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SOLUTIONS MANUAL FOR USE WITH


INCOME TAXATION 10e
EXERCISE 1-1

1.
2.
3.
4.
5.
6.
7.
8.
9.
10
.

D
F, K
I

EXERCISE 1-3

11 K
.
12 J
.
13 A
.

1.
2.
3.

4.

5.

6.

7.

8.

11
.
12
.
13
.
14
.
15
.
16
.
17
.
18
.
19
.
20
.

F
F
F
F
F
F
F

T
9.
10 T
.

21
.
22
.
23
.
24
.
25
.
26
.
27
.
28
.
29
.
30
.

T
F
F
F
F
T
T
T
T

31
.
32
.
33
.
34
.
35
.

T
T
T
T
T
F
F
F
T

EXERCISE 12
1.
2.
3.
4.
5.

Excise
Community
Due process
Donors tax
Shifting

7.
8.
9.

L
S
H
I
F
T
I
N
G

6. Lifeblood
Toll
School
Revenue
10. Tax amnesty

L
I
F
E
B
L
O
O
D
H
N

L
C

O
X

O
I

X
A
T

S
O

R
O

T
R
E
V
E
N
U
E

O
D

Y
T
S
E
N
M
A
X
A
T
D

F
F
T
T
T

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EXERCISE 1 4

EXERCISE 1 5

1.

11.

1.

11 B
.

2
1.

31 D
.

2.

12.

2.

12 A
.

2
2.

32 C
.

3.

13.

3.

13 A
.

2
3.

33 B
.

4.

14.

4.

14 C
.

2
4.

34 A
.

5.

15.

5.

15 C
.

2
5.

35 A
.

6.

16.

6.

16 B
.

2
6.

7.

17.

7.

17 D
.

2
7.

8.

18.

8.

18 A
.

2
8.

9.

19.

9.

19 C
.

2
9.

10.

20.

10 C
.

20 B
.

3
0.

EXERCISE 16
The claim of the Commissioner should be denied.
Rule-making power must be confined to details for regulating the mode or proceedings in
order to carry into effect the law as has been enacted, and it cannot be extended nor can it expand
the statutory requirements or to embrace matters not covered by the statute.
Administrative regulations must always be in harmony with the provisions of the law because
any resulting discrepancy between the two will always be resolved in favor of the basic law.

EXERCISE 17
YES. Double taxation means taxing twice the same property twice when it should be taxed
only once; that is taxing the same person twice by the same jurisdiction for the same thing.
Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same
subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes must be of the same kind or character.
There is indeed double taxation if respondent is subjected to the taxes under both Sections 14
and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter
the privilege of doing business in the City of Manila; (2) for the same purpose to make persons
conducting business within the City of Manila to contribute to city revenues; (3) by the same taxing

PAGE 3
authority the City of Manila; (4) within the same taxing jurisdiction within the territorial jurisdiction
of the City of Manila; (5) for the same taxing periods per calendar year; and (6) of the same kind or
character a local business tax imposed on gross sales or receipts of the business.
Moreover, Section 143(h) may be imposed only on businesses that are subject to excise tax,
VAT, or percentage tax under the NIRC, and that are not otherwise specified in preceding
paragraphs.

EXERCISE 1- 8
The law is constitutional. The tax is levied with a regulatory purpose to provide means for
the rehabilitation and stabilization of the threatened sugar industry. As the protection and promotion
of the sugar industry is a matter of public concern, the Legislature may determine within reasonable
bounds what is necessary for its protection and expedient for its promotion. Here, the legislative
discretion must be allowed full play, subject only to the test of reasonableness; and it is not contended
that the means provided in Section 6 of C.A. 567 bear no relation to the objective pursued or are
oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen
why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may
be made the implement of the States police power.

EXERCISE 21
1. The query should be addressed to the Commissioner of Internal Revenue because the power to
interpret the provisions of the National Internal Revenue Code (NIRC) and other tax laws is under
the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of
Finance.
Moreover, interpretation of officers, of laws which are entrusted to their administration, is
entitled to great respect and have in their favor a presumption of legality (Anscor Container
Corporation v. CTA, GR No. 38052, August 31, 1998).
2. I will inform him that a compromise is not allowed anymore because the case had already been
filed in the Regional Trial Court. The moment the case is filed in court, it cannot be subject to
compromise anymore.
3.

Piolo is correct. Under RA 1405 the BIR Commissioners power to inquire into a taxpayers bank
deposit is not in conflict with the Bank Secrecy Law. Based on the provision of the NIRC, the
Commissioner is authorized to inquire into bank deposit:
a.
b.

To determine the gross estate of a decedent; and


When a taxpayer applies for a compromise of his tax liability by reason of financial incapacity.

4.

I will request for a compromise of the assessed tax on ground that the financial position of the
taxpayer demonstrates clear inability to pay the assessed tax. Clearly, even if the case is decided
against the taxpayer, he will not have the money to pay the assessed tax. It is therefore an
exercise in futility to forego with the case against him.

5.

The claim for refund should be denied on ground of prescription. Recovery of taxes erroneously
paid or illegally collected are allowed only when filed within the two-year prescriptive period. The
two-year period should be computed from the time of actual filing of the Adjustment Return and
final payment of the tax (Phil. Bank of Communications vs. CIR, 302 SCRA 241).
Thus, the two year prescriptive period lapsed on April 5, 2011.

6. The Commissioner may not grant the refund when there is a deficiency tax assessment against the
claimant-taxpayer. To award such refund despite the existence of the deficiency assessment is an
absurdity and a polarity in conceptual effects (Commissioner vs. CA and Citytrust Banking Corp,
234 SCRA 348).
7.

Yes. Where a corporation paid quarterly corporate income taxes in any of the first three quarters
during the taxable year but incurs a net loss during the taxable year, the two-year period for the

PAGE 4
filing of claim for refund or credit shall be counted from the date of the filing of the annual
corporate income tax return (Commissioner vs. TMX Sales, 205 SCRA 184).
8.

a. The counting of the two (2) year period commences to run from the date of final payment.
Considering that the final payment was made on July 9, 2012, the prescriptive period will end
on July 9, 2014.
b.

Augusto has thirty days from receipt of the decision of the CIR to file an appeal with the CTA.
Since it was received on May 15, 2014, he has until June 14, 2014 to file his appeal with the
CTA.

c.

He is given 30 days from receipt of the CIRs decision but not exceeding 2 years from the date
of final payment. Hence, he has until July 9, 2014, or eight (8) days following the receipt of
the decision, to file an appeal with the CTA.

EXERCISE 2-2. MULTIPLE CHOICE


1.

2.

C
The Bureau of Immigration is under the Department of Justice.

3.

A
The BIR is inferior to the Court of Tax Appeals in terms of tax cases.
empowered to review the decision of a superior court.

4.

5.

6.

Thus, the BIR is not

The power to decide tax cases is more of a power and duty of the Commissioner rather than
the Bureau of Internal Revenue.
7.

B
The Community Tax is levied under the Local Government Code of 1991.
The Overseas Communication Tax and the Gross Receipts Tax are business taxes under
Section 120 and 121, respectively, of the National Internal Revenue Code.
The documentary stamp tax is levied under Title VII of the NIRC.

8.

A
The power to interpret the provisions of the NIRC is under the exclusive original jurisdiction of
the Commissioner of Internal Revenue, subject to review by the Secretary of Finance.

9.

D
Under RA 1125, as amended, the decisions of the Commissioner of Internal Revenue on cases
pertaining to disputed assessments, refunds of taxes, fees and other charges, penalties, etc. is
appealable only to the Court of Tax Appeals.

10.

D
The limited power of the Commissioner does not conflict with RA 1405 because the provision
of the Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law.
The Commissioner or his duly authorized representative may be allowed only to inquire into

PAGE 5
the bank deposits of the taxpayer on the following cases:
a. To determine the gross estate of the decedent.
b. Where the taxpayer has filed an application for compromise of his tax liability by reason of
financial incapacity; and
c. When there is a waiver duly signed by the taxpayer.
11

C
Revenue Audit Memorandum Order, Revenue Special Order and Revenue Travel Assignment
Order are not exercises of legislative power.
Revenue Regulations are more detailed interpretation of the tax laws. It is issued by the
Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue.

12.

D
The case cannot be compromised anymore if the case is filed already before the courts of
justice and if the case involves fraud.

13.

14.

B
Corporations are not allowed to be registered by the Securities and Exchange Commission for
the purpose of practice of public accountancy (RA 9298).

15.

C
A withholding agent is a party in interest having sufficient legal interest to bring a suit for
refund of taxes illegally collected from him.
The claim for refund must be filed with the CIR before any suit in Court of Tax Appeals is
commenced.
The computation of the two-year period starts from the filing of the final adjustment return
because it was only then that it could be ascertained whether the taxpayer made profits or
incurred losses in its business operations.

EXERCISE 2-3
1.

D
The last day to claim refund is June 30, 2013 or two (2) years from the date of final payment.

2.

A
Taxpayers are given 30 days from receipt of BIR decision but within two (2) years from the
date of payment, to appeal the decision to the Court of Tax Appeals.

3.

D
When the 2-year period is about to lapse, the suit or proceeding must be started in the Court
of Tax Appeals without awaiting for the decision of the Commissioner, or the 30-days
reglementary period from receipt of decision to appeal to the CTA.

4.

C
The best action is to file an appeal with the Court of Tax Appeals before the lapse of the 2year prescriptive period, without waiting for the decision of the Commissioner of Internal
Revenue.

5.

D
The counting of the 30 day prescriptive period for appeal starts from the date of receipt of the
decision because it would be unfair on the part of the taxpayer to include in the counting the

PAGE 6
date while the decision is still in the table of the Commissioner or it is still in transit.

EXERCISE 24
The proper party to question, or seek a refund of an indirect tax is the
statutory taxpayer, the person on whom the tax is imposed by law and who paid the
same even if he shifts the burden thereof to another. Even if Petron passed on to
Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is
not a tax but part of the price which Silkair had to pay as a purchaser.
An excise tax is an indirect tax where the tax burden can be shifted to the
customer but the tax liability remains with the manufacturer or producer.
The excise taxes are collected from manufacturers or producers before
removal of the domestic products from the place of production. Although excise
taxes can be considered as taxes on production, they are really taxes on property
as they are imposed on certain specified goods.
When Petron removes its petroleum products from its refinery in Limay,
Bataan, it pays the excise taxes due on the petroleum products thus removed.
Petron, as manufacturer or producer, is the person liable for the payment of the
excise tax as shown in the Excise Tax Returns filed with the BIR. Stated otherwise,
Petron is the taxpayer that is primarily, directly and legally liable for the payment
of the excise taxes. However, since an excise tax is an indirect tax, Petron can
transfer to its customers the amount of the excise tax paid by treating it as part of
the cost of the goods and tacking it on to the selling price.
Silkair as the purchaser and end consumer, ultimately bears the tax burden,
but this does not transform petitioners status into a statutory taxpayer.
In the refund of indirect taxes, the statutory taxpayer is the proper party who
can claim the refund.
Petitioner should invoke its tax exemption to Petron before buying the aviation
jet fuel. Petron, however, remains the statutory taxpayer on those excise taxes.

EXERCISE 3-1
1.

The partnership is not liable to pay income tax considering that no income was
earned during the year. The increase in the net assets was caused by the
additional contribution of P10,000 by the partners.

2.

The contention of Judge Nitafan is wrong. Payment of income tax by judges is


not covered by the constitutional protection against diminution of their
salaries during their continuance in office. Income taxation for the members
of the judiciary give substance to the equality among the three branches of the
government consisting of the executive, legislative and the judiciary.

3.

a. Face value
Less: Discount (100,000 x 20%)
Income subject to tax/Fair discounted
value
b. Discount
x Due in 2011

P 100,000
20,000
80,000
P 20,000
50%

PAGE 7
Income subject to tax, 2011

10,000

c. Income reportable in 2012 ( 20,000 x


50%)
4.

P 10,000

Whenever a stockholder is indebted to the corporation and said creditor


corporation decides to condone the debt, such condonation has the effect of a
payment of dividend to the stockholder. Therefore, the condonation made by
Lux Corporation to Eduardo is in effect a payment of dividend by Lux
Corporation to Eduardo.
If Eduardo is the creditor while Lux Corporation is the debtor and the
former decides to condone the debt of the latter, the amount is considered as
an additional investment by Eduardo to the corporation.

5.

Hilario is not required to report income on the condonation considering that


the condonation of debt was given without requiring him to render services.
The P50,000 constitutes more as a taxable gift rather than as a taxable income.

6.

Yes the amount of P30,000 is in the nature of a remuneratory donation; it is


subject to income tax.

7.

Under the tax benefit rule, whenever a bad debt is claimed as deduction from
gross income and it resulted to a reduction in its tax liability, the recovery of
such is subject to tax. Thus, when Pamco wrote off the accounts and claimed it
as deduction from gross income, there was a corresponding reduction in the
tax liability. It being the case, the recovery of such debt is taxable to PAMCO
but only up to P90,000, the amount that has been beneficial to PAMCO.

8.

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

9.

Value-added tax
Real property tax
Income tax
Stock transaction tax
Special assessment
Occupation tax
Estate tax
Income tax paid to a foreign
country
Community tax
Excise tax

not taxable
taxable
not taxable
not taxable
not taxable
taxable
not taxable
taxable if claimed as deduction

- taxable
- taxable

a. Yes, the dividends are subject to a final tax of 10%.


b. The dividends paid are in effect property dividends. They are subject to a
final tax of 10%
c. The dividends paid are actually stock dividends. They are not subject to tax.
d. Although some stockholders were paid stock dividends, since others were
paid cash, such declaration and payment resulted to a change in
proportionate interest. Thus, both the stockholders who were paid stocks
and cash dividends are subject to final tax.

10. a. Dividends received from domestic

not taxable

PAGE 8
b. Dividends received by resident foreign from
- not taxable
domestic
c. Dividends received by nonresident foreign corporation from domestic 15%
final tax if the country in which the nonresident foreign corporation is
domiciled shall allow tax credit of 15% in its income tax payable in such
foreign country.
11. a
.

Miss Supsup is entitled to 10% of the value of confiscated smuggled goods


but not exceeding P1,000,000. Since 10% of the value of the smuggled
goods is P10,000,000 (P100,000,000 x 10%), Miss Supsup is entitled only to
P1 million as tax informers reward.

b. The reward received by Miss Supsup is subject to a final withholding tax of


10%. Hence, the amount of tax to be withheld in favor of the government is
P100,000 (P1,000,000 x 10%).
12. a
.

Under Outright Method, the lessor is required to report as income the fair
market value of the improvement at the time of completion. Thus, she has
to report an income of P100,000 on the leasehold improvement and P48,000
(P4,000 x 12) on the rent, or a total amount of P148,000.

b. Rent (P4,000 x 12)


Add: Income on leasehold improvement
Cost of improvement
Less: Accumulated depreciation
(100,000/25 x 18.5)
Book value, end of lease
(26,000 / 18.5 x )
c
.

P
48,000
P 100,000
74,00
0
26,000
703
48,703

Rent ( 4,000 x 6)
Leasehold improvement:
Cost
Less: Depreciation (7/1/09 6/30/10)
(100,000 / 25)
Book value upon termination
Less: Amount already reported as
income
Income of lessor in 2013

EXERCISE 3 2

24,000
P 100,000
4,0
00
96,000
703

95,29
7
119,29
7

PAGE 9
1

11

12

13

14

10

15

3-3. TAX BENEFIT RULE


3ANSWER: B
3.1:
Case 1 P 40,000
Case 2 - 20,000
Case 3 - 40,000
Case 4 70,000 (85,000 15,000)
33.2:

(1) ANSWER: D
Gross profit

800,0
00
30,00
0
830,00
0

Add: Bad debts


recovered
Total
Less: Accounts writtenoff
Deductible
expenses
Net income before
income tax
33.3:

50,000
440,000

490,00
0
340,00
0

(2) ANSWER: D
Gross income before
taxes
Less: Deductible taxes
Amusement tax
Local business
taxes
Net loss

P
90,000
P 80,000
40,000

120,00
0
( 30,00
0)

ANSWER: B
Amusement tax

80,0

PAGE 10

Local business taxes


Taxable income

00
8,500
88,500

EXERCISES 3 3.4. MULTIPLE CHOICE


THEORY
1.

ANSWER: C
This is an application of the tax benefit rule. Under this
principle, the recovery of bad debt previously deducted is taxable if at
the time it was claimed as deduction, there was a corresponding
reduction in the income tax liability of the taxpayer.

2.

ANSWER: C
See the explanatory notes in No. 11 above on tax benefit rule.

3.

ANSWER: D
The capital gains tax is an income tax, while the tax paid on
inter vivos donation is a donors tax. These taxes, including the valueadded tax, are not deductible from gross income from purposes of
computing the income tax. Thus, the refund received from these
taxes are not subject to tax.
The community tax paid by a corporation is a deductible item
from gross income. Hence, a refund received is taxable.

EXERCISE 3-4
34.1:
1.

LEASEHOLD
IMPROVEMENT
ANSWER: B
Cash received
Tax paid by lessee
Income to be reported in 2011

120,000
3,000
123,000

The lessor shall apply cash method on prepayment of rental even if it is


using accrual method of accounting.
2.

ANSWER: D
Rent income (5,000 x 12)
Leasehold improvement
Tax paid by lessee
Income to be reported under outright
method

60,000
1,800,000
3,000
1,863,000

PAGE 11
3.

ANSWER: A
Rent income
Tax paid by lessee
Leasehold improvement:
Cost

60,000
3,000
1,800,0
00

Less: Accumulated depreciation


(1,800,000/30 x 17.5)

1,050,0
00
750,00
0

Book value, end of lease


(750,000/17.5) x 6/12
Income to be reported under spread-out
method
4.

21,429
84,429

ANSWER: C
Effective January 1, 2014, the land and the building shall be exempt from
real estate tax because it is now being used actually, directly and exclusively
for educational purpose.
All assessments or reassessments made after the 1 st day of January of
any year shall take effect on the 1 st day of January of the succeeding year
(Sec. 221, Local Government Code of 1991).

5.

6.

ANSWER: B
Rent expense
Depreciation (1,800,000/17.5)
Deductible expense

60,000
102,857
162,857

ANSWER: B
Cash received
Leasehold improvement (750,000/17.5)

60,000
42,857
102,857

Note:
No real property tax will be shouldered by the lessee starting 2014
because the land and the building shall be exempt from real estate tax
considering that it is now being used actually, directly and exclusive for
educational purpose.
7.

ANSWER: C
Cash received (5,000 x 3)
Leasehold improvement:
Cost
Less:
Accumulated
depreciation
(1,800,000/30 x 3.75)
Book
termination

value

upon

15,000
1,800,0
00
225,00
0
1,575,0
00

PAGE 12
Less: Amount declared as
income
2013
21,429
2014
42,857
2015
42,857
2016
42,857

150,0
00

Total

1,425,0
00
1,440,0
00

EXERCISE 3-4.2:
1.

ANSWER: A
Rent (2,000 x 12)

24,0
00
1,000,0
00
1,024,0
00

Leasehold improvement
Income using outright method
2.

ANSWER: C
Rent (2,000 x 12)
Leasehold improvement:
Cost
Less: Depreciation for 9 years
(1,000,000/20 x 9)
Book value, end of lease

24,00
0
1,000,0
00
450,0
00
550,00
0

Annual income (550,000/ 9 years)


Income under spread-out method
3.

61,111
85,111

ANSWER: C
Annual income reportable

61,11
1
x No. of years of reporting
____1
Loss incurred by Bryant
61,111
Note: It is presumed that Bryant had already reported his entire income on
leasehold improvement for the taxable year 2015 but not his income
from January to February 28, 2016.
EXERCISE 34.3:
ANSWER: B
Rent income
Income on leasehold improvement:
Cost of improvement

36,00
0
600,0
00

PAGE 13
Less: Depreciation for 15 years
(600,000/30 x 15)
Book value, end of lease
Divide by remaining term of lease
(years)
Annual income to be reported

300,000
300,000
15 20,000
56,000

EXERCISE 34.4
1. ANSWER: A
The income from rent received by Vic is taxable to him, while the amount
given as loan is not because there was no gain realized by Vic in this
transaction. As a matter of fact, there was no gain realized whether as
payment for services, interest or profit from investment.
2.

ANSWER: C
Cost of improvement
Less: Depreciation for 8 years (2,000,000/50 x
8)
Book value, end of lease
Rent income
Income from leasehold improvement
(1,680,000 / 8)
Total income using spread-out method

3.

P
2,000,00
0
320,00
0
1,680,00
0
P
10,000
210,000
220,000

ANSWER: D

EXERCISE 3-5
EXERCISE 35.1:

1.

ANSWER: D
Value of promissory note
Less: Discount (120,000 x 20%)
Taxable income, 2011

2.

P
120,000
24,000
96,000

ANSWER: D
Discount
Less: Income to be reported in 2012 (24,000
x 50%)
Taxable income, 2013

24,000
12,000
12,000

EXERCISE 35.2:

1.

ANSWER:

Value of promissory note

PAGE 14
Less: Discount (P50,000 x 25%)
Taxable income, 2013
2.

50,000
12,500
37,500

ANSWER: B
Value of promissory note
Less: Amount already declared as income
Taxable income, 2014

P
50,000
37,500
12,500

EXERCISE 35.3:

1.

ANSWER: C
Payment for services rendered by promissory note which can be
discounted, is taxable to the payee at its fair discounted value.

EXERCISE 3-6. MULTIPLE CHOICE


1.

ANSWER: B
A schedular system of taxation is a system employed where the income
tax treatment varies and is made to depend on the kind or category of taxable
income of the taxpayer. It is distinguished from global system in the sense that
the latter is employed where the tax system views indifferently the tax base
and generally treats in common all categories of taxable income of individual
(Tan vs. Del Rosario, 237 SCRA 324, 331).

2.

ANSWER:

Dividends received by a domestic and resident foreign from a domestic


corporation are not subject to income tax.
Dividends received by a resident citizen from a domestic corporation are
subject to a final tax of 10%.
Dividends received by a domestic corporation from a foreign corporation
are subject to ordinary income tax.
3.

ANSWER:

Winnings in lotto are tax exempt.


4.

ANSWER: C
Value-added tax, other percentage taxes and excise tax on certain goods
are taxes found under Titles IV, V and VI, respectively of NIRC, which contain
the provisions on business taxation; whereas, income taxation is discussed in
Title II of the same code.

5.

ANSWER: B
The amount of P3,000 raised by Mon is a gift which should be excluded
from gross income because when a financial aid is asked, that means that
there is no legally demandable obligation on the part of other people to give
him money.

PAGE 15
6.

ANSWER: D
Income refers to earnings, lawfully acquired, without consensual
recognition, express or implied of an obligation to repay and without
restriction as to their imposition (James vs. US, 366 US 213).

7.

ANSWER: C
The amount received by Ceidi and Ador fall within the ambit of income
from whatever source derived because these are income not expressly
excluded or exempted from the class of taxable income.
The above phrase is so broad that it includes all income not expressly
excluded or exempted from the class of taxable income, irrespective of
voluntary or involuntary action of the taxpayer in producing the income
(Gutierrez vs. CIR, CTA Case No. 65).

8.

ANSWER: D
The amount of indebtedness cancelled due to services rendered by the
debtor is considered as compensation income. It is just like paying an
employee by an amount equivalent to the services he had rendered to his
employer-creditor.

9.

ANSWER: C
The money value of accumulated leave credits not exceeding 10 days is
not taxable to the employee.
Travelling expenses received by an employee who was sent on a business
trip are not taxable to the employees provided that these employees are
required to liquidate said expenses.
Tips received by waitresses directly from customers which are not
accounted for by the employer to the employer are considered taxable income.

1
0

ANSWER: D
If a corporation to which a stockholder is indebted forgives the debt, the
transaction has the effect of a payment of dividend (Sec. 5, Rev. Regs. No. 2).

1
1

ANSWER: B
The money given to Lazaro is a remuneratory donation.
income, subject to income tax.

1
2

ANSWER: C
Tips
Liability condoned after rendering service
Taxable income

ANSWER: A

5,00
0
25,000
30,000

It is deemed an

PAGE 16
3
Selling price (115 x 200)
Less: Cost (100 x 200)
Gain on sale

23,000
20,000
3,000

Date
Shares Cost
per share
1-24-2008
200
P
100
2-05-2008
200
110
4-12-2008 (400 x 5%) 20
420
New cost per share (42,000/420)
P 100
1
4

ANSWER:

Total Cost
P 20,000
22,000
-- .
42,000

Selling price (115 x 200)


Less: Cost (95.23 x 200)
Gain on sale
No. of Shares
Date
Old
New

23,00
0
19,046
3,954
New Cost
per Share

Cost
1
5

1-24-2008
P20,000
ANSWER: C

200

210

P 95.23

Market value of shares - Mina


Company
x No. of Common shares
Property dividend
1
6

120
150
18,000

ANSWER: D
Market value of stocks dividends per
share
Stock dividend received by Rosa (1,000 x
20%x10%)
Dividend income

1
7

30
20
600

ANSWER: A
Selling price (30 x 25)
Less: Cost (5,000/125) x 25
Loss

750
1,000
( 250)
Amount

Number
Shares

P 5,000

PAGE 17
100
Dividend (100 x 25%)

25
Total

5,000

125
1
8

ANSWER: D
Sale of dividends (P60 x 40)

2,40
0

Less: Cost
200

(200 x

20

(200 x

P55)

11,0
00
-- .

20%)
220

11,00
0

(11,000/220) x P40

2,000
400

Gain on sale
1
9

ANSWER: A
Total sale (P400,000 + 50,000)
Less: Cost
Book value of farm equipment
Gain on sale
Add: Other income
Gross income

450,00
0
240,00
0
35,0
00

275,00
0
175,00
0
12,50
0
187,50
0

EXERCISE 3 -7.
Yes. It is part of Javiers gross income falling within the ambit of the income
from whatever source derived which includes 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.
The phrase includes also proceeds of stolen or embezzled property or gains
derived from illegal source. Thus, assuming that the Mellon Bank fails to recover
the money, it shall be taxable to Javier

PAGE 18
EXERCISE 41. CROSSWORD PUZZLE
2

E
R

&

I
N

G
3

EXERCISE 4 - 2
1

11

12

13

14

10

15

EXERCISE 4-3

1
.

a
.
b
.
c
.
d
.
e
.
f.
g
.

Interest on corporate
bonds
Salary

- Taxable

Tips

- Taxable

Winnings in lotto

- Not taxable (expressly exempt under


the law)
- Taxable (income from whatever source
derived)
- Taxable (income from whatever source
derived)
- Not taxable (de minimis benefit)

Winnings in jueteng
Money stolen from
mothers purse
Rice subsidy of P325 per
month

- Taxable

PAGE 19

2
.

The value of the free meals and lodging is not taxable to Yaya. It is very
clear that the couple required her to stay in their house for their own
benefit. Hence, the matter falls squarely within the convenience-of-theemployer rule.

3
.

No. The equivalent value of the living quarter is not taxable to Kulas
under the convenience-of-the-employer rule. The purpose of the piggery
farm in providing Kulas a room inside the premises is for the
convenience of Habang Bata Pa Piggery Farm.
The rice allowance is considered as a de minimis benefit which is exempt
from income tax. Thus, it is neither subject to creditable withholding tax
nor to fringe benefit tax.

4
.
5

The free parking and courtesy discounts are subject to fringe benefit tax
considering that Kareen Leon is a managerial employee of UB
Corporation.
The rice subsidy of P1,000 a month fall under the de minimis
benefits which are exempt from income tax.
The excess of the laundry allowance in the amount of P450 (P750300) is part of gross compensation income if such excess is beyond the
P30,000 ceiling for other benefits.
The rental value of the residential property is subject to fringe
benefits tax which is subject to final tax. Therefore, not part of the gross
income.

6
.

The cost of the educational assistance extended by De la Salle University


to Prof. Ferdinand Romero is supposed to be treated as part of the
teachers gross compensation income considering that Prof. Romero is
neither classified as managerial nor supervisory employee; he is still
classified as a rank-and-file employee.
However, since there is a condition that he should remain in the
employ of the employer for at least ten years after graduation, the
expenditure shall be considered as granted for the convenience of the
employers trade or business.
Therefore, whether the granting of the benefit is extended through a
qualifying/competitive examination or not, it should not be part of the
gross compensation income of Prof. Romero.
The cost of the tuition fee is attributable to the operation and
conduct of business of the employer. Therefore, the same shall be
deducted from the gross income of the school.

EXERCISE 4 4

1.

ANSWER:

PAGE 20

Fringe benefit expense


Fringe benefit tax expense
Deductible expense
2.

ANSWER:

Fringe benefit expense


Divide by
Grossed-up monetary value
3.

ANSWER:

34,00
0
16,000
50,000

34,0
00
68%
50,000

The fringe benefit tax is imposed only if the fringe benefit is given
to managerial or to supervisory employees.
Accounting clerks, janitors and the security guards are rank-andfile employees. Only the companys general manager is a managerial or
supervisory employee. Therefore, the fringe benefit tax must have been
given to him.
4.

ANSWER:

The one sack of rice is not subject to fringe benefit tax on the first
P1,000 per employee per month; the excess maybe also be exempt if
forming part of the other benefits not exceeding P30,000.
A corporation, though exempt from tax, is not exempt from the payment
of fringe benefit tax.
The equivalent value of free lodging given to a driver of an obstetrician
falls under convenience of the employer rule which is not subject to
fringe benefit tax.
The employers share in the GSIS contribution is not subject to income
tax.
EXERCISE 4-5

1.

ANSWER: B
Fees in civic club
Life insurance premium
Monetary value
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

2.

ANSWER: B
To rank and file employees:

5,000
15,400
20,400
68%
30,000
32%
9,600

PAGE 21

Christmas bonus
Loan benefits [96,000 x (12%-8%)
Medical allowance
Uniform allowance
To the supervisor:
Christmas bonus
Fees in civic club
Life insurance premium
Uniform allowance
Fringe benefit expense
Fringe benefit tax expense
Total deductions
3.

ANSWER:

32,000
3,840
16,000
12,000
4,000
5,000
15,400
3,000

63,840

27,400
91,240
9,60
0
100,84
0

Rank and file:


Christmas bonus (max: P 5,000 / employee 32,000
p.a.)
Medical allowance (max: 125 per employee 12,000
p.m.)
Uniform allowance (max: 3,000 / employee 12,000
p.a.)
Supervisor:
Christmas bonus
Uniform allowance
Total de minimis benefits
4.

ANSWER:

4,000
3,000
63,000

EXERCISE 4-6

1.

ANSWER: C
As a general rule, free meals and lodging furnished by the
employer to the employees are taxable to the latter.
However,
allowances furnished for and as a necessary incident to the property
performance of his duties are not taxable because they fall under the
convenience of the employer rule.

2.

ANSWER: C
Tonys gross income is P9,500 because his employers residence is
not the place of business where the employer conduct a significant
portion of his business.
On the other hand, Berts gross income should not include the
monthly value of his free meals and living quarters because the

PAGE 22

provision enables Cristy to avail of the services of Bert at her


convenience (RAMO 1-87).
3.

ANSWER: D
The free meals are given by the employer to provide sanitary meals
to its employees, while the free lodging are provided because they do
not want the workers to find difficulty in looking for boarding houses.
These benefits are obviously furnished for the benefit of the employees
and not to the advantage of the employer.
It is therefore, apparent that the allowances furnished are in the
form of fringe benefits. However, since they are given to ordinary
workers which fall within the classification of rank-and-file employees,
the benefits are taxable to them and are includible in the computation
of their respective gross income.

4.

ANSWER: D
The grossed-up monetary value includes the monetary value of the
fringe benefit received by the employee from his employer and the
amount of fringe benefits tax due thereon which was paid by the
employer.

5.

ANSWER: D
The use of aircraft owned and maintained by the employer shall be
treated as business use and not subject to fringe benefits tax.

6.

ANSWER: D
Jaguar is a rank-and-file employee. All fringe benefits given by his
employer are not subject to fringe benefits tax.
The free meals and lodging given to Col. General is specifically
exempt from fringe benefits tax. Moreover, it is also furnished for the
convenience of the employer (the Philippine Government) so that the
military officer shall be readily available when his services are
required. The uniform allowance falls under de minimis benefits which
are exempt from the fringe benefits tax.

7.

ANSWER: B
De minimis benefits are of relatively small value that they are
exempt from the payment of fringe benefits tax and ordinary income
tax.

8.

ANSWER: B
Fringe benefits given to rank and file employees are exempt from
fringe benefits tax. However, there are benefits which are subject to

PAGE 23

regular income tax depending upon the nature of benefits the


employees have received from their employer.
9.

ANSWER: D
A residential property owned by the employer and assigned to an
employer for use as his residence is subject to fringe benefits tax based
on the 5% of the fair market value of the land and improvements.

10 ANSWER: D
.
Unlike other individual taxpayers, nonresident aliens not engaged
in trade or business are subject to fringe benefits tax at a rate of 25%
of the grossed-up monetary value.
EXERCISE 4-7
1.

ANSWER: C
Purchase of groceries
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

10,50
0
68%
15,441
32%
4,941

The medical benefits is a de minimis benefit up to the ceiling of


P10,000, the excess of P7,500 is hereby presumed to be included as
part of Other Benefits.
2.

ANSWER: A
Monthly salary
Free meals and living quarters (P1,500 +
1,000)
Monthly gross compensation income

3.

6,500

ANSWER: B
Salary

4.

4,00
0
2,500

4,000

ANSWER: D
Cost of first class ticket
Rate subject to fringe benefit tax
Fringe benefit
Exchange value in Philippine currency
Fringe benefit subject to fringe benefit

$
2,500
30
%
750
43
32,250

PAGE 24

tax
Divide by
Grossed-up monetary value
Rate
Fringe benefit tax
5.

ANSWER: D
Monetary value (P800,000/5) x 50%
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

6.

Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

5,00
0
68%
7,352
32%
2,353

ANSWER: C
Interest at benchmark rate (P100,000 x
12% x 8/12)
Less: Interest at special rate (P100,000 x
9% x 8/12)
Interest foregone/value of benefit
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

8.

80,00
0
68%
117,64
7
32%
37,647

ANSWER: B
Monetary value (P10,000 x 50%)

7.

68%
47,426.
47
32
%
15,176.
47

8,000
6,000
2,000
68%
2,941.1
8
32%
941.18

ANSWER: A
Total expenses incurred
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

16,00
0
68%
23,529
32%
7,529

PAGE 25

9.

ANSWER: D
Salary of driver and housemaid (P4,000
+ 2,000)
Membership fees and dues (P75,000/12)
Monetary value of benefit
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

10.

ANSWER: A
Fair market value (higher)
Divide by
Grossed-up monetary value
Rate of tax
Fringe benefit tax

11.

ANSWER: D
Monetary value (3,400 x 50%)
Divide by
Grossed-up monetary value
Rate
Fringe benefit tax on rental
Add: Monthly rental
Fringe benefit to clerk
Deductible expense

12.

6,00
0
6,250
12,250
68%
18,015
32%
5,765

ANSWER:

2,500,00
0
68
%
3,676,4
71
32
%
1,176,4
71
1,70
0
68%
2,500
32%
800
3,400
3,000
7,200

Fringe benefit to supervisory employees


Divide by
Grossed-up monetary value
Rate
Fringe benefit tax

170,000
68%
250,000
32%
80,000