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 the 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 property. Alpha Corporation acquired the property in 2007 for P9 million. a) What is the nature of the real properties exchanged for tax purposes capital asset or ordinary asset? Explain. (3%) b) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. (3%) c) Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. (3%) (See discussion here) 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, 2008, the administrator of the estate and SLC jointly announced their big plans to 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. a) Is the BIR correct in valuing the real property at P40 million? Explain. (3%) b) If you disagree, what is the correct value to use for estate tax purposes? Explain. (3%) (See discussion here) III. DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Starting December 15, 2004, DEF Corporation paid annual royalties to DEF, Inc., for the use of the latters 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. a) As a BIR lawyer handling the case, would you raise the defense of prescription in your answer to the claim for tax credit? Explain. (4%) 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%) (See discussion here) 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 second-hand 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. a) Are the importations of motor vehicles from abroad subject to customs duties and value added taxes? Explain. (4%) b) If they are taxable, when must the duties and taxes be 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%) (See discussion here) V. Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of P1 million. Said property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. In October 2007, EIP Corporation, a real estate developer, expressed its desire to buy the Makati property at its fair market value of P300 million, payable as follows: (a) P60 million downpayment; and (b) balance, payable equally in twenty four (24) monthly consecutive installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property for shares of stock of MAS Corporation. A BIR ruling, confirming the tax-free exchange of property for shares of stock, was secured from the BIR National Office and a Certificate Authorizing Registration was issued by the Revenue District Officer (RDO) where the property was located. Subsequently, she sold her entire stockholdings in MAS Corporation to EIP Corporation for P300 million. In view of 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%) (See discussion here) VI. While driving his car to Baguio last month, Pedro Asuncion, together with his wife Assunta, and only son, Jaime, met an accident that caused the 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: .............................Assunta......................................................Jaime .............................Exclusive................Conjugal.......................Exclusive ...........................______________________________________________ Cash..................................................P10,000,000...............P1,200,000. Cars......................P2,000,000...................500,000. Land........................5,000,000................2,000,000. Residential house....................................4,000,000. Mortgage payable....................................2,500,000. Funeral expenses.......................................300,000. a) Is the Estate of Jaime Asuncion liable for estate tax? Explain. (4%) b) Is vanishing deduction applicable to the Estate of AssuntaAsuncion? Explain. (4%) (See discussion here) 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, 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. a) What is an assessment notice? What are the requisites of a valid assessment? Explain. (3%) b) As tax lawyer of EDS Corporation, what legal defense(s) would you raise against the assessment? Explain. (3%) (See discussion here) VIII. The City of Manila enacted an ordinance, imposing a 5% tax on gross receipts on rentals of space in privately-owned 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%)

(See discussion here) 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%) b) Are forfeiture proceedings of goods illegally imported criminal in nature? Explain. (3%) (See discussion here) 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? Explain. (3%) 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%) (See discussion here) XI. Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and 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 Filipino citizen residing in Quezon City, for P20 million. On February 9, 2006, Manalo 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 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 broker who said that the P1.2 million capital gains tax should be credited from the P1.75 million deficiency income tax. a) Is the BIR officers tax assessment correct? Explain. (3%) b) If you were hired by Manalo as his tax consultant, what advice would you give him to protect his interest? Explain. (3%) (See discussion here) XII. Greenhills Condominium Corporation incorporated in 2001 as a non-stock, non-profit association of unit owners in Greenhills Tower, San Juan City. To be able to reduce the association dues being collected from the unit owners, the Board of Directors of the corporation agreed to lease part of the ground floor of the condominium building to DEF Savings Bank for P120,000 a month or P1.44 million for the year, starting January 2007. a) Is the non-stock, non-profit association liable for value added tax in 2007? If your answer is in the negative, is it liable for another kind of business tax? (4%) b) Will the association be liable for value added tax in 2008 if it increases the rental to P150,000 a month beginning January 2008? Explain. (3%) (See discussion here) XIII. MNO Corporation was organized on July 1, 2006, to engage in trading of school supplies, with principal

place of business in Cubao, Quezon City. Its books of accounts and income statement showing gross sales as follows: July 1, 2006 to December 31, 2006.............................P 5,000,000. January 1, 2007 to June 30, 2007..............................P 10,000,000. July 1, 2007 to December 31, 2007............................P 15,000,000. Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for income tax purposes, it paid its 2% business tax for fiscal year ending June 30, 2007 based on gross sales of P15 million. However, the Quezon City Treasurer assessed the corporation 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%) b) May the deficiency business tax be paid in installments without surcharge and interest? Explain. (3%) (See discussion here) 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 tax for the value of the real property donated to them? Explain. (4%) b) Are Jose and Clara subject to donors tax? If so, how much is the taxable gift of each spouse and what rate shall be applied to the gift? Explain. (4%) (See discussion here) XV. In 2007, spouses Renato and Judy Garcia opened peso and dollar deposits at the Philippine branch of the Hong Kong Bank in Manila. Renato is an overseas worker in Hong Kong while Judy lives and works in Manila. During the year, the bank paid interest income of P10,000 on the peso deposit and US$1,000 on the dollar deposit. The bank withheld final income tax equivalent to 20% of the entire interest income and remitted the same to the BIR. a) Are the interest incomes on the bank deposits of spouses Renato and Judy Garcia subject to income tax? Explain. (4%) b) Is the bank correct in withholding the 20% final tax on the entire interest income? Explain. (3%) ANSWERS 1

a.

as to the property exchanged by alpha corp., it is an ordinary asset. it is one that is held for sale to customers because it is engaged in purchase and sale of real property. Sec. 39 of the NIRC as to juan gonzales, it depends. the problem did not state his trade/business, or at least juan's intended use for the property. if will be used or trade/business or falls under the enumeration under sec. 39 of the NIRC, it is an ordinary asset. if not it is a capital asset b. again it depends on whether the asset exchanged is an ordinary or capital asset. if ordinary, he is liable for net income tax of 5% to 32%. if the asset is a capital asset, he is liable for final income tax of 6%. the base will be the fair market value of the property exchanged or acquired, whichever is higher. c. since alpha corporation is a realtor, the land is an ordinary asset. hence, he is liable for net income tax of 35%.

My bar answer concise version.Ang tagal ko pinag isipan to because it is complicated, i am not sure if my answer is correct. a)Capital asset because the transaction is not in the ordinary course of trade or business.Furthermore, it is not inventoriable and not subject to depreciation.

b)Juan is subject to 6% final tax on capital gains based on the fair market value of the property. c)Yes, it is a transaction in the nature of sale, barter or exchange not in the ordinary course of trade or business.Accordingly, it is subject to a tax rate of 35% based on the fair market value of property received. Let me try to post my answer. 1.a). Insofar as the property of Juan Gonzales is concerned, this is in the nature of capital assets in the absence of information that this property is used by him in trade or business. Insofar as Alpha Corporation is concerned, it is clear from facts that said corporation is engaged in real estate business. By implication therefore, the property subject of exchange is held in the ordinary course of business, hence, it is an ordinary asset. Real properties held by corporations engaged in real estate business which form part of their inventoriable assets, primarily held for the purpose of selling them are considered as ordinary assets. 1.b) My comment first before my answer proper: The question is quite confusing because you are required to answer whether Juan Gonzales is liable for income tax which will not be consistent to your answer in 1.a if you consider the asset as capital asset. I humbly stress that there is difference between income tax and capital gain tax, the former is imposed on business, compensation or service activities on individual or corporate taxpayer, while the latter is a final tax imposed on sales of real estate considered as capital assets, thus subject to capital gain tax, anyway here is my answer: No, Juan Gonzales in not liable for income tax, instead, he is liable for capital gain tax at the rate of 6% based on fair market value of P10M. The nature of property of Juan Gonzales which was exchanged to residential properties owned by Alpha corporation is capital assets because this is not being held by him in the ordinary course of business and thus, not subject to income tax but to capital gain tax at the rate of 6% . 1.c. No, Alpha corporation is not liable for income tax in this particular transaction. In barter or exchange of property, both parties may be considered as buyer or seller. Alpha in this case, being engaged in real estate business which owned properties higher in value than that of Juan Gonzales can be considered as the buyer offering its property as consideration for the agricultural lot owned by Juan Gonzales. Gonzales, being the one who enjoyed a much beneficial value has already been subjected to capital gain tax. His role partakes the nature of a seller who is primarily liable to pay the appropriate capital gain tax. Alpha Corporation partakes the nature of a buyer using as consideration its own property, therefore it can no longer be held liable again for the same capital gain tax. Further, alpha corporation with property higher in value than Juan Gonzales, does not derive any gain from such exchange to make it liable for income tax. The agricultural property may just add up to its inventories subject to further developments and future selling. 2. a) No, the BIR is not correct in appraising the real property at 40 million. The tax code provides: Section 88. Determination of the Value of the Estate. (A) xxx xxxx xxxx (B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is higher of (1) The fair market value as determined by the Commissioner, or (2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. Since at the time of death of Jose Cernan on July 10, 2007, the fair value of the property is 20 million, the BIR committed grave mistake in the valuation of the property. 2) 20million. Same Legal basis above. II.a No, for estate tax purposes, real properties are valued based on fair market value at the time of death of the decedent, not at the time of acquisition, nor at the time of filing the estate tax return. The BIR committed an error when it valued the property at P40M. It can be inferred from facts that this valuation was made in consideration of the increase in price of the subject property due to announcement made by SLC on its plan to convert and develop the said property. This valuation however, has no legal basis because in determining the gross estate of the decedent, the law prescribes the use of such value taken at the time of death of the decedent. This value shall serve as the basis notwithstanding the external factors that may arise which may tend to influence the price of said properties at the time of filing the estate tax return.

3.

Before answering this question, I pause for almost 10 minutes because the facts do not give information as to where you are going to reckon the two years prescriptive period. This question is quite tricky because at first glance you might as well think that the period of two years had already elapsed from year 2004 to 2007, (the year when DEF Corporation filed its claim for tax credit). Anyway this is how I answered this question. I11.a No, the tax credit claimed by DEF Corporation for the year 2004 and 2005 will prescribe on April 15, 2007 and April 15, 2008 respectively. DEF Corporation seasonably filed its claim for tax credit on April 10, 2007; 5 days shy away from the last day of its two year prescriptive period. DEF Corporation is actually claiming for tax refund on its erroneous income tax returns for the years 2004 and 2005 which can be granted to it by the government in two ways, either as tax credit or in the form of actual cash refund. In the absence of information as to when DEF Corporation filed its income tax return for the year 2004, it is assumed to have been filed on the last day of filing which is April 15, 2005. Counting therefore from said date of filing up to April 10, 2007, the two years prescriptive period had not yet elapsed. The January 10, 2005 remittance of withholding tax is of no consequence and bears no significance in counting the period of prescription because this date refers to the remittance by DEF Corporation of the withholding tax in its capacity as withholding agent. Further, this is not the main issue from where said corporation based its claim for tax credit. The facts clearly state that the claim for tax credit is based on the erroneous filing of income tax return and not on withholding tax. Therefore as a BIR lawyer, I cannot raise in this case the defense of prescription. III.b No, the claim for tax credit of DEF Corporation is founded on its erroneous filing of income tax returns and not on the 15% final withholding tax on royalty remitted to its mother company based in California USA. Had DEF Corporation filed its claim on the basis of said final withholding tax, the BIR lawyer may have raised such defense of not being the proper party to such claim. The facts however are clear; DEF Corporation has filed its claim by virtue of its capacity as an income taxpayer. This situation therefore leaves no doubt that the said corporation is the proper party that can file such claim for tax credit. The BIR lawyer therefore cannot raise such defense of not a proper party against DEF Corporation.

4.

IV.a Yes, the government in its effort to boast economic activities through domestic and foreign investment grants those enterprises registered in special economic zone, certain tax exemption on some of their business activities. Some of these grants are exemption from import duties and value added tax on acquisition of raw materials, tools and other implements necessary for their operation. This exemption privilege however is not applicable to JKL enterprise because after importing those vehicles, they were subsequently sold to persons residing in the customs territory. Exemption is available only on importations of such materials or implements that are directly or indirectly used in the productions of goods or services. Importations therefore made by JKL corporations in this case are subject to customs duties and value added taxes. IV.b The prices or the acquisition costs as shown on the bill of lading may serve as the bases of computing the customs duties. In case the amount does not reflect the true value of such imported vehicles, the custom officer may disregard such amount and assign the appropriate value based on reasonable assessment. As regards the basis of computing the value added tax, the amount should be based on selling price imposed by JKL Corporations to its buyers. Customs duties must be paid upon release of said vehicles from the customs warehouse and should be paid to the Collector of Customs duly authorized to receive such payment. Value added tax on the other hand, must be remitted or paid to the appropriate Revenue District Office where the principal office of JKL Corporation is located.

5.

No, placing real estate a property in exchange of share of stocks of a particular corporation is not subject to income tax, nor it is subject to capital gain tax. Said taxes are imposed only on any activity by which an individual may derive some sort of gain or benefits. This is actually the principle by which the State may impose the burden of taxation against person, privilege or a particular activity. In exchanging property to shares of stocks, a person does not immediately derive such benefits because he is merely engaging into capital infusion which is in the nature of investing activities. To impose income tax on said activities would discourage the formation of business to the detriment of the economy as a whole. Maria Suerte therefore does not commit tax evasion when she exchanged her property to 300 million worth of stock of MAS Corporation. She correctly paid the corresponding capital gain tax based on graduated rate of 5% and 10% when she sold these stocks to EJP Corporation. These rates are proper because said stocks are not traded through Stocks Exchange. Yes, Maria Suerte had merely resorted to tax avoidance. Taxpayer may employ this legal means in order to

minimize his or her tax exposure. Had Maria Suerte directly sold all or substantial properties of MAS Corporation to EJP Corporation, she should have been liable to pay the corresponding income tax because the subject property can be considered as an ordinary assets. The presumption of an ordinary assets is shown by facts of being originally leased to MAS Corporation, thus, could have been used as an office or a place from where the production of papers may have been located. A situation which will make Maria Suerte liable for income tax instead of capital gain tax on sale of shares of stocks. This higher tax exposure however was legally avoided by Maria Suerte by selling instead the shares of stocks of MAS Corporation to EJP Corporation.

6.

my suggested answer: a) No, the estate of Jaime is exempt from estate tax. Jaime has a gross estate of 1,200,000 less standard deduction of 1,000,000 will result to net taxable estate of 200,000. The tax code provides that net taxable estate not exceeding 200,000 is exepmt from estate tax. (Sec. 84, Tax Code) b) No, vanishing deduction is not applicable. The tax code provides: Section 86 (A) (2) Property Previously Taxed. - xxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent's gross estate, and only if in determining the value of the estate of the prior decedent, no deduction was allowable under paragraph (2) in respect of the property or properties given in exchange therefor. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said Subsection shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. Since all the requirements imposed by law before the deduction can be made were not met, vanishing deduction will not be allowed/applicable.

Note: A lot of authors have a summarized form of these requirements/conditions/requisites.

7.

VII.a An assessment notice is a written statement signed by Revenue Officer duly authorized by the Commission of Internal Revenue informing the taxpayer of tax deficiency and requiring him or her to submit reply containing such defense why said deficiency cannot be enforced. A valid notice of assessment should contain facts and law from where the findings of tax deficiencies are based or may have been derived. VII.b As a lawyer of EDS Corporation, I will raise the following defenses: 1.Premature sending of final notice by not granting EDS Corporation the chance of assailing the assessment, thus, violating its right to due process. 2.Not giving EDS Corporation such reasonable time to submit its reply for any clarification it may raise regarding said assessment. The letter received by EDS Corporation on April 25, 2007 which contains due date of April 30, 2007 has given the said Corporation just a period of 5 days to settle the said assessment. Thus a manifestation of unjust enforcement or abuse of discretion on the part of the Revenue Officer. The contention of BAT corporation is meritorious. The ordinance imposing 5% tax on gross receipts operates as an income tax, hence, taxes imposed by the national government under NIRC shall not be imposed again by the local government.

8.

if the ordinance was made for revenue raising purposes then it was a business tax ordinance, if it is not for such purpose then it will be considered as a fee akin to a license imposed for regulatory purposes.

though it was called as tax ordinance if its purpose it regulatory in nature and not for revenue raising purposes it is not a business tax. 9 IX.a No, although the collector of customs, in case of substantial under declaration, by force of law can validly forfeit such imported vehicles in favor of government, I submit that due process must still be accorded to the owner by requiring him to pay the appropriate custom duties based on its actual worth. Only at the instance when the importer willfully refused to settle the required duties that the Collector of Customs can automatically forfeit the said imported vehicle. Due process is necessary in order to first establish, whether there is willful evasion or any act committed by the importer which would tend to defraud the government. IX.b No, there is difference between forfeiture proceedings and criminal proceedings, the former is conducted for the purpose of establishing the tax liability on dutiable goods illegally imported, while the latter is conducted for the purpose of establishing the criminal liability of the importer. In forfeiture proceedings, preponderance of evidence is required, while in criminal proceedings, proof beyond reasonable doubt is necessary. In criminal proceedings, the necessity of conducting a full blown trial may arise, while in forfeiture proceedings, a mere summary procedure may be adopted in order to reach proper adjudication of the case. Further, the adjudication of the forfeiture proceedings will not bar the filing of appropriate criminal action on the same case, thus, the two proceedings are actually distinct to each other.

10

.a No, in the absence of information whether John McDonald is engaged in regular business of buying and selling stock securities, he is deemed to have engaged in this transaction in isolated manner, thus, Philippine income tax does not apply to him. The kind of tax of which John McDonald is liable is capital gain tax on sale of shares of stocks traded through stock exchange. The transaction being coursed through stockbroker may give rise to the presumption that it is traded through stock exchange; hence, the rate is of 1% based on gross selling price. X.b No, regardless of citizenship of the person to whom John McDonald sold his stocks, still, he is not liable for Philippine Income tax. In this transaction, it is the seller who is being taxed and not the buyer, thus, in determining tax liability, citizenship of the buyer is of no moment. The same consequence, John McDOnald is liable for capital gain tax on sales of shares of stocks. Because he sold this stock directly to his friend, the tax base is the gain of P200,000.00 and the rate is 5% on the first P100,000.00 and 10% on the next P100,000.00.

11. Here is my primary answer: XI.a No, the BIR officer should have considered the 1.2M paid by Pedro Manalo as capital gain tax. This tax return was erroneously filed by Pedro Manalo, he should not have filed this return because the property involved is not within the Philippine Jurisdiction, and thus, capital gain tax is not applicable. The proper tax return Pedro Manalo should have filed is income tax instead of capital gain tax. This erroneous payment made by Pedro Manalo can be claimed by him as tax refund or tax credit against the correct income tax return of which he is required to file. The BIR officer therefore erroneously assessed Pedro Manalo by not allowing the P1.2 million as tax credit against the income tax deficiency. A situation which will create injustice as it would tend to impose two kinds of taxes on the same transaction undertaken by Pedro Manalo. In general, compensation will not apply in case of tax assessment where findings of tax deficiency may arise. However, in the interest of substantial justice and by reason of convenience both as to taxpayers and the government, this strict prohibition may be disregarded. But I consider this, worth of being an alternative answer: Yes, what has been filed by Pedro Manalo is an erroneous tax return which he can claim only as tax refund and cannot be the subject of compensation against his correct income tax deficiency properly assessed by the BIR officer. Pedro Manalo should settle the income tax deficiency and a separate claim for income tax refund should be filed by him to recover the P1.2M he erroneously paid. (note: I am not too familiar with the case, but Im sure there was this one case where compensation was allowed in offsetting the tax deficiency of the taxpayer)

X1.b If I am the tax consultant of Pedro Manalo, I would advise him to invoke the right of compensation so that he will not be required to pay the whole P1.75M deficiency income tax and avoid inconvenience of waiting to recover the P1.2M he erroneously paid. 1) For a), I answered in the affirmative mainly because of the errors committted by Manalo in the filing of his taxes, ie. absence of filing the correct income tax 2) For b), I answered that Manalo can make representations and show the BIR his documents proving that he did not neglect to pay his taxes. 12. I concur with the previous answer in this wise, XII.a No, rental of commercial space with annual gross income not exceeding P1.5M is not subject to value added tax. The monthly threshold of P10,000.00 of which rental is not subject to value added tax, finds no application in this case because it applies only to residential unit. The corporation not being liable to value added tax shall be subject to percentage tax insofar as its rental income is concerned. The collected dues which inure for the benefit of its members, being not in the nature of sales, are not subject to value added tax, nor are they subject to percentage tax. XII.b Yes, if the corporation will increase the rental to P150,000.0 a month, it means it will have a total annual gross income of P1,800,000.000 which will exceed the maximum threshold of P1,500,000.00, thus, it would now be subject to value added tax. _________________

a)No, the association is not subject to VAT because the law provides that an entity can only be subject to VAT if its gross receipts or income for a particular year is at least P1.5M. However, the association is subject to percentage tax. b)Yes, the association will now be subjected to VAT because its gross receipts or income now exceeds the threshhold amount of P1.5M. 13 This question is quite tricky, nevertheless, with humility------- to all readers, I kneel down and vow my head, please do allow me to share with you my answer, thanks. XIII.a No, business tax for the current year should be based on gross receipts during the previous year. Since in this case, MNO is paying its business tax for the year 2007, what should have been the basis is the gross receipts for the year 2006 in the amount of P5,000.000.00. MNO Corporation likewise committed a mistake when it includes as basis, its gross receipt for the semester ending June 2007 in the amount of P10,000.000.00. The position of city treasurer is partially correct that the local business taxes shall be based on calendar year, the error committed however is when it considered as basis the current gross receipt for the year 2007 amounting to 25,000.000.00. Local business tax should be paid during the first month of the calendar year in full or by installment. The basis therefore of this tax is the gross receipts incurred during the previous year and not the current year. In case of a newly established entity where it may not yet incur gross receipt during the previous year, the basis is the amount of initial capital. XIII.b No, deficiency business tax cannot be paid by installments without surcharge and interest. The government having deprived of its opportunity to use for public purpose such amount had it been paid on time by the taxpayer, cannot by any force of reason allow such compromise payment without imposing the corresponding surcharge and interest. Besides, the imposition of surcharge and interest is an statutory provision of law which a local public officer cannot exercise any amount of discretion. 14 XIV.a No, Maria and Pedro are donee in this case. They acquire ownership of said property by virtue of gratuitous title and

not by trade or business by which they may be liable for income tax. They are not even liable for donors tax because this tax is imposed upon the donor and not the donee. XIV.b Yes, being the donor, Jose and Clara are liable for donors tax. The gift being made on account of marriage of their son shall be entitled to a total exemption of P20,000.00, (10,000.00 for each spouse). The taxable base therefore for each spouse is P990,000.00 or a total of P1,980,000.00. The rate to be applied shall be based on graduated donors tax rate as provided for under the tax code. (Note: Sori, no matter how I extracted the third level storage of my brain cell, I cannot remember the numerous rates, I know some would share the same predicament, ginawan ko lang talaga ng paraan. Grabe) Note: I humbly submit that the P10,000.00 exemption is available to each parent because one may do such act of generosity independent of the other. Thus, in case of joint donation, exemption available to one shall not deprive the other to have only a single P10,000.00. This would create an absurd situation in a case where two different parents may not enjoy the same amount of exemptions just because one made it separately and the other jointly. With due respect, the two different scenarios obviously invite a clear violation of equal protection clause the tenets of which runs counter to the elementary rule that when the law does not distinguish we shall not distinguish..

a)

No, they are not subject to income tax.However, the donors are subject to donors tax based on the value of their donation. b)Yes, they are subject to donors tax.A deduction for dowry on account of marriage of their son in the amount of P10,000 is allowed.The net taxable gift therefore is P1,990,000 or P995,000 for each spouse subject to a tax rate of 15%. My asnwers: a) same anwer as of Joshuu. No taxes for the gift recipients as the parents will then have been exacted of donors' taxes. b) My answer is P10,000.00 gift from each parent; as each is allowed a tax gift exemption of P10,000.00 on account of donation propter nuptias for their child.

a)

No, they are not subject to income tax.However, the donors are subject to donors tax based on the value of their donation. b)Yes, they are subject to donors tax.A deduction for dowry on account of marriage of their son in the amount of P10,000 is allowed.The net taxable gift therefore is P1,990,000 or P995,000 for each spouse subject to a tax rate of 15%.

15. XV.a No, interest on bank deposit is subject to final tax. Such income shall no longer be included as part of any income subject to income tax for purposes of filing the income tax return. XV.b No, interest on dollar deposit is subject to 7.5% withholding tax. The bank is not correct in withholding the entire deposit of Renato and Judy at the rate of 20%. a)No, the interest incomes are subject to final tax.In the annual ITR of the spouses they should not anymore be included. b)No, the dollar deposit is under the expanded foreign currency system where the final tax rate is only 7.5%