinery

and

equipment - P50 Million; and installation P30 Million). Assume that the project was 40% complete in 2010 and 100% complete in 2011, based on the certificates issued by the architects and engineers working on the project. GOC paid FC as follows: P60 Million in 2010 and P40 Million in 2011 and FC paid PCC in foreign currency through a Philippine bank as follows: P10 Million in 2010 and P20 Million in 2011. (B) Is PCC, which adopted the percentage of completion method of reporting income and expenses, liable to value added tax in 2010 and in 2011. Explain your answer. (5%)

VAT: Zero-rated; Services Rendered to Persons Conducting Business Outside the Country (2013) (VII) XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer, received a query by e-mail from Gainsburg Corporation, a corporation organized under the laws of Delaware, but the e-mail came from California where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business in the Philippines. XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the opinion. Gainsburg remitted its payment through Citibank which converted the remitted US$1 ,000 to pesos and deposited the converted amount in the XYZ Law Offices account. What are the tax implications of the payment to XYZ Law Offices in terms of VAT and income taxes? (7%)

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SUGGESTED ANSWER: The payment to XYZ Law Offices by Gainsburg Corporation is subject to VAT and income tax in the Philippines. For VAT purposes, the transaction is a zero-rated sale of services where the output tax is zero percent and XYZ is entitled to claim as refund or tax credit certificate the input taxes attributable to the zero-rated sale. The services were rendered to a nonresident person, engaged in business outside the Philippines, which services are paid for in foreign currency inwardly remitted through the banking system, thereby making the sale of services subject to tax at zero-rate. (Sec 108 (B)(2), NIRC)

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effect that for income tax purposes, a taxpayer must be subject to examination and inspection by the internal revenue officers only once in a taxable year, this will not apply if there is fraud, irregularity or mistakes as determined by the Commissioner. In the instant case, what triggered the second examination is the findings by the BIR that Mr. Abcede’s 2009 return was fraudulent, accordingly, the examination is legally justified. (Sec 235, NIRC) BIR: Assessment; Requisites (2008) VII. After examining the books and records of

EDS

Corporation,

the

2004

final

assessment notice, showing basic tax of P1,000,000, deficiency interest of P400,000, and due date for payment of April 30, 2007,

Remedies in Internal Revenue Taxes

but without the demand letter, was mailed and released by the BIR on April 15, 2007. The registered letter, containing the tax assessment, was received by the EDS Corporation on April 25, 2007.

BIR: Assessment; Exemption to Examine Once a Year (2013) (X) In 2010, pursuant to a Letter of Authority (LA) issued by the Regional Director, Mr. Abcede was assessed deficiency income taxes by the BIR for the year 2009. He paid the deficiency. In 2011, Mr. Abcede received another LA for the same year 2009, this time from the National Investigation Division, on the ground that Mr. Abcede's 2009 return was fraudulent.

(A) What is an assessment notice? What are the

requisites

of

a

valid

assessment?

Explain. (3%) SUGGESTED ANSWER: An assessment notice is a computation prepared by the BIR of the alleged

Mr. Abcede contested the LA on the ground that he can only be investigated once in a taxable year. Decide. (7%) SUGGESTED ANSWER: The contention of Mr. Abcede is not tenable. While the general rule is to the

unpaid taxes, plus interests, penalties or surcharges,

if

any.

However,

an

assessment notice must be accompanied by a demand letter from the BIR in order to result in valid assessment (RR No. 1299).

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broker who said that the P1.2 million (B) As tax lawyer of EDS Corporation, what

capital gains tax should be credited from

legal defense(s) would you raise against the

the P1.75 million deficiency income tax.

assessment? Explain. (3%) (A) Is the BIR officer‟s tax assessment SUGGESTED ANSWER:

correct? Explain. (3%)

I would raise the defense that there is no

SUGGESTED ANSWER:

valid

assessment

because

EDS

Corporation did not receive a demand

The BIR officer correctly disallowed the

letter from the BIR.

credit of the final tax of P1.2 million against the net income tax, which is subject

to

deductions. of

35%

However, is

the

BIR: Assessment; Sale of Real Properties

assessment

incorrectly

(2008)

imposed. The correct rate is based on the 5-32% tax scale which is applicable

XI. Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and

to

individuals

(Sec.24[D1]

and

Sec.

42[A5] NIRC).

lot in San Francisco, California, U.S.A. which he acquired in 2000 for P15 million. On January 10, 2006, he sold said real property

to

Juan

Mayaman,

another

(B) If you were hired by Manalo as his tax consultant, what advice would you give him to protect his interest? Explain. (3%)

Filipino citizen residing in Quezon City, for P20 million. On February 9, 2006, Manalo

SUGGESTED ANSWER:

filed the capital gains tax return and paid P1.2 million representing 6% capital gains tax. Since Manalo did not derive any ordinary income, no income tax return was filed by him for 2006. After the tax audit conducted in 2007, the BIR officer assessed

I would

advise him to demand the

application

of

the

5-32%

tax

scale

instead of the fixed rate of 35% which applies only to domestic corporations (Sec. 24[D1] NIRC).

Manalo for deficiency income tax computed as follows: P5 million (P20 million less P15 million) x 35% = P1.75 million, without the capital gains tax paid being allowed as tax credit. Manalo consulted a real estate

BIR; Compromise; Financial Incapacity (2009) I(B) True or False. Explain your answer in not more than two (2) sentences. (5%)

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When the financial position of the taxpayer demonstrates a clear inability to pay the tax, the Commissioner of Internal Revenue may validly compromise the tax liability.

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acts charged did not exist (Castro v. Collector of Internal Revenue, L-12174, April 26, 1962).

SUGGESTED ANSWER: True. Financial incapacity is a ground allowed by law in order that the Commissioner of Internal Revenue may validly compromise a tax liability. (Sec 204, NIRC) BIR: Criminal Prosecution; Duty to Pay Tax despite Acquittal (2012) X. Explain the following statements: (A) The acquittal of the taxpayer in a criminal action under the Tax Code does not necessarily result in exoneration of said taxpayer from his civil liability to pay taxes. (3%)

BIR: Criminal Prosecution; Tax Evasion; Bribery (2013) (XII) You are the retained tax counsel of ABC Corp. Your client informed you that they have been directly approached with a proposal by a BIR insider (i.e., a middle rank BIR official) on the tax matter they have referred to you for handling. The BIR insider's proposal is to settle the matter by significantly reducing the assessment, but he will get 50% of the savings arising from the reduced assessment. What tax, criminal and ethical considerations will you take into account in giving your advice? Explain the relevance of each of these considerations. (9%) SUGGESTED ANSWER:

SUGGESTED ANSWERS: In

taxation,

criminally

the

liable

taxpayer because

becomes

of

a

civil

liability. While he may be acquitted on the criminal case, his acquittal could not operate to discharge him from the duty to pay tax, since that duty is imposed by statute prior to and independent of any attempt

on

the

taxpayer

to

evade

payment. The obligation to pay the tax is

not

a

felonious

mere acts

consequence charged

of in

the the

information, nor is a mere civil liability derived from crime that would be wiped out by the declaration that the criminal

I will advise my client not to accept the settlement proposal but instead pay the entire amount of tax that is legally due to the government. On the tax aspect, I will tell my client that a proposed assessment covering deficiency taxes which are legally due must be fully paid to exonerate the taxpayer from further liabilities. The unwarranted reduction of the proposed assessment into half and the payment thereof will not close the case but can be re-opened anytime within ten years from discovery so as to collect the correct amount of taxes from ABC Corp. The act of deliberately paying an amount of tax that is less than what is known by my client to be legally due through a cause of action that is unlawful is considered as tax evasion. I will advise my client that conniving with a BIR

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insider to reduce the proposed assessment for a fee us unlawful which can expose the officers of the corporation to criminal liability. Likewise, the payment to be made to the BIR official of 50% of the savings constitutes direct bribery punishable under the Revised Penal Code. Insofar as the BIR officer is concerned he will also be a principal to direct bribery and to the criminal violation penalized under Section 269 of the Tax Code.

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BIR: Failure to File Return; Collection Without Assessment (2012) (X) Explain the following statements: (B) Should the accused be found guilty beyond reasonable doubt for violation of Section 255 of the Tax Code (for failure for file

tax

return

or

to

supply

correct

information), the imposition of the civil On ethical grounds, agreeing to the settlement scheme being proposed by the BIR insider is agreeing to the perpetration of a dishonest act. Since taxation is symbiotic relationship, fair dealing on both sides is of paramount importance. I will remind my client that taxpayers owe honesty to government just as government owes fairness to taxpayers. (CIR v. Tokyo Shipping Co. Ltd., G.R. No. 68252, May 26, 1996)

liability by the CTA should be automatic and no assessment notice from the BIR is necessary? (2%) SUGGESTED ANSWER: Yes. If the failure to file tax return or to supply correct information resulted to unpaid taxes the amount of which is

BIR: False Return v. Fraudulent Return (2009) I(E) True or False. Explain your answer in not more than two (2) sentences. A false return and a fraudulent return are one and the same. (5%) SUGGESTED ANSWER: False. There is a different between a false return and a fraudulent return. The first merely implies a deviation from the truth or fact whether intentional or not, whereas the second is intentional and deceitful with the aim of evading the correct tax due (Aznar v. Commissioner, GR NO. L-20569, Aug 23, 1974, 58 SCRA 519 (1974)).

proven during trial, the CTA shall not only impose the criminal penalty but must likewise order the payment of the civil liability (Section 205(b), NIRC). As a matter of fact, it is well-recognized that in the case of failure to file a return, a proceeding in court for the collection of the tax may be filed without the need of an assessment, which recognizes that the civil liability of a taxpayer maybe established

without

the

need

of

an

assessment (Section 222(a), NIRC). BIR: Failure to File Return; Criminal Actions in RTC (2010) (VI) Based on the Affidavit of the Commissioner of Internal Revenue (CIR), an Information for failure to file income tax

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return under Section 255 of the National Internal Revenue Code (NIRC) was filed by the Department of Justice (DOJ) with the Manila Regional Trial Court (RTC) against XX, a Manila resident. XX moved to quash the Information on the ground that the RTC has no jurisdiction in view of the absence of a formal deficiency tax assessment issued by the CIR. Is a prior assessment necessary before an Information for violation of Section 255 of the NIRC could be filed in court? Explain. (4%) SUGGESTED ANSWER: No. In the case of failure to file a return, a proceeding in court for the collection of the tax may be filed without an assessment (Sec 222 (a), NIRC). The tax can be collected by filing a criminal action with the RTC because a criminal action is a mode of collecting the tax liability. (Sec. 205, NIRC). Besides, the Commissioner is empowered to prepare a return on the basis if his own knowledge, and upon such information as he can obtain from testimony or otherwise, which shall be prima facie correct and sufficient for legal purposes (Sec 6 (B), NIRC; the issuance of a formal deficiency tax assessment, therefore, is not required.

BIR: Prescription; Construction Criminal Cases (2010)

in

(Ib) True or False. In criminal cases involving tax offenses punishable under the National Internal Revenue Code (NIRC), prescription is construed strictly against the government. (1%)

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CTA: Jurisdiction of the CTA (2010) (Ic) In criminal cases where the Court of Tax Appeals (CTA) has exclusive original jurisdiction, the right to file a separate civil action for the recovery of taxes may be reserved. (1%) SUGGESTED ANSWER: False. (Sec. 11, Rule 9, 2005 Rules of the Court of Tax Appeals, as amended)

CTA: Jurisdiction of the CTA (2010) (Ie) Judgments, resolutions or orders of the Regional Trial Court in the exercise of its original jurisdiction involving criminal offenses arising from violations of the NIRC are appealable to the CTA, which shall hear the cases en banc. (1%) SUGGESTED ANSWER: False. (Sec. 3(b)(2), Rule 4, 2005 Revised Rules of the Court of Tax Appeals)

CTA: Jurisdiction; Appeals from Decisions of the Collector of Customs (2010) (VIII) What is the rule on appeal from decisions of the Collector of Customs in protest and seizure cases? When is the decision of the Collector of Customs appealable to the Court of Tax Appeals? Explain. (5%) SUGGESTED ANSWER:

SUGGESTED ANSWER:

Decisions of the Collector of Customs in protest and seizure cases are appealable to the Commissioner of Customs within 15 days from receipt of notice of the written decision.

False. (Lim v. Court of Appeals, G.R. No. 48134-37, Oct. 18, 1990)

As a rule, decisions of the Collector of Customs are not appealable to the Court

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of Tax Appeals. If the Collector of Customs, however, does not decide a protest for a long period of time, the inaction may be considered as an adverse decision by the Collector of Customs and the aggrieved taxpayer may appeal to the CTA even without the Collector’s and Commissioner’s actual decision (Commissioner of Customs v. Planters Products, Inc. G.R. No. 82018, March 16, 1989). CTA: Jurisdiction; Power to Compromise Agreements (2010)

Review

(V) Does the Court of Appeals have the power to review compromise agreements forged by the Commissioner of Internal Revenue and a taxpayer? Explain. (5%) SUGGESTED ANSWER: No, for either of two reasons (1) in instances in which the Commissioner of Internal Revenue is vested with authority to compromise, such authority should be exercised in accordance with the Commissioner’s discretion, and courts have no power, as a general rule, to compel him to exercise such discretion one way or another (Koppel Phils., Inc. v. CIR, 87 Phil, 351 (1950); (2) If the Commissioner abuses his discretion by not following the parameters set by law, the CTA, not the Court of Appeals, may correct such abuse if the matter is appealed to it. In case of arbitrary or capricious exercise by the Commissioner of the power to compromise, the compromise can be attacked and reversed through the judicial process. It must be noted however, that a compromise is considered as other matters arising under the NIRC which vests the CTA with jurisdiction, and since the decision of the CTA is appealable to the Supreme Court, the Court of Appeals is devoid of any power of review a compromise settlement forged by the Commissioner (PNOC v. Savellano, G.R. No. 109976,

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April 26, 2005; RA 9282 on jurisdiction of CTA). (Note: It is respectfully requested that if the examinee gives any one of the two reasons presented above, the answer should be given full credit.) CTA: Proceedings in the CTA (2010) (Id) Proceedings before the CTA in the exercise of its exclusive original jurisdiction are in the nature of trial de novo. (1%) SUGGESTED ANSWER: True. (CIR v. Manila Mining Corp. G.R. No. 153204, Aug. 31, 2005)

CTA: Suspension of the Collection of NIR Taxes (2010) (VII) What are the conditions that must be complied with before the Court of Tax Appeals may suspend the collection of national internal revenue taxes? (3%) SUGGESTED ANSWER: The CTA may suspend the collection of internal revenue taxes if the following conditions are met: 1. the case is pending appeal with the CTA; 2. in the opinion of the Court the collection will jeopardize the interest of the Government and/or the taxpayer; and 3. the taxpayer is willing to deposit in Court the amount being collected or to file a surety bond for not more than double the amount of the tax (Sec 11, RA 1125, as amended by RA 9282).

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Customs: Prescription Period to Assess (2013)

and applied for a refund of the excess tax credits.

(VI) On October 15, 2005, ABC Corp. imported 1,000 kilos of steel ingots and paid customs duties and VAT to the Bureau of Customs on the importation. On February 17, 2009, the Bureau of Customs, citing provisions of the Tariff and Customs Code on post-audit, investigated and assessed ABC Corp. for deficiency customs duties and VAT.

Will the claim for refund prosper? (6%)

Is the Bureau of Customs correct? (7%) SUGGESTED ANSWER: No. The Bureau of Customs (BOC) has lost its right to assess deficiency customs duties and VAT. The imported steel ingots in 2005 have been entered and the customs duties thereon had been paid by thereby making the liquidation of the importation final and conclusive upon all parties after the expiration of three (3) years from the date of final payment of duties and taxes (Sec 1603, TCC, as amended by RA 9135). [Note: Insofar as VAT on importation is concerned, the underpayment will be automatically cured when these are credited against the output tax due upon sale by the imported when the VAT return is filed. Be that as it may, an assessment for deficiency VAT can only be made by the BIR (not by BOC), VAT being an internal revenue tax, within three (3) years from the last day prescribed by law for filing of the VAT return. (Sec 203, NIRC)]. Taxpayer: Claim for Refund; Carry-Over Option is Irrevocable (2013) (I)In its final adjustment return for the 2010 taxable year, ABC Corp. had excess tax credits arising from its over-withholding of income payments. It opted to carry over the excess tax credits to the following year. Subsequently, ABC Corp. changed its mind

SUGGESTED ANSWER: No. The claim for refund will not prosper. While the law gives the taxpayer an option to whether carry-over or claim as refund the excess tax credits shown on its final adjustment return, once the option to carry-over has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed. (Sec 76, NIRC; CIR v. PL Management International Phils., Inc., April 4, 2011, 647 SCRA 72 (2011) G.R. No. 160949). Taxpayer: Claim for Refund; Substantiation Requirement (2009) (IV) International Technologies, Inc. (ITI) filed a claim for refund for unutilized input VAT with the Court of Tax Appeals (CTA). In the course of the trial, ITI engaged the services of an independent Certified Public Accountant (CPA) who examined the voluminous invoices and receipts of ITI. ITI offered in evidence only the summary prepared by the CPA, without the invoices and the receipts, and then submitted the case for decision. Can the CTA grant ITI's claim for refund based only on the CPA's summary? Explain. (4%) SUGGESTED ANSWER: No. The summary prepared by the CPA does not prove anything unless the documents which were the basis of the summary are submitted to the CTA and adduced in evidence. The invoices and receipts must be presented because they are the only real and direct evidence that would enable the Court to

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determine with particular certainty the basis of the refund (CIR v. Rio Tuba Nickel Mining Corp., 207 SCRA 549 (1992)).

authority to file a claim for refund and to bring an action for recovery of such claim (CIR v. Procter & Gamble, 204 SCRA 377, (1991)).

Taxpayer: Claim for Refund; Withholding Agent as a Proper Party (2009)

Taxpayer: Tax Credit; Off-Setting (2007)

X(A) ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.-based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income --- 30% for individual and 35% for corporate non-resident stockholders --- was deducted at source and remitted to the BIR.

XIII. ABC Corporation won a tax refund case for P150 Million. Upon execution of the judgment and when trying to get the Tax Credit Certificates (TCC) representing the refund, the Bureau of Internal Revenue (BIR) refused to issue the TCC on the basis of the fact that the corporation is under audit by the BIR and it has a potential tax liability. Is there a valid justification for the

On May 15, 1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. The Commissioner denied the claim.

BIR to withhold the issuance of the TCC? Explain your answer briefly? (5%) SUGGESTED ANSWER: The BIR has no valid justification to withhold the TCC. Offsetting the amount of TCC against a potential tax liability is

On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund.

not allowed, because both obligations are

Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident stockholders? Why or why not? (3%)

amount of deficiency tax is yet to be

SUGGESTED ANSWER:

CIR, 294 SCRA 687 [1998]).

Yes. A withholding agent is not only an agent of the Government but is also an agent of the taxpayer/income earner. Hence, ABCD is also an agent of the beneficial owner of the dividends with respect to the actual payment of the tax to the Government, such authority may reasonably be held to include the

ALTERNATIVE ANSWER:

no yet fully-liquidated. While the amount of the TCC has been determined; the determined through the completion of the audit. (Philex Mining Corporation v.

There

is

no

valid

justification

to

withhold the TCC. The requirement, that the claim for refund/TCC and liability for deficiency taxes must be settled

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under

one

proceeding

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to

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avoid

(A) As a BIR lawyer handling the case,

multiplicity of suits, will not apply since

would you raise the defense of

the determination of the entitlement to

prescription in your answer to the

the refund was already removed from the

claim for tax credit? Explain. (4%)

BIR. To reopen the claim for refund in order to give way to the introduction of

SUGGESTED ANSWER:

evidence of a deficiency assessment will lead to an endless litigation, which is not

Yes.

allowed.

available as against the 2004 tax credit.

(CIR

v.

Citytrust

Banking

The

defense

of

prescription

is

Under Sec. 229 NIRC, the prescriptive

Corporation, 499 SCRA 477 [2006]).

period is 2 years reckoned from the Taxpayer:

Claim

for

Tax

Credit;

Prescription (2008)

subsidiary of DEF, Inc., California, USA. December

15,

2004,

DEF

Corporation paid annual royalties to DEF, Inc., for the use the latter‟s software, for which the former, as withholding agent of the government, withheld and remitted to the BIR the 15% final tax based on the gross royalty payments. The withholding tax return was filed and the tax remitted to the BIR on January 10 of the following year, On April 10, 2007, DEF Corporation filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes covering the years 2004 and 2005. The following day, DEF Corporation filed a petition for review with the Court of Tax Appeals involving the tax credit claim for 2004 and 2005.

Sales, G.R. No. 83736, 15 January 1992; CIR v. PhilAm Life, G.R. No. 105208, 29

III. DEF Corporation is a wholly owned Starting

filing of the annual return (CIR v. TMX

May 1995; CIR v. CTA, G.R. No. 117254, 21 January 1999). However, the 2005 claim has not yet prescribed since its prescriptive period ends on January 11, 2008 while the claim was filed on April 10, 2007. The filing of the Petition for Review with the Tax Appeals on the 2005 Claim is premature (Sec. 57[A] NIRC). (B) Can the BIR lawyer raise the defense that DEF Corporation is not the proper party to file such claim for tax credit? Explain. (3%) SUGGESTED ANSWER: No. the BIR cannot raise the defense that DEF Corporation is not the proper party. In CIR v. Procter & Gamble, G.R. No. 66838, 02 December 1991, the Court

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ruled that a final withholding agent is a proper

party

“with

sufficient

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SUGGESTED ANSWER:

legal

interest” because it will be liable in the

NO. The Petition for Review should not

event that the final income tax cannot

be denied. The case is an exception to

be

also

the rule on exhaustion of administrative

Philippine Guaranty Co. v. CIR and CTA,

remedies. The BIR is estopped from

No. L-22074, 30 April 1965).

claiming that the filing of the Petition

paid

by

the

taxpayer

(See

Taxpayer: Petition for Review; Tenor of Finality of Assessment (2012)

for Review is premature because the taxpayer

failed

to

exhaust

all

administrative remedies. The statement

VIII. In the examination conducted by the

of the BIR in its Final Assessment Notice

revenue

corporate

and Demand Letter led the taxpayer to

taxpayer in 2010, the BIR issued a final

conclude that only a final judicial ruling

assessment notice and demand letter which

in his favor would be accepted by the

states: “It is requested that the above

BIR. The taxpayer cannot be blamed for

deficiency tax be paid immediately upon

not filing a protest against the Formal

receipt

Letter

officials

hereof,

against

the

inclusive

of

penalties

of

Demand

with

Assessment

incident to delinquency. This is our final

Notices since the language used and the

decision based on investigation. If you

tenor of the demand letter indicate that

disagree you may appeal this time, decision

it is the final decision of the respondent

within thirty (30) days from receipt hereof,

on the matter. The CIR should indicate,

otherwise said deficiency tax assessment

in a clear and unequivocal language,

shall

become

demandable.”

final, The

executory

and

whether

his

assessment

was

assessment

action

on

a

constitutes

disputed

his

final

immediately appealed by the taxpayer to

determination thereon in order for the

the Court of Tax Appeals, without filing its

taxpayer concerned to determine when

protest against the assessment and without

his or her right to appeal to the tax

a denial thereof by the BIR. If you were the

court accrues. Although there was no

judge, would you deny the petition for

direct reference for the taxpayer to bring

review filed by the taxpayer and consider

the matter directly to the CTA, it cannot

the case as prematurely filed? Explain your

be denied that the word “appeal” under

answer. (5%)

prevailing tax laws refers to the filing of a Petition for Review with the CTA (Allied Bank vs. CIR, G.R. No. 175097, February 5, 2010).

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Taxpayer: Prescription; Construction in Civil Cases (2010) I (a) True or False. In civil cases involving the collection of internal revenue taxes, prescription is construed strictly against the government and liberally in favor of the taxpayer. (1%) SUGGESTED ANSWER: True. (CIR v. BF Goodrich., Phils. Inc., G.R. No. 104171, Feb. 24, 1999; Phil. Journalists, Inc. v. CIR, G.R. No. 162852, Dec. 16, 2004.) Taxpayer: Prescription; Effect Prescription to File Protest (2009)

of

(XVII) A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals (CTA), but the CTA dismissed the same. a. Is the CTA correct in dismissing the petition for review? Explain your answer. (4%) SUGGESTED ANSWER: Yes. The protest was filed out of time, hence the CTA does not acquire jurisdiction over the matter (CIR v. Atlas Mining and Development Corp. (2000)). b. Assume that the CTA's decision dismissing the petition for review has become final. May the Commissioner legally enforce collection of the delinquent tax? Explain. (4%)

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SUGGESTED ANSWER: No. The protest was filed out of time and, therefore, did not suspend the running of the prescriptive period for the collection of the tax. Once the right to collect has prescribed, the Commissioner can no longer enforce collection of the tax liability against the taxpayer (CIR v. Atlas Mining and Development Corp. (2000)).

Taxpayer; Prescription; Effect of Waiver of Statute of Limitations (2010) (IId) What is the effect of the execution by a taxpayer of a "waiver of the statute of limitations" on his defense of prescription? (2%) SUGGESTED ANSWER: The waiver of the statute of limitation executed by a taxpayer is not a waiver of the right to invoke the defense of prescription. The waiver of the statute of limitation is merely an agreement in writing between the taxpayer and the BIR that the period to assess and collect taxes due is extended to a date certain. If prescription has already set in at the time of execution of the waiver or if the said waiver is invalid, the taxpayer can still raise prescription as defense (Phil. Journalists Inc., v. CIR, G.R. No. 162852, Dec. 16, 2004)

Taxpayer: Protest against Assessment Notice (2010)

Final

(IV) On March 10, 2010, Continental, Inc. received a preliminary assessment notice (PAN) dated March 1, 2010 issued by the Commissioner of Internal Revenue (CIR) for deficiency income tax for its taxable year 2008. It failed to protest the PAN. The CIR thereupon issued a final assessment notice (FAN) with letter of demand on April 30, 2010. The FAN was received by the

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corporation on May 10, 2010, following which or on May 25, 2010, it filed its protest against it.

the expiration of the 180-day period from submission of all relevant documents; or 2. Await the final decision of the Commissioner on the disputed assessment and appeal such final decision to the CTA within 30 days after receipt of a copy of such decision.

The CIR denied the protest on the ground that the assessment had already become final and executory, the corporation having failed to protest the PAN. Is the CIR correct? Explain. (5%) SUGGESTED ANSWER: No. The issuance of preliminary assessment notice (PAN) does not give rise to the right of the taxpayer to protest. What can be protested by the taxpayer is the final assessment notice (FAN) or that assessment issued following the PAN. Since the FAN was timely protested (within 30 days from receipt thereof, the assessment did not become final and executory (Sec 228, NIRC; RR No. 12-99).

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These options are mutually exclusive such that resort to one bars the application of the other (RCBC v. CIR, 522 SCRA 144 (2007)).

Taxpayer: Request for Reconsideration vs. Request for Reinvestigation (2012) VI.

The

BIR

assessment

issued

notice

in

and

2010

a

demand

final letter

against X Corporation covering deficiency income tax for the year 2008 in the amount

Taxpayer: Protest; Remedies Against BIR’s Inaction to a Protest (2009) (XVIII) A taxpayer received an assessment notice from the BIR on February 3, 2009. The following day, he filed a protest, in the form of a request for reinvestigation, against the assessment and submitted all relevant documents in support of the protest. On September 11, 2009, the taxpayer, apprehensive because he had not yet received notice of a decision by the Commissioner on his protest, sought your advice.

of

P10

Million,

X

Corporation

earlier

requested the advice of a lawyer on whether or

not

it

should

reconsideration

file

or

a

a

request request

for for

reinvestigation. The lawyer said it does not matter whether the protest filed against the assessment is a request for reconsideration or a request for reinvestigation, because it has the same consequences or implications. (A) What are the differences between a

What remedy or remedies are available to the taxpayer? Explain. (4%)

request for reconsideration and a request for reinvestigation? (5%)

SUGGESTED ANSWER: The remedy of a taxpayer is to avail of either of two options: 1. File a petition for review with the CTA within 30 days after

SUGGESTED ANSWER: Request for Reconsideration – plea for evaluation of assessment on the basis of

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existing

records

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without

need

of

presentation of additional evidence. It

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July 1, 2007 to December 31, 2007 15,000,000.

does not suspend the period to collect the deficiency tax.

Since MNO Corporation adopted fiscal year

Request for Reinvestigation – plea for re-

ending June 30 as its taxable year for

evaluation

income

on

the

basis

of

newly

tax

purposes,

it

paid

its

2%

discovered evidence which are to be

business tax for fiscal year ending June 30,

introduced for examination for the first

2007 based on gross sales of P15 million.

time. It suspends the prescriptive period

However,

to collect.

assessed the

(B) Do you agree with the advice of the lawyer? Explain your answer. (5%) SUGGESTED ANSWER: No, in view of the aforesaid difference between Request for Reconsideration & Request for Reinvestigation.

the

Quezon corporation

City

Treasurer

for

deficiency

business tax for 2007 based on gross sales of P25 million alleging that local business taxes shall be computed based on calendar year. (A) Is the position of the city treasurer tenable? Explain. (3%) SUGGESTED ANSWER:

Local & Real Property Taxes

Yes.

Under

Sec.

165

of

the

Local

Government Code, the taxable period for Local Taxation: Business Tax: Taxable Period, Payment in Instalment (2008) XIII. MNO Corporation was organized on July 1, 2006, to engage in trading of school supplies, with principal place of business in

the payment of business taxes is the calendar year. (B) May the deficiency business tax be paid in

installments

without

surcharge

and

interest? Explain. (3%)

Cubao, Quezon City. Its books of accounts and income statement showing gross sales

SUGGESTED ANSWER:

as follows: July 1, 2006 to December 31, 2006 P5,000,000. January 1, 2007 to June 30, 2007

Yes,

provided

there

is

a

valid

tax

ordinance enacted for that purpose that does not impose such surcharge and/or

P10,000,000.

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interest on any taxes not paid (Sec. 192,

legislative franchises state that they will

Local Government Code).

pay only 5% franchise tax in lieu of all taxes.

ALTERNATIVE ANSWER: No, There is no ordinance authorizing the

instalment

payment

of

business

taxes without interest and surcharges (See Sec. 192, Local Government Code). Local Taxation: Business Contractors (2010)

Tax

on

(IIe) What is the basis for the computation of business tax on contractors under the Local Government Code? (2%)

The

Province

of

Zamboanga

del

Norte

passed an ordinance in 1997 that imposes a

local

franchise

telecommunication

tax

on

companies

all

operation

within the province. The tax is 50% of 1% of the gross annual receipts of the preceding calendar

year

based

on

the

incoming

receipts, or receipts realized, within its territorial jurisdiction. Is the ordinance valid? Are PLDT, Smart

SUGGESTED ANSWER:

and Globe liable to pay franchise taxes?

The business tax on contractors is a graduated annual fixed tax based on the gross receipts for the preceding calendar year. However, when the gross receipts amount to P2 million or more, the business tax on contractors is imposed as a percentage tax at the rate of 50% of 1% (Sec 143 (e), LGC).

Reason briefly. (10%)

Local

Taxation:

Legality/

Constitutionality; Legislative Franchise

SUGGESTED ANSWER: The

ordinance

is

valid.

The

Local

Government Code explicitly authorizes provincial governments, notwithstanding any law or other special law, to impose a tax on business enjoying a franchise at the rate of 50% of 1% based on the gross

(2007)

annual receipts during the preceding II. The Local Government Code took effect

LGC).

on January 1, 1992. PLDT‟s legislative franchise was granted sometime

before

year within the province. (Section 137,

1992.

Its

franchise

provides that PLDT will only pay 3% franchise tax in lieu of all taxes.

PLDT is liable to the franchise tax levied by the province of Zamboanga del Norte. The

exemption

privileges

on

franchises granted before the passage of the

The legislative franchises of Smart and

tax Local

Government

Code

are

effectively repealed by the latter law.

Globe Telecoms were granted in 1998. Their

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(PLDT v. City of Davao, 363 SCRA 522 [2001]). Smart and Globe, however, are not liable to the franchise tax imposed under the provincial

ordinance.

The

legislative

franchises of Smart and Globe were granted in 1998, long after the Local Government Code took effect. Congress is deemed to have been aware of the provisions of the earlier law, when it granted the exemption. Accordingly, the latest will of the legislature to grant tax exemption must be respected. Local Taxation; Constitutionality; Professional or Occupation Taxes (2009) (VIII) The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons practicing various professions in the city. Among those subjected to the occupation tax were lawyers. Atty. Mariano Batas, who has a law office in Manila, pays the ordinanceimposed occupation tax under protest. He goes to court to assail the validity of the ordinance for being discriminatory. Decide with reasons. (3%) SUGGESTED ANSWER: The ordinance is valid. The tax imposed by the ordinance is in the nature of a professional tax which is authorized by law to be imposed by cities (Sec 151 in relation o Sec 139, LGC). The ordinance is not discriminatory because the City Council has the power to select the subjects of taxation and impose the same tax on those belonging to the same class. The authority given by law to cities is to impose a professional tax only on persons engaged in the practice of their profession requiring government

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examination and lawyers are included within that class of professionals. ALTERNATIVE ANSWER: The ordinance is valid. The ordinance is not discriminatory because it complies with the rule of equality and uniformity in taxation. Equality and uniformity in local taxation means that all subjects or objects of taxation belonging to the same class shall be taxed at the same rate within the territorial jurisdiction of the taxing authority or local government unit and not necessarily in comparison with other units although belonging to the same political subdivision. In fine, uniformity is required only within the geographical limits of the taxing authority. It is not for the Court to judge what particular cities or municipalities should be empowered to impose occupation tax. In case at bar, the imposition of the occupation tax to persons exercising various professionals in the city is well within the authority of the City of Manila (Punsalan et. al. v. City of Manila, 95 Phil. 46 (1954)). Local Taxation; Legality/ Constitutionality; Regulatory Measures (2009) (VI) The Sanggunian Bayan of the Municipality of Sampaloc, Quezon, passed an ordinance imposing a storage fee of ten centavos (P0.10) for every 100 kilos of copra deposited in any bodega within the Municipality's jurisdiction. The Metropolitan Manufacturing Corporation (MMC), with principal office in Makati, is engaged in the manufacture of soap, edible oil, margarine, and other coconut oil-based products. It has a warehouse in Sampaloc, Quezon, used as storage space for the copra purchased in Sampaloc and nearby towns before the same is shipped to Makati. MMC goes to court to challenge the validity of the ordinance, demanding the refund of the storage fees it paid under protest.

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Is the ordinance answer. (4%)

valid?

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Explain

your

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SUGGESTED ANSWER: BAT

Corporation

is

correct

questioning

the

SUGGESTED ANSWER:

because

is

Yes. The municipality is authorized to impose reasonable fees and charges as a regulatory measure in an amount commensurate with the cost of regulations, inspection and licensing (Sec 147, LGC). In the case at bar, the storage of copra in any warehouse within the municipality can be the proper subject of regulation pursuant to the police power granted to municipalities under the Revised Administrative Code of the “general welfare clause.” A warehouse used for keeping or storing copra is an establishment likely to endanger the public safety or likely to gave rise to conflagration because the oil content of the copra, when ignited, is difficult to put under control by water and the use of chemicals is necessary to put out the fire. It is, thus, reasonable that the Municipality impose storage fees for its own surveillance and lookout (Procter & Gamble Philippine Manufacturing Corporation v. Municipality of Jagna, Province of Bohol, 94 SCRA 894 (1979)).

imposed is authorized by Sec. 143 (H) of

Local

Taxation:

Legality/

Constitutionality; Tax Rate (2008) VIII.

The

City

of

Manila

enacted

an

ordinance, imposing a 5% tax on gross receipts on rentals of space in privatelyowned public markets. BAT Corporation questioned the validity of the ordinance, stating that the tax is an income tax, which cannot be imposed by the city government. Do you agree with the position of BAT Corporation? Explain (5%)

it

ordinance,

in

income

tax.

but

not

The

tax

the Local Government Code. However, the maximum rate that can be imposed by the city is only 3% (Sec. 151, Local Government

Code).

Therefore,

tax

imposed

Manila

is

for

by

invalid

exceeding the amount allowed by law.

Local Taxation; Principal Office Branches; Situs of Taxation (2010)

and

(XII) Ferremaro, Inc., a manufacturer of handcrafted shoes, maintains its principal office in Cubao, Quezon City. It has branches/sales offices in Cebu and Davao. Its factory is located in Marikina City where most of its workers live. Its principal office in Quezon City is also a sales office. Sales of finished products for calendar year 2009 in the amount of P10 million were made at the following locations: i)

Cebu branch

25%

ii)

Davao branch

15%

iii) Quezon City branch 60% Total

100%

Where should the applicable local taxes on the shoes be paid? Explain. (3%) SUGGESTED ANSWER: Twenty five percent (25%) of total sales or P2.5 million shall be taxed in Cebu and 15% of total sales or P1.5 million shall be taxed in Davao. For the

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remaining 60% sales amounting to P6 million which are recorded in the principal office, 30% thereof or P1.8 million is taxable in Quezon City where the principal office is located and 70% or P4.2 million is taxable in Marikina City where the factory is located. Under the law, manufacturers maintaining a branch or sales outlet shall record the sale in the branch or sales outlet making the sale and pay the tax in the city or municipality where the branch or outlet is located. Since Ferremaro, Inc. maintains one factory, the sales recorded in the principal office shall be allocated and 30% of said sales are taxable in the place where the principal office is located while 70% is taxable in the place where the factory is located (Sec. 150, LGC). Local Taxation: Retiring Business (2010) (IIf) How are retiring businesses taxed under the Local Government Code? (2%) SUGGESTED ANSWER: Retiring businesses under the LGC are taxed in their gross sales or gross receipts in the current year and not in the preceding year. If the tax paid in the current year is less than the tax due on gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired (Sec 145, LGC). Local Taxation; Taxing Power; Limitation (2010) (XIII) XYZ Shipping Corporation is a branch of an international shipping line with voyages between Manila and the West Coast of the U.S. The company‟s vessels load and unload cargoes at the Port of Manila, albeit it does not have a branch or sales office in Manila. All the bills of lading and invoices are issued by the branch office

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in Makati which is also the company‟s principal office. The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using the Port of Manila. Can the City Government of Manila legally impose said levy on the corporation? Explain. (3%) SUGGESTED ANSWER: No, Manila cannot legally levy the 2% Gross Receipts Tax on the shipping line, because taxes on the gross receipts of transportation contractors and passengers or freight by hire and common carriers by air, land or water is a limitation on the exercise of taxing powers by local government units (Sec 133 (j), LGC). ALTERNATIVE ANSWER: No. Since the gross receipts of an international shipping company is subject to tax under the Internal Revenue Code, the power to tax is impliedly withheld from local government units. This is the “rule on preemption or exclusionary rule” which applies unless by express provision of law, LGUs are given the power to tax that field already covered by the taxing power of the National government (Victorias Milling Co., Inc. v. Mun. of Victorias, L2113, Sept 27, 1968; Sec 133, LGC). Local Taxation: Taxing Power; Nature (2007) I.

What is the nature of the taxing power

of

the

provinces,

municipalities and cities? How will the local government units be able to exercise their taxing powers? (5%)

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conferred by the Constitution by giving

Assessor assessed Mr. Amado for real property taxes on the land and the warehouse. Mr. Amado objected to the assessment, contending that he should not be asked to pay realty taxes on the land since it is municipal property.

them the authority to create their own

Was the assessment proper? (5%)

SUGGESTED ANSWER: The

taxing

power

municipalities

sources

and

of

of

the

cities

revenue.

provinces, is

directly

The

local

government units do not exercise the power to tax as an inherent power or by a valid delegation of the power by the Congress,

but

pursuant

to

a

direct

authority conferred by the Constitution. (Mactan

Cebu

International

Airport

Authority v. Marcos, 261 SCRA 667 [1996]; NPC v. City of Cabanatuan, 401 SCRA 259 [2003]). The local government units exercise the power to tax by levying taxes, fees and charges consistent with the basic policy of local autonomy, and to assess and collect all these taxes, fees and charges which will exclusively accrue to them. The

local

government

units

are

authorized to pass tax ordinances (levy)

SUGGESTED ANSWER: Yes, the assessment is proper. The land, although owned by the municipality, is not exempt from real property tax because the beneficial use has been granted to a taxable person. (Sec 234 (a), LGC) Real Property Tax; Exemption; Religious Activities (2010) (XIV) A inherited a two-storey building in Makati from his father, a real estate broker in the „60s. A group of Tibetan monks approached A and offered to lease the building in order to use it as a venue for their Buddhist rituals and ceremonies. A accepted the rental of P1 million for the whole year. The following year, the City Assessor issued an assessment against A for non-payment of real property taxes.

and collection of the taxes imposed in

Is the assessor justified in assessing A‟s deficiency real property taxes? Explain. (3%)

the said ordinances. (Section 129, and

SUGGESTED ANSWER:

and to pursue actions for the assessment

132, Local Government Code).

Real Property Taxation: Beneficial Use of the Property (2013) (VIII) Mr. Amado leased a piece of land owned by the Municipality of Pinagsabitan and built a warehouse on the property for his business operations. The Municipal

No. The property is exempt from real property tax by virtue of the beneficial use thereof by the Tibetan monks for their religious rituals and ceremonies. A property that is actually, directly and exclusively used for religious purposes is exempt from the real property tax (Sec 234, LGC; Sec 28(3), Article IV, Phil. Constitution). The test of exemption from the tax is not ownership but beneficial use of the property (City of

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Baguio v. Busuego, L-29772, Sept 18, 1980). Real Property Taxation: Payment; Taxpayer (2009)

Liable

for

(IX) Republic Power Corporation (RPC) is a government-owned and controlled corporation engaged in the supply, generation and transmission of electric power. In 2005, in order to provide electricity to Southern Tagalog provinces, RPC entered into an agreement with Jethro Energy Corporation (JEC), for the lease of JEC's power barges which shall be berthed at the port of Batangas City. The contract provides that JEC shall own the power barges and the fixtures, fittings, machinery, and equipment therein, all of which JEC shall supply at its own cost, and that JEC shall operate, manage and maintain the power barges for the purpose of converting the fuel of RPC into electricity. The contract also stipulates that all real estate taxes and assessments, rates and other charges, in respect of the power barges, shall be for the account of RPC. In 2007, JEC received an assessment of real property taxes on the power barges from the Assessor of Batangas City. JEC sought reconsideration of the assessment on the ground that the power barges are exempt from real estate taxes under Section 234 [c] of R.A. 7160 as they are actually, directly and exclusively used by RPC, a government-owned and controlled corporation. Furthermore, even assuming that the power barges are subject to real property tax, RPC should be held liable therefor, in accordance with the terms of the lease agreement. Is the contention of JEC correct? Explain your answer. (4%) SUGGESTED ANSWER: No, the contention of JEC is not correct. The owner of the power barges is JEC which is required to operate, manage and maintain the power barges for the purpose of converting the fuel of RPC

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into electricity. This belies the claim that RPC, a government-owned and controlled corporation engaged in the supply, generation and transmission of electric power, is the actual, direct and exclusive user of the barge, hence, does not fall within the purview of the exempting provision of Sec 234(c) of RA 7160. Likewise, the argument that RPC should be liable to the real property taxes consonant with the contract is devoid of merit. The liability for the payment of the real estate taxes is determined by law and not by the agreement of the parties (FELS Energy Inc. v. The Province of Batangas, 516 SCRA 186 (2007)).

Real Property Taxation: Payment; Period (2012)

Liable

for

III. Mr. Jose Castillo is a resident Filipino citizen. He purchased a parcel of land in Makati City in 1970 at a consideration of P1 Million. In 2011, the land, which remained undeveloped and idle had a fair market value of P20 Million. Mr. Antonio Ayala, another Filipino citizen, is very much interested in the property and he offered to buy the same for P20 Million. The Assessor of Makati City re-assessed in 2011 the property at P10 Million. (A) When is Mr. Castillo liable for real property tax on the land beginning 2011 or beginning 2012? Explain your answer. (2%) SUGGESTED ANSWER: Mr. Castillo shall be liable to the real property tax based on the re-assessment beginning 2012. All re-assessments made after the first day of any year shall take effect on the first day of January of the succeeding year (Section 221,LGC). [Note: The question is misleading. Mr. Castillo is liable to the real property tax on

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the property when he became the owner thereof although his liability increases upon re-assessment of the property.]

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and unappeallable. Since no decision on the protest was made, the taxpayer should have appealed to the RTC within 30 days from the lapse of the period to decide the protest (Sec 195, LGC).

Remedies in Local Taxes Taxpayer: Local Tax; Period Protest and Appeal (2010)

to

File

(IX) On May 15, 2009, La Manga Trading Corporation received a deficiency business tax assessment of P1,500,000.00 from the Pasay City Treasurer. On June 30, 2009, the corporation contested the assessment by filing a written protest with the City Treasurer. On October 10, 2009, the corporation received a collection letter from the City Treasurer, drawing it to file on October 25, 2009 an appeal against the assessment before the Pasay Regional Trial Court (RTC).

Tariff And Customs Duties Customs: Exempted Transactions; Importation and Use within SBMA (2008) IV. JKL Corporation is a domestic corporation engaged in the importation and sale of motor vehicles in the Philippines and is duly registered with the Subic Bay Metropolitan Authority (SBMA). In December 2007, it imported several secondhand motor vehicles from Japan and Korea, which it stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to persons residing in the customs territory.

(IXa) Was the protest of the corporation filed on time? Explain. (3%)

(A) Are the importations of motor vehicles from abroad subject to customs duties and value added taxes? Explain. (4%)

SUGGESTED ANSWER:

SUGGESTED ANSWER:

The protest was filed on time. The taxpayer has the right to protest an assessment within 60 days from receipt thereof (Sec 195, LGC). (IXb) Was the appeal with the Pasay RTC filed on time? Explain. (3%) SUGGESTED ANSWER: The appeal was not filed on time. When an assessment is protested, the treasurer has 60 days within which to decide. The taxpayer has 30 days from receipt of the denial of the protest or from the lapse of the 60-day period to decide whichever comes first, otherwise the assessment becomes conclusive and unappeallable. Since no decision becomes conclusive

No. because domestic corporations importing used vehicles that are “stored, used or traded” within the Subic Naval Base Area enjoy an exemption from customs duties and VAT, provided they are registered with the SBMA (R.A. 7096; Executive Secretary v. Southwing Heavy Industries, G.R. No. 164171, 20 February 2006). (B) If they are taxable, when must the duties and taxes is paid? What are the bases for and purposes of computing customs duties and VAT? To whom must the duties and VAT be paid? Explain. (3%)

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SUGGESTED ANSWER: Duties and taxes must be paid upon release of the vehicle from Customs’ custody. Custom duties for motor vehicles are based on the value being used by the Bureau for assessing customs duties. VAT is also based on the value being used by the Bureau for motor vehicles (Sec. 107[A] NIRC). Duties must be paid to the Bureau of Customs. VAT must be paid to the Bureau of Internal Revenue. Customs: Forfeiture Proceeding, Nature (2008) IX. William Antonio imported into the Philippines a luxury car worth US$100,000. This car was, however, declared only for US$20,000 and corresponding customs duties and taxes were paid thereon. Subsequently, the Collector of Customs discovered the underdeclaration and he initiated forfeiture proceedings of the imported car. (A) May the Collector of Customs declare the imported car forfeited in favor of the government? Explain. (3%) SUGGESTED ANSWER: Yes, Under-declaration of value is a ground for forfeiture (See Sec. 1206, Tariff and Customs Code; See also Feeder International v. CA, G.R. No. 94262, 31 May 1991). (B) Are forfeiture proceedings of goods illegally imported criminal in nature? Explain. (3%) SUGGESTED ANSWER: No, a forfeiture proceeding under tariff and customs laws in not penal in nature, the main purpose of which is to enforce the administrative fines or forfeiture incident to unlawful importation of goods or their deliberate possession. The penalty in seizure cases is distinct and

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separate from the criminal liability that might be imposed against the indicted importer or possessor and both kinds of penalties may be imposed (Peo. v. CFI of Rizal, et al., No. L-41686, 17 November 1980). Customs: Jurisdiction; Issuance Warrant of Search and Seizure (2009)

of

(V) Jessie brought into the Philippines a foreign-made luxury car, and paid less than the actual taxes and duties due. Due to the discrepancy, the Bureau of Customs instituted seizure proceedings and issued a warrant of seizure and detention. The car, then parked inside a pay parking garage, was seized and brought by government agents to a government impounding facility. The Collector of Customs denied Jessie's request for the withdrawal of the warrant. Aggrieved, Jessie filed against the Collector a criminal complaint for usurpation of judicial functions on the ground that only a judge may issue a warrant of search and seizure. a. Resolve with reasons criminal complaint. (4%)

Jessie's

SUGGESTED ANSWER: The criminal complaint is bereft of merit. The issuance of a warrant of seizure and detention by the Collector of Customs for goods released contrary to law, as when there is underpayment of taxes and duties, is his primary and exclusive jurisdiction and precludes the judge of regular courts form taking cognizance of the subject matter. Accordingly, what was done by the Collector could not be a basis of a prosecution for the usurpation of judicial functions (Commissioner v. Navarro, 77 SCRA 264 (1977)). b. Would your answer be the same if the luxury car was seized while

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parked inside the garage of Jessie's residence? Why or why not? (4%) SUGGESTED ANSWER: No. The luxury car being in a dwelling house, cannot be seized by officers of the Bureau of Customs exercising police authority without a search warrant issued by a judge of a competent court (Sec 2209, TCC; Pacis v. Pamaran, 56 SCRA 16 (1974)).

Other Related Matters

BIR: Bank Deposits Secrecy Violation (2012) VII. (A) May the bank deposits – peso and foreign currency – of an individual taxpayer be disclosed by a commercial bank to the Commissioner of Internal Revenue, in connection with a tax investigation being conducted by revenue officials, without violating the relevant bank secrecy laws? Explain your answer. (5%) SUGGESTED ANSWER: No. As a general rule, bank deposits of an individual taxpayer may not be disclosed by a commercial bank to the Commissioner. As exceptions, the Commissioner is authorized to inquire into the bank deposits of: (1) a decedent to determine his gross estate; and (2) any taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability. In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until

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he waives in writing his privilege under Republic Act No. 1405 (Bank Secrecy Law) or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer (Section 6, NIRC). (B) In 2011 the Commissioner of the US Internal Revenue Service (IRS) requested in writing the Commissioner of Internal Revenue to get the information from a bank in the Philippines, regarding the deposits of a US Citizen residing in the Philippines, who is under examination by the officials of the US IRS, pursuant to the US- Philippine Tax Treaty and other existing laws. Should the BIR Commissioner agree to obtain such information from the bank and provide the same to the IRS? Explain your answer. (5%) SUGGESTED ANSWER: Yes. The Commissioner should agree to the request pursuant to the principle of international comity. The Commissioner of Internal Revenue has the authority to inquire into bank deposit accounts and related information held by financial institutions of a specific taxpayer subject of a request for the supply of tax information from a foreign tax authority pursuant to an international convention or agreement to which the Philippines is a signatory or party of (Section 3, RA 10021). (C) Is the bank secrecy law in the Philippines violated when the BIR issues a Warrant of Garnishment directed against a domestic bank requiring it not to allow any withdrawal from any existing bank deposit of the delinquent taxpayer mentioned in the Warrant and to freeze the same until the tax delinquency of said taxpayer is settled with the BIR? Explain your answer. (5%) SUGGESTED ANSWER: No. Garnishment is an administrative remedy allowed by law to enforce a tax liability. Bank accounts shall be

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garnished by serving a warrant of garnishment upon the taxpayer and upon the president, manager, treasurer or other responsible officer of the bank. Upon receipt of the warrant of garnishment, the bank shall turn over to the Commissioner so much of the bank accounts as may be sufficient to satisfy the claim of the Government (Section 208, NIRC).

MULTIPLE CHOICE QUESTIONS (MCQ)

2013

Taxation

Law

Exam

MCQ (October 13, 2013) I. ABC Corp. was dissolved and liquidating dividends were declared and paid to the stockholders. What tax consequence follows? (1%) (A) ABC Corp. should deduct a final tax of 10% from the dividends. (B) The stockholders should declare their gain from their investment and pay income tax at the ordinary rates. (C) The dividends are exempt from tax. (D) ABC Corp. should withhold a 10% creditable tax. SUGGESTED ANSWER: (B) Section 39, BIR Ruling 39-02, Nov. 11, 2002 II. MGC Corp. secured an income tax holiday for 5 years as a pioneer industry. On the fourth year of the tax holiday, MGC Corp. declared and paid cash dividends to

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its stockholders, all of whom are individuals. Are the dividends taxable? (1%) (A) The dividends are taxable; the tax exemption of MGC Corp. does not extend to its stockholders. (B) The dividends are tax exempt because of MGC Corp.'s income tax holiday. (C) The dividends are taxable if they exceed 50% of MGC Corp.'s retained earnings. (D) The dividends are exempt if paid before the end of MGC Corp.'s fiscal year. SUGGESTED ANSWER: (A) Sunio v. NLRC, G.R. No. 57767, Jan. 31, 1984 III. Mr. Alas sells shoes in Makati through a retail store. He pays the VAT on his gross sales to the BIR and the municipal license tax based on the same gross sales to the City of Makati. He comes to you for advice because he thinks he is being subjected to double taxation. What advice will you give him? (1%) (A) Yes, there is double taxation and it is oppressive. (B) The City of Makati does not have this power. (C) Yes, there is double taxation and this is illegal m the Philippines. (D) Double taxation is allowed where one tax is imposed by the national government and the other by the local government. SUGGESTED ANSWER: (D) CIR v. Solidbank Corp., G.R. No. 148191, Nov. 25, 2003 IV. Congress passed a sin tax law that increased the tax rates on cigarettes by 1,000%. The law was thought to be sufficient to drive many cigarette companies out of business, and was questioned in court by a cigarette company that would go out of business because it would not be able to pay the increased tax. The cigarette company is __________ (1%) (A) wrong because taxes are the lifeblood of the government

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(B) wrong because the law recognizes that the power to tax is the power to destroy (C) correct because no government can deprive a person of his livelihood (D) correct because Congress, in this case, exceeded its power to tax SUGGESTED ANSWER: (B) McCulloch v. Maryland, 17 U.S. 4 Wheat 316 (1819) V. Mr. Alvarez is in the retail business. He received a deficiency tax assessment from the BIR containing only the computation of the deficiency tax and the penalties, without any explanation of the factual and legal bases for the assessment. Is the assessment valid? (1%) (A) The assessment is valid; all that Mr. Alvarez has to know is the amount of the tax. (B) The assessment is invalid; the law requires a statement of the facts and the law upon which the assessment is based. (C) The assessment is valid but Mr. Alvarez can still contest it. (D) The assessment is invalid because Mr. Alvarez has no way to determine if the computation is erroneous. SUGGESTED ANSWER: (B) Section 228, NIRC, Azucena Reyes v. Commissioner VI. In 2010, Mr. Platon sent his sister Helen $1 ,000 via a telegraphic transfer through the Bank of PI. The bank's remittance clerk made a mistake and credited Helen with $1,000,000 which she promptly withdrew. The bank demanded the return of the mistakenly credited excess, but Helen refused. The BIR entered the picture and investigated Helen. Would the BIR be correct if it determines that Helen earned taxable income under these facts? (1%) (A) No, she had no income because she had no right to the mistakenly credited funds.

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(B) Yes, income is income regardless of the source. (C) No, it was not her fault that the funds in excess of $1,000 were credited to her. (D) No, the funds in excess of$1,000 were in effect donated to her. SUGGESTED ANSWER: (B)Javier v. Commissioner, 199 SCRA 824, G.R. No. 78953 VII. The municipality of San Isidro passed an ordinance imposing a tax on installation managers. At that time, there was only one installation manager in the municipality; thus, only he would be liable for the tax. Is the law constitutional? (1%) (A) It is unconstitutional because it clearly discriminates against this person. (B) It is unconstitutional for lack of legal basis. (C) It is constitutional as it applies to all persons in that class. (D) It is constitutional because the power to tax is the power to destroy. SUGGESTED ANSWER: (C)Shell Co. of P.I. v. Vaño, 94 Phil 387 VIII. XYZ Corporation manufactures glass panels and is almost at the point of insolvency. It has no more cash and all it has are unsold glass panels. It received an assessment from the BIR for deficiency income taxes. It wants to pay but due to lack of cash, it seeks permission to pay in kind with glass panels. Should the BIR grant the requested permission? (1%) (A) It should grant permission to make payment convenient to taxpayers. (B) It should not grant permission because a tax is generally a pecuniary burden. (C) It should grant permission; otherwise, XYZ Corporation would not be able to pay. (D) It should not grant permission because the government does not

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have the storage facilities for glass panels. SUGGESTED ANSWER: (B)Characteristics of Taxes IX. Prior to the VAT law, sales of cars were subject to a sales tax but the tax applied only to the original or the first sale; the second and subsequent sales were not subject to tax. Deltoid Motors, Inc. (Deltoid) hit on the idea of setting up a wholly-owned subsidiary, Gonmad Motors, Inc. (Gonmad), and of selling its assembled cars to Gonmad at a low price so it would pay a lower tax on the first sale. Gonmad would then sell the cars to the public at a higher price without paying any sales tax on this subsequent sale. Characterize the arrangement. (1%) A. The plan is a legitimate exercise of tax planning and merely takes advantage of a loophole in the law. B. The plan is legal because the government collects taxes anyway. C. The plan is improper; the veil of corporate fiction can be pierced so that the second sale will be considered the taxable sale. D. The government must respect Gonmad's separate juridical personality and Deltoid's taxable sale to it. SUGGESTED ANSWER: (C)Koppel Philippines Inc. v. Yatco, 77 Phil 496 X. PRT Corp. purchased a residential house and lot with a swimming pool in an upscale subdivision and required the company president to stay there without paying rent; it reasoned out that the company president must maintain a certain image and be able to entertain guests at the house to promote the company's business. The company president declared that because they are childless, he and his wife could very well live in a smaller house. Was there a taxable fringe benefit? (1%) (A) There was no taxable fringe benefit since it was for the

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convenience of the employer and was necessary for its business. (B) There was a taxable fringe benefit since the stay at the house was for free. (C) There was a taxable fringe benefit because the house was very luxurious. (D) There was no taxable fringe benefit because the company president was only required to stay there and did not demand free housing. SUGGESTED ANSWER: (A)Section 33, NIRC; RR No. 3-98 XI. Taxpayer A was required by the BIR to sign and submit a waiver of the statute of limitations on the assessment period, to give the BIR more time to complete its investigation. The BIR accepted the waiver but failed to indicate the date of its acceptance. What is the legal status of the waiver? (1%) (A) The waiver is valid because the date of acceptance is immaterial and unimportant. (B) The waiver is invalid; the taxpayer cannot be required to waive the statute of limitations. (C) The waiver is invalid; the date of acceptance is crucial in counting the start of the period of suspension of the prescriptive period. (D) The waiver is valid, having been accepted by the BIR. SUGGESTED ANSWER: (C)Commissioner v. Kudos Metal Corp., G.R. No. 178087, May 5, 2010 XII. Taxpayer Andy received on January 3, 2010 a preliminary assessment notice (PAN) from the BIR, stating that he had fifteen (15) days from its receipt to comment or to file a protest. Eight (8) days later (or on January11, 2010), before he could comment or file a protest, Andy received the final assessment notice (FAN). Decide on the validity of the FAN. (1%) (A) The FAN is invalid; Andy was not given the chance to respond

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to the PAN, in violation of his due process rights. (B) The FAN is invalid for being premature. (C) The FAN is valid since it was issued before the right to assess prescribed. (D) The FAN is valid. There is no legal requirement that the FAN should await the protest to the PAN because protest to the PAN is not mandatory. SUGGESTED ANSWER: (A)Section 228, NIRC; RR No. 12-99 XIII. MSI Corp. imports orange and lemon concentrates as raw materials for the fruit drinks it sells locally. The Bureau of Customs (BOC) imposed a 1% duty rate on the concentrates. Subsequently, the BOC changed its position and held that the concentrates should be taxed at 7% duty rate. MSI disagreed with the ruling and questioned it in the CTA which upheld MSI's position. The Commissioner of Customs appealed to the CTA en bane without filing a motion for reconsideration. Resolve the appeal. (1%) (A) The appeal should be dismissed because a motion for reconsideration is mandatory. (B) The appeal should be dismissed for having been filed out of time. (C) The appeal should be given due course since a motion for reconsideration is a useless exercise. (D) The appeal should be upheld to be fair to the government which needs taxes. SUGGESTED ANSWER: (A)RA 9282; Rule 8, Revised Rules of the CTA XIV. The spouses Jun and Elvira Sandoval purchased a piece of land for P5,000,000 and included their two (2) minor children as co-purchasers in the Deed of Absolute Sale. The Commissioner of Internal Revenue (CIR) ruled that there was an implied donation and assessed donors' taxes against the spouses.

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Rule on the CIR's action. (1%) (A) The CIR is wrong; a donation must be express. (B) The CIR is wrong; financial capacity is not a requirement for a valid sale. (C) The CIR is correct; the amount involved is huge and ultimately ends up with the children. (D) The CIR is correct; there was animus donandi since the children had no financial capacity to be co-purchasers. SUGGESTED ANSWER: (D)Spouse Evono v. Department of Finance, et. al., CTA EB Case No. 705, June 4, 2012 XV. Pheleco is a power generation and distribution company operating mainly from the City of Taguig. It owns electric poles which it also rents out to other companies that use poles such as telephone and cable companies. Taguig passed an ordinance imposing a fee equivalent to 1% of the annual rental for these poles. Pheleco questioned 'the legality of the ordinance on the ground that it imposes an income tax which local government units (LGUs) are prohibited from imposing. Rule on the validity of the ordinance. (1%) (A) The ordinance is void; the fee is based on rental income and is therefore a tax on income. (B) The ordinance is valid as a legitimate exercise of police power to regulate electric poles. (C) The ordinance is void; 1% of annual rental is excessive and oppressive. (D) The ordinance is valid; an LGU may impose a tax on income. SUGGESTED ANSWER: (B)Section 129, RA 7160 XVI. Aleta sued Boboy for breach of promise to marry. Boboy lost the case and duly paid the court's award that included, among others, Pl00,000 as moral damages for the mental anguish Aleta suffered. Did Aleta earn a taxable income? (1%)

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(A) She had a taxable income of P100,000 since income is income from whatever source. (B) She had no taxable income because it was a donation. (C) She had taxable income since she made a profit. (D) She had no taxable income since moral damages are compensatory. SUGGESTED ANSWER: (D)Section 32 (B)(4), NIRC XVII. Mr. Mayuga donated his residential house and lot to his son and duly paid the donor's tax. In the Deed of Donation, Mr. Mayuga expressly reserved for himself the usufruct over the property for as long as he lived. Describe the donated property from the taxation perspective. (1%) (A) The property will form part of Mr. Mayuga's gross estate when he dies. (B) The property will not fom1 part of Mr. Mayuga's gross estate when he dies because he paid the donor's tax. (C) The property will form part of Mr. Mayuga's gross estate because he died soon after the donation. (D) The property will not form part of Mr. Mayuga's gross estate because it is no longer his. SUGGESTED ANSWER: (A)Section 85(B), NIRC XVIII. Mr. Z made an importation which he declared at the Bureau of Customs (BOC) as "Used Truck Replacement Parts". Upon investigation, the container vans contained 15 units of Porsche and Ferrari cars. Characterize Mr. Z's action. (1%) (A) Mr. Z committed smuggling. (B) Mr. Z did not commit smuggling because he submitted his shipment to BOC examination. (C) Mr. Z only made a misdeclaration, but did not commit smuggling.

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(D) Mr. Z did not commit smuggling because the shipment has not left the customs area. SUGGESTED ANSWER: (A)Section 3601, TCCP; Rieta v. People of the Philippines, 436 SCRA 273 XIX. Mr. A was preparing his income tax return and had some doubt on whether a commission he earned should be declared for the current year or for the succeeding year. He sought the opinion of his lawyer who advised him to report the commission in the succeeding year. He heeded his lawyer's advice and reported the commission in the succeeding year. The lawyer's advice turned out to be wrong; in Mr. A's petition against the BIR assessment, the court ruled against Mr. A. Is Mr. A guilty of fraud? (1%) (A) Mr. A is not guilty of fraud as he simply followed the advice of his lawyer. (B) Mr. A is guilty of fraud; he deliberately did not report the commission in the current year when he should have done so. (C) Mr. A's lawyer should pay the tax for giving the wrong advice. (D) Mr. A is guilty for failing to consult his accountant. SUGGESTED ANSWER: (A)CIR v. CA, G.R. No. 119322, June 4, 1996 XX. The BIR, through the Commissioner, instituted a system requiring taxpayers to submit to the BIR a summary list of their sales and purchases during the year, indicating the name of the seller or the buyer and the amount. Based on these lists, the BIR discovered that in 2004 ABC Corp. purchased from XYZ Corp. goods worthP5,000,000. XYZ Corp. did not declare these for income tax purposes as its reported gross sales for 2004was only Pl,000,000. Which of the following defenses may XYZ Corp. interpose in an assessment against it by the BIR? (1%)

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(A) The BIR has no authority to obtain third party information to assess taxpayers. (B) The third party information is inadmissible as hearsay evidence. (C) The system of requiring taxpayers to submit third party information is illegal for violating the right to privacy. (D) None of the above. SUGGESTED ANSWER: (D)Sections 5 and 6, NIRC

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Bank A from loans to its debtor-customers (active income); (D) Income tax on interest income of deposits of Bank A is a direct tax, while GRT on interest income on loan transaction is an indirect tax. SUGGESTED ANSWER: (A) There is no double taxation if the law imposes two different taxes on the same income, business or property. First, the

2012

Taxation

Law

Exam

which earns interest that is subjected to the 20% final withholding tax. At the same time, Bank A is subjected to the 5% gross receipts tax on its interest income on loan customers.

are

imposed

on

two

matter of the FWT [Final Withholding

(1) Bank A deposited money with Bank B

to

herein

different subject matters. The subject

MCQ (October 14, 2012)

transactions

taxes

Which

statement below INCORRECTLY describes the transaction? (A) There is double taxation because two taxes - income tax and gross receipts tax are imposed on the interest incomes described above, and double taxation is prohibited under the 1987 Constitution. (B) There is no double taxation because the first tax is income tax, while the second tax is business tax; (C) There is no double taxation because the income tax is on the interest income of Bank A on its deposits with Bank B (passive income), while the gross receipts

Tax] is the passive income generated in the form of interest

on deposits and

yield on deposit substitutes, while the subject

matter

of

the

GRT

[Gross

Receipts Tax] is the privilege of engaging in the business of banking. Second, although both taxes are national in scope because they are imposed by the same taxing authority - the national government under the Tax Code - and operate

within

the

same

Philippine

jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned. (Commissioner of Internal Revenue vs.

tax is on the interest Income received by “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

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Taxation Law Q&As (2007-2013)

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BPI, G.R. No. 147375 dated June 26,

(A) The assessed taxes must be enforced by

2006)

the government. (B) The underlying basis of taxation is

(2) Which of the following statements is

government

necessity,

for

without

NOT correct?

taxation, a government can neither exist nor endure;

(A) In case of doubt, statutes levying taxes

(C) Taxation is an arbitrary method of

are

exaction by those who are in the seat of

construed

strictly

against

the

government;

power;

(B) The construction of a statute made by

(D) The power of taxation is an inherent

his predecessors is not binding upon the

power of the sovereign to impose burdens

successor, if thereafter he becomes satisfied

upon

that a different construction should be

jurisdiction

given;

revenues”.

(C) The reversal of a ruling shall not

SUGGESTED ANSWER:

generally be given retroactive application, if

(B)

said reversal will be prejudicial to the

government,

for

taxpayer;

government

can

(D) A memorandum circular promulgated

endure.

by the CIR that imposes penalty for

sovereignty, the exercise of taxing power

violations of certain rules needed not be

derives

published in a newspaper of general

existence

circulation or official gazette because it

contract with its citizens obliges it to

has the force and effect of law.

promote public interest and common

SUGGESTED ANSWER:

good. The theory behind the exercise of

(D) A revenue memorandum circular

the

subjects for

Taxes

and

objects

the

purpose

are

A

the

to

its

raising

of

the

without

taxes,

the

neither

exist

nor

source

of

of

lifeblood

principal

its

power

the

“within

attribute

from

state

tax

the

whose

emanates

of very

social

from

shall not begin to be operative until after

necessity;

due

fairly

cannot fulfil its mandate of promoting

Internal

the general welfare and well-being of the

Revenue vs. Philippine Airlines, G.R. No.

people. (National Power Corporation vs.

180066 dated July 8, 2009).

City of Cabanatuan, G.R. No. 149110

notice

presumed

thereof

may

(Commissioner

be of

without taxes, government

April 9, 2003). (3) Which statement below expresses the lifeblood theory?

(4) Which statement is WRONG?

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Taxation Law Q&As (2007-2013)

(A)

The

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power

of

taxation

exercised

by

the

political

subdivisions,

may

government, and

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be its

(6) Income from the performance of service

public

is treated as income from within the

utilities;

Philippines, if:

(B) Generally, there is no limit on the amount of tax that may be imposed;

(A) The payment of compensation for the

(C) The money contributed as tax becomes

service is made in the Philippines;

part of the public funds;

(B) The contract calling for the performance

(D) The power of tax is subject to certain

of service is signed in the Philippines;

constitutional limitations.

(C) The service is actually performed in

SUGGESTED ANSWER:

the Philippines;

(A) Inherent Powers of the State

(D) The recipient of service income is a resident of the Philippines.

(5) The Philippines adopted the semi-global

SUGGESTED ANSWER:

tax system, which means that:

(C) Section 42, NIRC

(A) All taxable incomes, regardless of the

(7) For income tax purposes, the source of

nature of income, are added together to

the service income is important for the

arrive at gross income, and all allowable

taxpayer, who is a:

taxable income; (B)

All

incomes

subject

to

final

(A) Filipino citizen residing in Makati City;

withholding taxes are liable to income

(B) Non-resident Filipino citizen working

tax under the schedular tax system,

and residing in London, United Kingdom;

while all ordinary income as well as

(C) Japanese citizen who is married to a

income not subject to final withholding

Filipina citizen and residing in their family

taxes are liable to income tax under’ the,

home located in Fort Bonifacio, Taguig City;

global tax system;

(D) Domestic corporation.

(C) All taxable incomes are subject to final

SUGGESTED ANSWER:

withholding taxes under the schedular tax

(B) Section 23 in relation to Section 42,

system;

NIRC

(D) All taxable incomes from sources within

[NOTE:

and without the Philippines are liable to

considering that resident aliens are also

income tax.

taxable only on income derived from

SUGGESTED ANSWER:

within the Philippines]

C

is

also

a

correct

answer

(B) General Principles of Taxation

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Taxation Law Q&As (2007-2013)

(8)

Interest

income

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of

a

domestic

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in 2010 and derived a gain of P1 Million

commercial bank derived from a peso loan

therefrom. The gain is:

to a domestic corporation in 2010 is:

(A) Taxable at 30% regular corporate income tax based on net taxable income;

(A) Subject to the 30% income tax based

(B) Taxable at 5%/10% capital gains tax

on its net taxable income;

based on net capital gain;

(B) Subject to the 20% final withholding

(C) Taxable at ½ of 1% stock transaction

tax;

tax based on the gross selling price or fair

(C) Subject to the 7.5% final withholding

market value, whichever is higher

tax;

(D) Exempt from income tax.

(D) Subject to 10% final withholding tax.

SUGGESTED ANSWER:

SUGGESTED ANSWER:

(A) Section 22(U) in relation to Section

(A) Section 27(A)

27, NIRC

(9) A resident foreign corporation is one

(11) An individual, who is a real estate

that is:

dealer, sold a residential lot in Quezon City at a gain of P100,000.00 (selling price of

(A)

Organized

under

the

laws

of

the

Philippines that does business in another

P900,000.00 and cost is P800,000.00). The sale is subject to income tax as follows:

country; (B) Organized under the laws of a foreign

(A) 6% capital gains tax on the gain;

country that sets up a regional headquarter

(B) 6% capital gains tax on the gross selling

in the Philippines doing product promotion

price or fair market value, whichever is

and information dissemination;

higher;

(C)

Organized

under

the

laws

of

the

(C) Ordinary income tax at the graduated

Philippines that engages business in special

rates of 5% to 32% of net taxable

economic zone;

income;

(D) Organized under the laws of a foreign

(D) 30% income tax on net taxable income.

country that engages in business in

SUGGESTED ANSWER:

Makati City, Philippines.

(C) Section 24, NIRC

SUGGESTED ANSWER: (D) Section 22(H), NIRC

(12) During the audit conducted by the BIR official, it was found that the rental income

(10) A dealer in securities sold unlisted

claimed

by

the

corporation

was

not

shares of stocks of a domestic corporation

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Taxation Law Q&As (2007-2013)

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subjected to expanded withholding tax.

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(A) Section 127, NIRC

Accordingly, the claimed rental expense: (14) The appropriate method of accounting (A) Is deductible from the gross income of

for

a

contractor

on

his

long-term

the corporation, despite non-withholding of

construction contract (i.e., it takes more

income tax by the corporation;

than a year to finish) is:

(B) Is deductible from the gross income of the corporation, provided that the 5%

(A) Cash method;

expanded withholding tax is paid by the

(B) Accrual method;

corporation during the audit;

(C) Instalment sale method;

(C) Is not deductible from gross income

(D) Percentage of completion method.

of

SUGGESTED ANSWER:

the

corporation

due

to

non-

withholding of tax;

(D) Section 127, NIRC

(D) Is deductible, if it can be shown that the lessor has correctly reported the rental

(15) A general professional partnership

income in his tax return.

(GPP) is one:

SUGGESTED ANSWER: (C) Section 34(K), NIRC

(A) That is registered as such with the Securities and Exchange Commission and

(13) A resident Filipino citizen (not a dealer

the Bureau of Internal Revenue;

in securities) sold shares of stocks of a

(B) That is composed of individuals who

domestic corporation that are listed and

exercise a common profession;

traded in the Philippine Stock Exchange.

(C) That exclusively derives income from the practice of the common profession;

(A) The sale is exempt from income tax

(D) That derives professional income and

but subject to the ½ of 1% stock

rental income from property owned by it.

transaction tax;

Which statement above does NOT properly

(B) The sale is subject to income tax

refer to a GGP?

computed at the graduated income tax

SUGGESTED ANSWER:

rates of 5% to 32% on net taxable Income;

(C) Section 26, NIRC

(C)

[Note:The question is unfair because it

The

sale

is

subject

to

the

stock

transaction tax and income tax;

gives an initial impression that the

(D) The sale is both exempt from the stock

examiner is asking the statement which

transaction tax and income tax.

best characterizes a GPP but the real

SUGGESTED ANSWER:

question is found after the enumeration

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Taxation Law Q&As (2007-2013)

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of the choices which might not be

the amount thereof could be determined

noticed by the examinee.]

with reasonable accuracy; (D) A person who uses the completed

(16) The interest expense of a domestic

method, whereby the construction project

corporation on a bank loan in connection

has been completed during the year the

with

contract was signed.

the

purchase

of

a

production

equipment:

SUGGESTED ANSWER: (C) The accrual of income and expense is

(A) Is not deductible from gross income of

permitted when the all-events test has

the borrower corporation;

been met. This test requires: (1) fixing of

(B) Is deductible from the gross income

a right to income or liability to pay; and

of the borrower-corporation during the

(2) the availability of the reasonable

year or it may be capitalized as part of

accurate determination of such income

cost of the equipment;

or liability.

(C) Is deductible only for a period of five years from date of purchase;

The all-events test requires the right to

(D) Is deductible only if the taxpayer uses

income or liability be fixed, and the

the cash method of accounting.

amount of such income or liability be

SUGGESTED ANSWER:

determined with reasonable accuracy.

(B) Section 34(B)(3), NIRC

However, the test does not demand that the amount of income or liability be

(17) The “all events test” refers to:

known absolutely, only that a taxpayer has

at

his

disposal

the

information

(A) A person who uses the cash method

necessary to compute the amount with

where all sales have been fully paid by the

reasonable accuracy. The all-events test

buyers thereof;

is satisfied where computation remains

(B) A person who uses the instalment sales

uncertain, if its basis is unchangeable;

method,

of

the test is satisfied where a computation

consideration is paid in full by the buyer

may be unknown, but is not as much

thereof within the year of sale;

unknowable, within the taxable year. The

(C)

A

where

person

method,

the

who

whereby

full

amount

uses

the

accrual

an

expense

is

amount of liability does not have to be determined

exactly;

it

must

be

deductible for the taxable year in which

determined with “reasonable accuracy.”

all

(Commissioner of Internal Revenue vs.

the

events

had

occurred

which

determined the fact of the liability and

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Taxation Law Q&As (2007-2013)

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Isabela Cultural Corporation, G.R. No.

SUGGESTED ANSWER:

172231 February 12, 2007)

(B) Section 30, NIRC

(18) All the items below are excluded from

(20) ABS Corporation is a PEZA-registered

gross income, except:

export

enterprise

which

manufactures

cameras and sells all its finished products (A) Gain from sale of long-term bonds,

abroad. Which statement is NOT correct?

debentures and indebtedness; (B) Value of property received by a person

(A) ABS Corporation is subject to the 5%

as donation or inheritance;

final tax on gross income earned, in lieu

(C) Retirement benefits received from the

of all national and local taxes;

GSIS, SSS, or accredited retirement plan;

(B) ABS Corporation is exempt from the

(D) Separation pay received by a retiring

30% corporate income tax on net income,

employee under a voluntary retirement

provided it pays value added tax.

program of the corporate employer.

(C) ABS Corporation is subject to the 30%

SUGGESTED ANSWER:

corporate income tax on net income;

(D) Section 32(B)(6)

(D) ABS Corporation is exempt from all national

and

local

taxes,

except

real

(19) Which statement is correct? A non-

property tax.

stock, non-profit charitable association that

SUGGESTED ANSWER:

sells its idle agricultural property is:

(A) Sections 23 & 24, RA 7916

(A) Not required to file an income tax

(21) In May 2010, Mr. and Mrs. Melencio

return,

the

Antonio donated a house and lot with a fair

transaction to the BIR, provided the sales

market value of P10 million to their son,

proceeds are invested in another real estate

Roberto, who is to be married during the

during the year;

same year to Josefina Angeles. Which

(B) Required to pay the 6% capital gains

statement below is INCORRECT?

nor

pay

income

tax

one

tax on the gross selling price or fair market value, whichever is higher;

(A) There are four (4) donations made - two

(C) Mandated to pay the 30% regular

(2) donations are made by Mr. Melencio

corporate income tax on the gain from sale;

Antonio to Roberto and Josefina, and two

(D) Required to withhold the applicable

(2) donations are made by Mrs. Antonio;

expanded withholding tax rate on the

(B) The four (4) donations are made by the

transaction and remit the same to the BIR.

Spouses Antonio to members of the family,

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hence, subject to the graduated donor‟s tax

SUGGESTED ANSWER:

rates (2%-15%);

(B) Section 85, NIRC

(C) Two (2) donations are made by the spouses to members of the family, while

(23) In 2006, Mr. Vicente Tagle, a retiree,

two

bought

(2)

other

donations

are

made

to

10,000

CDA

shares

that

are

strangers;

unlisted in the local stock exchange for P10

(D) Two (2) donations made by the

per share. In 2010, the said shares had a

spouses

to

book value per share of P60 per share. In

as

view of a car accident in 2010, Mr. Vicente

to

deduction

Roberto from

are

the

entitled

gross

gift

donation proper nuptias.

Tagle had to sell his CDA shares but he

SUGGESTED ANSWER:

could sell the same only for P50 per share.

(D) Section 101, NIRC; Tang Ho v. Court

The sale is subject to tax as follows:

of Appeals (A) 5%/10% capital gains tax on the capital (22) While he was traveling with friends,

gain from sale of P40 per share (P50 selling

Mr.

price less P10 cost);

Jose

Francisco,

resident

Filipino

citizen, died on January 20, 2011 in a

(B) 5/%10% capital gains tax on the capital

California Hospital, USA, leaving personal

gain of P50 per share, arrived at by

and real properties with market values as

deducting the cost (P10 per share) from the

follows: House and Lot in Quezon City- P10

book value (P60 per share);

million; Cash in bank in California

-

(C) 5%/10% capital gains tax on the

US$10,000.00; Citibank in New York -

capital gain from sale of P40 per share

US$5,000.00; Cash in BPI Makati - P4

(P50 selling price less P10 cost) plus

million; Car in Quezon City - P1 million;

donor’s tax on the excess of the fair

Shares of stocks of Apple Corporation, US

market value of the shares over the

corporation listed in NY Stock Exchange -

consideration;

US $5,000.00. Funeral expenses paid - P2

(D) Graduated income tax rates of 5% to

million.

32% on the net taxable income from the

Assume

conversion

rate

of

US$1=Php50. His gross estate for the

sale of the shares.

Philippine estate tax purposes shall be:

SUGGESTED ANSWER: (C) Section 24(C) in relation to Section

(A) 13 Million;

100, NIRC; RR No. 6-2008

(B) 14 Million; (C) 15 Million;

(24) On January 10, 2011, Maria Reyes,

(D) 16 Million

single-mother, donated cash in the amount

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of P50,000.00 to her daughter Cristina, and

(26) Sale of residential house and lot by an

on

donated

official of a domestic corporation to another

another P50,000.00 to Cristina. Which

official in the same corporation for a

statement is correct?

consideration of P2.5 million in 2011 is:

(A) Maria Reyes is subject to donor‟s tax in

(A) Exempt from VAT because the gross

2011 because gross gift is P100,000.00;

sales do not exceed P2.5 million;

(B) Maria Reyes is exempt from donor’s

(B)

tax

property

December

in

20,

2011

2011,

because

she

gross

gift

is

Exempt

from

sold

VAT

is

a

because capital

the

asset,

P100,000.00;

regardless of the gross selling price;

(C) Maria Reyes is exempt from donor‟s tax

(C) Exempt from VAT because the seller is

in 2011 only to the extent of P50,000.00;

not

(D) Maria Reyes is exempt from donor‟s tax

business;

in 2011 because the donee is minor.

(D) Taxable at 12% VAT output tax on the

SUGGESTED ANSWER:

gross selling price of P2.5 million.

(B) Section 99(A), NIRC

Which statement above is INCORRECT?

a

person

engaged

in

real

estate

SUGGESTED ANSWER: (25) Jose Ramos, single, died of a heart

(B) Section 106, NIRC

attack on October 10, 2011. leaving a residential house and lot with a market

(27) An importer of flowers from abroad in

value

2011:

of

P1.8

P100,000.00.

million

Funeral

and

cash

expenses

of paid

amounted to P250,000.00.

(A) Is liable for VAT, if it registers as a VAT person;

(A) His estate will be exempt from estate

(B) Is exempt from VAT, because the goods

tax because the net estate is zero;

are treated as agricultural products;

(B) His estate will be subject to estate tax

(C) Is exempt from VAT, provided that his

because net estate is P1,650,000.00;

total importation of flowers does not exceed

(C) His estate will be subject to estate tax

P1.5 Million;

because net estate is P1,700,000.00;

(D) Is liable for VAT, despite the fact that

(D) His estate will be subject to estate tax

it did not register as a VAT person and

because net estate is P800,000.00.

its total annual sales of flowers do not

SUGGESTED ANSWER:

exceed P1.5 Million.

(A) Section 85 & 86, NIRC

SUGGESTED ANSWER: (D) Section 107, NIRC

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amusement tax on admissions under the (28)

A

VAT

-

registered

contractor

Local Government Code;

performed services for his customer in 2010

(B) MBM Corporation is both liable for the

and billed him P11.2 Million, broken down

12% VAT and 20% amusement tax on

as follows: P10 Million - cost of services,

admissions;

plus P1.2 Million, 12% VAT. Of the contract

(C) MBM Corporation is both exempt from

price of P10 Million, only P8 Million plus

the 12% VAT and 20% amusement tax on

VAT

admissions;

thereon

was

received

from

the

customer in 2010, and the balance of P4

(D) MBM Corporation is liable for the 12%

Million plus VAT was received by the

VAT,

contractor in 2011. How much is the

amusement tax on admissions.

taxable gross receipts of the contractor for

SUGGESTED ANSWER:

2010, for VAT purposes?

(A) CIR v. SM Prime Holdings Inc., G.R.

but

exempt

“

from

the

20%

No. 183505, February 26, 2010 (A) P10 Million, the total cost of services performed in 2010;

(30) A pawnshop shall now be treated, for

(B) P8 Million, the amount received from

business tax purposes:

the customer in 2010; (C) P8 Million plus VAT received from the

(A) As a lending investor liable to the 12%

customer in 2010;

VAT on its gross receipts from interest

(D) P11.2 Million, the total cost of services

income and from gross selling price from

performed plus 12% VAT.

sale of unclaimed properties;

SUGGESTED ANSWER:

(B) Not as a lending investor, but liable

(B) Section 108, NIRC

to the 5% gross receipts tax imposed on a non-bank financial intermediary under

(29)

MBM

Corporation

is

the

owner-

Title VI (Other Percentage Taxes);

operator of movie houses in Cavite. During

(C) As exempt from 12% VAT and 5% gross

the year 2010, it received a total gross

receipts tax;

receipts of P20 Million from the operation of

(D) As liable to the 12% VAT and 5% gross

movies. It did not register as a VAT person.

receipts tax.

Which statement below is correct?

SUGGESTED ANSWER: (B) RR No. 10-2004; H. Tambunting Inc.

(A) MBM Corporation is exempt from the

v. CIR, G.R. No. 172394, October 13,

12%

2010

VAT,

but

liable

for

the

20%

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(31) Under the VAT system, there is no

(C) Gross receipts of a CPA during the

cascading because the tax itself is not again

year amounted to P1 Million; the CPA

being taxed. However, in determining the

registered as a VAT person in January

tax base on sale of taxable goods under the

2011, before practicing his profession;

VAT system:

(D) Sales of a book store during the year amounted to P10 Million; it did not register

(A)

The

professional

tax

paid

by

the

as a VAT person with the BIR.

professional is included in gross receipts;

SUGGESTED ANSWER:

(B) The other percentage tax (e.g., gross

(C) Section 108, NIRC

receipts

tax)

paid

by

the

taxpayer

is

included in gross selling price;

(33) A lessor of real property is exempt from

(C) The excise tax paid by the taxpayer

value added tax in one of the transactions

before withdrawal of the goods from the

below. Which one is it?

place of production or from customs custody is included in the gross selling

(A) Lessor leases commercial stalls located

price;

in the Greenhills Commercial Center to

(D) The documentary stamp tax paid by the

VAT-registered

sellers

taxpayer is included in the gross selling

lessor‟s

rental

price or gross receipts.

amounted to P12 Million;

gross

of

cell

during

phones; the

year

(B) Lessor leases residential apartment SUGGESTED ANSWER:

units

to

individual

tenants

for

(C) Section 106, NIRC; RR No. 16-2005

P10,000.00 per month per unit; his gross rental income during the year amounted

(32) Except for one transaction, the rest are

to P2 Million;

exempt from value added tax. Which one is

(C)

VAT taxable?

P10,000.00

Lessor

leases commercial stalls at per

stall

per

month

and

residential units at P15,000.00 per unit per (A) Sales of chicken by a restaurant owner

month;

who did not register as a VAT person and

(D) Lessor leases two (2) residential houses

whose gross annual sales is P1.2 Million;

and lots at P50,000.00 per month per unit,

(B) Sales of copra by a copra dealer to a

but he registered as a VAT person.

coconut oil manufacturer who did not

SUGGESTED ANSWER:

register as a VAT person and whose gross

(B) Section 109 (Q), NIRC

annual sales is P5 Million;

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(34) IBP Bank extended loans to debtors

[Note: This is not absolutely true because a

during the year, with real properties of the

restaurant may sell the vegetables in their

debtors being used as collateral to secure

original state which will be exempt from

the loans. When the debtors failed to pay

VAT under Section 109(A), irrespective of

the unpaid principal and interests after

who is the seller.]

several demand letters, the bank foreclosed the same and entered into contracts of

(36) Which importation in 2011 is subject

lease with tenants. The bank is subject to

to VAT?

the tax as follows: (A) Importation of fuels by a person engaged (A) 12% VAT on the rental income, but

in international shipping worth P20 Million;

exempt from the 7% gross receipts tax;

(B)

(B) 7% gross receipts tax on the rental

refrigerated Kobe beef from Japan by a beef

income, but exempt from VAT;

dealer for sale to hotels in Makati City with

(C) Liable to both the 12% VAT and 7%

a fair market value of P1.2 Million;

gross receipts tax;

(C) Importation of wines by a wine dealer

(D) Exempt from both the 12% VAT and 7%

with a fair market value of P2 Million for

gross receipts tax.

sale to hotels in Makati City;

SUGGESTED ANSWER:

(D) Importation of books worth P5 Million

(B) Section 121, NIRC

and school supplies worth P1.2 Million.

Importation

of

raw,

unprocessed,

SUGGESTED ANSWER: (35) Which transaction below is subject to

(C) Sections 107 & 109, NIRC

VAT?

[Note: d) may also be a correct choice because only importation of books is

(A) Sale of vegetables by a farmer in Baguio

exempt from VAT. The importation of

City to a vegetable dealer;

school supplies is not exempt.]

(B) Sale of vegetables by a vegetable dealer in Baguio City to another vegetable dealer

(37) Input tax is available to a VAT -

in Quezon City;

registered buyer, provided that:

(C) Sale of vegetables by the QC vegetable dealer to a restaurant in Manila;

(A) The seller is a VAT - registered person;

(D) Sale of vegetables by the restaurant

(B) The seller issues a VAT invoice or

operator to its customers.

official

SUGGESTED ANSWER:

indicates the VAT component;

receipt,

which

separately

(D) Section 109, NIRC

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(C) The goods or service is subject to or

(39) A hotel operator that is a VAT -

exempt from VAT, but the sale is covered by

registered person and who leases luxury

a VAT invoice or receipt issued by VAT-

vehicles to its hotel customers is:

registered person; (D) The name and TIN of the buyer is not

(A) Subject to the 3% common carriers tax

stated or shown in the VAT invoice or

and 12% VAT;

receipt.

(B) Subject to the 3% common carriers tax

SUGGESTED ANSWER:

only;

(B) Section 113(B), NIRC

(C) Subject to the 12% VAT only; (D) Exempt from both the 3% common

(38) Claim for tax creditor refund of excess

carriers tax and 12% VAT.

input tax is available only to:

SUGGESTED ANSWER: (C) Section 108, NIRC

(A) A VAT - registered person whose sales are

made

to

embassies

of

foreign

(40) Which statement is correct? A bar

governments and United Nations agencies

review

center

located in the Philippines without the BIR

lawyers is:

owned

and

operated

by

approval of the application for zero-rating; (B) Any person who has excess input tax

(A) Exempt from VAT, regardless of its gross

arising from local purchases of taxable

receipts during the year because it is an

goods and services;

educational center;

(C) A VAT - registered person whose sales

(B) Exempt from VAT, provided that its

are made to clients in the Philippines;

annual gross receipts do not exceed P1.5

(D) A VAT - registered person whose sales

Million in 2011;

are

(C) Subject to VAT, regardless of its gross

made

to

customers

outside

the

Philippines and who issued VAT invoices’

receipts during the year;

or receipts with the words “ZERO RATED

(D) Subject to VAT, if it is duly accredited

SALES” imprinted on the sales invoices

by TESDA.

or receipts.

SUGGESTED ANSWER:

SUGGESTED ANSWER:

(B) Section 109 (V), NIRC

(D) Kepco Phils. Corp. v. CIR, G.R. No. 179961, January 31, 2011

(41) For 2012, input tax is not available as a credit against the output tax of the buyer of taxable goods or services during the quarter, if:

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(C) Sections 105 & 109, NIRC (A) The VAT invoice or receipt of the seller is registered with the BIR;

(43) Which statement is FALSE under the

(B) The VAT invoice or receipt of the

VAT law?

seller does not separately indicate the gross selling price or gross receipts and

(A) A VAT- registered person will be subject

the VAT component therein;

to

(C) The VAT invoice or receipt is issued in

regardless of his gross sales or receipts;

the name of the VAT-registered buyer and

(B) A person engaged in trade or business

his TIN is shown i said invoice, or receipt;

selling taxable goods or services must

(D) The VAT invoice or receipt issued by the

register as a VAT person, when his gross

seller shows the Taxpayer Identification

sales or receipts for the year 2011 exceed

Number plus the word “VAT” or “VAT

P1.5 Million;

registered person”.

(C) A person who issued a VAT- registered

SUGGESTED ANSWER:

invoice or receipt for a VAT - exempt

(B) Section 113, NIRC

transaction is liable to the 12% VAT as a

VAT

for

his

taxable

transactions,

penalty for the wrong issuance thereof: (42) The public market vendor below, who

(D) Once a doctor of medicine exercises

is not a VAT - registered person is liable to

his profession during the year, he needs

VAT in 2010, if:

to register as a VAT person and to issue VAT

receipts

for

professional

(A) She sells raw chicken and meats and

received.

her gross sales during the year is P2

SUGGESTED ANSWER:

Million;

(D) Section 236(G)(1)(b), NIRC

fees

(B) She sells vegetables and fruits in her stall and her gross sales during the year is

(44) The Commissioner of Internal Revenue

P1.6 Million;

may NOT inquire into the bank deposits of

(C) She sells canned goods, processed

a taxpayer, except:

coconut oils, and cut flowers in her stall and her gross sales during the year is

(A) When the taxpayer files a fraudulent

P2.5 Million;

return;

(D) She sells live fish, shrimps, and crabs

(B) When the taxpayer offers to compromise

and her gross sales during the year is P5

the

Million.

assessment;

assessed

tax

based

on

erroneous

SUGGESTED ANSWER:

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(C)

When

the

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taxpayer

offers

to

compromise the assessed tax based on financial

incapacity

to

pay

and

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2007 with the QC Post Office. Which statement is correct?

he

authorizes the Commissioner in writing

(A) The assessment notice is void because it

to look into his bank records;

was mailed beyond the prescriptive period;

(D) When the taxpayer did not file his

(B) The assessment notice is void because it

income tax return for the year.

was not received by the taxpayer within the

SUGGESTED ANSWER:

three-year period from the date of filing of

(C) Section 6(F), NIRC

the tax return; (C) The assessment notice is void if the

(45) The Commissioner of Internal Revenue

taxpayer can show that the same was

issued a BIR ruling to the effect that the

received only after one(1) month from date

transaction is liable to income tax and

of mailing;

value added tax. Upon receipt of the ruling,

(D) The assessment notice is valid even if

a taxpayer does not agree thereto. What is

the taxpayer received, the same after the

his proper remedy?

three-year period from the date of filing of the tax return.

(A) File a petition for review with the Court

SUGGESTED ANSWER:

of Tax Appeals within thirty(30) days from

(D) Section 203, NIRC; BPI v. CIR, G.R.

receipt thereof;

No. 139736, October 17, 2005

(B) File a motion for reconsideration with the Commissioner of Internal Revenue;

(47) A Preliminary Assessment Notice (PAN)

(C) File an appeal to the Secretary of

is NOT required to be issued by the BIR

Finance

before issuing a Final Assessment Notice

within

thirty(30)

days

from

receipt thereof;

(FAN) in one of the following cases:

(D) File an appeal to the Secretary of Justice within thirty(30) days from receipt

(A) When a taxpayer does not pay the 2010

thereof.

deficiency income tax liability on or before

SUGGESTED ANSWER:

July 15 of the year;

(C) Section 4, NIRC

(B) When the finding for any deficiency tax is the result mathematical error in

(46) On April 15, 2011, the Commissioner

the computation of the tax as appearing

of Internal Revenue mailed by registered

on the face of the return;

mail the final assessment notice and the demand letter covering the calendar year

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(C)

When

a

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discrepancy

has

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been

protest was submitted by it on June 30,

determined between the value added tax

2011. If no denial of the protest was

paid and the amount due for the year;

received by the taxpayer, when is the last

(D) When the amount of discrepancy shown

day for the filing of its appeal to the CTA?

in the Letter Notice is not paid within thirty (30) days from date of receipt.

(A) November 30, 2011;

SUGGESTED ANSWER:

(B) December 30, 2011;

(B) Section 228, NIRC

(C) January 30, 2012; (D) February 28, 2012.

(48) When a protest against the deficiency

SUGGESTED ANSWER:

income tax assessment was denied by the

(C) Section 228, NIRC

BIR Regional Director of Quezon City, the appeal to the Court of Tax Appeals must be

(50)

Using

filed by a taxpayer:

immediately

the

same

preceding

facts

in

number,

the but

assuming that the final decision on the (A) If the amount of basic tax assessed is

disputed assessment was received by the

P100,000.00 or more;

taxpayer on July 30, 2011, when is the last

(B) If the amount of basic tax assessed is

day for filing of the appeal to the CTA.

P300,000.00 or more; (C) If the amount of basic tax assessed is

(A) August 30, 2011;

P500,000.00 or more;

(B) September 30, 2011;

(D) If the amount of basic tax assessed is

(C) December 30, 2011;

P1 Million or more.

(D) January 30, 2012.

SUGGESTED ANSWER:

SUGGESTED ANSWER:

All the choices are correct. All the

(A) Section 228, NIRC (nearest answer

decisions on disputed assessments are

but not a correct answer)

appealable

Division)

[Note: The period to appeal is within 30

irrespective of the amount (Section 3,

days from receipt of the final decision by

RA 9282).

the Commissioner. The decision was

to

the

CTA

(in

received on July 30, 2011 so the last day (49) The taxpayer received an assessment

to perfect an appeal with the CTA is

notice on April 15, 2011 and filed its

August 29, 2011. It is thus clear that the

request

question

for

reinvestigation

against

the

did

not

provide

for

the

assessment on April 30, 2011. Additional

CORRECT answer. Hence, it should be

documentary evidence in support of its

treated as a bonus question.]

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from the date of submission of complete (51)

Which

court

has

jurisdiction

to

determine if the warrant of distraint and

documents, an appeal must be filed with the CTA:

levy issued by the BIR is valid and to rule if the waiver of the Statute of Limitations was

(A) Within thirty (30) days after filing the

validly effected?

administrative claim with the BIR; (B) Within sixty (60) days after filing the

(A) City Courts;

administrative claim with the BIR;

(B) Regional Trial Courts;

(C) Within one hundred twenty (120) days

(C) Court of Tax Appeals;

after filing the administrative claim with the

(D) Court of Appeals.

BIR;

SUGGESTED ANSWER:

(D) Within thirty (30) days from the

(C) Section 7, RA 9282

receipt of the decision denying the claim or after the expiration of the 120-day

(52) Which statement below on compromise

period.

of tax liability is correct?

SUGGESTED ANSWER: (D) Section 112(C) NIRC of 1997

(A) Compromise of a tax liability is available only at the administrative level;

In case of full or partial denial by the

(B) Compromise of a tax liability is available

CIR, the taxpayer’s recourse is to file an

only before trial at the CTA;

appeal before the CTA within 30 days

(C) Compromise of a tax liability is

from receipt of the decision of the CIR.

available even during appeal, provided

However, if after the 120-day period the

that prior leave of court is obtained;

CIR fails to act on the application for tax

(D) Compromise of a tax liability is still

refund/credit,

available even after the court decision has

taxpayer is to appeal the inaction of the

become final and executory.

CIR to CTA within 30 days. (CIR v. Aichi

SUGGESTED ANSWER:

Forging Company of Asia, Inc., G.R. No.

(C) RR 30-2002

184823, October 6, 2010)

(53) In case of full or partial denial of the

(54)

written claim for refund or excess input tax

documents within sixty (60) days from the

directly attributable to zero-rated sales, or

filing of the protest is available only where:

The

the

submission

remedy

of

the

of

the

required

the failure on the part of the Commissioner to act on the application within 120 days

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Which

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(A) The taxpayer previously filed a Motion

(56)

statement

is

correct?

The

for Reconsideration with the BIR official;

collection of a deficiency tax assessment by

(B) The taxpayer previously filed a request

distraint and levy:

for reconsideration with the BIR official; (C)

The

taxpayer

previously

filed

a

(A) May be repeated, if necessary, until

request for reinvestigation with the BIR

the

official;

expenses, is collected;

(D)

The

taxpayer

previously

filed

an

full

amount

due,

including

all

(B) Must be done successively, first by

extension to file a protest with the BIR

distraint and then by levy;

official.

(C) Automatically covers the bank deposits

SUGGESTED ANSWER:

of a delinquent taxpayer;

(C) Section 228, NIRC; RCBC v. CIR

(D) May be done only once during the taxable year.

(55)

The

prescriptive

period

for

the

collection of the deficiency tax assessment

SUGGESTED ANSWER: (A) Section 217, NIRC

will be tolled: (A) If the taxpayer files a request for reconsideration

with

the

Asst.

(57)

The

prescriptive

period

to

file

a

criminal action is:

Commissioner; (B) If the taxpayer files a request for reinvestigation that is approved by the (C) If the taxpayer changes his address in the Philippines that is communicated to the (D) If a warrant of levy is served upon the

of the final assessment notice;

of the violation of the law, and if the

SUGGESTED ANSWER: 223,

annual tax return; (D) Five (5) years from the commission

taxpayer‟s real property in Manila NIRC;

BPI

v.

Commissioner, G.R. No. 139736, October 17, 2005

(B) Five (5) years from the date of issuance (C) Three (3) years from the filing of the

BIR official;

Section

of the commission of fraud or non-filing of tax return;

Commissioner of Internal Revenue;

(B)

(A) Ten (10) years from the date of discovery

same be not known at the time, from the discovery thereof and the institution of judicial proceedings for its investigation and punishment. SUGGESTED ANSWER: (D) Section 281, NIRC

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(D) The CTA will impose civil or tax (58) The accused‟s mere reliance on the

liability, provided that a computation of

representations made by his accountant,

the tax liability is presented during the

with deliberate refusal or avoidance to

trial.

verify the contents of his tax return and to

SUGGESTED ANSWER:

inquire on its authenticity constitutes:

(C) or (D) Republic vs. Patanao, L-22356, July 1, 1967; (Castro v. Collector of

(A) Simple negligence;

Internal Revenue, L-12174, April 26,

(B) Gross negligence;

1962).

(C) Wilful blindness; (D) Excusable negligence.

(60) X Corporation had excess income tax

SUGGESTED ANSWER:

payment for the year 2008, which it chose

(C) CTA E.B. Criminal Case No. 006;

to carryover in 2009. In filing its 2009

People v. Kintanar, G.R. No. 196340

corporate income tax return, it signified its intention

(by

checking

the

small

box

(59) The acquittal of the accused in the

“refund” at the bottom of the return) to get

criminal action for the failure to file income

a refund of the overpaid amount in 2008.

tax return and failure to supply correct

Can the refund be allowed or not, and if

information

disallowed, does X Corporation lose the

will

have

the

following

consequence:

claimed amount?

(A) The CTA will automatically exempt the

(A) X Corporation may not get the refund

accused from any civil liability;

because the decision to carryover in 2008

(B) The CTA will still hold the taxpayer

was irrevocable for that year, and it may

liable for deficiency income tax liability in

not change that decision in succeeding

all cases, since preponderance of evidence

years;

is merely required for tax cases;

(B) X Corporation may not get the refund

(C) The CTA will impose

in 2009, but the amount being claimed

liability

only

final

as refund may be utilized in succeeding

assessment notice issued by the BIR

years until fully exhausted because there

against the accused in accordance with

is no prescriptive period for carryover of

the prescribed procedures for issuing

excess income tax payments;

assessments,

(C) X Corporation may get the refund,

during the trial;

if

there

civil or tax

which

was

was

a

presented

provided that it will no longer carryover

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such amount or utilize the same against its

(C) Section 2227, Revised Administrative

income tax liability in the future;

Code of 1917

(D) X Corporation may file instead a claim of tax credit, in lieu of refund.

(62) Which of the following statements is

SUGGESTED ANSWER:

NOT a test of a valid ordinance?

(B) Section 76, NIRC The carryover of excess income tax

(A) It must not contravene the Constitution

payments is no longer limited to the

or any statute;

succeeding

(B) It must not be unfair or oppressive;

taxable

year.

Unutilized

excess income tax payments may now be

(C) It must not be partial or discriminatory;

carried over to the succeeding taxable

(D) It may prohibit or regulate trade.

years until fully utilized. In addition, the

SUGGESTED ANSWER:

option to carryover excess income tax

(D) To be valid, an ordinance must not

payments is now irrevocable. Hence,

prohibit

unutilized excess income tax payments

(Magtajas

may no longer be refunded. (Belle Corp.

Corporation, Inc., G.R. No. 111097, July

v. CIR, G.R. No. 181298, January 10,

20, 1994)

but

may

v.

regulate

Pryce

trade.

Properties

2011) (63) Taxing power of local government units (61) Which statement is correct?

shall NOT extend to the following taxes, except one:

(A) Legislative acts passed by the municipal

(A) Income tax on banks and other

council in the exercise of its lawmaking

financial institutions;

authority are denominated as resolutions

(B) Taxes of any kind on the national

and ordinances;

government,

(B) Legislative acts passed by the municipal

instrumentalities,

council in the exercise of its lawmaking

units;

authority are denominated as resolutions;

(C)

(C)

products

Legislative

acts

passed

by

the

Taxes

its

on when

and

agencies local

agricultural sold

by

and

government and

the

aquatic marginal

municipal council in the exercise of its

farmers or fishermen;

lawmaking authority are denominated as

(D) Excise taxes on articles enumerated

ordinances;

under the National Internal Revenue Code.

(D) Both ordinances and resolutions are

SUGGESTED ANSWER:

solemn and formal acts.

(A) Section 186, RA 7160

SUGGESTED ANSWER:

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Taxation Law Q&As (2007-2013)

(64)

Which

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statement

on

prescriptive

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SUGGESTED ANSWER:

periods is true?

(D) Section 198, RA 7160

(A) The prescriptive periods to assess taxes

(66)

in the National Internal Revenue Code and

Authority

the Local Government Code are the same;

property tax. Which statement below is

(B) Local taxes shall be assessed within

NOT correct?

The

Manila (MIAA)

International is

exempt

Airport

from

real

five (5) years from the date they became due;

(A) MIAA is not a government-owned or

(C) Action for the collection of local taxes

controlled corporation because it is not

may be instituted after the expiration of the

organized

period to assess and to collect the tax;

corporation;

(D) Local taxes may be assessed within ten

(B) MIAA is a government instrumentality

(10)

years

from

underpayment

of

discovery tax

which

as

with

a

stock

corporate

or

non-stock

of

the

vested

powers

does

not

performing essential public services;

and

constitute fraud.

(C) MIAA is not a taxable entity because the

SUGGESTED ANSWER:

real property is owned by the Republic of

(B) Section 194, RA 7160

the Philippines and the beneficial use of such property has not been granted to a

(65) The appraisal, assessment, levy and

private entity;

collection of real property tax shall be

(D) MIAA is a government-owned or

guided by the following principles. Which

controlled

statement does NOT belong here?

required to meet the test of economic

corporation

because

it

is

viability. (A) Real property shall be appraised at its

SUGGESTED ANSWER:

current and fair market value;

(D) MIAA vs. City of Pasay, G.R. No.

(B) Real property shall be classified for

163072, April 2, 2009

assessment purposes on the basis of its actual use;

(67) For purposes of real property taxes, the

(C) Real property shall be assessed on the

tax rates are applied on:

basis of a uniform classification within each local political subdivision;

(A) Zonal values;

(D) The appraisal and assessment of real

(B) Fair market value;

property

(C) Assessed values;

shall

be

based

on

audited

financial statements of the owner.

(D) Reproduction values,

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SUGGESTED ANSWER:

(C) To file an appeal with the Provincial

(C) Section 233, RA 7160

Board

of

Assessment

Appeals

within

sixty (60) days from receipt of the (68) One of the local government units

assessment;

below does NOT have the power to impose

(D) To file an appeal with the Provincial

real property tax:

Board of Assessment Appeals within sixty (60) days from receipt of the assessment

(A) Bacoor, Cavite;

and paying the assessed tax under protest.

(B) Davao, City;

SUGGESTED ANSWER:

(C) Tarlac Province;

(C) Section 226, RA 7160

(D) Malabon, Metro Manila. SUGGESTED ANSWER:

(70) The City Government of Manila may

(A) Section 200,RA 7160

NOT impose:

[Note: The answer above is premised on the belief that Bacoor is a municipality

(A) Basic real property tax at 2% of the

and the LGC does not vest municipalities

assessed value of real property;

with the power to impose real property

(B) Additional levy on real property for the

taxes, except for municipalities within

special

the Metropolitan Manila area. However,

assessed value of real property;

Bacoor is already a city hence, can no

(C) Additional ad valorem tax on idle lands

longer be a correct choice. Since the

at a rate not exceeding 5% of the assessed

question

value;

did

not

provide

for

the

education

fund

at

1%

of

the

CORRECT answer, it should be treated as

(D) Special levy on lands within its

a bonus.]

territory specially benefited by public works projects or improvements funded

(69) Where the real property tax assessment

by it at 80% of the actual cost of the

is erroneous, the remedy of the property

projects or improvements.

owner is:

SUGGESTED ANSWER: (D) Section 240, Ra 7160

(A) To file a claim for refund in the Court of Tax Appeals if he has paid the tax, within

71.

Importation

thirty (30) days from date of payment;

terminated:

of

goods

is

deemed

(B) To file an appeal with the Provincial Board of Assessment Appeals within thirty (30) days from receipt of the assessment;

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(A) When the customs duties are paid, even

(A) The home consumption value;

if the goods remain within the customs

(B) The total value;

premises;

(C) The total landed cost;

(B) When the goods are released or

(D) The transaction value.

withdrawn from the customs house upon

SUGGESTED ANSWER:

payment of the customs duties or with

(D) Section 201, Tariff and Customs

legal permit to withdraw;

Code, as amended by RA 8181 dated

(C)

When

the

goods

enter

Philippine

March 28, 1996.

territory and remain within the customs house within thirty (30) days from date of

(74) The imported articles shall in any case

entry;

be

(D) When there is part payment of duties on

examination when:

subject

to

the

regular

physical

the imported goods located in the customs area.

(A) The importer disagrees with the findings

SUGGESTED ANSWER:

as contained in the government surveyor‟s

(B) Section 1202, Tariff and Customs

report‟

Code

(B) The number, weight and nature of packages indicated in the customs entry

(72) A protest against an assessment issued

declaration and supporting documents

by the Collector of Customs for unpaid

differ from that in the manifest;

customs duties on imported goods shall be

(C)

filed with:

damaged;

The

container

is

not

leaking

or

(D) The shipment is covered by alert/hold (A) The Commissioner of Customs;

orders issued pursuant to an existing order.

(B) The Regional Trial Court;

SUGGESTED ANSWER:

(C) The Court of Tax Appeals;

(B) Sec. 1401, Tariff and Customs Code,

(D) The Collector of Customs.

as amended by RA 7650.

SUGGESTED ANSWER: (D) Section 2308, Tariff and Customs

(75) Which cases are appealable to the

Code

CTA?

(73) The dutiable value of an imported

(A) Decisions of the Secretary of Finance in

article subject to an ad valorem rate of duty

cases involving liability for customs duties,

under existing law shall be:

seizure, detention or release of property affected;

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(B) Decisions of the Commissioner of

(2) Anne Lapada, a student activist, wants

Customs in cases involving liability for

to impugn the validity of a tax on text

customs duties, seizure, detention or

messages. Aside from claiming that the law

release of property affected;

adversely

(C) Decisions of the Collector of Customs in

messages by text, what may she allege that

cases involving liability for customs duties,

would strengthen her claim to the right to

seizure, detention or release of property

file a taxpayer‟s suit?

affects

her

since

she

sends

affected; (D) Decisions of the BIR Commissioner in

(A) That she is entitled to the return

cases involving liability for customs duties,

of the taxes collected from her in

seizure, detention or release of property

case the court nullifies the tax

affected.

measure.

SUGGESTED ANSWER:

(B) That

(B) Section 7, RA 9282.

tax

money

is

being

extracted and spent in violation of the constitutionally guaranteed

2011

Taxation

Law

Exam

MCQ (November 13, 2011) (1) A municipality may levy an annual ad valorem tax on real property such as land, building,

machinery,

and

other

improvement only if (A) the real property is within the Metropolitan Manila Area. (B) the real property is located in the municipality. (C) the DILG authorizes it to do so. (D) the power is delegated to it by the province.

right

to

freedom

of

communication. (C) That she is filing the case in behalf of a substantial number of taxpayers. (D)

That

text

messages

are

an

important part of the lives of the people she represents. (3) There is no taxable income until such income is recognized. Taxable income is recognized when the (A) taxpayer fails to include the income in his income tax return. (B)

income

has

been

actually

received in money or its equivalent.

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(C) income

has

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been

received,

either actually or constructively.

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papers of the shipment yet since the Food and Drug Administration (FDA) needed to test the suitability of the wine for human

(D) transaction that is the source of

consumption. Is the Bureau of Customs at

the income is consummated.

fault for refusing to release the shipment

(4) Keyrand, Inc., a Philippine corporation,

just as yet?

sold through the local stock exchange

(A) Yes, because the importation was

10,000 PLDT shares that it bought 2 years

already terminated as a result of the

ago. Keyrand sold the shares for P2 million

payment of the taxes due.

and realized a net gain of P200,000.00. How shall it pay tax on the transaction?

(B) Yes, the Bureau of Customs is estopped from holding the release of

(A) It shall declare a P2 million gross

the shipment after receiving the

income in its income tax return,

payment.

deducting its cost of acquisition as an expense.

(C) No, if the amount paid as duties and value-added taxes due on the

(B) It shall report the P200,000.00

importation was insufficient.

in its corporate income tax return adjusted by the holding period.

(D) No,

because

the

Bureau

of

Customs has not yet issued the (C) It shall pay 5% tax on the first

legal

P100,000.00

pending the FDA's findings.

of

the

P200,000.00

permit

for

withdrawal

and 10% tax on the remaining P100,000.00.

(6) Which theory in taxation states that without taxes, a government would be

(D) It shall pay a tax of one-half of

paralyzed for lack of power to activate and

1% of the P2 million gross sales.

operate it, resulting in its destruction?

(5) Amaretto, Inc., imported 100 cases of Marula

wine

from

South

Africa.

(A) Power to destroy theory

The

shipment was assessed duties and value-

(B) Lifeblood theory

added taxes of P300,000 which Amaretto, Inc.

immediately

paid.

The

Bureau

of

Customs did not, however, issue the release

(C) Sumptuary theory (D) Symbiotic doctrine

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Taxation Law Q&As (2007-2013)

(7)

The

spouses

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Helena

and

Federico

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and letter of demand covering the taxable

wanted to donate a parcel of land to their

year

son Dondon who is getting married in

envelope shows April 10, 2011. Her return

December, 2011. The parcel of land has a

is not a false and fraudulent return. Can

zonal valuation of P420,000.00. What is the

Mia raise the defense of prescription?

most

efficient

mode

of

donating

2007

but

the

postmark

on

the

the (A) No. The 3 year prescriptive

property?

period started to run on April 15, (A) The spouses should first donate

2008,

hence,

it

has

not

in 2011 a portion of the property

expired on April 10, 2011.

yet

valued at P20,000.00 then spread the P400,000.00 equally for 2012,

(B) Yes. The 3 year prescriptive

2013, 2014 and 2015.

period started to run on April 15, 2008, hence, it had already expired

(B) Spread the donation over a

by May 20, 2011.

period of 5 years by the spouses donating

P100,000.00

each

year

(C)

No.

The

prescriptive

period

started to run on March 30, 2008,

from 2011 to 2015.

hence, the 3 year period expired on (C) The

spouses

should

each

April 10, 2011.

donate a P110,000.00 portion of the value of the property in 2011

(D)

then

prescriptive period started to run on

each

should

donate

P100,000.00 in 2012.

Yes.

Since

the

3-year

March 30, 2008, it already expired by May 20, 2011.

(D) The spouses should each donate a P100,000.00 portion of the value

(9) Double taxation in its general sense

of the property in 2011, and another

means taxing the same subject twice during

P100,000.00 each in 2012. Then, in

the same taxing period. In this sense,

2013, Helena should donate the

double taxation

remaining P20,000.00. (8) Mia, a compensation income earner, filed her income tax return for the taxable year 2007 on March 30, 2008. On May 20,

(A) violates substantive due process. (B) does not violate substantive due process.

2011, Mia received an assessment notice

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(C) violates

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the

right

to

equal

protection.

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(B) Interests earned on its dollar deposits in a Philippine bank under the

(D) does not violate the right to

Expanded

Foreign

Currency

Deposit System.

equal protection. (C) Dividends from a two-year old (10) The payor of passive income subject to

Norwegian

final tax is required to withhold the tax

operations in Zambia but derives

from the payment due the recipient. The

60% of its gross income from the

withholding of the tax has the effect of

Philippines.

subsidiary

with

(A) a final settlement of the tax

(D) Royalties from the use in Brazil

liability on the income.

of generator sets designed in the

(B) a credit from the recipient's income tax liability.

Philippines by its engineers. (12) Tong Siok, a Chinese billionaire and a

(C) consummating the transaction resulting in an income.

Canadian resident, died and left assets in China valued at P80 billion and in the Philippines assets valued at P20 billion. For

(D) a deduction in the recipient's income tax return.

Philippine estate tax purposes the allowable deductions indebtedness,

for

expenses,

and

taxes,

losses, property

a

previously taxed, transfers for public use,

corporation registered in Norway, has a 50

and the share of his surviving spouse in

MW electric power plant in San Jose,

their conjugal partnership amounted to P15

Batangas. Aside from Guidant's income

billion. Tong's gross estate for Philippine

from its power plant, which among the

estate tax purposes is

(11)

Guidant

Resources

Corporation,

following is considered as part of its income from sources within the Philippines? (A) Gains from the sale to an Ilocos

Norte

generators

power

bought

United States.

plant from

of the

(A) P20 billion. (B) P5 billion. (C) P100 billion. (D) P85 billion.

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(13) Anktryd, Inc., bought a parcel of land

(A) Yes. Aplets is a non-resident

in 2009 for P7 million as part of its

foreign corporation engaged in trade

inventory of real properties. In 2010, it sold

or business in the Philippines.

the land for P12 million which was its zonal valuation. In the same year, it incurred a

(B) No. The tax should have been

loss of P6 million for selling another parcel

computed on the basis of gross

of land in its inventory. These were the only

revenues and not net income.

transactions

it

had

in

its

real

estate

(C) No. Aplets is a non-resident

business. Which of the following is the

foreign corporation not engaged

applicable tax treatment?

in

trade

or

business

in

the

Philippines.

(A) Anktryd shall be subject to a tax of 6% of P12 million.

(D) Yes. Aplets is doing business in

(B) Anktryd could deduct its P6

the Philippines through its exclusive

million loss from its P5 million

distributor Kim's Trading. Inc.

gain.

(15) In 2009, Spratz, Inc.‟s net profit before

(C) Anktryd's gain of P5 million shall

tax was P35 million while its operating

be subject to the holding period.

expenses was P31 million. In 2010, its net profit before tax was P40 million and its

(D) Anktryd's P6 million loss could

operating expenses was P38 million. It did

not be deducted from its P5 million

not declare dividends for 2009 and 2010.

gain.

And

it

has

no

proposed

capital

expenditures for 2011 and the immediate (14) Aplets Corporation is registered under

future. May Spratz be subject to the

the laws of the Virgin Islands. It has

improperly accumulated tax on its retained

extensive operations in Southeast Asia. In

profits for 2009 and 2010?

the Philippines, Its products are imported and sold at a mark-up by its exclusive

(A)

Yes,

since

the

accumulated

distributor, Kim's Trading, Inc. The BIR

amounts

are

compiled a record of all the imports of Kim

operations in relation to what it

from Aplets and imposed a tax on Aplets

usually needed annually.

reasonable

for

net income derived from its exports to Kim. Is the BIR correct?

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(B) Yes, since the accumulation is

(C) identify who should collect the

not reasonably necessary for the

tax.

immediate needs of the business. (D) determine who should be subject (C) No, because there is no showing

to the tax.

that the taxpayer's 2009 and 2010 net profit before tax exceeded its

(18)

Passive

income

includes

income

paid-up capital.

derived from an activity in which the earner does not have any substantial participation.

(D) No, because the taxpayer is not shown

to

be

corporation,

a

a

This type of income is

publicly-listed

bank,

or

(A) usually subject to a final tax.

an

insurance company. (16)

The

actual

effort

exerted

(B) exempt from income taxation. by

the

(C) taxable only if earned by a

government to effect the exaction of what is

citizen.

due from the taxpayer is known as

(D) included in the income tax

(A) assessment. (B) levy. (C) payment.

return. (19)

2010,

Juliet

Ulbod

earned

P500,000.00 as income from her beauty parlor

(D) collection.

In

and

received

P250,000.00

as

Christmas gift from her spinster aunt. She had no other receipts for the year. She

(17) Although the power of taxation is

spent P150,000.00 for the operation of her

basically legislative in character, it is NOT

beauty parlor. For tax purposes, her gross

the function of Congress to

income for 2010 is

(A) fix with certainty the amount of

(A) P750,000.00.

taxes. (B) P500,000.00. (B) collect the tax levied under the law.

(C) P350,000.00. (D) P600,000.00.

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(20) Exempted from donor‟s taxation are

gross income was derived solely

gifts made

from Philippine sources.

(A) for the use of the barangay.

(22) An example of a tax where the concept of progressivity finds application is the

(B) in consideration of marriage. (A) income tax on individuals. (C) to a school which is a stock corporation.

(B)

excise

tax

on

petroleum

products. (D)

to

a

for-profit

government

corporation.

(C)

value-added

tax

on

certain

tax

on

boxing

articles. (21) Federico, a Filipino citizen, migrated to the United States some six years ago and

(D)

amusement

got a permanent resident status or green

exhibitions.

card. He should pay his Philippine income (23) A corporation may change its taxable

taxes on

year to calendar or fiscal year in filing its (A) the gains derived from the sale in California,

U.S.A.

of

jewelry

annual income tax return, provided

he (A) it seeks prior BIR approval of

purchased in the Philippines.

its proposed change in accounting (B) the proceeds he received from a

period.

Philippine insurance company as the sole beneficiary of life insurance

(B)

taken

approval

by

his

father

who

died

it

simultaneously of

its

new

seeks

BIR

accounting

recently.

period.

(C) the gains derived from the sale

(C) it should change its accounting

in the New York Stock Exchange

period two years prior to changing

of shares of stock in PLDT, a

its taxable year.

Philippine corporation. (D) dividends received from a two

(D) its constitution and by-laws authorizes the change.

year old foreign corporation whose

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(24) What is the rule on the taxability of

which are subject to value-added tax. Since

income

educational

he is using the calendar year as his taxable

its

year, his taxable quarters end on the last

that

institution

a

government

derives

from

school

operations? Such income is

day

of

March,

June,

September,

and

December. When should Ka Pedring file the (A) subject to 10% tax on its net

VAT quarterly return for his gross sales or

taxable

receipts for

income

as

if

it

is

a

proprietary educational institution.

the

period of

June

1 to

September 30?

(B) Exempt from income taxation

(A) Within

if it is actually, directly, and

September 30

25

days

from

exclusively used for educational purposes.

(B) Within 45 days from September 30

(C) subject to the ordinary income tax rates with respect to incomes

(C) Within 15 days from September

derived from educational activities.

30

(D) Exempt from income taxation in

(D) Within 30 days from September

the same manner as government-

30

owned and controlled corporations. (27) In January 2011, the BIR issued a (25) Which among the following reduces the

ruling that Clemen's vodka imports were

gross estate (not the net estate) of a citizen

not subject to increased excise tax based on

of the Philippines for purposes of estate

his claim that his net retail price was only

taxation?

P200 per 750 milliliter bottle. This ruling was applied to his imports for May, June,

(A) Transfers for public use (B) Property previously taxed (C) Standard deduction of P1 million (D) Capital of the surviving spouse

and July 2011. In September 2011, the BIR revoked its ruling and assessed him for deficiency taxes respecting his May, June and July 2011 vodka imports because it discovered that his net retail price for the vodka was P250 per bottle from January to September

(26) Ka Pedring Matibag, a sole proprietor,

application

2011. of

Does

the

the

retroactive

revocation

violate

buys and sells "kumot at kulambo" both of

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Clemen's

right

to

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due

process

as

a

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(B) The eldest child who would be

taxpayer?

reimbursed by the others.

(A) Yes, since the presumption is

(C) All the four children, the tax

that the BIR ascertained the facts

to

before it made its ruling.

them.

(B) No, because he acted in bad

(D) The person designated by the

faith when he claimed a lower net

will as the one liable.

be

divided

equally

among

retail price than what he actually (29) On July 31, 2011, Esperanza received

used.

a preliminary assessment notice from the (C) No, since he could avail of

BIR demanding that she pays P180,000.00

remedies available for disputing the

deficiency

assessment.

income. How many days from July 31, 2011

income

taxes

on

her

2009

should Esperanza respond to the notice? (D)

Yes,

acquired

since a

he

vested

had right

already in

the

(A) 180 days.

favorable BIR ruling. (B) 30 days. (28) Don Fortunato, a widower, died in May, (C) 60 days.

2011. In his will, he left his estate of P100 million to his four children. He named his compadre,

Don

Epitacio,

to

be

(D) 15 days.

the

administrator of the estate. When the BIR sent a demand letter to Don Epitacio for the payment of the estate tax, he refused to pay claiming that he did not benefit from the estate, he not being an heir. Forthwith, he resigned as administrator. As a result of the

(30) The BIR could not avail itself of the remedy of levy and distraint to implement, through collection, an assessment that has become final, executory, and demandable where

resignation, who may be held liable for the

(A) the subject of the assessment is

payment of the estate tax?

an income tax.

(A)

Don

Epitacio

since

the

tax

became due prior to his resignation.

(B) the amount of the tax involved does not exceed P100.00.

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(C) the corporate taxpayer has no

(A) it is recognized as revenue under

other uncollected tax liability.

accounting standards even if the law does not do so.

(D) the taxpayer is an individual compensation income earner.

(B) the taxpayer retires from the business without approval from the

(31) Alain

Descartes,

a French citizen

BIR.

permanently residing in the Philippines, received several items during the taxable

(C) the taxpayer has been paid and

year. Which among the following is NOT

has received in cash or near cash

subject to Philippine income taxation?

the taxable income.

(A) Consultancy fees received for

(D) the

designing

complete or virtually complete

a

computer

program

and installing the same in the

earning

process

is

and an exchange has taken place.

Shanghai facility of a Chinese (33)

firm.

Which

among

circumstances

negates

(B) Interests from his deposits in a

presumption

local

assessment?

bank

earned

of

foreign

abroad

currency

converted

of

the the

following prima

correctness

of

a

facie BIR

to (A)

Philippine pesos.

The

BIR

assessment

was

seasonably protested within 30 days (C)

Dividends

received

from

an

from receipt.

American corporation which derived 60% of its annual gross receipts

(B)

from Philippine sources for the past

notice

7 years.

assessment notice.

(D) Gains derived from the sale of

(C) Proof that the assessment is

his condominium unit located in

utterly

The Fort, Taguig City to another

arbitrary, and capricious.

resident alien.

No

preliminary

was

issued

assessment prior

without

to

the

foundation,

(D) The BIR did not include a formal

(32) Income is considered realized for tax

letter of demand to pay the alleged

purposes when

deficiency.

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(34) On March 30, 2005 Miguel Foods, Inc.

(A) Partnership exclusively for the

received a notice of assessment and a letter

design

of demand on its April 15, 2002 final

infrastructure projects considered

adjustment return from the BIR. Miguel

as practice of civil engineering.

Foods

then

filed

a

request

of

government

for

reinvestigation together with the requisite

(B) Joint-stock company formed for

supporting documents on April 25, 2005.

the

On June 2, 2005, the BIR issued a final

construction projects.

assessment reducing the amount of the tax demanded.

Since

Miguel

Foods

was

satisfied with the reduction, it did not do anything anymore. On April 15, 2010 the BIR

garnished

the

corporation's

bank

deposits to answer for the tax liability. Was the BIR action proper?

the filing of the protest within which to collect.

undertaking

(C) Business partnership engaged in energy operations under a service contract with the government. (D)

Joint

account

(cuentas

en

participacion) engaged in the trading

(36) Spanflex Int‟l Inc. received a notice of assessment from the BIR. It seasonably filed a protest with all the necessary

(B) Yes. The BIR has 5 years from issuance

assessment

of

of mineral ores.

(A) Yes. The BIR has 5 years from

the

purpose

of

within

the which

final to

collect. (C) No. The taxpayer did not apply for a compromise.

supporting documents but the BIR failed to act on the protest. Thirty days from the lapse of 180 days from the filing of its protest, Spanflex still has not elevated the matter to the CTA. What remedy, if any, can Spanflex take? (A) It may file a motion to admit

(D) No. Without the taxpayer‟s prior

appeal if it could prove that its

authority, the BIR action violated

failure to appeal was due to the

the Bank Deposit Secrecy Law.

negligence of counsel.

(35) Which among the following taxpayers is

(B) It may no longer appeal since

required to use only the calendar year for

there is no BIR decision from which

tax purposes?

it could appeal.

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(C) It

may

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wait

for

the

final

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(39) In March 2009, Tonette, who is fond of

decision of the BIR on his protest

jewelries,

bought

a

diamond

ring

for

and appeal it to the CTA within

P750,000.00, a bracelet for P250,000.00, a

30 days from receipt of such

necklace for P500,000.00, and a brooch for

decision.

P500,000.00. Tonette derives income from the exercise of her profession as a licensed

(D) None. Its right to appeal to the

CPA. In October 2009, Tonette sold her

CTA has prescribed.

diamond ring, bracelet, and necklace for

(37) Gerardo died on July 31, 2011. His estate tax return should be filed within (A) six months from filing of the notice of death.

only P1.25 million incurring a loss of P250,000.00. She used the P1.25 million to buy a solo diamond ring in November 2009 which

she

sold

for

P1.5

million

in

September 2010. Tonette had no other transaction in jewelry in 2010. Which

(B) sixty days from the appointment

among the following describes the tax

of an administrator.

implications

arising

from

the

above

transactions? (C) six months from the time he (A) Tonette may deduct his 2009

died on July 31, 2011.

loss only from her 2009 professional (D) sixty days from the time he died

income.

on July 31, 2011. (B) Tonette may carry over and (38) Income from dealings in property (real,

deduct her 2009 loss only from

personal, or mixed) is the gain or loss

her 2010 gain.

derived (C) Tonette may carry over and (A) only from the cash sales of

deduct her 2009 loss from her 2010

property.

professional income as well as from her gain.

(B)

from

cash

and

gratuitous

receipts of property.

(D) Tonette may not deduct her 2009

(C) from sale and lease of property.

loss

from

both

her

2010

professional income and her gain.

(D) only from the sale of property.

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(40)

Anion,

Inc.

received

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a

notice

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of

(C) gratuitously allows its use for

assessment and a letter from the BIR

educational purposes by a school

demanding the payment of P3 million pesos

established for profit.

in deficiency income taxes for the taxable year 2008. The financial statements of the

(D)

company show that it has been suffering

government-owned

financial reverses from the year 2009 up to

corporation.

the present. Its asset position shows that it could pay only P500,000.00 which it offered as a compromise to the BIR. Which among the following may the BIR require to enable it to enter into a compromise with Anion, Inc.?

(42)

sells

Dondon

the

and

property

to

a

non-profit

Helena

were

legally

separated. They had six minor children, all qualified

to

be

claimed

as

additional

exemptions for income tax purposes. The court

awarded

custody

of

two

of

the

children to Dondon and three to Helena, (A) Anion must show it has faithfully

with

Dondon

directed

to

provide

full

paid taxes before 2009.

financial support for them as well. The court awarded the 6th child to Dondon's

(B) Anion must promise to pay its

father with Dondon also providing full

deficiency when financially able.

financial

support.

Assuming

that

only

Dondon is gainfully employed while Helena (C) Anion must waive its right to

is not, for how many children could Dondon

the secrecy of its bank deposits.

claim additional exemptions when he files

(D) Anion must immediately deposit

his income tax return?

the P500,000.00 with the BIR.

(A) Six children.

(41) Real property owned by the national

(B) Five children.

government is exempt from real property taxation unless the national government (A) transfers it for the use of a local

(C) Three children. (D) Two children.

government unit. (43) Political campaign contributions are (B) leases the real property to a

NOT deductible from gross income

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(B) if the candidate supported wins

time. To do otherwise would violate the

the election because of possible

canon of a sound tax system referred to as

corruption. (A) theoretical justice. (C) since they do not help earn the income from which they are to be deducted.

(C) administrative feasibility.

(D) since such amounts are not considered

as

income

of

the

candidate to whom given.

assessment is appealed to the CTA, the BIR's power to garnish the taxpayer's bank deposits

destroy. Is this always so? (A) No. The Executive Branch may decide not to enforce a tax law which it believes to be confiscatory.

(A) is suspended to await the finality of such decision.

can reverse BIR decisions when prejudicial to the taxpayer.

final decisions of the BIR are subject to appeal. (D) is not suspended since the government

existence depends

on

of tax

revenues. property

the

destruction

of

the

property

rights of a taxpayer. (C) Yes. Tax laws should always be

(C) is not suspended because only

continued

(B) Yes. The tax collectors should enforce a tax law even if it results to

(B) is suspended given that the CTA

Real

(D) symbiotic relationship. (46) The power to tax is the power to

(44) When a BIR decision affirming an

(45)

(B) fiscal adequacy.

enforced because without taxes the very

existence

of

the

State

is

endangered. (D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected. (47) Jeopardy assessment is a valid ground

taxes

should

not

disregard increases in the value of real property occurring over a long period of

to compromise a tax liability (A) involving deficiency income taxes only, but not for other taxes.

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(B) because of doubt as to the

Appeals a denial of his application for

validity of the assessment.

refund of income tax overpayment?

(C) if the compromise amount does

(A) Within 30 days from receipt of

not exceed 10% of the basic tax.

the Commissioner‟s denial of his application for refund.

(D) only when there is an approval of the National Evaluation Board.

(B) Within 30 days from receipt of the denial which must not exceed

(48) Zygomite Minerals, Inc., a corporation

2 years from payment of income

registered and holding office in Australia,

tax.

not operating in the Philippines, may be subject to Philippine income taxation on

(C) Within 2 years from payment of the

(A) gains it derived from sale in

income taxes sought

to be

refunded.

Australia of an ore crusher it bought from

the

Philippines

with

the

proceeds converted to pesos.

(D) Within 30 days from receipt of the denial or within two years from payment.

(B) gains it derived from sale in Australia of shares of stock of

(50) After the province has constructed a

Philex

barangay

Mining

Corporation,

a

Philippine corporation.

road,

the

Sangguniang

Panglalawigan may impose a special levy upon the lands specifically benefitted by the

(C)

dividends

earned

from

road up to an amount not to exceed

investment in a foreign corporation that derived 40% of its gross income

(A) 60% of the actual cost of the

from Philippine sources.

road without giving any portion to the barangay.

(D) interests derived from its dollar deposits in a Philippine bank under

(B) 100% of the actual project cost

the

without giving any portion to the

Expanded

Foreign

Currency

Deposit System.

barangay.

(49) As a general rule, within what period

(C) 100% of the actual project cost,

must a taxpayer elevate to the Court of Tax

keeping 60% for the province and giving 40% to the barangay.

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(D) 60% of the actual cost, dividing

(A) No, so long as the donated

the same between the province and

money goes directly to the winners

the barangay.

and not through the association.

(51) Celia donated P110,000.00 to her

(B) Yes, since the national sports

friend Victoria who was getting married.

association for billiards does not

Celia gave no other gift during the calendar

sanction the event.

year. What is the donor's tax implication on (C) No, because it is donated as

Celia‟s donation?

prize

for

(A) The P100,000.00 portion of the

competition

donation is exempt since given in

association.

an under

international the

billiards

consideration of marriage. (D) Yes, but only that part that (B) A P10,000.00 portion of the

exceeds the first P100,000.00 of

donation is exempt being a donation

total

in consideration of marriage.

calendar year.

Levox

donations

for

the

(C) Celia shall pay a 30% donor's

(53) A violation of the tariff and customs

tax on the P110,000.00 donation.

laws is the failure to

(D) The P100,000.00 portion of the

(A) pay the customs duties and

donation is exempt under the rate

taxes and to comply with the rules

schedule for donor's tax.

on customs procedures.

(52) Levox Corporation wanted to donate P5

(B) pay the customs duties and

million

taxes or to comply with the rules

as prize

money for

the

world

professional billiard championship to be

on customs procedures.

held in the Philippines. Since the Billiard Sports Confederation of the Philippines

(C) pay the customs duties and

does not recognize the event, it was held

taxes.

under the auspices of the International Professional Billiards Association, Inc. Is Levox subject to the donor's tax on its

(D)

comply

with

the

rules

on

customs procedures.

donation?

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(54) What is the effect on the tax liability of

(A)

a

actually, directly, and exclusively

taxpayer

who

does

not

protest

an

assessment for deficiency taxes?

No,

since

the

donation

is

used for educational purposes.

(A) The taxpayer may appeal his

(B) Yes, because the donation is to

liability

be wholly used for administration

to

the

CTA

since

the

assessment is a final decision of the

purposes.

Commissioner on the matter. (C) Yes, since he did not obtain the (B) The BIR could already enforce

requisite NGO certification before he

the

made the donation.

collection

of

the

taxpayer's

liability if it could secure authority (D) No, because the donation does

from the CTA.

not (C) The

taxpayer's

becomes collection

liability

fixed

and

subject

as

the

assessment

determined.

(55) A non-stock, non-profit school always had cash flow problems, resulting in failure administrative

personnel to effectively manage the school. In 2010, Don Leon donated P100 million pesos to the school, provided the money shall be used solely for paying the salaries, and

benefits

of

taxable

by the province of professional taxes?

suspended for 180 days from the expiration of the period to protest.

wages,

his

(56) What is the tax base for the imposition

(A)

well-trained

of

income for 2010.

(D) The taxpayer's liability remains

recruit

10%

to

becomes final and collectible.

to

exceed

administrative

That

which

Congress

(B) The pertinent provision of the local Government Code. (C) The reasonable classification made

by

the

provincial

sanggunian. (D) That which the Dept. of Interior and Local Government determined.

personnel. The donation represents less

(57) There is prima facie evidence of a false

than 10% of Don Leon's taxable income for

or fraudulent return where the

the year. Is he subject to donor's taxes? (A) tax return was amended after a notice of assessment was issued.

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(B) tax return was filed beyond the

(60) No action shall be taken by the BIR on

reglementary period.

the taxpayer‟s disputed issues until the taxpayer has paid the deficiency taxes

(C) taxpayer changed his address without notifying the BIR.

(A) when the assessment was issued against

(D) deductions claimed exceed by

a

false

and

fraudulent

return.

30% the actual deductions. (B) if there was a failure to pay the (58) The proceeds received under a life

deficiency tax within 60 days from

insurance

BIR demand.

endowment

contract

is

NOT

considered part of gross income (C) if the Regional Trial Court issues (A) if it is so stated in the life

a writ of preliminary injunction to

insurance endowment policy.

enjoin the BIR.

(B) if the price for the endowment

(D) attributable to the undisputed

policy was not fully paid.

issues in the assessment notice.

(C) where payment is made as a

(61) Is an article previously exported from

result of the death of the insured.

the Philippines subject to the payment of

(D) where the beneficiary was not the

one

who

took

out

the

endowment contract. (59) The excess of allowable deductions over

customs duties? (A) Yes, because all articles that are imported from any foreign country are subject to duty.

gross income of the business in a taxable

(B) No, because there is no basis for

year is known as

imposing

duties

previously

exported

(A) net operating loss. (B) ordinary loss. (C) net deductible loss.

on

articles from

the

Philippines. (C) Yes, because exemptions are strictly

construed

against

the

importer who is the taxpayer.

(D) NOLCO.

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(D) No,

if

it

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is

covered

by

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a

(63) Under the Tariff and Customs Code,

certificate of identification and

abandoned imported articles becomes the

has not been improved in value.

property of the

(62) Prior to the enactment of the Local

(A) government whatever be the

Government Code, consumer's cooperatives

circumstances.

registered

under

the

Cooperative

Development Act enjoyed exemption from

(B) insurance company that covered

all taxes imposed by a local government.

the shipment.

With

the

withdrawal cooperatives

Local of

Government

exemptions, continue

to

Code‟s

could

these

enjoy

such

exemption? (A)

(C) shipping company in case the freight was not paid. (D) bank if the shipment is covered

Yes,

because

the

Local

Government Code, a general law, could not amend a special law such as the Cooperative Development Act. (B) No, Congress has not by the majority vote of all its members granted exemption to consumers' cooperatives.

by a letter of credit. (64) Ka Tato owns a parcel of land in San Jose, Batangas declared for real property taxation, as agricultural. In 1990, he used the land for a poultry feed processing plant but continued to declare the property as agricultural. In March 2011, the local tax assessor discovered Ka Tato‟s change of use of his land and informed the local treasurer

(C) No, the exemption has been

who demanded payment of deficiency real

withdrawn to level the playing field

property taxes from 1990 to 2011. Has the

for all taxpayers and preserve the

action prescribed?

LGUs' financial position. (D) Yes,

their

specifically

(A) No, the deficiency taxes may be

exemption

mentioned

is

among

those not withdrawn by the Local Government Code.

collected

within

five

years

from

when they fell due. (B) No. The deficiency taxes for the period 1990 up to 2011 may still be collected within 10 years from March 2011.

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(C) Yes. More than 10 years had

(D) a resident alien engaged in trade

lapsed for the period 1990 up to

or business in the Philippines.

2000, hence the right to collect the (66) Lualhati Educational Foundation, Inc.,

deficiency taxes has prescribed.

a stock educational institution organized (D) Yes. More than 5 years had

for profit, decided to lease for commercial

lapsed for the collection of the

use a 1,500 sq. m. portion of its school. The

deficiency taxes for the period 1990

school actually, directly, and exclusively

up to 2005.

used the rents for the maintenance of its school buildings, including

(65)

Pierre

de

Savigny,

a

Frenchman,

arrived in the Philippines on January 1,

payment of

janitorial services. Is the leased portion subject to real property tax?

2010 and continued to live and engage in business in the Philippines. He went on a

(A) Yes, since Lualhati is a stock and

tour of Southeast Asia from August 1 to

for profit educational institution.

November 5, 2010. He returned to the Philippines on November 6, 2010 and

(B) No, since the school actually,

stayed

directly, and exclusively used the

until April

15, 2011 when he

returned to France. He earned during his stay in the Philippines a gross income of P3 million from his investments in the country. For the year 2010, Pierre‟s taxable status is that of (A) a non-resident alien not engaged in

trade

or

business

in

the

Philippines.

trade

(C) No, but it may be subject to income taxation on the rents it receives. (D) Yes, since the leased portion is not

actually,

directly,

and

exclusively used for educational purposes.

(B) a non-resident alien engaged in

rents for educational purposes.

or

business

in

the

Philippines.

(67) Apparently the law does not provide for the refund of real property taxes that have been collected as a result of an erroneous

(C) a resident alien not engaged in

or illegal assessment by the provincial or

trade or business in the Philippines.

city assessor. What should be done in such instance to avoid an injustice?

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(A) Question the legality of the no-

(D) Issue a notice of constructive

refund rule before the Supreme

distraint

Court.

interest.

(B)

Enact

a

new

to

protect

government

ordinance

(69) Money collected from taxation shall not

amending the erroneous or illegal

be paid to any religious dignitary EXCEPT

assessment to correct the error.

when

(C) Subsequent adjustment in tax

(A) the

religious

dignitary

is

computation and the application

assigned to the Philippine Army.

of the excess payment to future (B) it is paid by a local government

real property tax liabilities.

unit. (D) Pass a new ordinance providing for the refund of real property taxes

(C) the payment is passed in audit

that

by the COA.

have

been

erroneously

or

illegally collected.

(D) it is part of a lawmaker‟s pork

(68) What should the BIR do when the prescriptive period for the assessment of a tax deficiency is about to prescribe but the taxpayer has not yet complied with the BIR requirements for the production of books of accounts and other records to substantiate the

claimed

deductions,

exemptions

or

credits? (A) Call the taxpayer to a conference to explain the delay. (B)

Immediately

investigation

of

barrel. (70) Discriminatory duties may NOT be imposed upon articles (A)

wholly

manufactured

in

the

discriminating country but carried by vessels of another country. (B)

not

manufactured

in

the

discriminating country but carried by vessels of such country.

conduct the

an

taxpayer's

activities. (C) Issue a jeopardy assessment coupled with a letter of demand.

(C)

partly

manufactured

in

the

discriminating country but carried by vessels of another country. (D) not

manufactured

discriminating

in

country

the and

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Taxation Law Q&As (2007-2013)

carried

by

vessels

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of

another

country.

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(73) Which among the following concepts of taxation is the basis for the situs of income taxation?

(71) The taxpayer seasonably filed his protest together with all the supporting

(A) Lifeblood doctrine of taxation

documents. It is already July 31, 2011, or (B) Symbiotic relation in taxation

180 days from submission of the protest but the BIR Commissioner has not yet

(C)

decided his protest. Desirous of an early taxpayer should file his appeal to the Court

of

(D) Sumptuary purpose of taxation

of Tax Appeals not later than (74)

In

"Operation

temporarily

Kandado,"

closed

establishments,

(B) August 30, 2011.

purpose

taxation

resolution of his protested assessment, the

(A) August 31, 2011.

Compensatory

the

BIR

business

including

New

Dynasty

Corporation that failed to comply with VAT regulations. New Dynasty contends that it

(C) August 15, 2011.

should not be temporarily closed since it (D) August 1, 2011.

has a valid and existing VAT registration, it faithfully issued VAT receipts, and filed the

(72) Which of the following are NOT usually

proper VAT returns. The contention may be

imposed when there is a tax amnesty?

rejected if the BIR investigation reveals that

(A) Civil,

criminal,

and

administrative penalties (B) Civil and criminal penalties (C)

Civil

and

administrative

penalties (D)

Criminal

penalties

(A)

the

taxpayer

regularly

filing

has its

not

income

been tax

returns for the past 4 years. (B) the taxpayer deliberately filed a false and fraudulent return with deliberate intention to evade taxes.

and

administrative

(C)

the

taxpayer

documents

to

used

falsified

support

its

application for refund of taxes.

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Taxation Law Q&As (2007-2013)

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(D) there was an understatement of taxable sales or receipts by 30%

or

more

for

the

taxable

quarter.

Tres Personas Solo Dios, as the corporation rented

Taxation

Law

Exam

MCQ (September 12, 2010) (III) Mirador, Inc., a domestic corporation,

(75) The head priest of the religious sect sole,

2010

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out

a

5,000

sq.

m.

lot

registered in its name for use as school site of a school organized for profit. The sect used the rentals for the support and upkeep of its priests. The rented lot is

filed its Annual Income Tax Return for its taxable year 2008 on April 15, 2009. In the Return,

it

reflected

overpayment

of

indicated

choice

its

an

income

P1,000,000.00 to

carry-over

tax and the

overpayment as an automatic tax credit against

its

income

tax

liabilities

in

subsequent years.

(A) not exempt from real property

On April 15, 2010, it filed its Annual

taxes because the user is organized

Income Tax Return for its taxable year 2009

for profit.

reflecting a taxable loss and an income tax overpayment for the current year 2009 in

(B) exempt from real property taxes

the amount of P500,000.00 and its income

since it is actually, directly, and

tax overpayment for the prior year 2008 of

exclusively

P1,000,000.00.

used

for

religious

In

purposes.

its

2009

Return,

the

corporation

indicated its option to claim for refund the (C) not exempt from real property

total

taxes since it is the rents, not the

P1,500,000.00

land, that is used for religious

Choose which of the following statements is

purposes.

correct.

(D) exempt since

it

exclusively purposes.

from is

real

property

actually, used

for

directly,

taxes and

educational

income

tax

overpayment

of

a. Mirador, Inc. may claim as refund the total income tax overpayment of P1,500,000.00

reflected

in

its

income tax return for its taxable year 2009; b. It

may

claim

amount

of

representing

as

its

refund

the

P500,000.00 income

tax

overpayment for its taxable year 2009; or “Never Let The Odds Keep You From Pursuing What You Know In Your Heart You Were Meant To Do.”-Leroy Satchel Paige

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Taxation Law Q&As (2007-2013)

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c. No amount may be claimed as refund.

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Wena will declare the income from the coffee shop.

Explain the basis of your answer. (5%)

b. Wena will declare the combined compensation

income

of

the

spouses, and Raffy will declare the SUGGESTED ANSWER:

income from the coffee shop.

B. It may claim as refund the amount of P500,000 representing its income tax overpayment for its taxable year 2009. Since the taxpayer has opted to carry-over the P1 million overpaid income tax for taxable year 2008, said option is considered irrevocable and no application for cash refund shall be allowed for it (Sec 76, NIRC;

c. All the income will be declared by Raffy alone, because only one consolidated return is required to be filed by the spouses. d. Raffy

will

declare

his

own

compensation income and Wena will declare hers. The income from the coffee shop shall be

CIR v. Bank of Philippine Island,

equally divided between them.

G.R. No. 178490, July 7, 2009).

Each

spouse

separately

shall

be

on

taxed their

corresponding taxable income to

2009

Taxation

Law

Exam

MCQ (September 13, 2009)

be covered by one consolidated return for the spouses. e. Raffy

will

declare

his

own

(XI) Raffy and Wena, husband and wife,

compensation income and Wena

are both employed by XXX Corporation.

will declare hers. The income from

After office hours, they jointly manage a

the coffee shop shall be equally

coffee shop at the ground floor of their

divided between them. Raffy will

house. The coffee shop is registered in the

file one income tax return to cover

name of both spouses. Which of the

all the income of both spouses,

following is the correct way to prepare

and the tax is computed on the

their income tax return? Write the letter

aggregate taxable income of the

only. DO NOT EXPLAIN YOUR ANSWER.

spouses.

(2%) a. Raffy will declare as his income the salaries of both spouses, while

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Taxation Law Q&As (2007-2013)

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References: Answers

to

Bar

Examination

Questions by the UP LAW COMPLEX (2007, 2009, 2010) PHILIPPINE ASSOCIATION OF LAW SCHOOLS (2008) UP LAW Review lawphil.net

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Page 125 of 125

2014 BAR EXAMINATIONS TAXATION LAW

Page 1 of 23

I. On March 27, 2012, the Bureau of Internal Revenue (BIR) issued a notice of assessment against Blue Water Industries Inc. (BWI), a domestic corporation, informing the latter of its alleged deficiency corporate income tax for the year 2009. On April 20, 2012, BWI filed a letter protest before the BIR contesting said assessment and demanding that the same be cancelled or set aside. However, on May 19, 2013, that is, after more than a year from the filing of the letter protest, the BIR informed BWI that the latter’s letter protest was denied on the ground that the assessment had already become final, executory and demandable. The BIR reasoned that its failure to decide the case within 180 days from filing of the letter protest should have prompted BWI to seek recourse before the Court of Tax Appeals (CTA) by filing a petition for review within thirty (30) days after the expiration of the 180-day period as mandated by the provisions of the last paragraph of Section 228 of the National Internal Revenue Code (NIRC). Accordingly, BWI’s failure to file a petition for review before the CTA rendered the assessment final, executory and demandable. Is the contention of the BIR correct? Explain. (5%) SUGGESTED ANSWER No, the contention of BIR is not correct. The right of BWI to consider the inaction of the Commissioner on the protest within 180 days as an appealable decision is only optional and will not make the assessment final, executory and demandable (Section 228, NIRC; Lascona Land Co., Inc. vs CIR 667 SCRA 455 (March 5, 2012) II. Mr. De Sarapen is a candidate in the upcoming Senatorial elections. Mr. De Almacen, believing in the sincerity and ability of Mr. De Sarapen to introduce much needed reforms in the country, contributed P500,000.00 in cash to the campaign chest of Mr. De Sarapen. In addition, Mr. De Almacen purchased tarpaulins, t-shirts, umbrellas, caps and other campaign materials that he also donated to Mr. De Sarapen for use in his campaign. Is the contribution of cash and campaign materials subject to donor’s tax? (4%) SUGGESTED ANSWER The Tax Code provides that any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code (Section 99 (C ), NIRC). On the other hand, the Omnibus Election provides, that any provision of the law to the contrary notwithstanding, any contribution in cash or in kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to the Commission shall not be subject to any payment of gift tax (Section 13, RA 7166). Hence, the contributions will be exempt from donor’s tax if they are duly reported to the Commission. Otherwise, the contributions will be subject to donor’s tax.

2014 BAR EXAMINATIONS TAXATION LAW

Page 2 of 23 III.

Dr. Taimtim is an alumnus of the College of Medicine of Universal University (UU), a privately-owned center for learning which grants yearly dividends to its stockholders. UU. has a famous chapel located within the campus where the old folks used to say that anyone who wanted to pass the medical board examinations should offer a dozen roses on all the Sundays of October. This was what Dr. Taimtim did when he was still reviewing for the board examinations. In his case, the folk saying proved to be true because he is now a successful cardiologist. Wanting to give back to the chapel and help defray the costs of its maintenance, Dr. Taimtim donated P50,000.00 to the caretakers of the chapel which was evidenced by an acknowledgment receipt. In computing his net taxable income, can Dr.Taimtim use his donation to the chapel as an allowable deduction from his gross income under the National Internal Revenue Code (NIRC)? (4%) SUGGESTED ANSWER No, the donation is not deductible. The chapel is owned by privately-owned university hence the donation for the maintenance of the chapel is a donation to the university. The donation to be deductible must comply with the requirement that the net income of the done must not inure to the benefit of any private stockholder or individual. In the instant case, the university is granting yearly dividends to its stockholders which is a clear violation of the law appertaining to the so-called “private inurement doctrine” thereby making the donation nondeductible (Section 34 (h)(1), NIRC)

2014 BAR EXAMINATIONS TAXATION LAW

Page 3 of 23 IV.

Gangwam Corporation (GC) filed its quarterly tax returns for the calendar year 2012 as follows: First quarter - April 25, 2012 Second quarter - July 23, 2012 Third quarter - October 25, 2012 Fourth quarter - January 27, 2013 On December 22, 2013, GC filed with the Bureau of Internal Revenue (BIR) an administrative claim for refund of its unutilized input Value-Added Tax (VAT) for the calendar year 2012. After several months of inaction by the BIR on its claim for refund, GC decided to elevate its claim directly to the Court of Tax Appeals (CTA) on April 22, 2014. In due time, the CTA denied the tax refund relative to the input VAT of GC for the first quarter of 2012, reasoning that the claim was filed beyond the two-year period prescribed under Section 112(A) of the National Internal Revenue Code (NIRC). (A)

Is the CTA correct? (3%)

(B)

Assuming that GC filed its claim before the CTA on February 22, 2014, would your answer be the same? (3%)

SUGGESTED ANSWER (A) No. CTA is not correct. The two-year period to file a claim for refund refers to the administrative claim and does not refer to period within which to elevate the claim to the CTA. The filing of the administrative claim for refund was timely done because it is made within two years from the end of the quarter when the zero-rated transaction took

place (Section 112(A), NIRC). When GC decided to elevate its claim to the CTA on April 22, 2014, it was after the lapse of 120 days from the filing of the claim for refund with the BIR, hence, the appeal is seasonably filed. The rule of VAT refunds is two years to file the claim with the BIR, plus 120 days for the Commissioner to act and inaction after 120 days is a deemed adverse decision on the claim, appealable to the CTA within 30 days from the lapse of the 120-day period (CIR vs Aichi Forging Company of Asia, Inc., GR No. 184823, Oct 6, 2010; CIR vs San Roque GR. No. 187485 (Feb 12, 2013) (B) Yes. The two-year prescriptive period to file a claim for refund refers to the administrative claim with the BIR and not to the period to elevate the claim to the CTA. Hence, the CTA cannot deny the refund for reasons that the first quarter claim was filed beyond the two-year period prescribed by law. However, when the claim is made before the CTA on February 24, there is definitely no appealable decision as yet because the 120-day period for the Commissioner to act on the claim for refund has not yet lapsed. Hence the act of the taxpayer in elevating the claim to the CTA is premature and the CTA has no jurisdiction to rule thereon (CIR vs Aichi Forging Company of Asia, Inc. GR No.184823, Oct 6, 2010; CIR vs San Roque, GR No. 187485 (Feb 12, 2013))

2014 BAR EXAMINATIONS TAXATION LAW

Page 4 of 23

V. The City of Liwliwa assessed local business taxes against Talin Company. Claiming that there is double taxation, Talin Company filed a Complaint for Refund or Recovery of Illegally and/or Erroneously-collected Local Business Tax; Prohibition with Prayer to Issue Temporary Restraining Order and Writ of Preliminary Injunction with the Regional Trial Court (RTC). The RTC denied the application for a Writ of Preliminary Injunction. Since its motion for reconsideration was denied, Talin Company filed a special civil action for certiorari with the Court of Appeals (CA). The government lawyer representing the City of Liwliwa prayed for the dismissal of the petition on the ground that the same should have been filed with the Court of Tax Appeals (CTA). Talin Company, through its lawyer, Atty. Frank, countered that the CTA cannot entertain a petition for certiorari since it is not one of its powers and authorities under existing laws and rules. Decide. (5%) SUGGESTED ANSWER The government lawyer is correct that it is the CTA that is vested with proper jurisdiction. The law is clear when it said that – “The CTA shall have exclusive appellate jurisdiction to review by appeal decisions, orders or resolutions of the RTC, in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction (Section 7(3) RA 9282). In a recent case decided by the SC, it was held that the CTA has certiorari powers over the issue of grave abuse of discretion on the part of the RTC in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court, as this is inherent to its exercise of appellate jurisdiction (City of Manila vs Ho. Caridad H. Grecia-Cuerdo, GR No. 175723 February 4, 2014)

2014 BAR EXAMINATIONS TAXATION LAW

Page 5 of 23

VI. Choose the correct answer. Smuggling - (1%) (A) does not extend to the entry of imported or exported articles by means of any false or fraudulent invoice, statement or practices; the entry of goods at less than the true weight or measure; or the filing of any false or fraudulent entry for the payment of drawback or refund of duties. (B) is limited to the import of contraband or highly dutiable cargo beyond the reach of customs authorities. (C)

is committed by any person who shall fraudulently import or bring into the Philippines, or assist in so doing, any article, contrary to law, or shall receive, conceal, buy, sell or any manner facilitate the transportation, concealment or sale of such article after importation, knowing the same to have been imported contrary to law.

(C) is committed by any person who shall fraudulently import or bring into the Philippines, or assist in so doing, any article, contrary to law, or shall receive, conceal, buy, sell or any manner facilitate the transportation, concealment or sale of such article after importation, knowing the same to have been imported contrary to law. (Section 3601, Tariff and Customs Code)

2014 BAR EXAMINATIONS TAXATION LAW

Page 6 of 23

VII. In accordance with the Local Government Code (LGC), the Sangguniang Panglungsod (SP) of Baguio City enacted Tax Ordinance No. 19, Series of 2014, imposing a P50.00 tax on all the tourists and travellers going to Baguio City. In imposing the local tax, the SP reasoned that the tax collected will be used to maintain the cleanliness of Baguio City and for the beautification of its tourist attractions. (D) is punishable by administrative penalty only. Claiming the tax to be unjust, Baguio Travellers Association (BTA), an association of travel agencies in Baguio City, filed a petition for declaratory relief before the Regional Trial Court (RTC) because BTA was apprehensive that tourists might cancel their bookings with BTA’s member agencies. BTA also prayed for the issuance of a Temporary Restraining Order (TRO) to enjoin Baguio City from enforcing the local tax on their customers and on all tourists going to Baguio City. The RTC issued a TRO enjoining Baguio City from imposing the local tax. Aggrieved, Baguio City filed a petition for certiorari before the Supreme Court (SC) seeking to set aside the TRO issued by the RTC on the ground that collection of taxes cannot be enjoined. Will the petition prosper? (5%) SUGGESTED ANSWER Yes. The petition for certiorari will prosper. The RTC has no jurisdiction to entertain any action concerning the validity of a Tax Ordinance and to enjoin the imposition of taxes levied by it. Any question on the legality of the tax ordinance can only be raised on appeal with the Secretary of Justice and the appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and the payment of the tax levied therein (Section 187, LGC) VIII. Masarap Kumain, Inc. (MKI) is a Value-Added Tax (VAT)-registered company which has been engaged in the catering business for the past 10 years. It has invested a substantial portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and delivery vans. MKI sold its first delivery van, already 10 years old and idle, to Magpapala Gravel and Sand Corp. (MGSC), a corporation engaged in the business of buying and selling gravel and sand. The selling price of the delivery van was way below its acquisition cost. Is the sale of the delivery van by MKI to MGSC subject to VAT? (4%) SUGGESTED ANSWER Yes, the sale of the delivery van is subject to VAT being a transaction incidental to the catering business which is a VAT-registered activity of MKI. Transactions that are undertaken incidental to the pursuit of a commercial or economic activity are considered as entered into in the course of trade or business (Section 105, NIRC). A sale of a fully depreciated vehicle that has been used in business is subject to VAT as an incidental transaction, although such sale may be considered isolated (Mindanao II Geothermal Partnership vs CIR GR no. 193301; GR no. 194637, March 11, 2013)

2014 BAR EXAMINATIONS TAXATION LAW

Page 7 of 23

IX. Mr. Gipit borrowed from Mr. Maunawain P100,000.00, payable in five (5) equal monthly installments. Before the first installment became due, Mr. Gipit rendered general cleaning services in the entire office building of Mr. Maunawain, and as compensation therefor, Mr. Maunawain cancelled the indebtedness of Mr. Gipit up to the amount of P75,000.00. Mr. Gipit claims that the cancellation of his indebtedness cannot be considered as gain on his part which must be subject to income tax, because according to him, he did not actually receive payment from Mr. Maunawain for the general cleaning services. Is Mr. Gipit correct? Explain. (4%) SUGGESTED ANSWER No. The cancellation of the indebtedness of up to P75,000 is intended as a compensation for the general cleaning services rendered by Mr. Gipit. Compensation for services in whatever form paid is part of gross income. (Section 32 (A), NIRC)

X. Which of the following is an exclusion from gross income? (1%) (A)

Salaries and wages

(B)

Cash dividends

(C)

Liquidating dividends after dissolution of a corporation

(D)

De minimis benefits

(E)

Embezzled money

SUGGESTED ANSWER (D) DE MINIMIS BENEFITS (SECTION 33 (C) (4); RR NO. 3-98

2014 BAR EXAMINATIONS TAXATION LAW

Page 8 of 23

XI. Triple Star, a domestic corporation, entered into a Management Service Contract with Single Star, a non-resident foreign corporation with no property in the Philippines. Under the contract, Single Star shall provide managerial services for Triple Star’s Hongkong branch. All said services shall be performed in Hongkong.

Is the compensation for the services of Single Star taxable as income from sources within the Philippines? Explain. (4%) SUGGESTED ANSWER No. The compensation for services rendered by Single Star is an income derived from sources without the Philippines. To be considered as income from within, the labor or service must be performed within the Philippines (Section 42 (A)(3) and Section 42 (C)(3), NIRC). Since all the services required to be performed by Single Star, a non-resident foreign corporation, is to be performed in Hongkong, the entire income is from sources without.

XII. Which of the following should not be claimed as deductions from gross income? (1%) (A)

discounts given to senior citizens on certain goods and services.

(B)

advertising expense to maintain some form of goodwill for the taxpayer’s business.

(C)

salaries and bonuses paid to employees.

(D)

interest payment on loans for the purchase of machinery and equipment used in business.

SUGGESTED ANSWER (B) advertising expense to maintain some form of goodwill for the taxpayer’s business.

2014 BAR EXAMINATIONS TAXATION LAW

Page 9 of 23

XIII. Hopeful Corporation obtained a loan from Generous Bank and executed a mortgage on its real property to secure the loan. When Hopeful Corporation failed to pay the loan, Generous Bank extrajudicially foreclosed the mortgage on the property and acquired the same as the highest bidder. A month after the foreclosure, Hopeful Corporation exercised its right of redemption and was able to redeem the property. Is Generous Bank liable to pay capital gains tax as a result of the foreclosure sale? Explain. (4%) SUGGESTED ANSWER No. In a foreclosure of a real estate mortgage, the capital gains tax accrues only after the lapse of the redemption period because it is only then that there exist a transfer of property. Thus, if the right to redeem the foreclosed property was exercised by the mortgagor before expiration of the redemption period, as in this case, the foreclosure is not a taxable event (See RR no.4-99; Supreme Transliner, Inc. vs BPI Family Savings Bank, Inc. GR No. 165617, February 25, 2011)

2014 BAR EXAMINATIONS TAXATION LAW

Page 10 of 23

XIV. Mr. X, a Filipino residing in Alabama, U.S.A., died on January 2, 2013 after undergoing a major heart surgery. He left behind to his wife and two (2) kids several properties, to wit: (4%) (1)

Family home in Makati City;

(2)

Condominium unit in Las Piñas City;

(3)

Proceeds of health insurance from Take Care, a health maintenance organization in the Philippines; and

(4)

Land in Alabama, U.S.A. The following expenses were paid:

(1)

Funeral expenses;

(2)

Medical expenses; and

(3)

Judicial expenses in the testate proceedings.

(A) What are the items that must be considered as part of the gross estate income of Mr. X? (B) What are the items that may be considered as deductions from the gross estate? SUGGESTED ANSWER (A) All the items of properties enumerated in the problem shall form part of the gross estate of Mr. X. The composition of the gross estate of a decedent who is a Filipino citizen shall include all of his properties, real or personal, tangible or intangible, wherever situated (Section 85, NIRC). Note: It is suggested that if the examinee answered NONE, the same should be given full credit because there is no gross estate INCOME in the problem. Likewise, it is suggested that any answer should be given full credit because of the question is worded in a confusing manner (B) All the items of expenses in the problem are deductible from the gross estate. However, the allowable amount of funeral expenses shall be 5% of the gross estate or actual, whichever is lower, but in no case shall the amount deductible go beyond P 200,000. Likewise, the deductible medical expenses must be limited to those incurred within one year prior his death but not to exceed P 500,000. In addition to the items of expenses mentioned in the problem, there is also allowed as deduction from the gross estate the standard deduction amounting to P1 million (Section 86, NIRC)

2014 BAR EXAMINATIONS TAXATION LAW

Page 11 of 23 XV.

When is a pre-assessment notice required under the following cases? (1%) (A) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return. (B)

When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent.

(C)

When the excise tax due on excisable articles has been paid.

(D) When an article locally purchased or imported by an exempt person, such as, but not limited to vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. SUGGESTED ANSWER (A) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return.

XVI. Mr. Tiaga has been a law-abiding citizen diligently paying his income taxes. On May 5, 2014, he was surprised to receive an assessment notice from the Bureau of Internal Revenue (BIR) informing him of a deficiency tax assessment as a result of a mathematical error in the computation of his income tax, as appearing on the face of his income tax return for the year 2011, which he filed on April 15, 2012. Mr. Tiaga believes that there was no such error in the computation of his income tax for the year 2011. Based on the assessment received by Mr. Tiaga, may he already file a protest thereon? (4%) SUGGESTED ANSWER Yes. Mr. Tiaga may consider the assessment notice as a final assessment notice and his right to protest within 30 days from receipt may now be exercised by him. When the finding of a deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the return, a pre-assessment notice shall not be required hence, the assessment notice is a final assessment notice (Section 228, NIRC; RR No. 18-2013)

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XVII. In a civil case for Annulment of Contract of Sale, plaintiff Ma. Reklamo presented in evidence the Contract of Sale which she sought to be annulled. No documentary stamp tax on the Contract of Sale was paid because according to plaintiff Ma. Reklamo, there was no need to pay the same since the sale was not registered with the Register of Deeds. Plaintiff Ma. Reklamo is now offering the Contract of Sale as her evidence. Is the Contract of Sale admissible? (4%) SUGGESTED ANSWER No. The Contract of Sale cannot be admitted in evidence. The document is clearly taxable because the law imposes a documentary stamp tax (DST) on Sales and Agreement to Sell and Memoranda of Sale (Section 175, NIRC). Since the (DST) thereon is not paid the effect is that the instrument, document or paper which is required by law to be stamped and which has been signed, issued, accepted and transferred without being duly stamped shall not be recorded, nor shall it or used in evidence in any court until the requisite stamp or stamps shall have been affixed thereto and cancelled. (Section 201, NIRC) In the case at bar, no documentary stamp tax was paid on the Contract of Sale, hence, it cannot be used as her evidence in court.

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XVIII. Madam X owns real property in Caloocan City. On July 1, 2014, she received a notice of assessment from the City Assessor, informing her of a deficiency tax on her property. She wants to contest the assessment. (4%) (A) What are the administrative remedies available to Madam X in order to contest the assessment and their respective prescriptive periods? (B) May Madam X refuse to pay the deficiency tax assessment during the pendency of her appeal? SUGGESTED ANSWER (A) The administrative remedies available to Madam X to contest the assessment and their respective prescriptive periods are as follows: 1. Pay the deficiency real property tax under protest (Section 252, LGC) 2. File the protest with local treasurer – The protest in writing must be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide the protest within sixty (60) days from receipt (Section 252, LGC) 3. Appeal to the LBAA – If protest is denied or upon the lapse of the 60-day period for the treasurer to decide, the taxpayer may appeal to the LBAA within 60 days and the cases decided within 120 days Section 226 & 229, LGC) 4. Appeal to the CBAA – If not satisfied with the decision of the LBAA, appeal to the CBAA within 30 days from receipt of a copy of the decision (Section 229 (c), LGC). (B) No. The payment of the deficiency tax is a condition before she can protest the deficiency assessment. It is the decision on the protest or inaction thereon that gives her the right to appeal. This means that she cannot refuse to pay the deficiency assessment during the pendency of the appeal because it is the payment itself which gives rise to the remedy. The law provides that no protest (which is the beginning of the disputation process) shall be entertained unless the taxpayer first pays the tax. (Section 252, LGC)

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The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 65-2012 imposing Value-Added Tax (VAT) on association dues and membership fees collected by condominium corporations from its member condominium-unit owners. The RMC’s validity is challenged before the Supreme Court (SC) by the condominium corporations. The Solicitor General, counsel for BIR, claims that association dues, membership fees, and other assessment/charges collected by a condominium corporation are subject to VAT since they constitute income payments or compensation for the beneficial services it provides to its members and tenants.

On the other hand, the lawyer of the condominium corporations argues that such dues and fees are merely held in trust by the condominium corporations exclusively for their members and used solely for administrative expenses in implementing the condominium corporations’ purposes. Accordingly, the condominium corporations do not actually render services for a fee subject to VAT. Whose argument is correct? Decide. (5%) SUGGESTED ANSWER 1. The lawyer of the condominium corporations is correct. The association dues, membership fees, and other assessments/charge do not constitute income payments because they were collected for the benefit of the unit owners and the condominium corporation is not created as a business entity. The collection is the money of the unit owners pooled together and will be spent exclusively for the purpose of maintaining and preserving the building and its premises which they themselves own and possess (First e-Bank Tower Condominium Corp., vs BIR Special Civil Action No. 12-1236, RTC Br. 146, Makati City) 2. In the case of Office Metro Philippines, Inc. (formerly Regus Centres, Inc.) vs. CIR (CTA Case No. 8382), the Court only dealt with the EWT issue as the VAT issue was not raised. However, the CTA held that in the payment of association dues to a condominium corporation, these dues are merely held in trust and used solely for administrative expenses from which does not realize any gain or profit. The BIR, on the other hand, views these payments as income or compensation for beneficial services. However, a perusal of Section 105 shows that transactions in the course of a trade or business (sells, barters, exchanges, leases goods or properties, renders services, imports goods) are those subject to VAT. In the case of a condominium corporation, the function of the entity is merely for administrative purposes and not a trade or business. Thus, payments in the form of association dues should not be subjected to VAT.

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XX. During his lifetime, Mr. Sakitin obtained a loan amounting to P10 million from Bangko Uno for the purchase of a parcel of land located in Makati City, using such property as collateral for the loan. The loan was evidenced by a duly notarized promissory note. Subsequently, Mr. Sakitin died. At the time of his death, the unpaid balance of the loan amounted to P2 million. The heirs of Mr. Sakitin deducted the amount of P2 million from the gross estate, as part of the "Claims against the Estate." Such deduction was disallowed by the Bureau of Internal Revenue (BIR) Examiner, claiming that the mortgaged property was not included in the computation of the gross estate. Do you agree with the BIR? Explain. (4%) SUGGESTED ANSWER Yes. Unpaid mortgages upon, or any indebtedness with respect property are deductible from the gross estate only if the value of the decedent’s interest in said property, undiminished by such mortgage or indebtedness, is included in the gross estate (Section 86 (A)(1)(e). In the instant case, the interest of the decedent in the property purchased from the loan where the said property was used as the collateral, was not included in the gross estate. Accordingly, the unpaid balance of the loan at the time of Mr. Sakitin’s death is not deductible as “Claims against the Estate”.

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XXI. On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Ms. Pares, sold a 16-storey commercial building known as Haeltown Building to Mr. Belly for P100 million. Mr. Belly, in turn, sold the same property on the same day to Bell Gates, Inc. (BGI) for P200 million. These two

(2) transactions were evidenced by two (2) separate Deeds of Absolute Sale notarized on the same day by the same notary public. Investigations by the Bureau of Internal Revenue (BIR) showed that: (1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale between HC and Mr. Belly; (2) as early as May 17, 2014, HC received P40 million from BGI, and not from Mr. Belly; (3) the said payment of P40 million was recorded by BGI in its books as of June 30, 2014 as investment in Haeltown Building; and (4) the substantial portion of P40 million was withdrawn by Ms. Pares through the declaration of cash dividends to all its stockholders. Based on the foregoing, the BIR sent Haeltown Corporation a Notice of Assessment for deficiency income tax arising from an alleged simulated sale of the aforesaid commercial building to escape the higher corporate income tax rate of thirty percent (30%). What is the liability of Haeltown Corporation, if any? (4%) SUGGESTED ANSWER Haelton Corporation is liable for the deficiency income tax as a result of tax evasion. The purpose of selling first the property to Mr. Belly is to create a tax shelter. He never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale of him was merely a tax ploy, a sham and without business purpose and economic substance. The intermediary transaction, which was prompted more on the mitigation of tax liabilities than for legitimate business purpose constitutes one of tax evasion. However, being a corporation, Haelton can only be liable for civil fraud which is a civil liability rather than a criminal fraud which can only be committed by natural persons. (CIR vs Benigno Toda, Jr. 438 SCRA 290 (2004)

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XXII. Choose the correct answer. Double Taxation - (1%) (A) is one of direct duplicate taxations wherein two (2) taxes must be imposed on the same subject matter, by the same taxing authority, within the same jurisdiction, during the same period, with the same kind or character of tax, even if the purposes of imposing the same are different. (B) is forbidden by law; and therefore, it is a valid defense against the validity of a tax measure. (C) means taxing the same property twice when it should be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing. (D) exists when a corporation is assessed with local business tax as a manufacturer, and at the same time, value-added tax as a person selling goods in the course of trade or business.

SUGGESTED ANSWER (C) means taxing the same property twice when it should be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing. (Victorias Milling Co vs Municipality of Victorias, Negros Occidental (1968)

XXIII. Choose the correct answer. Tax Avoidance ‒ (1%) (A) is a scheme used outside of those lawful means and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. (B)

is a tax saving device within the means sanctioned by law.

(C) is employed by a corporation, the organization of which is prompted more on the mitigation of tax liabilities than for legitimate business purpose. (D)

is any form of tax deduction scheme, regardless if the same is legal or not.

SUGGESTED ANSWER (B) is a tax saving device within the means sanctioned by law. (Philip Manufacturing Corp vs CIR (1968)

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XXIV. A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their profession as lawyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among which are as follows: (6%) Earnings: (1)

Professional/legal fees from various clients

(2)

Cash prize received from a religious society in recognition of the exemplary service of ABC Law Firm

(3)

Gains derived from sale of excess computers and laptops Payments:

(1)

Salaries of office staff

(2)

Rentals for office space

(3)

Representation expenses incurred in meetings with clients

(A) What are the items in the above mentioned earnings which should be included in the computation of ABC Law Firm’s gross income? Explain. (B) What are the items in the above-mentioned payments which may be considered as deductions from the gross income of ABC Law Firm? Explain. (C) If ABC Law Firm earns net income in 2012, what, if any, is the tax consequence on the part of ABC Law Firm insofar as the payment of income tax is concerned? What, if any, is the tax consequence on the part of A, B, and C as individual partners, insofar as the payment of income tax is concerned? SUGGESTED ANSWER (A) The three (3) items of earnings should be included in the computation of ABC Law Firm’s gross income. The professional/legal fees from various clients is included as part of gross income being in the nature of compensation for services (Section 32 (A)(1), NIRC). The cash prize from a religious society in recognition of its exemplary services is also included there being no law providing for its exclusion. This is not a prize in recognition of any of the achievements enumerated under the law hence, should form part of gross income (Section 32 (B)(7)(C), NIRC). The gains from sale of excess computers and laptops should also be included as part of the firm’s gross income because the term gross income specifically includes gains derived from dealings in property (Section 32 (A)(3), NIRC) (B) The law firm being formed as a general professional partnership is entitled to the same deductions as allowed to corporations (Section 26, NIRC). Hence, the three (3) items of deductions mentioned in the problem are all deductible, they being in the nature of ordinary and necessary expenses incurred in the practice of profession (Section 34 (A), NIRC).

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ALTERNATIVE ANSWER The law firm being formed as a general professional partnership is entitled to the same deductions as allowed to corporations (Section 26, NIRC). Hence, the three (3) items of deductions mentioned in the problem are all deductible, they being in the nature of ordinary and necessary expenses incurred in the practice of profession (Section 34 (A), NIRC). However, the amount deductible for representation expenses incurred by a taxpayer engaged in sale of services, including a law firm, is subject to a ceiling of 1% of net revenue (RR No. 10-2002). (C) The net income having been earned by the law firm, which is formed and qualifies as a general professional partnership, is not subject to income tax because the earner is devoid of any income tax personality. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. The partnership is merely treated for income tax purposes as a passthrough entity so that its net income is not taxable at the level of the partnership but said net income should be attributed to the partners,

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whether or not distributed to them, and they are liable to pay the income tax based on their respective taxable income as individual taxpayers (Section 26, NIRC) XXV. Which of the following transactions is subject to Value-Added Tax (VAT)? (1%) (A) Sale of shares of stock-listed and traded through the local stock exchange (B) Importation of personal and household effects belonging to residents of the Philippines returning from abroad subject to custom duties under the Tariff and Customs Code (C) Services rendered by individuals pursuant to an employeremployee relationship (D) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority (B) Importation of personal and household effects belonging to residents of the Philippines returning from abroad subject to custom duties under the Tariff and Customs Code (exempt from VAT only if exempt from customs duties, Section 109 (1)(C), NIRC) XXVI. Freezy Corporation, a domestic corporation engaged in the manufacture and sale of ice cream, made payments to an officer of Frosty Corporation, a competitor in the ice cream business, in exchange for said officer’s revelation of Frosty Corporation’s trade secrets. May Freezy Corporation claim the payment to the officer as deduction from its gross income? Explain. (4%) SUGGESTED ANSWER No. The payments made in exchange for the revelation of a competitor’s trade secrets is considered as an expense which is against law, morals, good customs or public policy, which is not deductible (3M PH, Inc. vs CIR (1988)). Also, the law will not allow the deduction of bribes, kickbacks and other similar payments. Applying the principle of ejusdem generis, payment made by Freezy Corporation would fall under “other similar payments” which are not allowed as deduction from gross income (Section 34 (A)(1)(C), NIRC) XXVII. In January 2013, your friend got his first job as an o ffice clerk. He is single and lives with his family who depends upon him for financial support. His parents have long retired from their work, and his two (2) siblings are still minors and studying in grade school. In February 2014, he consulted you as he wanted to comply with all the rules pertaining to the preparation and filing of his income tax return. He now asks you the following: (A) Is he entitled to personal exemptions? If so, how much? (1%)

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(B) Is he entitled to additional exemptions? If so, how much? (1%) (C) What is the effect of the taxes withheld from his salaries on his taxable income? (2%) SUGGESTED ANSWER (A) Yes. The law allows a basic personal exemption of P50,000 for each individual taxpayer (Section 35 (A), NIRC) (B) No. While his parents and minor siblings are living with and dependent upon him for financial support, they are not qualified dependents for purposes of additional exemptions. The term “dependent” for purposes of the additional personal exemption would include only legitimate, illegitimate or legally adopted child. (Section 35(B), NIRC) (C) The taxes withheld from his salaries will not affect his taxable income because they are not allowed as tax deductions but as tax credits. Tax deductions reduce the taxable income while tax credits reduce the tax liability (Central Drug Corporation vs CIR) XXVIII. Choose the correct answer. Tax laws - (1%) (A) may be enacted for the promotion of private enterprise or business for as long as it gives incidental advantage to the public or the State (B) are inherently legislative; therefore, may not be delegated (C) are territorial in nature; hence, they do not recognize the generally-accepted tenets of international law (D) adhere to uniformity and equality when all taxable articles or kinds of property of the same class are taxable at the same rate (D) adhere to uniformity and equality when all taxable articles or kinds of property of the same class are taxable at the same rate (City of Baguio vs de Leon, 25 SCRA 938) XXIX. Doña Evelina, a rich widow engaged in the business of currency exchange, was assessed a considerable amount of local business taxes by the City Government of Bagnet by virtue of Tax Ordinance No. 24. Despite her objections thereto, Doña Evelina paid the taxes. Nevertheless, unsatisfied with said Tax Ordinance, Doña Evelina, through her counsel Atty. ELP, filed a written claim for recovery of said local business taxes and contested the assessment. Her claim was denied, and so Atty. ELP elevated her case to the Regional Trial Court (RTC). The RTC declared Tax Ordinance No. 24 null and void and without legal effect for having been enacted in violation of the public ation requirement of tax ordinances and revenue measures under the Local Government Code (LGC) and on the ground of double taxation.

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On appeal, the Court of Tax Appeals (CTA) affirmed the decision of the RTC. No motion for reconsideration was filed and the decision became final and executory. (4%)

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(A) If you are Atty. ELP, what advice will you give Doña Evelina so that she can recover the subject local business taxes? (B) If Doña Evelina eventually recovers the local business taxes, must the same be considered as income taxable by the national government? SUGGESTED ANSWER (A) The remedy availed of by Dona Evelina to question the validity if the assessment was to file a written claim for recovery which was denied by the city treasurer. It appears that after the denial, the judicial remedies were properly pursued. Since the decision by the CTA had already become final and executory, the counsel should advice Dona Evelina to press for the execution of the judgment. Should the city treasurer refuse to refund the local taxes paid, they should push for the issuance of a writ of execution by the CTA to force the local treasurer to make the refund. (B) Yes. Subject to the tax benefit rule. The local business tax paid is a business connected tax hence, deductible from gross income. If at the time of its deduction it resulted to a tax benefit to Dona Evelina, then the recovery will form part of gross income to the extent of the tax benefit on the previous deduction (Section 34 (C)(1), NIRC)

2015 Bar Examinations TAXATION I Explain the principles of a sound tax system. (3%) SUGGESTED ANSWER: The principles of a sound tax system are the following: a.Fiscal adequacy which means that the sources of revenue should be sufficient to meet the demands of public expenditures; b.Equality or theoretical justice which means that the tax burden should be proportionate to the taxpayer’s ability to pay (this is the socalled ability to pay principle); and c. Administrative feasibility which means that the tax law should be capable of convenience, just and effective administration II Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a professional boxing match held in 2013, he won prize money in United States (US) dollars equivalent to P300,000,000. a) Is the prize money paid to and received by Mr. A in the US taxable in the Philippines? Why? (2%) b) May Mr. A's prize money qualify as an exclusion from his gross income? Why? (2%) c) The US already imposed and withheld income taxes from Mr. A's prize money. How may Mr. A use or apply the income taxes he paid on his prize money to the US when he computes his income tax liability in the Philippines for 2013? (4%) SUGGESTED ANSWER: a. Yes. Under the Tax Code, the income within and without of a resident citizen is taxable. Since Mr. A is a resident Filipino citizen, his income worldwide is taxable in the Philippines. b. No. Under the law, all prizes and awards granted to athletes in local and

international sports competitions whether held in the Philippines or abroad and sanctioned by their national sports association are excluded from gross income. However, in this case, there is no showing that the boxing match was sanctioned by the Philippine National Sports Commission. Therefore, the prize money is not excluded. c. Mr. A may avail of tax credit against his tax liability in the Philippines for taxes paid in foreign countries. He has to signify in his income tax return his desire to avail the deduction. III Ms. C, a resident citizen, bought ready-towear goods from Ms. B, a nonresident citizen. a) If the goods were produced from Ms. B's factory in the Philippines, is Ms. B's income from the sale to Ms. C taxable in the Philippines? Explain. (2%) b) If Ms. B is an alien individual and the goods were produced in her factory in China, is Ms. B's income from the sale of the goods to Ms. C taxable in the Philippines? Explain. (2%) SUGGESTED ANSWER: a. Yes, the income of Ms. B from the sale of ready-to-wear goods to Ms. C is taxable. A nonresident citizen is taxable only on income derived from sources within the Philippines. In line with the source rule of income taxation, since the goods are produced and sold within the Philippines, Ms. B’s Philippine-sourced income is taxable in the Philippines. b. Yes, but only a proportionate part of the income. Gains, profits and income from the sale of personal property produced by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly without the Philippines.

IV Mr. E and Ms. F are both employees of AAA Corp. They got married on February 14, 2011. On December 29, 2011, the couple gave birth to triplets. On June 25, 2013, they had twins. What were the personal exemptions/deductions which Mr. E and Ms. F could claim in the following taxable years: a) For2010 (2%) b) For 2011 (3%) c) For 2013 (2%) SUGGESTED ANSWER: a. Both Mr. E and Ms. F can claim for personal exemption up to P50,000.00. b. Either Mr. E or Ms. F can claim for additional exemption of P25,000.00 each for their children. This is in addition to the personal exemption of P50,000.00 which they can respectively claim. According to the Tax Code, only one of the spouses can claim for additional exemption for every dependent. c. Mr. E and Ms. F can claim for personal exemptions, respectively. In addition, any one of them, exclusively, can claim for the additional exemptions in relation to their four dependents amounting to P25,000.00 each. Under the Tax Code, an individual may claim up to four additional exemptions in connection with his/her dependents. V BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014. In June 2015, its Board of Directors approved the distribution of cash dividends to its stockholders. BBB, Inc. has individual and corporate stockholders. What is the tax treatment of the cash dividends received from BBB, Inc. by the following stockholders:

a) A resident citizen (1%) b) Non-resident alien engaged in trade or business (1%) c) Non-resident alien not engaged in trade or business (1% ) d) Domestic corporation (1%) e) Non-resident foreign corporation (1%) SUGGESTED ANSWER: a. A final withholding tax of ten percent (10%) shall be imposed upon the cash dividends actually or constructively received by a resident citizen from BBB, Inc. b. A final withholding tax of twenty percent (20%) shall be imposed upon the cash dividends actually or constructively received by a nonresident alien engaged in trade or business from BBB, Inc. c. A final withholding tax equal to twenty-five percent (25%) of the entire income received from all sources within the Philippines, including the cash dividends received from BBB, Inc. d. Dividends received by a domestic corporation from another corporation, such as BBB, Inc., shall not be subject to tax. e. A final withholding tax of fifteen percent (15%) is imposed on the amount of cash dividends received from BBB, Inc., subject to the tax sparing credit provision (Section 28(B)(5)(b), NIRC). The application of the tax sparing credit is that the country-domicile of the recipient corporation allows a credit against the tax due from the non-resident foreign corporation. Otherwise, the applicable tax rate is thirty percent (30%) of the gross income received during each taxable year from all sources within the Philippines.

VI Differentiate between double taxation in the strict sense and in a broad sense and give an example of each. (4%) SUGGESTED ANSWER: Double taxation in the strict sense pertains to the direct double taxation. This means that the taxpayer is taxed twice by the same taxing authority, within the same taxing jurisdiction, for the same property and same purpose. On the other hand, double taxation in broad sense pertains to indirect double taxation. This extends to all cases in which there is a burden of two or more impositions. It is the double taxation other than those covered by direct double taxation. VII On May 15, 2013, CCC, Inc. received the Final Decision on Disputed Assessment issued by the Commissioner of Internal Revenue (CIR) dismissing the protest of CCC, Inc. and affirming the assessment against said corporation. On June 10, 2013, CCC, Inc. filed a Petition for Review with the Court of Tax Appeals (CTA) in division. On July 31, 2015, CCC, Inc. received a copy of the Decision dated July 22, 2015 of the CT A division dismissing its Petition. CCC, Inc. immediately filed a Petition for Review with the CT A en banc on August 6, 2015. Is the immediate appeal by CCC, Inc. to the CTA en banc of the adverse Decision of the CTA division the proper remedy? (3%) SUGGESTED ANSWER: No, CCC, Inc. should first file a motion for reconsideration with the CTA Division. Petition for review of a decision or resolution of the Court in Division must be preceded by the filing of a timely motion for reconsideration or new trial with the Division. Before the CTA En Banc could take cognizance of the petition for review concerning a case falling under its exclusive appellate jurisdiction, the litigant must

sufficiently show that it sought prior reconsideration or moved for a new trial with the concerned CTA division. VIII In June 2013, DDD Corp., a domestic corporation engaged in the business of leasing real properties in the Philippines, entered into a lease agreement of a residential house and lot with EEE, Inc., a non-resident foreign corporation. The residential house and lot will be used by officials of EEE, Inc. during their visit to the Philippines. The lease agreement was signed by representatives from DDD Corp. and EEE, Inc. in Singapore. DDD Corp. did not subject the said lease to VAT believing that it was not a domestic service contract. Was DDD Corp. correct? Explain. (3%) Suggested Answer: DDD Corp. is not correct. Any person who, in the ordinary course of trade or business, leases properties, whether personal or real, shall be subject to valueadded tax (VAT), except for unless the gross annual receipts of the lessor do not exceed P1,919,500.00 or that the monthly rental does not exceed P12,800, for residential units. Based on the destination principle, goods and services are taxed only in the country where they are consumed. Here, the services rendered to the officials of EEE are within the Philippines. Hence, DDD Corp. is subject to VAT. IX For calendar year 2011, FFF, Inc., a VATregistered corporation, reported unutilized excess input VAT in the amount of Pl,000,000.00 attributable to its zero-rated sales. Hoping to impress his boss, Mr. G, the accountant of FFF, Inc., filed with the Bureau of Internal Revenue (BIR) on January 31, 2013 a claim for tax refund/credit of the Pl,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011. Not having received any

communication from the BIR, Mr. G filed a Petition for Review with the CTA on March 15, 2013, praying for the tax refund/credit of the Pl,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011. a) Did the CTA acquire jurisdiction over the Petition of FFF, Inc.? (2%) b) Discuss the proper procedure and applicable time periods for administrative and judicial claims for refund/credit of unutilized excess input VAT. (4%) SUGGESTED ANSWER: a.The CTA has not acquired jurisdiction over the Petition of FFF, Inc. because the juridical claim has been prematurely filed on March 15, 2013. The Supreme Court ruled that the 30-day periodafter the expiration of the 120-day period fixed by law for the Commissioner of Internal Revenue to act on the claim for refund is jurisdictional and failure to comply would bar the appeal and deprive the CTA of its jurisdiction to entertain the appeal. In this case, Mr. G filed the administrative claim on January 31, 2013. The petition for review should have been should have been filed on June 30, 2013. Filing the judicial claim on March 15, 2013 is premature, thus the CTA did not acquire jurisdiction. b. The administrative claim must be filed with the Commissioner of Internal Revenue (CIR) within the two-year prescriptive period. The proper reckoning period date for the two-year prescriptive period is the close of the taxable quarter when the relevant sales were made. However, as an exception, are claims applied only from June 8, 2007 to September 12, 2008, wherein the twoyear prescriptive period for filing a claim for tax refund or credit of unutilized input VAT payments should be counted from the date of filing of the VAT return and payment of the tax. The taxpayer can file a judicial claim in one of two ways: (1) file the judicial claim within thirty days after the Commissioner of

Internal Revenue denies the claim within the120-day period, or (2) file the judicial claim within 30 days from the expiration of the 120-day period if the Commissioner does not act within the 120-day period. As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. As an exception, premature filing is allowed only if filed between December 10, 2003 and October 5, 2010, when the BIR Ruling No. DA-489-03 was still in force. X Indicate whether each of the following individuals is required or not required to file an income tax return: a) Filipino citizen residing outside the Philippines on his income from sources outside the Philippines. (1%) b) Resident alien on income derived from sources within the Philippines. (1%) c) Resident citizen earning purely compensation income from two employers within the Philippines, whose income taxes have been correctly withheld. (1%) d) Resident citizen who falls under the classification of minimum wage earners. (1%) e) An individual whose sole income has been subjected to final withholding tax. (1%) SUGGESTED ANSWER: a. No, because a non-resident Filipino citizen is taxable only in income sourced within the Philippines. b. Yes because a resident alien is taxable for income derived from sources within the Philippines. c. Yes. A resident citizen who is earning purely compensation income from two employers should file income tax return for not being qualified for substituted filing.

d. No. Under the law, all minimum wage earners in the private and public sector shall be exempt from payment of income tax. e. No. Under the law, an individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A)of the NIRC need not file a return. XI What are de minim is benefits and how are these taxed? Give three (3) examples of de minimis benefits. (4%) SUGGESTED ANSWER: De minimis benefits are facilities, and privileges furnished or offered by an employer to his employees, which are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees. The excess over the de minimis limit prescribed shall be considered, along with the “other benefits” under Section 32(B)(7)(e)(iv), NIRC, in determining whether or not the P82,000 threshold has been exceeded. Any excess over the de minimis ceiling may be exempt if it is covered by the unused portion of the P82,000.00 non-taxable “other benefits”. Otherwise, any amount in excess of the P82,000.00 threshold becomes subject to tax. The following shall be considered as “de minimis” benefits: 1.Monetized unused vacation leave credits of private employees not exceeding 10 days during the year; 2.Monetized unused vacation and sick leave credits paid to government officials

and employees, regardless of the number of days; 3.Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or P125 per month; 4.Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500; 5.Uniform and clothing allowance exceeding P5,000 per annum;

not

6.Actual medical assistance not exceeding P10,000 per annum; 7.Laundry allowance not exceeding P300 per month; 8.Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; 9.Gifts given during Christmas and major anniversary celebrations not exceeding P50,000 per employee per annum; 10.Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage on a per region basis; 11.Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total annual monetary value received from both CBA and productivity incentive schemes combined do not exceed ten thousand pesos (P10,000.00) per employee per taxable year XII

Mr. H decided to sell the house and lot wherein he and his family have lived for the past 10 years, hoping to buy and move to a new house and lot closer to his children's school. Concerned about the capital gains tax that will be due on the sale of their house, Mr. H approaches you as a friend for advice if it is possible for the sale of their house to be exempted from capital gains tax and the conditions they must comply with to avail themselves of said exemption. How will you respond? (4%) SUGGESTED ANSWER: Mr. H may avail the exemption from capital gains tax on sale of principal residence by natural persons. Under the law, the following are the requisites: (1) proceeds of the sale of the principal residence have been fully utilized in acquiring or constructing new principal residence within eighteen (18) calendar months from the date of sale or disposition; (2) The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residence built or acquired; (3) The Commissioner has been duly notified, through a prescribed return, within thirty (30) days from the date of sale or disposition of the person’s intention to avail of the tax exemption; and (4) Exemption was availed only once every ten (10) years. XIII GGG, Inc. offered to sell through competitive bidding its shares in HHH Corp., equivalent to 40% of the total outstanding capital stock of the latter. JJJ, Inc. acquired the said shares in HHH Corp. as the highest bidder. Before it could secure a certificate authorizing registration/tax clearance for the transfer of the shares of stock to JJJ, Inc., GGG, Inc. had to request a ruling from the BIR confirming that its sale of the said shares was at fair market value and was thus not subject to donor's tax. In BIR Ruling No. 012-

14, the CIR held that the selling price for the shares of stock of HHH Corp. was lower than their book value, so the difference between the selling price and the book value of said shares was a taxable donation. GGG, Inc. requested the Secretary of Finance to review BIR Ruling No. 012-14, but the Secretary affirmed said ruling. GGG, Inc. filed with the Court of Appeals a Petition for Review under Rule 43 of the Revised Rules of Court. The Court of Appeals, however, dismissed the Petition for lack of jurisdiction declaring that it is the CTA which has jurisdiction over the issues raised. Before which Court should GGG, Inc. seek recourse from the adverse ruling of the Secretary of Finance in the exercise of the latter's power of review? (3%) SUGGESTED ANSWER: GGG should file its petition with the Court of Tax Appeals. The Supreme Court held that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the CTA which has the authority to issue, among others, a writ of certiorari in the exercise of its appellate jurisdiction. XIV KKK Corp. secured its Certificate of Incorporation from the Securities and Exchange Commission on June 3, 2013. It commenced business operations on August 12, 2013. In April 2014, Ms. J, an employee of KKK Corp. in charge of preparing the annual income tax return of the corporation for 2013, got confused on whether she should prepare payment for the regular corporate income tax or the minimum corporate income tax. a) As Ms. J's supervisor, what will be your advice? (2%) b) What are the distinctions between regular corporate income tax and minimum corporate income tax? (3%)

SUGGESTED ANSWER: a. As Ms. J’s supervisor, I will advise that KKK Corp. should prepare payment for the regular corporate income tax. Under the Tax Code, Minimum Corporate Income Tax (MCIT) is applicable beginning on the fourth taxable year following the commencement of operation. Thus, in this case, KKK Corp. will only apply MCIT starting taxable year 2017. b. Distinction as to taxpayer: Regular corporate income tax applies to all corporate taxpayers; while minimum corporate income tax applies to domestic corporations and resident foreign corporations. Distinction as to rate: Regular income tax is 30%; while minimum corporate income tax is 2%. Distinction as to tax base: Regular corporate income tax is based on the net taxable income, except nonresident foreign corporation which is based on gross income; while minimum corporate income tax is based on gross income. Distinction as to period of applicability: Regular corporate income tax is applicable once the corporation commenced its operation, while MCIT is applicable beginning the fourth taxable year following the commencement of operation. XV In 2012, Dr. K decided to return to his hometown to start his own practice. At the end of 2012, Dr. K found that he earned gross professional income in the amount of P1,000,000.00; while he incurred expenses amounting to P560,000.00 constituting mostly of his office space rent, utilities, and miscellaneous expenses related to his medical practice. However, to Dr. K's dismay, only P320,000.00 of his expenses were duly covered by receipts. What are the options

available for Dr. K so he could maximize the deductions from his gross income? (3%) SUGGESTED ANSWER: Dr. K may opt to use the optional standard deduction (OSD) in lieu of the itemized deduction. OSD is a maximum of forty percent (40%) of gross receipts during the taxable year. Proof of actual expenses is not required, but Dr. K shall keep such records pertaining to his gross receipts. XVI LLL is a government instrumentality created by Executive Order to be primarily responsible for integrating and directing all reclamation projects for the National Government. It was not organized as a stock or a non-stock corporation, nor was it intended to operate commercially and compete in the private market. By virtue of its mandate, LLL reclaimed several portions of the foreshore and offshore areas of the Manila Bay, some of which were within the territorial jurisdiction of Q City. Certificates of title to the reclaimed properties in Q City were issued in the name of LLL in 2008. In 2014, Q City issued Warrants of Levy on said reclaimed properties of LLL based on the assessment for delinquent property taxes for the years 2010 to 2013. a. Are the reclaimed properties registered in the name of LLL subject to real property tax? (4 % ) b. Will your answer be the same in (a) if from 2010 to the present time, LLL is leasing portions of the reclaimed properties for the establishment and use of popular fast-food restaurants J Burgers, G Pizza, and K Chicken? (2%) SUGGESTED ANSWER: a. The reclaimed properties are not subject to real property tax because LLL is a government instrumentality. Instrumentality refers to any agency of

the National Government, not integrated within the department framework vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. Under the law, real property owned by the Republic of the Philippines (Republic) is exempt from real property tax unless the beneficial use thereof has been granted to a taxable person. When the title of the real property is transferred to LLL, the Republic remains the owner of the real property. Thus, such arrangement does not result in the loss of the tax exemption. b. No. As a rule, properties owned by the Republic of the Philippines are exempt from real property tax except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. LLL leased out portions of the reclaimed properties to a taxable entity, such as the popular fast-food restaurant, hence the reclaimed properties are subject to real property tax. XVII Mr. L owned several parcels of land and he donated a parcel each to his two children. Mr. L acquired both parcels of land in 1975 for ll200,000.00. At the time of donation, the fair market value of the two parcels of land, as determined by the CIR, was 112,300,000.00; while the fair market value of the same properties as shown in the schedule of values prepared by the City Assessors was 112,500,000.00. What is the proper valuation of Mr. L's gifts to his children for purposes of computing donor's tax? (3%)

FMV as determined by the Commissioner or the FMV as shown in the schedule of values fixed by the provincial or city assessors. In this case, for the purpose of computing donor’s tax, the proper valuation is the value prepared by the City Assessors amounting to P2,500,00.00 because it is higher than the FMV determined by the CIR. XVIII Under the Tariff and Customs Code, as amended: a. When does importation begin and when is it deemed terminated? (2%) b. In what easels is the decision of the Collector automatically reviewed by the Commissioner of Customs? In what instance/s is the decision of the Commissioner automatically appealed to the Secretary of Finance? (4%) SUGGESTED ANSWER: a. Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein. Importation is deemed terminated upon payment of the duties, taxes and other charges upon the articles, or secured to be paid, at a port of entry and the legal permit for withdrawal shall have been granted, or incase said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs.

SUGGESTED ANSWER:

b. Whenever the decision of the Collector of Customs is adverse to the government, the said decision is automatically elevated to the Commissioner of Customs for review, and if such decision is affirmed by the Commissioner of Customs, the same will be automatically elevated to and be finally reviewed by the Secretary of Finance.

The valuation of Mr. L’s gift to his children is the fair market value (FMV) of the property at the time of donation. It is the higher of the

XIX In 2014, M City approved an ordinance levying customs duties and fees on goods

coming into the territorial jurisdiction of the city. Said city ordinance was duly published on February 15, 2014 with effectivity date on March 1, 2014. a. Is there a ground for opposing said ordinance? (2%) b. What is the proper procedural remedy and applicable time periods for challenging the ordinance? (4%) SUGGESTED ANSWER: a. Yes, on the ground that the ordinance is ultra-vires. The taxing powers of local government units, such as M City, cannot extend to the levy of taxes, fees and charges already imposed by the national government, and this include, among others, the levy of customs duties under the Tariff and Customs Code. b. Any question on the constitutionality or legality of tax ordinances may be raised on appeal within thirty (30) days from the effectivity to the Secretary of Justice. The Secretary of Justice shall render a decision within sixty (60) days from the date of receipt of the appeal. Thereafter, within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file the appropriate proceedings with the Regional Trial Court. XX After filing an Information for violation of Section 254 of the National Internal Revenue Code (Attempt to Evade or Defeat Tax) with the CTA, the Public Prosecutor manifested that the People is reserving the right to file the corresponding civil action for the recovery of the civil liability for taxes. As counsel for the accused, comment on the People's manifestation. (3%) SUGGESTED ANSWER: I will move for the denial of the manifestation. Any provision of law or the

Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such civil action separately from the criminal action shall be recognized. XXI MMM, Inc., a domestic telecommunications company, handles incoming telecommunications services for nonresident foreign companies by relaying international calls within the Philippines. To broaden the coverage of its telecommunications services throughout the country, MMM, Inc. entered into various interconnection agreements with local carriers. The non-resident foreign corporations pay MMM, Inc. in US dollars inwardly remitted through Philippine banks, in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. MMM, Inc. filed its Quarterly VAT Returns for 2000. Subsequently, MMM, Inc. timely filed with the BIR an administrative claim for the refund of the amount of P6,321,486.50, representing excess input VAT attributable to its effectively zero-rated sales in 2000. The BIR ruled to deny the claim for refund of MMM, Inc. because the VAT official receipts submitted by MMM, Inc. to substantiate said claim did not bear the words "zero-rated" as required under Section 4.108-1 of Revenue Regulations (RR) No. 7-95. On appeal, the CTA division and the CT A en bane affirmed the BIR ruling. MMM, Inc. appealed to the Supreme Court arguing that the NIRC itself did not provide for such a requirement. RR No. 7-95 should not prevail over a taxpayer's substantive right to claim tax refund or credit. a. Rule on the appeal of MMM, Inc. (3%)

b. Will your answer in (a) be any different if MMM, Inc. was claiming refund of excess input VAT attributable to its effectively zerorated sales in 2012? (2%) SUGGESTED ANSWER: a.The appeal of MMM, Inc. must be denied. MMM, Inc.’s position that the requirements under RR No. 7-95 should not prevail over a taxpayer’s substantive right to claim tax refund or credit is unmeritorious. The Secretary of Finance has the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the NIRC. Such rules and regulations are given weight and respect by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields. An applicant for a claim for tax refund or tax credit must not only prove entitlement to the claim but also compliance with all the documentary and evidentiary requirements. Consequently, the CTA and the CTA en banc correctly ruled that the failure to indicate the words “zero-rated” on the invoices and receipts issued by a taxpayer would result in the denial of the claim for refund or tax credit. b. No. In Kepco Philippines Corporation v. Commissioner of Internal Revenue, the Supreme Court ruled that the subsequent incorporation of Section 4.108-1 of RR 795 in Section 113(B)(2)(c) of RA 9337 actually confirmed the validity of the imprinting requirement on VAT invoices or official receipts –a case falling under the principle of legislative approval of administrative interpretation by reenactment. XXII State the conditions for allowing the following as deductions from the gross estate of a citizen or resident alien for the purpose of imposing estate tax: a. Claims against the estate (2%)

b. Medical expenses (2%) SUGGESTED ANSWER: a. In order that the claims against the estate may be deducted, the following are the requisites: 1.The liability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations incurred incident to his death such as unpaid funeral expenses and unpaid medical expenses; 2.The liability was contracted in good faith and for adequate and full consideration in money or money’s worth; 3.The claim must be a debt or claim which is valid in law and enforceable in court; 4.The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have prescribed. At the time the indebtedness was incurred, the debt instrument was duly notarized and if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan. b. All medical expenses incurred within one (1) year before the death of the decedent which are duly substantiated with receipts, provided that the total amount thereof, whether paid or unpaid, does not exceed Five Hundred Pesos (P500,000.00). ---ooo0ooo---

2016 TAXATION BAR QUESTION with suggested answer QUESTION ON LOCAL TAX 1. The City of Maharlika passed an ordinance imposing a tax on any sale or transfer of real property located within the city at a rate of fifty percent (50%) of one percent (1%) of the total consideration of the transaction. Jose sold a parcel of land in the city, which he inherited from his deceased parents, and refused to pay the aforesaid tax. He instead filed a case asking that the ordinance be declared null and void since the tax it imposed can only be collected by the national government, as in fact he was paid the Bureau of Internal Revenue (BIR) the required Capital Gain Tax. If you were the city legal officer of Maharlika what defenses would you raise to sustain the validity of the ordinance? ANSWER: The Ordinance passed by the City Council of Maharlika imposing a Transfer Tax on the sale, or any other mode of transferring ownership at the rate of 50% of 1% of the total consideration involved in the acquisition of the property cannot be declared null and void as Petitioned by Jose with his contention that he already paid the Capital Gain Tax. Said City Ordinance is a Taxing Power granted to the Provincial, Municipality or Cities, pursuant to Section 135 of the Local Government Code of 1991 (LGC). Transfer Tax paid in the Bureau of Internal Revenue (BIR) can be either donor’s or estate taxes which is far different with the Transfer tax imposed by the Local Government, hence, there is no reason to be confuse. Also, the transfer tax paid to the provincial or city assessor’s office, its evidence of payment or the official receipt is required by the Register of Deeds of the province concerned before registering any deed. This is also required by the provincial assessor before cancelling an old tax declaration and issuing a new one in its place. The payment of the transfer tax is the responsibility of the seller, donor, transferor, executor or and administrator. As to the rate of tax imposed it is also compliant to Section 151 of the LGC. Therefore, Jose has no reason not to pay nor to question the transfer tax imposed on him and seek declaration of which to be null and void.

Question 2 on local tax Philippine National Railways (PNR) operates the rail transport of passengers and goods by providing train stations and freight customer facilities from Tutuban, Manila to the Bicol Province. As the operator of the railroad transit, PNR administers the land, improvements and equipment within its main station in Tutuban, Manila. Invoking Section 193 of the Local Government Code (LGC) expressly withdrawing the tax exemption privileges of government-owned and controlled corporations upon the effectivity of the Code in 1992, the City Government of Manila issued Final Notices of Real Estate Tax Deficiency in the amount of P624,000,000.00 for the taxable years 2006 to 2010. On the other hand, PNR, seeking refuge under the principle that the government cannot tax itself, insisted that the PNR lands and buildings are owned by the Republic. Is the PNR exempt from real property tax? Explain your answer. (5%) Answer: Yes, PNR is exempt from real property tax. PNR is a corporation created to serve as the instrumentality of the Government of the Philippines in providing a nationwide railroad and transport system, and under Section 133 (o) of the Local Government Code, PNR as a government instrumentality as such it is not taxable because it is not subject to taxes, fees or charges of any kind by local governments pursuant to the Local Government Code the only exception is when PNR leases its real property to a taxable person as provided in Section 234(a) of the Local Government Code, in which case the specific real property leased becomes subject to real estate tax. Thus, only portions of the PNR Lands and Buildings leased to taxable persons like private parties are subject to real estate tax by the City of Manila. Section 193 does not apply with PNR since its charter is not listed as Government owned and controlled corporation.

Question no. 3 on Local tax The Philippine-British Association, Inc. (Association) is a non-stock, non-profit organization which owns the St. Michael's Hospital (Hospital). Sec. 216 in relation to Sec. 215 of the LGC classifies all lands, buildings and other improvements thereon actually, directly, and exclusively used for hospitals as "special." A special classification prescribes a lower assessment than a commercial classification. Within the premises of the Hospital, the Association constructed the St. Michael's Medical Arts Center (Center) which will house medical practitioners who will lease the spaces therein for their clinics at prescribed rental rates. The doctors who treat the patients confined in the Hospital are accredited by the Association. The City Assessor classified the Center as "commercial" instead of "special" on the ground that the Hospital owner gets income from the lease of its spaces to doctors who also entertain out-patients. Is the City Assessor correct in classifying the Center as "commercial?" Explain. (5%)

Answer: Real Property shall be classified for purposes of assessment as provided by Sec.215 of the Local Government Code. In the same code, Sec. 216 All lands, buildings, and other improvements thereon actually, directly and exclusively used for hospitals, cultural, or scientific purposes, and those owned and used by local water districts, and governmentowned or controlled corporations rendering essential public services in the supply and distribution of water and/or generation and transmission of electric power shall be classified as special. However, in Section 217 it is provided that Real property shall be classified, valued and assessed on the basis of actual use regardless if where located, whoever owns it, and who ever uses it. St. Michael's Medical Arts Center (Center) which will house medical practitioners who will lease the spaces therein for their clinics at prescribed rental rates and the doctors who treat the patients confined in the Hospital are accredited by the Association, was classified by the City Assessor as “Commercial” instead of “Special” because the Hospital owner gets income from the lease of its spaces to doctors who also entertain out-patients. The City Assessor on the foregoing arguments, classified it as commercial, however, in the case of City Assessor of Cebu vs. Association of Benevola de Cebu, the court ruled that Center the importance of CHHMAC in the operation of CHH cannot be over-emphasized nor disputed. Clearly, it plays a key role and provides critical support to hospital operations. Charging rentals for the offices used by its accredited physicians cannot be equated to a commercial venture. Finally, respondents charge of rentals for the offices and clinics its accredited physicians occupy cannot be equated to a commercial venture, which is mainly for profit. Respondents explanation on this point is well taken. First, CHHMAC is only for its consultants or accredited doctors and medical specialists. Second, the charging of rentals is a practical necessity: (1) to recoup the investment cost of the building, (2) to cover the rentals for the lot CHHMAC is built on, and (3) to maintain the CHHMAC building and its facilities. Third, as correctly pointed out by respondent, it pays the proper taxes for its rental income. And, fourth, if there is indeed any net income from the lease income of CHHMAC, such does not inure to any private or individual person as it will be used for respondent’s other charitable projects. The Supreme Court affirmed the decision of CA that CHHMAC building should be classified as special and not commercial and should be accorded the 10% special assessment for it is not operated primarily for profit but as an integral part of CHH and CHHMAC operations being devoted for the benefit of the CHHs patients. In the instant case being similarly situated the City Assessor is incorrect for classifying the Center as commercial instead of special on the proper application of Sec. 216 in relation to Section 215 of the Local Government Code.