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or decision of the Supreme Court. (Michelle J. Lhuiller v. CIR, G.R. No. 150947, July 15,
2003; Sec. 7, NIRC)
c. Does a BIR ruling have a retroactive effect, considering the principle that
tax exemptions should be interpreted strictly against the taxpayer?
A BIR ruling cannot be given retroactive effect if it would be prejudicial to the taxpayer.
Section 246 of the NIRC provides for retroactive effect in the following cases:
1. Where the taxpayer deliberately mis-states or omits material facts from his return or
any document required of him by the Bureau of Internal Revenue;
2. Where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the rulings is based; or
3. Where the taxpayer acted in bad faith (Section 246, NIRC).
V.
(10%)
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 paid
based on the zonal value. The Revenue District Officer (RDO), however,
refused to issue the Certificate Authorizing Registration for the reason that
based on his ocular inspection the property should have a higher zonal
valuation determined by the Commissioner of Internal Revenue because
the area is already a commercial area. Accordingly, the RDO wanted to
make a recomputation of the taxes due by using the fair market value
appearing in a nearby bank's valuation list which is practically double the
existing zonal value. The RDO also wanted to assess a donor's tax on the
difference between the selling price based on the zonal value and the fair
market value appearing in a nearby bank's valuation list.
a. Does the RDO have the authority or discretion to unilaterally use the fair
market value as the basis for determining the capital gains tax and not the
zonal value as determined by the Commissioner of Internal Revenue?
Reason briefly.
The RDO has no discretion. The only value that can be applied is the zonal value as fixed
and determined by the Commissioner. (Section 6[E], NIRC).
b. Should the difference in the supposed taxable value be legally subject to donor's tax?
Reason briefly.
By applying the fixed zonal value, there should be no difference in the taxable value and
the declared value that might be subject of a donors tax. However, assuming that such a
difference may exist, the variance in price may raise a legal presumption of an intended
donation.
A demand gift arises only if tax is avoided as a result of selling property at a price lower
than its fair market value. In a sale subject to 6% capital gains tax, the tax is always
based on the gross selling price or fair market value whichever is higher. This means,
therefore, that the deemed gift provision under the Tax Code will not apply because the
6% capital gains tax can be applied to the higher value.
VI.
(5%)
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 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 purchased three condominium
units in Makati which he is renting out for P15, 000 a moth each.
a. Does the US$1, 000 pension become taxable because he is now residing in
the Philippines? Reason briefly.
Alternative Answer:
No, the US$1,000 pension is excluded from gross income because it is received by a
Filipino resident or non-resident from a foreign private institution which under Section
32(B)(6) of the NIRC is excluded from gross income.
Alternative Answer:
No, the US$1,000 pension is excluded from gross income because it is derived from
sources outside of the Philippines by a non-resident citizen. He may only be taxed for
income from sources within the Philippines. (Section 42[A][3] in relation to Section 23,
NIRC)
b. Is his purchase of the three condominium units subject to any tax?
Reason briefly.
Alternative Answer:
Yes, the purchase of the 3 condominium units is subject to:
1. Documentary stamp tax (payable by either seller or purchaser) (Section 196, NIRC);
2. Local transfer tax imposed under the Local Government Code (Sec. 134, LGC)
3. Value added tax, if Z purchased the units from real estate developers and/or real
estate lessors; and
4. Income tax, either capital gains tax or regular income tax, depending on whether the
condominium is regarded as a capital asset or an ordinary asset of the seller
Alternative Answer:
Strictly speaking, purchase is not a taxable event under the Internal Revenue Code,
except for the requirement of documentary stamp tax in the case of real property. (Sec.
196, NIRC)
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 supervisions 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.
No, the monthly sack of rice not exceeding P1,000.00 for the rank and file employees is
a de minimis benefit not subject to tax. The rice is a privilege the employer furnishes his
employees, of relatively small value, offered to promote the health, goodwill,
contentment or efficiency of his employees. (Revenue Regulations No. 02-98, [April 17.
1998]; BIR Ruling No. 023-02 [June 21, 2002] citing Section 2.78[A], Revenue
Regulations No. 2-98 & Section 33, 1997 TRA as implemented by Revenue Regulations
No. 3-98 as amended)
IX.
(10%)
Weber Realty Company which owns a three-hectare land in Antipolo
entered into a Joint Venture Agreement (JVA) with Prime Development
Company for the development of said parcel of land. Weber Realty as owner
of the land contributed the land to the Joint Venture and Prime
Development agreed to develop the same into a residential subdivision and
construct residential houses thereon. They agreed that they would divide
the lots between them.
a. Does the JVA entered into by and between Weber and Prime create a
separate taxable entity? Explain briefly.
Alternative Answer:
No, since the arrangement between Weber Realty Co. and Prime Development Co. is for
the purpose of understanding a construction project, there is no separate taxable entity
pursuant to Section 22[B[ of the NIRC.
Alternative Answer:
Yes, but only for purposes of the Value Added Tax, a joint venture for the construction
project resulted in the creation of a separate taxable entity. It is not subject to income
tax pursuant to Section 22[B[ of the NIRC.
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.
No, the allocation of saleable lots to Weber and Prime is not subject to income tax and
the expanded withholding tax. There is no income realized in the distribution of
property, but merely a return of capital.
c. Is the sale by Weber or Prime of their respective shares in the saleable
lots to third parties subject to income tax and to expanded withholding tax?
Explain briefly.
Yes, the sale by Weber and Prime of their respective shares results in the realization of
income subject to income tax and expanded withholding tax.
X.
(10%)
XIII.
(5%)
ABC Corporation won a tax refund case for P50 Million. Upon execution of
the judgement 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 BIR to withhold the issuance of the TCC? Explain your answer briefly.
There is no valid justification to withhold the TCC. Offsetting of the amount of TCC
against a potential tax liability is not allowed because both obligations are not yet fully
liquidated. TCC has been determined as to its amount while the deficiency tax is yet to
be determined through the completion of the audit. (Philex Mining Corporation v.
Commissioner of Internal Revenue, Court of Appeals, and Court of Tax Appeals, G.R.
No. 125704, August 28, 1998)
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