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LAW ON TAXATION

TABLE OF CONTENTS

I. General Principles of Taxation


A. Definition and concept of taxation ..................................................................................... 1
B. Nature of taxation ............................................................................................................. 1
C. Characteristics of taxation ................................................................................................ 3
D. Power of taxation compared with other powers ................................................................ 4
1. Police power
2. Power of eminent domain
E. Purpose of taxation........................................................................................................... 4
1. Revenue-raising
2. Non-revenue/special or regulatory
F. Principles of sound tax system ......................................................................................... 5
1. Fiscal adequacy
2. Administrative feasibility
3. Theoretical justice
G. Theory and basis of taxation ............................................................................................ 6
1. Lifeblood theory
2. Necessity theory
3. Benefits-protection theory (Symbiotic relationship)
4. Jurisdiction over subject and objects
H. Doctrines in taxation......................................................................................................... 8
1. Prospectivity of tax laws ............................................................................................ 8
2. Imprescriptibility......................................................................................................... 8
3. Double taxation ......................................................................................................... 8
a) Strict sense
b) Broad sense
c) Constitutionality of double taxation
d) Modes of eliminating double taxation
4. Escape from taxation ............................................................................................... 13
a) Shifting of tax burden ....................................................................................... 13
(i) Ways of shifting the tax burden
(ii) Taxes that can be shifted
(iii) Meaning of impact and incidence of taxation
b) Tax avoidance .................................................................................................. 14
c) Tax evasion ...................................................................................................... 16
5. Exemption from taxation .......................................................................................... 19
a) Meaning of exemption from taxation
b) Nature of tax exemption
c) Kinds of tax exemption
(i) Express
(ii) Implied
(iii) Contractual
d) Rationale/grounds for exemption
e) Revocation of tax exemption
6. Compensation and set-off........................................................................................ 20
7. Compromise ............................................................................................................ 24
8. Tax amnesty ............................................................................................................ 24
a) Definition
b) Distinguished from tax exemption
9. Construction and interpretation of: .......................................................................... 24
a) Tax laws
(i) General rule
(ii) Exception
b) Tax exemption and exclusion ........................................................................... 24
(i) General rule
(ii) Exception
c) Tax rules and regulations ................................................................................. 26
(i) General rule only
d) Penal provisions of tax laws ............................................................................. 26
e) Non-retroactive application to taxpayers........................................................... 27
(i) Exceptions
I. Scope and limitation of taxation ....................................................................................... 29
1. Inherent limitations .................................................................................................. 29
a) Public purpose ................................................................................................. 29
b) Inherently legislative ......................................................................................... 29
(i) General rule
(ii) Exceptions ............................................................................................... 29
(a) Delegation to local governments
(b) Delegation to the President
(c) Delegation to administrative agencies ............................................... 30
c) Territorial .......................................................................................................... 30
(i) Situs of taxation ........................................................................................ 30
(a) Meaning ........................................................................................... 30
(b) Situs of income tax ........................................................................... 31
(1) From sources within the Philippines
(2) From sources without the Philippines
(3) Income partly within and partly without the Philippines
(c) Situs of property taxes ...................................................................... 36
(1) Taxes on real property
(2) Taxes on personal property
(d) Situs of excise tax............................................................................. 36
(1) Estate tax
(2) Donors tax
(e) Situs of business tax ......................................................................... 36
(1) Sale of real property
(2) Sale of personal property
(3) Value-Added Tax (VAT)
d) International comity .......................................................................................... 36
e) Exemption of government entities, agencies, and instrumentalities .................. 37
2. Constitutional limitations .......................................................................................... 37
a) Provisions directly affecting taxation ................................................................. 37
(i) Prohibition against imprisonment for non-payment of poll tax
(ii) Uniformity and equality of taxation .......................................................... 37
(iii) Grant by Congress of authority to the president to impose tariff rates
(iv) Prohibition against taxation of religious, charitable entities, and
educational entities ................................................................................. 40
(v) Prohibition against taxation of non-stock, non-profit institutions .............. 46
(vi) Majority vote of Congress for grant of tax exemption
(vii) Prohibition on use of tax levied for special purpose
(viii) Presidents veto power on appropriation, revenue, tariff bills
(ix) Non-impairment of jurisdiction of the Supreme Court
(x) Grant of power to the local government units to create its own sources
of revenue
(xi) Flexible tariff clause ................................................................................ 47
(xii) Exemption from real property taxes ........................................................ 49
(xiii) No appropriation or use of public money for religious purposes............. 52
b) Provisions indirectly affecting taxation .............................................................. 52
(i) Due process
(ii) Equal protection
(iii) Religious freedom
(iv) Non-impairment of obligations of contracts
J. Stages of taxation ........................................................................................................... 56
1. Levy
2. Assessment and collection
3. Payment
4. Refund
K. Definition, nature, and characteristics of taxes
L. Requisites of a valid tax
M. Tax as distinguished from other forms of exactions
1. Tariff
2. Toll
3. License fee
4. Special assessment
5. Debt
N. Kinds of taxes ................................................................................................................ 58
1. As to object
a) Personal, capitation, or poll tax
b) Property tax
c) Privilege tax
2. As to burden or incidence
a) Direct
b) Indirect
3. As to tax rates
a) Specific
b) Ad valorem
c) Mixed
4. As to purposes
a) General or fiscal
b) Special, regulatory, or sumptuary
5. As to scope or authority to impose
a) National internal revenue taxes
b) Local real property tax, municipal tax
6. As to graduation
a) Progressive
b) Regressive
c) Proportionate

II. National Internal Revenue Code (NIRC) of 1997, as amended ....................................... 60


A. Income taxation .............................................................................................................. 60
1. Income tax systems ................................................................................................ 60
a) Global tax system
b) Schedular tax system
c) Semi-schedular or semi-global tax system
2. Features of the Philippine income tax law ............................................................... 62
a) Direct tax
b) Progressive
c) Comprehensive
d) Semi-schedular or semi-global tax system
3. Criteria in imposing Philippine income tax ............................................................... 63
a) Citizenship principle
b) Residence principle
c) Source principle
4. Types of Philippine income tax ................................................................................ 65
5. Taxable period ......................................................................................................... 65
a) Calendar period
b) Fiscal period
c) Short period
6. Kinds of taxpayers ................................................................................................... 66
a) Individual taxpayers.......................................................................................... 66
(i) Citizens
(a) Resident citizens
(b) Non-resident citizens
(ii) Aliens
(a) Resident aliens
(b) Non-resident aliens
(1) Engaged in trade or business
(2) Not engaged in trade or business
(iii) Special class of individual employees
(a) Minimum wage earner
b) Corporations .................................................................................................... 66
(i) Domestic corporations
(ii) Foreign corporations
(a) Resident foreign corporations
(b) Non-resident foreign corporations
(iii) Joint venture and consortium
c) Partnerships ..................................................................................................... 68
d) General professional partnerships .................................................................... 68
e) Estates and trusts ............................................................................................ 69
f) Co-ownerships .................................................................................................. 70
7. Income taxation ....................................................................................................... 72
a) Definition
b) Nature
c) General principles
8. Income .................................................................................................................... 72
a) Definition
b) Nature
c) When income is taxable
(i) Existence of income
(ii) Realization of income ............................................................................... 72
(a) Tests of realization
(b) Actual vis--vis constructive receipt
(iii) Recognition of income ............................................................................. 76
(iv) Methods of accounting ............................................................................ 77
(a) Cash method vis--vis accrual method
(b) Installment payment vis--vis deferred payment vis--vis percentage
completion (in long-term contracts)
d) Tests in determining whether income is earned for tax purposes ..................... 78
(i) Realization test
(ii) Claim of right doctrine or doctrine of ownership, command, or control
(iii) Economic benefit test, doctrine of proprietary interest
(iv) Severance test
(v) All events test
9. Gross income .......................................................................................................... 80
a) Definition .......................................................................................................... 80
b) Concept of income from whatever source derived............................................ 82
c) Gross income vis--vis net income vis--vis taxable income ............................. 83
d) Classification of income as to source ............................................................... 83
(i) Gross income and taxable income from sources within the Philippines
(ii) Gross income and taxable income from sources without the Philippines
(iii) Income partly within or partly without the Philippines
e) Sources of income subject to tax...................................................................... 85
(i) Compensation income .............................................................................. 85
(ii) Fringe benefits ......................................................................................... 92
(a) Special treatment of fringe benefits
(b) Definition
(c) Taxable and non-taxable fringe benefits
(iii) Professional income ................................................................................ 96
(iv) Income from business ............................................................................. 96
(v) Income from dealings in property ............................................................. 97
(a) Types of properties ........................................................................... 98
(1) Ordinary assets
(2) Capital assets
(b) Types of gains from dealings in property ........................................ 101
(1) Ordinary income vis--vis capital gain ...................................... 101
(2) Actual gain vis--vis presumed gain
(3) Long term capital gain vis--vis short-term capital gain
(4) Net capital gain, net capital loss
(5) Computation of the amount of gain or loss .............................. 103
(6) Income tax treatment of capital loss ........................................ 105
(a) Capital loss limitation rule (applicable to both
corporations and individuals)
(b) Net loss carry-over rule (applicable only to individuals)
(7) Dealings in real property situated in the Philippines................. 106
(8) Dealings in shares of stock of Philippine corporations ............. 106
(a) Shares listed and traded in the stock exchange
(b) Shares not listed and traded in the stock exchange
(9) Sale of principal residence ....................................................... 108
(vi) Passive investment income ................................................................... 109
(a) Interest income ............................................................................... 109
(b) Dividend income ............................................................................. 111
(1) Cash dividend
(2) Stock dividend
(3) Property dividend
(4) Liquidating dividend
(c) Royalty income ............................................................................... 113
(d) Rental income................................................................................. 115
(1) Lease of personal property
(2) Lease of real property
(3) Tax treatment of
(a) Leasehold improvements by lessee
(b) VAT added to rental/paid by the lessee
(c) Advance rental/long term lease
(vii) Annuities, proceeds from life insurance or other types of insurance .... 115
(viii) Prizes and awards .............................................................................. 116
(ix) Pensions, retirement benefit, or separation pay .................................. 118
(x) Income from any source whatever ...................................................... 125
(a) Forgiveness of indebtedness .......................................................... 125
(b) Recovery of accounts previously written-off when taxable/when not
taxable .......................................................................................... 125
(c) Receipt of tax refunds or credit ....................................................... 126
(d) Income from any source whatever .................................................. 126
(e) Source rules in determining income from within and without........... 127
(1) Interests
(2) Dividends
(3) Services
(4) Rentals
(5) Royalties
(6) Sale of real property
(7) Sale of personal property
(8) Shares of stock of domestic corporation
Situs of income taxation (see page 2 under inherent
limitations, territorial)
(f) Exclusions from gross income ........................................................ 129
(1) Rationale for the exclusions
(2) Taxpayers who may avail of the exclusions
(3) Exclusions distinguished from deductions and tax credit
(4) Under the Constitution ............................................................. 130
(a) Income derived by the government or its political
subdivisions from the exercise of any essential
governmental function
(5) Under the Tax Code ................................................................ 130
(a) Proceeds of life insurance policies .................................... 130
(b) Return of premium paid
(c) Amounts received under life insurance, endowment or
annuity contracts ............................................................. 132
(d) Value of property acquired by gift, bequest, devise or
descent ............................................................................. 132
(e) Amount received through accident or health insurance..... 136
(f) Income exempt under tax treaty
(g) Retirement benefits, pensions, gratuities, etc. ................. 138
(h) Winnings, prizes, and awards, including those in sports
competition ...................................................................... 144
(6) Under special laws................................................................... 146
(a) Personal Equity and Retirement Account
(g) Deductions from gross income ....................................................... 146
(1) General rules ........................................................................... 147
(a) Deductions must be paid or incurred in connection
with the taxpayers trade, business or profession
(b) Deductions must be supported by adequate receipts
or invoices (except standard deduction)
(c) Additional requirement relating to withholding
(2) Return of capital (cost of sales or services) ............................ 149
(a) Sale of inventory of goods by manufacturers
and dealers of properties
(b) Sale of stock in trade by a real estate dealer and
dealer in securities
(c) Sale of services
(3) Itemized deductions................................................................ 149
(a) Expenses ......................................................................... 149
(1) Requisites for deductibility ......................................... 149
(a) Nature: ordinary and necessary
(b) Paid and incurred during taxable year
(2) Salaries, wages and other forms of compensation for
personal services actually rendered, including the
grossed-up monetary value of the fringe benefit
subjected to fringe benefit tax which tax should have
been paid ................................................................. 155
(3) Travelling/transportation expenses
(4) Cost of materials
(5) Rentals and/or other payments for use or possession
of property
(6) Repairs and maintenance
(7) Expenses under lease agreements
(8) Expenses for professionals
(9) Entertainment/Representation expenses
(10) Political campaign expenses.................................... 156
(11) Training expenses
(b) Interest ............................................................................. 158
(1) Requisites for deductibility ......................................... 158
(2) Non-deductible interest expense ............................... 159
(3) Interest subject to special rules .................................. 160
(a) Interest paid in advance
(b) Interest periodically amortized
(c) Interest expense incurred to acquire property
for use in trade/business/profession
(d) Reduction of interest expense/interest arbitrage
(c) Taxes ................................................................................ 161
(1) Requisites for deductibility
(2) Non-deductible taxes
(3) Treatments of surcharges/interests/fines for delinquency
(4) Treatment of special assessment
(5) Tax credit vis--vis deduction
(d) Losses .............................................................................. 161
(1) Requisites for deductibility ......................................... 161
(2) Other types of losses ................................................. 163
(a) Capital losses
(b) Securities becoming worthless
(c) Losses on wash sales of stocks or securities
(d) Wagering losses
(e) Net Operating Loss Carry-Over (NOLCO)
(e) Bad debts ......................................................................... 164
(1) Requisites for deductibility
(2) Effect of recovery of bad debts
(f) Depreciation ...................................................................... 166
(1) Requisites for deductibility
(2) Methods of computing depreciation allowance
(a) Straight-line method
(b) Declining-balance method
(c) Sum-of-the-years-digit method
(g) Charitable and other contributions .................................... 168
(1) Requisites for deductibility
(2) Amount that may be deducted
(h) Contributions to pension trusts ......................................... 169
(1) Requisites for deductibility
(i) Deductions under special laws ........................................... 169
(4) Optional standard deduction .................................................... 169
(a) Individuals, except non-resident aliens
(b) Corporations, except non-resident foreign corporations
(c) Partnerships
(5) Personal and additional exemption (R.A. No. 9504, Minimum
Wage Earner Law) ................................................................ 170
(a) Basic personal exemptions
(b) Additional exemptions for taxpayer with dependents
(c) Status-at-the-end-of-the-year rule
(d) Exemptions claimed by non-resident aliens
(6) Items not deductible................................................................. 176
(a) General rules
(b) Personal, living or family expenses
(c) Amount paid for new buildings or for
permanent improvements (capital
expenditures)
(d) Amount expended in restoring property (major repairs)
(e) Premiums paid on life insurance policy covering life or
any other officer or employee financially interested
(f) Interest expense, bad debts, and losses from sales
of property between related parties
(g) Losses from sales or exchange or property
(h) Non-deductible interest
(i) Nondeductible taxes
(j) Non-deductible losses
(k) Losses from wash sales of stock or securities
(7) Exempt corporations ....................................................................... 177
(a) Propriety educational institutions and hospitals
(b) Government-owned or controlled corporations
(c) Others
10. Taxation of resident citizens, non-resident citizens, and resident aliens .............. 177
a) General rule that resident citizens are taxable on income from all sources
within and without the Philippines ................................................................ 177
(i) Non-resident citizens
b) Taxation on compensation income .............................................................. 179
(i) Inclusions ............................................................................................... 179
(a) Monetary compensation
(1) Regular salary/wage
(2) Separation pay/retirement benefit not otherwise exempt
(3) Bonuses, 13th month pay, and other benefits not exempt
(4) Directors fees
(b) Non-monetary compensation
(1) Fringe benefit not subject to tax
(ii) Exclusions ............................................................................................. 181
(a) Fringe benefit subject to tax
(b) De minimis benefits
(c) 13th month pay and other benefits, and payments
specifically excluded from taxable compensation income
(iii) Deductions ............................................................................................ 184
(a) Personal exemptions and additional exemptions ............................ 185
(b) Health and hospitalization insurance .............................................. 188
(c) Taxation of compensation income of a minimum wage earner ....... 188
(1) Definition of statutory minimum wage
(2) Definition of minimum wage earner
(3) Income also subject to tax exemption: holiday pay,
overtime pay, night-shift differential, and hazard pay
c) Taxation of business income/income from practice of profession ................ 188
d) Taxation of passive income ......................................................................... 188
(i) Passive income subject to final tax ......................................................... 189
(a) Interest income .............................................................................. 189
(i) Treatment of income from long-term deposits
(b) Royalties ....................................................................................... 190
(c) Dividends from domestic corporations ........................................... 190
(d) Prizes and other winnings ............................................................. 191
(ii) Passive income not subject to final tax ................................................. 193
e) Taxation of capital gains .............................................................................. 193
(i) Income from sale of shares of stock of a Philippine corporation ........... 193
(a) Shares traded and listed in the stock exchange
(b) Shares not listed and traded in the stock exchange
(ii) Income from the sale of real property situated in the Philippines .......... 195
(iii) Income from the sale, exchange, or other disposition of other capital
assets ................................................................................................... 198
11. Taxation of non-resident aliens engaged in trade or business ............................. 200
a) General rules
b) Cash and/or property dividends
c) Capital gains
Exclude: non-resident aliens not engaged in trade or business
12. Individual taxpayers exempt from income tax ..................................................... 201
a) Senior citizens
b) Minimum wage earners
c) Exemptions granted under international agreements
13. Taxation of domestic corporations ...................................................................... 201
a) Tax payable ................................................................................................. 203
(i) Regular tax
(ii) Minimum Corporate Income Tax (MCIT) ............................................. 204
(a) Imposition of MCIT
(b) Carry forward of excess minimum tax
(c) Relief from the MCIT under certain conditions
(d) Corporations exempt from the MCIT
(e) Applicability of the MCIT where a corporation is governed both
under the regular tax system and a special income tax system
b) Allowable deductions ................................................................................... 206
(i) Itemized deductions
(ii) Optional standard deduction
c) Taxation of passive income ......................................................................... 208
(i) Passive income subject to tax .............................................................. 208
(a) Interest from deposits and yield, or any other monetary benefit
from deposit substitutes and from trust funds and similar
arrangements and royalties
(b) Capital gains from the sale of shares of stock not traded in the
stock exchange
(c) Income derived under the expanded foreign currency deposit system
(d) Inter-corporate dividends
(e) Capital gains realized from the sale, exchange, or disposition of
lands and/or buildings
(ii) Passive income not subject to tax ........................................................ 211
d) Taxation of capital gains .............................................................................. 211
(i) Income from sale of shares of stock
(ii) Income from the sale of real property situated in the Philippines
(iii) Income from the sale, exchange, or other disposition of other
capital assets
e) Tax on proprietary educational institutions and hospitals ............................. 213
f) Tax on government-owned or controlled corporations, agencies or
instrumentalities ................................................................................... 214
14. Taxation of resident foreign corporations ............................................................. 214
a) General rule
b) With respect to their income from sources within the Philippines
c) Minimum Corporate Income Tax
d) Tax on certain income
(i) Interest from deposits and yield, or any other monetary benefit from
deposit substitutes, trust funds and similar arrangements and
royalties
(ii) Income derived under the expanded foreign currency deposit system
(iii) Capital gains from sale of shares of stock not traded in the
stock exchange
(iv) Inter-corporate dividends
Exclude:
(i) International carrier
(ii) Offshore banking units
(iii) Branch profits remittances
(iv) Regional or area headquarters and regional operating
headquarters of multinational companies
15. Taxation of non-resident foreign corporations ...................................................... 215
a) General rule
b) Tax on certain income
(i) Interest on foreign loans
(ii) Inter-corporate dividends
(iii) Capital gains from sale of shares of stock not traded in the
stock exchange
Exclude:
(i) Non-resident cinematographic film-owner, lessor or distributor
(ii) Non-resident owner or lessor of vessels chartered by Philippine
nationals
(iii) Non-resident owner or lessor of aircraft machineries and other
equipment
16. Improperly accumulated earnings of corporations ............................................... 216
17. Exemption from tax on corporations .................................................................... 217
18. Taxation of partnerships ...................................................................................... 217
19. Taxation of general professional partnerships ..................................................... 217
20. Withholding tax .................................................................................................... 220
a) Concept
b) Kinds
(i) Withholding of final tax on certain incomes
(ii) Withholding of creditable tax at source
c) Withholding of VAT ...................................................................................... 224
d) Filing of return and payment of taxes withheld ............................................. 224
(i) Return and payment in case of government employees
(ii) Statements and returns
e) Final withholding tax at source .................................................................... 227
f) Creditable withholding tax ............................................................................ 228
(i) Expanded withholding tax
(ii) Withholding tax on compensation
g) Timing of withholding ................................................................................... 229
B. Estate tax ..................................................................................................................... 229
1. Basic principles ................................................................................................... 230
2. Definition
3. Nature
4. Purpose or object
5. Time and transfer of properties ........................................................................... 230
6. Classification of decedent
7. Gross estate vis--vis net estate
8. Determination of gross estate and net estate ..................................................... 231
9. Composition of gross estate ............................................................................... 235
10. Items to be included in gross estate ................................................................... 235
11. Deductions from estate ....................................................................................... 241
12. Exclusions from estate ........................................................................................ 245
13. Tax credit for estate taxes paid in a foreign country............................................ 246
14. Exemption of certain acquisitions and transmissions .......................................... 246
15. Filing of notice of death
16. Estate tax return ................................................................................................. 247
C. Donors tax ................................................................................................................... 251
1. Basic principles
2. Definition
3. Nature
4. Purpose or object
5. Requisites of valid donation
6. Transfers which may be constituted as donation
a) Sale/exchange/transfer of property for insufficient consideration ................. 251
b) Condonation/remission of debt
7. Transfer for less than adequate and full consideration ........................................ 254
8. Classification of donor ........................................................................................ 255
9. Determination of gross gift .................................................................................. 256
10. Composition of gross gift .................................................................................... 256
11. Valuation of gifts made in property ..................................................................... 257
12. Tax credit for donors taxes paid in a foreign country
13. Exemptions of gifts from donors tax ................................................................... 258
14. Person liable ....................................................................................................... 264
15. Tax basis ............................................................................................................ 265
D. Value-Added Tax (VAT) .............................................................................................. 267
1. Concept .............................................................................................................. 267
2. Characteristics/Elements of a VAT-Taxable transaction ..................................... 267
3. Impact of tax
4. Incidence of tax
5. Tax credit method ............................................................................................... 269
6. Destination principle
7. Persons liable ..................................................................................................... 269
8. VAT on sale of goods or properties .................................................................... 271
a) Requisites of taxability of sale of goods or properties
9. Zero-rated sales of goods or properties, and effectively zero-rated sales of goods
or properties ....................................................................................................... 274
10. Transactions deemed sale .................................................................................. 275
a) Transfer, use or consumption not in the course of business of
goods/properties originally intended for sale or use in the course of
business
b) Distribution or transfer to shareholders, investors or creditors
c) Consignment of goods if actual sale not made within 60 days from date
of consignment
d) Retirement from or cessation of business with respect to inventories on hand
11. Change or cessation of status as VAT-registered person ................................... 275
a) Subject to VAT
(i) Change of business activity from VAT taxable status to VAT-
exempt status
(ii) Approval of request for cancellation of a registration due to reversion
to exempt status
(iii) Approval of request for cancellation of registration due to desire to
revert to exempt status after lapse of 3 consecutive years
b) Not subject to VAT
(i) Change of control of a corporation
(ii) Change in the trade or corporate name
(iii) Merger or consolidation of corporations
12. VAT on importation of goods .............................................................................. 276
a) Transfer of goods by tax exempt persons
13. VAT on sale of service and use or lease of properties ........................................ 278
a) Requisites for taxability
14. Zero-rated sale of services ................................................................................. 280
15. VAT exempt transactions .................................................................................... 282
a) VAT exempt transactions, in general
b) Exempt transaction, enumerated
16. Input tax and output tax, defined ......................................................................... 286
17. Sources of input tax ............................................................................................ 286
a) Purchase or importation of goods
b) Purchase of real properties for which a VAT has actually been paid
c) Purchase of services in which VAT has actually been paid
d) Transactions deemed sale
e) Presumptive input
f) Transitional input
18. Persons who can avail of input tax credit ............................................................ 286
19. Determination of output/input tax; VAT payable; excess input tax credits ........... 286
a)
Determination of output tax
b)
Determination of input tax creditable
c)
Allocation of input tax on mixed transactions
d)
Determination of the output tax and VAT payable and computation of
VAT payable or excess tax credits
20. Substantiation of input tax credits ....................................................................... 286
21. Refund or tax credit of excess input tax .............................................................. 287
a) Who may claim for refund/apply for issuance of tax credit certificate
b) Period to file claim/apply for issuance of tax credit certificate
c) Manner of giving refund
d) Destination principle or cross-border doctrine
22. Invoicing requirements ....................................................................................... 289
a) Invoicing requirements in general
b) Invoicing and recording deemed sale transactions
c) Consequences of issuing erroneous VAT invoice or VAT official receipt
23. Filing of return and payment ............................................................................... 290
24. Withholding of final VAT on sales to government ................................................ 290
E. Tax remedies under the NIRC ...................................................................................... 290
1. Taxpayers remedies ............................................................................................. 290
a) Assessment ................................................................................................... 293
(i) Concept of assessment .......................................................................... 293
(a) Requisites for valid assessment
(b) Constructive methods of income determination
(c) Inventory method for income determination
(d) Jeopardy assessment
(e) Tax delinquency and tax deficiency
(ii) Power of the Commissioner to make assessments and prescribe additional
requirements for tax administration and enforcement ........................... 300
(a) Power of the Commissioner to obtain information, and
to summon/examine, and take testimony of persons
(iii) When assessment is made ................................................................... 303
(a) Prescriptive period for assessment
(1) False, fraudulent, and non-filing of returns
(b) Suspension of running of statute of limitations
(iv) General provisions on additions to the tax ............................................ 311
(a) Civil penalties
(b) Interest
(c) Compromise penalties
(v) Assessment process .............................................................................. 312
(a) Tax audit
(b) Notice of informal conference
(c) Issuance of preliminary assessment notice
(d) Notice of informal conference
(e) Issuance of preliminary assessment notice
(f) Exceptions to issuance of preliminary assessment notice
(g) Reply to preliminary assessment notice
(h) Issuance of formal letter of demand and assessment
notice/final assessment notice
(i) Disputed assessment
(j) Administrative decision on a disputed assessment
(vi) Protesting assessment .......................................................................... 317
(a) Protest of assessment by taxpayer ................................................. 317
(1) Protested assessment
(2) When to file a protest
(3) Forms of protest
(4) Content and validity of protest
(b) Submission of documents within 60 days from filing of protest
(c) Effect of failure to protest ............................................................... 319
(d) Period provided for the protest to be acted upon
(vii) Rendition of decision by Commissioner............................................... 320
(a) Denial of protest.............................................................................. 320
(1) Commissioners actions equivalent to denial of protest
(a) Filing of criminal action against taxpayer
(b) Issuing a warrant of distraint and levy
(2) Inaction by Commissioner
(viii) Remedies of taxpayer to action by Commissioner ............................... 323
(a) In case of denial of protest
(b) In case of inaction by Commissioner within 180 days from
submission of documents
(c) Effect of failure to appeal
b) Collection ....................................................................................................... 329
(i) Requisites ............................................................................................... 329
(ii) Prescriptive periods ................................................................................ 329
(iii) Distraint of personal property including garnishment ............................. 332
(a) Summary remedy of distraint of personal property
(1) Purchase by the government at sale upon distraint
(2) Report of sale to the Bureau of Internal Revenue (BIR)
(3) Constructive distraint to protect the interest of the government
(iv) Summary remedy of levy on real property ............................................. 333
(a) Advertisement and sale
(b) Redemption of property sold
(c) Final deed of purchaser
(v) Forfeiture to government for want of bidder ........................................... 334
(a) Remedy of enforcement of forfeitures
(1) Action to contest forfeiture of chattel
(b) Resale of real estate taken for taxes
(c) When property to be sold or destroyed
(d) Disposition of funds recovered in legal proceedings or obtained
from forfeiture
(vi) Further distraint or levy ........................................................................ 334
(vii) Tax lien ................................................................................................ 334
(viii) Compromise ........................................................................................ 334
(a) Authority of the Commissioner to compromise and abate taxes
(ix) Civil and criminal actions ....................................................................... 337
(a) Suit to recover tax based on false or fraudulent returns
c) Refund ........................................................................................................... 341
(i) Grounds and requisites for refund ........................................................... 341
(ii) Requirements for refund as laid down by cases ..................................... 342
(a) Necessity of written claim for refund
(b) Claim containing a categorical demand for reimbursement
(c) Filing of administrative claim for refund and the suit/proceeding
before the CTA within 2 years from date of payment regardless
of any supervening cause
(iii) Legal basis of tax refunds ..................................................................... 345
(iv) Statutory basis for tax refund under the tax code .................................. 345
(a) Scope of claims for refund
(b) Necessity of proof for claim or refund
(c) Burden of proof for claim of refund
(d) Nature of erroneously-paid tax/illegally assessed collected
(e) Tax refund vis--vis tax credit
(f) Essential requisites for claim of refund
(v) Who may claim/apply for tax refund/tax credit........................................ 349
(a) Taxpayer/withholding agents of non-resident foreign corporation
(vi) Prescriptive period for recovery of tax erroneously or illegally collected 351
(vii) Other consideration affecting tax refunds ............................................. 355
2. Government remedies ........................................................................................... 356
a) Administrative remedies
(i) Tax lien
(ii) Levy and sale of real property
(iii) Forfeiture of real property to the government for want of bidder
(iv) Further distraint and levy
(v) Suspension of business operation
(vi) Non-availability of injunction to restrain collection of tax
b) Judicial remedies
3. Statutory offenses and penalties............................................................................ 356
a) Civil penalties ................................................................................................. 356
(i) Surcharge............................................................................................... 356
(ii) Interest .................................................................................................. 356
(a) In general
(b) Deficiency interest
(c) Delinquency interest
(d) Interest on extended payment
4. Compromise and abatement of taxes .................................................................... 358
a) Compromise
b) Abatement
F. Organization and Function of the Bureau of Internal Revenue ..................................... 361
1. Rule-making authority of the Secretary of Finance ................................................ 361
a) Authority of Secretary of Finance to promulgate rules and regulations
b) Specific provisions to be contained in rules and regulations
c) Non-retroactivity of rulings
2. Power of the Commissioner to suspend the business operation of a taxpayer ...... 365
III. Local Government Code of 1991, as amended
A. Local government taxation ........................................................................................... 366
1. Fundamental principles ......................................................................................... 366
2. Nature and source of taxing power ........................................................................ 366
a) Grant of local taxing power under the local government code
b) Authority to prescribe penalties for tax violations
c) Authority to grant local tax exemptions
d) Withdrawal of exemptions
e) Authority to adjust local tax rates
f) Residual taxing power of local governments
g) Authority to issue local tax ordinances
3. Local taxing authority ............................................................................................ 370
a) Power to create revenues exercised through Local Government Units
b) Procedure for approval and effectivity of tax ordinances
4. Scope of taxing power ........................................................................................... 371
5. Specific taxing power of Local Government Units.................................................. 371
a) Taxing powers of provinces ........................................................................... 371
(i) Tax on transfer of real property ownership
(ii) Tax on business of printing and publication
(iii) Franchise tax
(iv) Tax on sand, gravel and other quarry services
(v) Professional tax
(vi) Amusement tax
(vii) Tax on delivery truck/van
b) Taxing powers of cities ................................................................................... 373
c) Taxing powers of municipalities ...................................................................... 375
(i) Tax on various types of businesses
(ii) Ceiling on business tax impossible on municipalities within Metro Manila
(iii) Tax on retirement on business
(iv) Rules on payment of business tax
(v) Fees and charges for regulation & licensing
(vi) Situs of tax collected
d) Taxing powers of barangays .......................................................................... 378
e) Common revenue raising powers ................................................................... 379
(i) Service fees and charges
(ii) Public utility charges
(iii) Toll fees or charges
f) Community tax ............................................................................................... 379
6. Common limitations on the taxing powers of LGUs ............................................... 379
7. Collection of business tax ...................................................................................... 382
a) Tax period and manner of payment
b) Accrual of tax
c) Time of payment
d) Penalties on unpaid taxes, fees or charges
e) Authority of treasurer in collection and inspection of books
8. Taxpayers remedies ............................................................................................. 383
a) Periods of assessment and collection of local taxes, fees or charges
b) Protest of assessment
c) Claim for refund of tax credit for erroneously or illegally collected tax, fee
or charge
9. Civil remedies by the LGU for collection of revenues ............................................. 386
a) Local governments lien for delinquent taxes, fees or charges
b) Civil remedies, in general
(i) Administrative action
(ii) Judicial action
B. Real property taxation .................................................................................................. 387
1. Fundamental principles .......................................................................................... 387
2. Nature of real property tax ..................................................................................... 388
3. Imposition of real property tax ................................................................................ 388
a) Power to levy real property tax
b) Exemption from real property tax
4. Appraisal and assessment of real property tax ...................................................... 396
a) Rule on appraisal of real property at fair market value
b) Declaration of real property
c) Listing of real property in assessment rolls
d) Preparation of schedules of fair market value
(i) Authority of assessor to take evidence
(ii) Amendment of schedule of fair market value
e) Classes of real property
f) Actual use of property as basis of assessment
g) Assessment of real property
(i) Assessment levels
(ii) General revisions of assessments and property classification
(iii) Date of effectivity of assessment or reassessment
(iv) Assessment of property subject to back taxes
(v) Notification of new or revised assessment
h) Appraisal and assessment of machinery
5. Collection of real property tax ................................................................................ 399
a) Date of accrual of real property tax and special levies
b) Collection of tax
(i) Collecting authority
(ii) Duty of assessor to furnish local treasurer with assessment rolls
(iii) Notice of time for collection of tax
c) Periods within which to collect real property tax
d) Special rules on payment
(i) Payment of real property tax in installments
(ii) Interests on unpaid real property tax
(iii) Condonation of real property tax
e) Remedies of LGUs for collection of real property tax
(i) Issuance of notice of delinquency for real property tax payment
(ii) Local governments lien
(iii) Remedies in general
(iv) Resale of real estate taken for taxes, fees or charges
(v) Further levy until full payment of amount due
6. Refund or credit of real property tax ...................................................................... 402
a) Payment under protest
b) Repayment of excessive collections
7. Taxpayers remedies ............................................................................................. 402
a) Contesting an assessment of value of real property ....................................... 402
(i) Appeal to the Local Board of Assessment Appeals
(ii) Appeal to the Central Board of Assessment Appeals
(iii) Effect of payment of tax
b. Payment of real property tax under protest .................................................... 404
(i) File protest with local treasurer
(ii) Appeal to the Local Board of Assessment Appeals
(iii) Appeal to the Central Board of Assessment Appeals
(iv) Appeal to the CTA
(v) Appeal to the Supreme Court

IV. Tariff and Customs Code of 1978, as amended ............................................................ 405


A. Tariff and duties, defined.............................................................................................. 405
B. General rule: all imported articles are subject to duty. ................................................. 405
1. Importation by the government taxable
C. Purpose for imposition ................................................................................................. 406
D. Flexible tariff clause ..................................................................................................... 406
E. Requirements of importation ........................................................................................ 407
1. Beginning and ending of importation ..................................................................... 407
2. Obligations of importer .......................................................................................... 408
a) Cargo manifest
b) Import entry
c) Declaration of correct weight or value
d) Liability for payment of duties
e) Liquidation of duties
f) Keeping of records
F. Importation in violation of tax credit certificate .............................................................. 409
1. Smuggling
2. Other fraudulent practices
G. Classification of goods ................................................................................................. 410
1. Taxable importation
2. Prohibited importation
3. Conditionally-free importation
H. Classification of duties ................................................................................................. 412
1. Ordinary/regular duties .......................................................................................... 413
a) Ad valorem; methods of valuation ................................................................... 413
(i) Transaction value
(ii) Transaction value of identical goods
(iii) Transaction value of similar goods
(iv) Deductive value
(v) Computed value
(vi) Fallback value
b) Specific .......................................................................................................... 413
2. Special duties ........................................................................................................ 414
a) Dumping duties
b) Countervailing duties
c) Marking duties
d) Retaliatory/discriminatory duties
e) Safeguard
I. Remedies ..................................................................................................................... 416
1. Government .......................................................................................................... 416
a) Administrative/extrajudicial ............................................................................ 416
(i) Search, seizure, forfeiture, arrest
b) Judicial .......................................................................................................... 424
(i) Rules on appeal including jurisdiction
2. Taxpayer ............................................................................................................... 425
a) Protest
b) Abandonment
c) Abatement and refund

V. Judicial Remedies (R.A. No. 1125, as amended, and the Revised Rules of the
Court of Tax Appeals)
A. Jurisdiction of the Court of Tax Appeals ....................................................................... 428
1. Exclusive appellate jurisdiction over civil tax cases ............................................... 428
a) Cases within the jurisdiction of the court en banc
b) Cases within the jurisdiction of the court in divisions
2. Criminal cases....................................................................................................... 435
a) Exclusive original jurisdiction
b) Exclusive appellate jurisdiction in criminal cases
B. Judicial procedures ...................................................................................................... 436
1. Judicial action for collection of taxes ..................................................................... 436
a) Internal revenue taxes
b) Local taxes
(i) Prescriptive period
2. Civil cases ............................................................................................................. 440
a) Who may appeal, mode of appeal, effect of appeal ....................................... 440
(i) Suspension of collection of tax
a) Injunction not available to restrain collection
(ii) Taking of evidence
(iii) Motion for reconsideration or new trial
b) Appeal to the CTA, en banc ........................................................................... 445
c) Petition for review on certiorari to the Supreme Court ..................................... 445
3. Criminal cases....................................................................................................... 445
a) Institution and prosecution of criminal actions ................................................ 445
(i) Institution of civil action in criminal action
b) Appeal and period to appeal .......................................................................... 448
(i) Solicitor General as counsel for the people and government
officials sued in their official capacity
c) Petition for review on certiorari to the Supreme Court ..................................... 448
C. Taxpayers suit impugning the validity of tax measures or acts of taxing authorities .... 448
1. Taxpayers suit, defined ........................................................................................ 448
2. Distinguished from citizens suit ............................................................................ 449
3. Requisites for challenging the constitutionality of a tax measure or act of taxing
authority ................................................................................................................ 449
a) Concept of locus standi as applied in taxation
b) Doctrine of transcendental importance
c) Ripeness for judicial determination
VI. Documentary Tax ............................................................................................... 449
TAXATION LAW

I. General Principles of Taxation


A. Definition and concept of taxation

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 of tax? Explain.

SUGGESTED ANSWER:

The power of taxation is inherent in the State being an attribute of sovereignty. As an


incident of sovereignty, the power to tax has been described as unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be
found only in the responsibility of the legislature which imposes the tax on the
constituency who are to pay it. [Mactan Cebu International Airport Authority v. Marcos,
261 SCRA 667, (1996)].

Being an inherent power, the legislature can enact laws to raise revenues even without
the grant of said power in the Constitution. It must be noted that Constitutional
provisions relating to the power of taxation do not operate as grants of the power of
taxation to the Government, but instead merely constitute limitations upon a power
which would otherwise be practically without limit. [Cooley, Constitutional Limitations,
1927 8th Ed., p. 787] (BAR 2005)

B. Nature of taxation

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 jurisdictions, 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:

4. Taxes are levied by the executive branch of government.

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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. (NPC v. Albay, 186 SCRA 198
(1990). (BAR 2004)

Why is the power to tax considered inherent in a sovereign State?

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). (BAR 2003)

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 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. (BAR 2001)

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
States 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.

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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. (BAR 1996)

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%) (2013 Bar Question)

(A) wrong because taxes are the lifeblood of the government


(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) wrong because the law recognizes that the power to tax is the power to destroy

In McCulloch v. Maryland Chief Justice Marshall declared that the power to tax involves
the power to destroy. This maxim only means that the power to tax includes the power to
regulate even to the extent of prohibition or destruction of businesses. The reason is that
the legislature has the inherent power to determine who to tax, what to tax and how
much tax is to be imposed. Pursuant to the regulatory purpose of taxation, the
legislature may impose tax in order to discourage or prohibit things or enterprises
inimical to the public welfare.

In the given problem, the legislatures imposition of prohibitive sin tax on cigarettes is
congruent with its purpose of discouraging the public form smoking cigarettes which are
hazardous to health.

C. Characteristics of taxation

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%) (2013 Bar Question)

(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.

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(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 have the storage
facilities for glass panels.

SUGGESTED ANSWER:

(B) It should not grant permission because a tax is generally a pecuniary burden. This
principle is one of the attributes or characteristics of tax.

D. Power of taxation compared with other powers


1. Police power
2. Power of eminent domain

E. Purpose of taxation
1. Revenue-raising
2. Non-revenue/special or regulator

Money collected from taxation shall not be paid to any religious dignitary
EXCEPT when: (2011 Bar Question)

(A) the religious dignitary is assigned to the Philippine Army


(B) it is paid by a local government unit
(C) the payment is passed in audit by the COA
(D) it is part of a lawmakers pork barrel

SUGGESTED ANSWER:

(A) the religious dignitary is assigned to the Philippine Army

The police power, the power to tax and the power of eminent domain are inherent
powers of government. May a tax be validly imposed in the exercise of the police
power and not of the power to tax? If your answer is in the affirmative, give an
example.

ANSWER:

The police power may be exercised for the purpose of requiring licenses for which
license fees may have to be paid. The amount of the license fees for the regulation of
useful occupations should only be sufficient to pay for the cost of the license and the
necessary expense of police surveillance and regulation. For non-useful occupations,
the license fee may be sufficiently high to discourage the particular activity sought to be
regulated. It is clear from the foregoing that police power may not be exercised by itself
alone for the purpose of raising taxes. However, police power may be exercised jointly
with the power of taxation for the purpose of raising revenues. (Lutz us. Araneta, 98
Phil. 148)

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ALTERNATIVE ANSWER:

Taxation involves the power to raise revenue not only in order to support the existence
of government but likewise to carry out legitimate objects of government. Among such
legitimate objects are those that police power itself can cover. As early as the case of
Lutz vs. Araneta (98 Phil. 148), the Supreme Court has ruled that taxation may be used
to implement an object of police power. An illustration of such exercise would be an
imposition of taxes on gambling, the rates of which are made somewhat onerous in
order to discourage gambling instead of an outright prohibition thereof by an exercise of
a police power measure such as by present provisions of the Revised Penal Code.
(BAR 1991)

To provide means for rehabilitation and stabilization of the sugar industry so as


to prepare it for the eventuality of the loss of the quota allocated to the
Philippines resulting from the lifting of U.S. sanctions against an African country.
Congress passes a law increasing the existing tax on the manufacture of sugar
on a graduated basis. All collections made under the law are to accrue to a
special fund to be spent only for the purposes enumerated therein, among which
are to place the sugar industry in a position to maintain itself and ultimately to
insure its continued existence despite the loss of that quota, and to afford
laborers employed in the industry a living wage and to improve their working
conditions. X, a sugar planter, files a suit questioning the constitutionality of the
law alleging that the tax is not for a public purpose as the same is being levied
exclusively for the aid and support of the sugar industry. Decide the case.

ANSWER:

The suit filed by the sugar planter questioning the constitutionality of the sugar industry
stabilization measure is untenable. Taxation is no longer merely for raising revenue to
support the existence of government but the power may also be exercised to carry out
legitimate objects of the government. It is a legitimate object of government to protect its
local industries on which the national economy largely depends. Where the aim of the
tax measure is to achieve such a governmental objective, the tax Imposition can be said
to be for a public purpose (Gaston vs. Republic Bank, 158 SCRA 626). (BAR 1991)

F. Principles of sound tax system


1. Fiscal adequacy
2. Administrative feasibility

A law that allows taxes to be paid either in cash or in kind is valid.

SUGGESTED ANSWER:

True. There is no law which requires the 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. (BAR 2009)
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3. Theoretical justice

G. Theory and basis of taxation


1. Lifeblood theory

Which statement below expresses the lifeblood theory? (2012 BAR)

a) The assessed taxes must be enforced by the government.


b) The underlying basis of taxation is government necessity, for without taxation, a
government can neither exist nor endure;
c) Taxation is an arbitrary method of exaction by those who are in the seat of power;
d) The power of taxation is an inherent power of the sovereign to impose burdens upon
subjects and objects within its jurisdiction for the purpose of raising revenues.

SUGGESTED ANSWER:

b) The underlying basis of taxation is government necessity, for without taxation, a


government can neither exist nor endure

Taxes are the lifeblood of the government, for without taxes, the government can neither
exist nor endure. A principal attribute of sovereignty, the exercise of taxing power
derives its source from the very existence of the state whose social contract with its
citizens obliges it to promote public interest and common good. The theory behind the
exercise of the power to tax emanates from necessity; without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-being of the people.
(National Power Corporation vs. City of Cabanatuan)

Anne Lapada, a student activist, wants to impugn the validity of a tax on text
messages. Aside from claiming that the law adversely affects her since she sends
messages by text, what may she allege that would strengthen her claim to the right
to file a taxpayers suit? (2011 Bar Question)

(A) That she is entitled to the return of the taxes collected from her in case the court
nullifies the tax measure.
(B) That tax money is being extracted and spent in violation of the constitutionally
guaranteed 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.

SUGGESTED ANSWER:

(B) That tax money is being extracted and spent in violation of the constitutionally
guaranteed right to freedom of communication.

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Real property taxes should not disregard increases in the value of real property
occurring over a long period of time. To do otherwise would violate the canon of
a sound tax system referred to as: (2011 Bar Question)

(A) theoretical justice.


(B) fiscal adequacy.
(C) administrative feasibility.
(D) symbiotic relationship.

SUGGESTED ANSWER:

(B) fiscal adequacy

Explain the principles of a sound tax system. (2015 Bar Question)

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 taxpayers ability to pay (this is the so-called ability to pay principle); and
c. Administrative feasibility which means that the tax law should be capable of
convenience, just and effective administration.

Which theory in taxation states that without taxes, a government would be


paralyzed for lack of power to activate and operate it, resulting in its destruction?
(2011 Bar Question)
(A) Power to destroy theory
(B) Lifeblood theory
(C) Sumptuary theory
(D) Symbiotic doctrine

SUGGESTED ANSWER:

(B) Lifeblood theory.

The power to tax is the power to destroy. Is this always so? (2011 Bar Question)

(A) No. The Executive Branch may decide not to enforce a tax law which it
believes to be confiscatory.
(B) Yes. The tax collectors should enforce a tax law even if it results to the
destruction of the property rights of a taxpayer.
(C) Yes. Tax laws should always be 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.

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SUGGESTED ANSWER:

(D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected.

Discuss the meaning and the implications of the following statement:


Taxes are the lifeblood of government and their prompt and certain availability is
an imperious need."

ANSWER:

The phrase, taxes are the lifeblood of government, etc." expresses the underlying basis
of taxation which is governmental necessity, for indeed, without taxation, a government
can neither exists nor endure. Taxation is the indispensable and inevitable price for
civilized society: without taxes, the government would be paralyzed. This phrase has
been used, for instance, to justify the validity of the laws providing for summary
remedies in the collection of taxes. As a consequence of the above rule, an injunction
against the assessment and collection of taxes is generally withheld be the laws
imposing such taxes. Even when it is not so, under procedural laws such an injunction
may not be obtained as held in the case of Valley Trading Co. vs. CFI (G.R. No. 49529,
31 March 1989), where the Supreme Court ruled that the damages that may be caused
to the taxpayer by being made to pay the taxes cannot be said to be as irreparable as it
would be against the governments inability to collect taxes. (BAR 1991)

2. Necessity theory
3. Benefits-protection theory (Symbiotic relationship)
4. Jurisdiction over subject and objects

H. Doctrines in taxation
1. Prospectivity of tax laws
2. Imprescriptibility
3. Double taxation

Choose the correct answer. Double Taxation - (1%) (2014 Bar Question)

(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.

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(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 :

A. Double taxation 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 of character of tax, even if the
purposes of imposing the same are different.

Is double taxation a valid defense against the legality of a tax measure?

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, in that
the same subject Is taxed twice when it should be taxed but once, in a fashion that both
taxes are imposed for the same purpose by the same taxing authority, within the same
jurisdiction or taxing district, for the same taxable period and for the same kind or
character of a tax, then it becomes legally objectionable for being oppressive and
inequitable. (BAR 1997)

X, a lessor of a property, pays real estate tax on the premises, a real estate
dealers tax based on rental receipts and income tax on the rentals. X claims that
this is double taxation. Decide.

ANSWER:

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 dealers 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). (BAR 1996)

a. Strict sense

Differentiate between double taxation in the strict sense and in a broad sense and
give an example of each. (2015 Bar Question)

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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.

b. Broad sense

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 (Compania General de Tabacos de
Filipinos v. City of Manila, 8 SCRA 367 367 [1963]). (BAR 2004)

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?

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. (BAR 1997)

c. Constitutionality of double taxation


d. Modes of eliminating double taxation

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.

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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 a
deduction from his gross income in the Philippines, or to claim it as a tax credit (Sec.
34(C)(1)(b), NIRC).

B. 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%)

SUGGESTED ANSWER:

No. The income from abroad of a non-resident citizen is exempt from the Philippine
income tax; hence, there is no international double taxation on said income (Sec. 23,
NIRC).

Bank A deposit money with Bank B 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 transactions to customers. Which
statement below INCORRECTLY describes the transaction? (2012 BAR)

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 on
the interest income received by 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 and tax.

SUGGESTED ANSWER:

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

There is no double taxation if the law imposes two different taxes on the same income,
business or property. First, the taxes herein are imposed on two different subject
matters. The subject matter of the FWT [Final Withholding Tax] is the passive income

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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. BPI, G.R. No. 147375)

Double taxation in its general sense means taxing the same subject twice during
the same taxing period. In this sense, double taxation: (2011 Bar Question)

(A) violates substantive due process.


(B) does not violate substantive due process.
(C) violates the right to equal protection.
(D) does not violate the right to equal protection.

SUGGESTED ANSWER:

(C) violates the right to equal protection.

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%) (2013 Bar Question)

(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 in 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) Double taxation is allowed where one tax is imposed by the national government
and the other by the local government.

There is double taxation when one tax is imposed by the national government and the
other is imposed by a local government unit.4 However, the 1987 Constitution does not
forbid double taxation. In Pepsi-Cola Bottling Company of the Philippines, Inc. v.
Municipality of Tanauan (G.R. No. L-31156, February 27, 1976), the Supreme Court
declared that double taxation does not violate the uniformity rule nor does it infringe the

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equal protection guarantee just because one tax is imposed by the national government
and the other tax is levied by a local government unit.

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:


a. Allowing reciprocal exemption either by law or by treaty;
b. Allowance of tax credit for foreign taxes paid;
c. Allowance of deduction for foreign taxes paid; and
d. Reduction of the Philippine tax rate. (BAR 1997)

4. Escape from taxation


a. Shifting of tax burden

What is tax pyramiding? What is its basis in law? 5%

SUGGESTED ANSWER:

Tax pyramiding refers to the imposition of a tax upon a tax. This occurs when the tax is
added as part of the tax base. It has no basis in law (People v. Sandiganbayan, 467
SCRA 137 [2005]; CIR v. American Rubber Co., 18 SCRA 842 [1966]).

ANOTHER SUGGESTED ANSWER:

Tax pyramiding refers to a situation where some or all of the stages of distribution of
goods or services are taxed, with the accumulation borne by the final consumer. There
is tax pyramiding when sales taxes are applied to both inputs and outputs, thus shifting
the tax burden to the ultimate consumer. It has no basis in law because it violates the
principle of uniformity and neutrality in taxation (R.G. Holcombe, Taxing Services, 30
Fla. St. U.L. Rev. 467 [19966]) (BAR 2006)

Lilys 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 Lilys Fashion, Inc. the 10% VAT on the purchased items amounting to
P500,000.00. Lilys 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%

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SUGGESTED ANSWER:

No. The exemption of lily's Fashion, Inc. is only for taxes for which it is directly liable,
hence, it cannot 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, Inc. is not the taxpayer
in so far as the passed-on tax is concerned and therefore, it cannot claim for a refund of
a tax merely shifted to it. Only taxpayers are allowed to file a claim for refund (Phil.
Acetylene Co., Inc. v. CR, 20 SCRA 1056 [1987]). (BAR 2006)

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 should not be liable to pay the sales tax.

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?

SUGGESTED ANSWER:

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. (BAR 2004)

b. Tax avoidance

Choose the correct answer. Tax Avoidance (2014 Bar Question)


(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. Tax avoidance is a tax-saving device within the means sanctioned by law.

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Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of
PI 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 down payment; 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 (P100,000x 5% plus
P298,900,000 x 10%), instead of the corporate income tax of PI04,650,000 (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%)

SUGGESTED ANSWER:

The contention of the RDO is not tenable. Maria Suerte resorted to tax avoidance and
not tax evasion. Tax avoidance is the use of legal means to reduce tax liability and it is
the legal right of a taxpayer to decrease the amount of what otherwise would be his
taxes by means which the law permits. (Heng Tong Textiles Co., Inc. v. Commissioner,
24 SCRA 767 [1968J\. There is nothing illegal about transferring first the property to' a
corporation in a tax free exchange and later selling the shares obtained in the exchange
at a lower tax than what could have been imposed if the property was sold directly.

ANOTHER SUGGESTED ANSWER:

The contention is devoid of basis. To constitute tax amount of tax less than what is
known by the taxpayer to be legally due; 2) an accompanying state of mind which is
described as being evil, in bad faith, willful or deliberate and not merely accidental; and
3) a course of action or failure of action which is unlawful. The second and third factors
are not present in the instant case, hence there is no tax evasion that was committed.
The means employed to reduce taxes being allowed by law, it was a case of tax
avoidance that was resorted to. (Commissioner v. Toda, 438 SCRA 290 [2004]). (BAR
2008)

Mr. Pascual's income from leasing his property reaches the maximum rate of tax
under the law. He donated one-half of his said property to a non-stock, non-profit
educational institution whose income and assets are actually, directly and

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exclusively used for educational purposes, and therefore qualified for tax
exemption under Article XTV, 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 legally 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 donors tax. The donation is the legal means
employed to transfer the incidence of income tax on the rental income. (BAR 2000)

Distinguish tax evasion from tax avoidance.

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. (BAR 1996)

c. Tax evasion

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. (2013 Bar
Question)

SUGGESTED ANSWER:

As a lawyer, I have the responsibility to give only a lawful advice. Canon I of the Code of
Professional Responsibility mandates me to uphold the Constitution, obey the laws of
the land and promote respect for law and legal processes. Rule 1.01 states that a
lawyer shall not engage in unlawful, dishonest, immoral or deceitful conduct. Rule 1.02
provides that a lawyer shall not counsel or abet activities aimed at defiance of the law
or at lessening confidence in the legal system.

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Therefore, I will advise my client not to agree with the proposal of the BIR officer.
Agreeing with the proposal will result in criminal prosecution under the following laws:

Under the NIRC, the officers of the board who authorized the tax evasion will be liable
under Section 253(C), while the corporation shall be liable under Section 256.

The BIR official is liable under Section 269 which provides for the violations committed
by government enforcement officers. Paragraph (d) of Section 269 provides that one of
these violations is offering or undertaking to accomplish, file or submit a report or
assessment on a taxpayer without the appropriate examination of the books of accounts
or tax liability, or offering or undertaking to submit a report or assessment less than the
amount due the Government for any consideration or compensation, or conspiring or
colluding with another or others to defraud the revenues or otherwise violate the
provisions of this Code.

Under the Revised Penal Code, the officers of the corporation shall be liable under
Article 212 for corruption of public officials while the BIR official is liable for direct
bribery.

Both my client and the BIR official will also be liable under Republic Act No. 3019 or the
Anti- Graft and Corrupt Practices Act.

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? (2014
Bar Question)

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SUGGESTED ANSWER :

The tax planning scheme adopted by Haeltown Corporation constitutes tax evasion.
According to CIR v. Estate of Benigno Toda (G.R. No. 147188, September 14, 2004), a
transaction where a taxpayer made it appear that there were two sales of the property
was considered tainted with fraud. The sole purpose of acquiring and transferring title
of the property on the same day was to create a tax shelter. The sale to Mr. Belly (which
is subject to individual capital gains tax) was to mislead the BIR and avoid the higher
corporate income tax.

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' P2.0 Million as the selling
price.

Discuss the consequences of the action taken by the parties. (5%)

SUGGESTED ANSWER:

Both Josel and his tax consultant are criminally liable for tax evasion. Here, it is clear
that the three requisite factors to constitute tax evasion are present, viz: (1) the end to
be achieved which is the payment of less than that known by them to be legally due; (2)
an accompanying state of mind which is evil, in bad faith, willfull or deliberate and not
merely accidental; and (3) a course of action which is unlawful. [CIR v. Estate of
Benigno P. Toda, Jr., 438 SCRA 290 (2004)]. (BAR 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:

Yes. The ruling of the DOJ in denying the motion is correct. The issuance of the
deficiency assessment notice prior to prosecution is not necessary because the facts of

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the case show that the crime of evasion is complete since the violator has knowingly
and willfully filed a fraudulent return with intent to evade/defeat a part or all of the tax.
[Ungdb v. Cusi, Jr., 97 SCRA 877 (1980)]. What is involved here is not the collection of
taxes but a criminal prosecution for violation of the National Internal Revenue Code.

However, the contention that the joint affidavit of the BIR examiners showing the
computation of tax liabilities maybe considered an assessment is erroneous. It is not an
assessment which may entitle the taxpayer to protest. [CIR v. Pascor Realty 81
Development Corp., 309 SCRA402 (1999)]. An assessment is a formal notice to the
taxpayer stating that the amount thereon is due as a tax and containing a demand for
the payment thereof. [Alhambra Cigar & Cigarette Mfg. Co. v. Collector, 105 Phil. 1337
(1959)] (BAR 2005)

Distinguish tax evasion from tax avoidance.

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. (BAR 1996)

5. Exemption from taxation

The President of the Philippines and the Prime Minister of Japan entered into an
executive agreement in respect of a loan facility to the Philippines from Japan
whereby it was stipulated that interest on loans granted by private Japanese
financial institutions to private financial Institutions in the Philippines shall not be
subject to Philippine income taxes.

Is this tax exemption valid? Explain

ANSWER:

Yes. The tax exemption is valid because an executive agreement has the force and
effect of a treaty under the provision of the Revenue Code. Taxation is subject to
International Comity.

ALTERNATIVE ANSWERS:

The act of tax exemption is an act of taxation which is inherently legislative. Therefore, a
mere executive agreement cannot provide for a tax exemption.

No. Under the NIRC, for interest on investment in the Philippines in loans to be exempt
from taxation, such investment must have been made by foreign government-owned or
controlled financing institutions or international financing institutions established by

Page 19 of 450
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governments. In the case at bar, the loans would be granted by private Japanese
financial institutions and therefore, the interest thereon would not be exempt from
taxation. (BAR 1992)

In a loan agreement between the Central Bank of the Philippines (as borrower)
and private international bank (as lender), it is stipulated that all payments of
Interest by the Central Bank to the lenders shall be made free and clear from all
Philippine taxes which may be imposed thereon.

Is the stipulation valid? Explain.

ANSWER:

No. The act of tax exemption is an act of taxation which is inherently legislative and,
therefore, a mere executive agreement without concurrence by Congress cannot
provide for a tax exemption.

ALTERNATIVE ANSWER:

It is valid. The stipulation in the agreement that the lender shall be made free and clear"
from all Philippine taxes, simply meant that the Central Bank will assume the tax liability
which is not contrary to law, morals, good customs, public order or public policy. (BAR
1992)

a. Meaning of exemption from taxation


b. Nature of tax exemption
c. Kinds of tax exemption
d. Rationale/grounds for exemption
e. Revocation of tax exemption

6. Compensation and set-off

The doctrine of equitable recoupment allows a taxpayer whose claim for refund
has prescribed to offset tax liabilities with his claim of overpayment.

SUGGESTED ANSWER:

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. VST, 104 Phil. 1062 [1958]). (BAR 2009)

ABC Corporation won a tax refund case for P50 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

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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.

SUGGESTED ANSWER:

The BIR has no valid justification to withhold the TCC. Offsetting the amount of
TCC against a potential tax liability is not allowed, because both obligations are
not yet fully-liquidated. While the amount of the TCC has been determined, the
amount of deficiency tax is yet to be determined through the completion of the
audit. (PhilexMining Corporation v. CIR, 294 SCRA 687[1998]).

ALTERNATIVE ANSWER:

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 under one proceeding to
avoid multiplicity of suits, will not apply since the determination of the entitlement to the
refund was already removed from the BIR. To reopen the claim for refund in order to
give way to the introduction of evidence of a deficiency assessment will lead to an
endless litigation, which is not allowed. (CIR v. Citytrust Banking Corporation, 499
SCRA 477[2006]). (BAR 2007)

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) taxes are of distinct kind, essence and nature, and these impositions cannot be
classed in merely the same category as ordinary obligations; (2) the applicable laws
and. principles governing each are peculiar, not necessarily common, to each; and (3)
public policy is better subserved if the integrity and independence of taxes are
maintained. [Republic v. Mambulao Lumber Company, 4 SCRA 622 (1962)].

However, if the obligation to pay taxes and the taxpayers claim against the government
are both overdue, demandable, as well as fully liquidated, compensation takes place by
operation of law and both obligations are extinguished to their concurrent amounts.
[Domingo v. Garlitos, 8 SCRA 443 (1963)]. (BAR 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 and debts are of different nature and character; hence, no set-off or
compensation between these two different classes of obligations is allowed. The taxes

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assessed are the obligations of the taxpayer arising from law, while the money
judgment against the government is an obligation arising from contract, whether
express or implied. Inasmuch that taxes are not debts, it follows that the two obligations
are not susceptible to set-off or legal compensation. [Francia v. Intermediate Appellate
Court, 162 SCRA 753 (1988)].

It is only when the local tax assessment and the final judgment are both overdue,
demandable, as well fully liquidated may set-off or compensation be allowed. [Domingo
v. Garlitos, 8 SCRA 443, (1963)]. (BAR 2005)

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:

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 cannot, 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 taxe3 are due to the
government in its sovereign capacity. [Philex Mining Corp. v. CIR, GR No. 125704,
August 29, 1998). (BAR 2001)

X is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot
has an area of300square 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 PI50,000.00. 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.

ANSWER:

The income tax liability of X cannot be compensated with the amount owed by the
Government as compensation for his property expropriated. Taxes are of distinct kind,

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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. LAC, G.R 76749. June 28, 1988) (BAR 1996)

Ms. Edna Dinoso is the registered owner of a residential lot with a two-story
house situated in Naga City. The lot with an area of328 sq. meter is described and
covered by TCT No. 4739 of the Registry of Deeds of Naga City.

On September 12. 1977, a 115 sq. meter portion of Ednas property was
expropriated by the

Republic of the Philippines for the sum of P6.700.00 representing the assessed
value of the aforesaid portion: This amount was deposited by the Government in
Ednas account.

For almost ten (10) years, Edna failed to pay her real estate taxes on the same
property. Thus, on November 5, 1977, her property was sold at public auction by
the City Treasurer of Naga City to satisfy her real estate tax delinquencies
amounting to P5, 800.00. The highest bidder for the property was Angel Chua.

Edna was not present at the public auction although she later admitted having
received the notice of hearing for the petition for entry of a new certificate of title
by Angel Chua. (Both the auction sale and the final bill of sale were annotated at
the back of TCT No. 4739 by the Register of Deeds.)

On March 15, 1979, Edna filed a complaint to annul the auction sale which was
denied by the CFI Judge of Naga City. In fact, the CFI Judge ordered the TCT #
4739 of Edna be cancelled and that a new title be issued to Angel Chua.

On appeal, the Court of Appeals affirmed the CFI decision in toto. Edna then
elevated the case to the Supreme Court citing several grave errors of law, among
which are:

That her tax delinquencies (involving P5, 800.00) for non-payment of real estate
taxes were offset by the sum of P6,700.00which the government of the Philippines
owed her. She claims that her tax delinquencies have been extinguished by legal
compensation:

Discuss the merits of the appeal.

ANSWER:

The decision of the Court of Appeals affirming the CFI decision must be affirmed.

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On the procedural aspect, it has not been shown, as required under the Real Property
Tax Code that plaintiff has paid the amount for which the real property has been sold
plus interest.

On the claim of extinction of tax liability by legal compensation, there is jurisprudence to


the effect that the doctrine of equitable recoupment does not apply in this Jurisdiction.
Assuming it does, the facts of the case bear out that the Government does not owe the
plaintiff any amount. (BAR 1992)

7. Compromise
8. Tax amnesty
a. Definition
b. Distinguished from tax exemption

Which of the following are NOT usually imposed when there is a tax amnesty?
(2011 Bar Question)
(A) Civil, criminal, and administrative penalties
(B) Civil and criminal penalties
(C) Civil and administrative penalties
(D) Criminal and administrative penalties

SUGGESTED ANSWER:

(A) Civil, criminal, and administrative penalties

Distinguish a tax amnesty from a tax exemption. (3%)

SUGGESTED ANSWER:

Tax amnesty is 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. Castaneda, G.R. No. L- 46881,
1988).

Tax exemption is 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 NE 365). It is generally prospective in application. (BAR 2001)

9. Construction and interpretation


a. Tax laws
b. Tax exemption and exclusion

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

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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 V 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. (Nitqfan et, al. v, CIR, 152 SCRA 284
[1987)} (BAR 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 should not be liable to pay the sales tax. Is this claim tenable?
(5%)

SUGGESTED ANSWER:

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 cannot be permitted to
exist upon vague implications (Asiatic Petroleum Co., Ltd. V. Llanes, 49 Phil 466
[1926]). (BAR 2004)

Why are tax exemptions strictly construed against the taxpayer?

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 SCRA351). 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. (BAR 1996)

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c. Tax rules and regulations

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 Goddrich., Phils. Inc., GR No. 104171, Feb 24, 1999; Phil. Journalists
Inc. v. CIR G.R. No. 162852, Dec. 16, 2004]

XYZ Corporation, an export-oriented company, was able to secure a Bureau of


Internal Revenue (BIR) ruling in June 2005 that exempts from tax the importation
of some of its raw materials. The ruling is of first impression, which means the
interpretations made by the Commissioner of Internal Revenue are one without
established precedents. 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 the second ruling could be subject
to tax.

What are BIR rulings?

SUGGESTED ANSWERS:

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 and incidentally often contain such well-
considered and sound law, but the courts have held that they do not prevent an entire
change of front at any time and are merely advisory - sort of an information service to
the taxpayer. (Aban, Law of Basic Taxation in the Philippines, p. 149 citing Quiazon and
Lukban). (BAR 2007)

d. Penal provisions of tax laws

In criminal cases involving tax offenses punishable under the National Internal
Revenue Code (NIRC), prescription is construed strictly against the government.
(1%)

SUGGESTED ANSWER:

FALSE. [Lim v. Court of Appeals, GR No. 48134-37, Oct 18, 1990.]

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e. Non-retroactive application to taxpayers

Which of the following statement is NOT correct? (2012 BAR)

a) In case of doubt, statutes levying taxes are constructed strictly the government;
b) The construction of a statute made by his predecessors is not binding upon the
successor, if thereafter he becomes satisfied that a different construction should be
given;
c) The reversal of a ruling shall not generally be given retroactive application, if said
reversal will be prejudicial to the taxpayer;
d) A memorandum circular promulgated by the CIR that imposes penalty for violations
of certain rules need not be published in a newspaper of general circulation or official
gazette because it has the force and effect of law.

SUGGESTED ANSWER:

d) A memorandum circular promulgated by the CIR that imposes penalty for violations
of certain rules need not be published in a newspaper of general circulation or official
gazette because it has the force and effect of law.

A revenue memorandum circular shall not begin to be operative until after due notice
thereof maybe fairly presumed. (Commissioner of Internal Revenue vs. Philippine
Airlines, G.R. No. 180066, July 8, 2009)

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 P1,000,000.

Which of the following defenses may XYZ Corp. interpose in an assessment


against it by the BIR? (1%) (2013 Bar Question)

(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) None of the above.

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Section 6(B) of the NIRC authorizes the Commissioner to assess the property tax due
from a taxpayer when he believes that the report the taxpayer submitted is false,
incomplete, or erroneous. The same provision authorizes the Commissioner to amend
the return from his own knowledge and from such information he can obtain through
testimony or otherwise, which is deemed prima facie correct and sufficient for all legal
purposes.

Does a BIR ruling have a retroactive effect, considering the principle that tax
exemptions should be interpreted strictly against the taxpayer?

SUGGESTED ANSWER:

No. A BIR ruling cannot be given retroactive effect if its retroactive application is
prejudicial to the taxpayer. (Section 246, NIRC; CIR v. Court of Appeals et. al. 267
SCRA 557[1997]).

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 material 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). (BAR 2007)

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 cannot 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 32411986]), (BAR
2004)

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I. Scope and limitation of taxation
1. Inherent limitations

Enumerate the four (4) inherent limitations on taxation. Explain each item briefly.
(4%) (BAR 2009)

ANSWER:

The inherent limitations on the power to tax are:

Taxation is for a 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.

Taxation is inherently legislative. - Only the legislature has full discretion as to the
persons, property, occupation or business to be taxed provided these are all within the
States 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 176184).

Taxation is territorial. - Taxation may be exercised only within the territorial jurisdiction
of the taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing
authority may determine the place of taxation or tax situs",

Taxation is subject to international comity. - This is a limitation which is founded on


reciprocity designed to maintain a harmonious and productive relationships among the
various states. Under international comity, a state must recognize the generally-
accepted tenets of international law, among which are the principles of sovereign
equality among states and of their freedom from suit without their consent, that limit the
authority of a government to effectively impose taxes on a sovereign state and its
instrumentalities, as well as on its property held, and activities undertaken in that
capacity.

a. Public purpose
b. Inherently legislative
i. Exceptions
1. Delegation to local governments

May Congress, under the 1987 Constitution, abolish the power to tax of local
governments?

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 governments exercise of the power to tax (Sec. 5, Art X, 1987 Constitution). (BAR
2003)

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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 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. (BAR 2001)

2. Delegation to the President

3. Delegation to administrative agencies

Which statement is WRONG? (2012 BAR)

a) The power of taxation may be exercised by the government, its political subdivisions,
and public utilities;
b) Generally, there is no limit on the amount of tax that may be imposed;
c) The money contributed as tax becomes part of the public funds;
d) The power of tax is subject to certain constitutional limitations.

SUGGESTED ANSWER:

a) The power of taxation may be exercised by the government, its political subdivisions,
and public utilities

c. Territorial
i. Situs of taxation
a. Meaning

Which among the following concepts of taxation is the basis for the situs of
income taxation? (2011 Bar Question)

(A) Lifeblood doctrine of taxation


(B) Symbiotic relation in taxation
(C) Compensatory purpose of taxation

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(D) Sumptuary purpose of taxation

SUGGESTED ANSWER:

(B) Symbiotic relation in taxation

b. Situs of income tax

From what sources of income are the following persons/ corporations taxable by
the Philippine government?

- Citizen of the Philippines residing therein; [1%]


- Non-resident citizen; [1%]
- An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker; [1%]
- An alien individual, whether a resident or not of the Philippines; [1%]
- A domestic corporation; [1%)

SUGGESTED ANSWER:

(Section 23, NIRC of 1997)

A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.

A nonresident citizen is taxable only on income derived from sources within the
Philippines.

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.

An alien individual, whether a resident or not of the Philippines, is taxable only on


income derived from sources within the Philippines.

A domestic corporation is taxable on all income derived from sources within and without
the Philippines. (BAR 1998)

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?

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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 (SN1TS)
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 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.
(BAR 1997)

What is the principle of mobilia sequuntur personam in income taxation?

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. (BAR 1994)

Newtex International (Phils.) Inc. is an American firm duly authorized to engage in


business in the Philippines as a branch office. In its activity of acting as a buying
agent for foreign buyers of shirts and dresses abroad and performing liason work
between its home office and the Filipino garment manufacturers and exporters.
Newt ex does not generate any income. To finance its office expenses here, its
head office abroad regularly remits to it the needed amount. To oversee its
operations and manage its office here, which had been in operation for two (2)
years, the head office assigned three
foreign personnel.

Are the three foreign personnel subject to Philippine income tax?

ANSWER:

The three (3) foreign personnel are subject to tax on the income that they receive for
services rendered in the Philippines. Non-resident aliens are subject to tax on income
from sources within the Philippines. Income is deemed derived from sources within the
country when it is earned for services rendered in the Philippines (Sec. 22. in relation to
Sec. 36, NIRC). (BAR 1991)

1. From sources within the Philippines

Guidant Resources Corporation, a corporation registered in Norway, has a 50 MW


electric power plant in San Jose, Batangas. Aside from Guidant's income from its
power plant, which among the following is considered as part of its income from
sources within the Philippines? (2011 Bar Question)

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(A) Gains from the sale to an Ilocos Norte power plant of generators bought from the
United States.
(B) Interests earned on its dollar deposits in a Philippine bank under the Expanded
Foreign Currency Deposit System.
(C) Dividends from a two-year old Norwegian subsidiary with operations in Zambia but
derives 60% of its gross income from the Philippines.
(D) Royalties from the use in Brazil of generator sets designed in the Philippines by its
engineers.

SUGGESTED ANSWER:
(A) Gains from the sale to an Ilocos Norte power plant of generators bought from the
United States.

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 KIAs 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.

Is the position of KIA tenable? Reasons. (4%)

SUGGESTED ANSWER:

KIAs 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 the 35% tax based on its taxable income pursuant to Section
25(a)( 1) of the Tax Code of 1977. 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 from 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. KIAs income being derived from within, is subject to Philippine income tax (CIR
v. British Overseas Airways Corporation, 149 SCRA 395, [1987]).

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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 of1977) then in effect and the prevailing jurisprudence on the matter. However,
with the adoption of the National Internal Revenue Code ofl997(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 this wise should also be
considered as a correct answer, viz:

ANOTHER SUGGESTED ANSWER:

Yes. KIA is a non-resident foreign corporation which is taxable only on income from
within. The income of KIA as an international air carrier is derived from the sale of
transportation services. Compensation for services is an income from within if the
services are performed in the Philippines (Section 42(A)(3), NIRC). The origination of
the flight is determinative of the source of the income of the international air carrier. If
the flight originates in the Philippines to a foreign destination, the income is an income
from within; if it originates 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
(Section 28(A)(3)(a), NIRC). (BAR 2009)

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?

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
theTax 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. (BAR 1994)

2. From sources without the Philippines

Triple Star, a domestic corporation, entered into a Management Service Contract


with Single Star, a non-resident foreign corporation with no property in the

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Philippines. Under the contract, Single Star shall provide managerial services for
Triple Stars 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. (2014 Bar Question)

SUGGESTED ANSWER:

No. Pursuant to the case of Commissioner of Internal Revenue v. Baier-Nickel (G.R.


No. 153793, August 29, 2006), the factor which determines the source of income for
personal services is the place where the services were actually rendered. Since Single
Star, a non-resident foreign corporation, will perform all the managerial services for
Triple Stars branch in Hong Kong, all compensation income arising from the
performance of such services will be considered income from sources outside the
Philippines, and therefore not subject to Philippine income tax.

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.

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:

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

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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. (BAR 2002)

3. Income partly within and partly without the Philippines

c. Situs of property taxes


1. Taxes on real property
2. Taxes on personal property

d. Situs of excise tax


1. Estate tax
2. Donors tax

e. Situs of business tax


1. Sale of real property
2. Sale of personal property
3. Value-Added Tax (VAT)

d. International comity

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.

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.

On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA)
reiterating its demand for refund.

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 the 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

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the treaty, should be granted (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 is 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. (BAR 2009)

e. Exemption of government entities, agencies and instrumentalities

2. Constitutional limitations
a. Provisions directly affecting taxation
i. Prohibition against imprisonment for non-payment of poll tax
ii. Uniformity and equality of taxation

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%)(2013 Bar Question)

(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) It is constitutional as it applies to all persons in that class.

The ordinance imposing tax on installation managers does not violate the equal
protection clause under Section 1, Article III of the Constitution and the uniformity rule
under Section 28, Article VI of the Constitution. The equal protection clause simply
means that all persons subject to legislation shall be treated alike under like
circumstances and conditions both in privileges conferred and liabilities imposed. On
the other hand, the uniformity rule states that a tax is uniform when it operates with the
same force and effect in every place where the subject of it is found. It does not signify
an intrinsic but simply a geographical uniformity. (See: British American Tobacco v.
Camacho, G.R. No. 163583, April 15, 2009)

In the given problem, the ordinance applies to all installation manager. In other words,
the ordinance does not specifically identify who among the installation managers shall

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be liable for tax. The fact that there is only one installation manager in the municipality
does not mean that the taxing authority singled him out as the only taxable person.

Choose the correct answer. Tax laws - (1%) (2014 Bar Question)

(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

SUGGESTED ANSWER :

D. Tax laws adhere to uniformity and equality when all taxable articles or kinds of
property of the same class are taxable at the same rate.

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.

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.

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. (BAR 2003)

Explain the requirement of uniformity as a limitation in the imposition and/or


collection of taxes. [5%]

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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 & Tait 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 8L Co. v.
Yatco. 69 Phil. 420). (BAR 1998)

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 RA. 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.

Marquez and Peneyra Law Offices filed a taxpayers 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.

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Is this contention correct? Explain.

ANSWER:

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 [Tan vs. del Rosario et al
G.R No. 109289, October 3. 1994). (BAR 1995)

iii. Grant by Congress of authority to the president to impose tariff rates

iv. Prohibition against taxation of religious, charitable entities, and educational


entities

What is the rule on the taxability of income that a government educational


institution derives from its school operations? Such income is: (2011 Bar
Question)

(A) subject to 10% tax on its net taxable income as if it is a proprietary educational
institution.
(B) Exempt from income taxation if it is actually, directly, and exclusively used for
educational purposes.
(C) subject to the ordinary income tax rates with respect to incomes derived from
educational activities.
(D) Exempt from income taxation in the same manner as government-owned and
controlled corporations.

SUGGESTED ANSWER:

(B)Exempt from income taxation if it is actually, directly, and exclusively used for
educational purposes

A law imposing a tax on income of religious institutions derived from the sale of
religious articles is valid.

SUGGESTED ANSWER:

False. Congress can pass a law taxing income of religious institutions from its property
or activities used for profit but not on their income from exercise of religious activities.

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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. 386[1957J).

The Constitution provides charitable institutions, churches, parsonages 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 income tax only
c. from value-added tax only
d. from real property tax only
e. from capital gains tax only

SUGGESTED ANSWER:

I choose (d), from real property tax only. This is the connotation of the phrase and all
lands, buildings and improvements" thereby limiting the exemption to real property taxes
only (CIR v. CA, 298 SCRA 83 [1998]; Lladoc v. Commissioner, 14 SCRA 292 [1967];
Hodges v. Municipal Board of Iloilo City, 19 SCRA 28 [1965]). (BAR 2006)

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.
(5%)

SUGGESTED ANSWER:

No. The portions of the land occupied and used by the church, convent and school run
by the church are exempt from real property taxes while the portion of the land occupied
by commercial establishments and the portion, which is idle, are subject to real property
taxes. The usage of the property and not the ownership" is the determining factor
whether or not the property is taxable. [Lung Center of the Philippines v. Q.C., 433
SCRA 119 (2004)]. (BAR 2005)

XYZ Colleges is a non-stock, non-profit educational institution run by the


Archdiocese of BP City. It collected and received the following:

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A) Tuition fees
B) Dormitory fees
C) Rentals from canteen concessionaires
D) Interest from money-market
E) Donation of a lot and building by school alumni

SUGGESTED ANSWER:

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).

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(A)(3), NIRC).

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 (1998)}.

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 XIV, 1987 Constitution).

The donation to a non-stock, non-profit educational institution will be exempt from the
donors 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. XIV, 1987 Constitution if in relation to Section 101(AX3), MRC).

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Suppose that XYZ Colleges is a proprietary educational institution owned by the
Archbishops 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)). Accordingly, all of the
income enumerated in the problem will be taxable.

The donation of lot and building will likewise be subject to the donors 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(A)(3), NIRC) (BAR 2004)

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 300-square 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.

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:

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 non-profit
corporations organized for religious, charitable or social welfare purposes are exempt

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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). (BAR 2002)

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:

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 is 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; CIRv. YMCA, GR No. 124043, 1998).
(BAR 2002)

Article VII, 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 exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.

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). (

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. BAR 2000)

The Constitution exempts from taxation charitable institutions, churches,


parsonages or convents appurtenant thereto, mosques and non-profit cemeteries

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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.

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. (BAR
1996)

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?

ANSWER:

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).

For the same reasons, the University of Bigaa is not liable to pay income taxes for the
operation of the bookstore, since this is an ancillary activity the conduct of which is
carried out within the school premises.

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. (BAR 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 PI,000,000.00 which they used for
the support of the orphans in the city. Who are liable to pay taxes?

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ANSWER:

The following are liable to pay Income taxes:

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
promoting and operating the Binatra Show, they engaged in an activity conducted for
profit. (Ibid.)

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. (BAR 1994)

v. Prohibition against taxation of non-stock, non-profit educational Institutions

A group of philanthropists organized a non-stock, non-profit hospital for


charitable purposes to provide medical services to the 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? (2013 Bar
Question)

SUGGESTED ANSWER:

The non-stock, non-profit hospitals income from paying patients is subject to a


preferential income tax of 10%.

In Commissioner of Internal Revenue v. St. Lukes Medical Center, the Supreme Court
laid down the rules on the treatment of icome tax of non-profit hospitals. Pursuant to
Sec. 30(E) and (G) of the NIRC, these hospitals are exempt from income tax with
respect to their activities conducted exclusively for charitable or social welfare purposes.
However, they are subject to a preferential income tax rate of 10% under charitable or
social welfare purposes.

Under Article XIV, Section 4 (3) of the 1987 Philippine Constitution, all revenues
and assets of non-stock, non-profit educational institutions, used actually,
directly and exclusively for educational purposes, are exempt from taxes and
duties. Are income derived from dormitories, canteens automatically exempt from
taxation? Explain. (5%)

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SUGGESTED ANSWER:

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 nonstock 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. (BAR 2000)

vi. Majority vote of Congress for grant of tax exemption


vii. Prohibition on use of tax levied for special purpose
viii. Presidents veto power on appropriation, revenue, tariff bills
ix. Non-impairment of jurisdiction of the Supreme Court
x. Grant of power to the local government units to create its own sources of
revenue
xi. Flexible tariff clause

Which of the following propositions may now be untenable:


A) The court should construe a law granting tax exemption strictly against the
taxpayer.
B) The court should construe a law granting a municipal corporation the power to
tax most strictly.
C) The Court of Tax Appeals has jurisdiction over decisions of the Customs
Commissioner in cases involving liability for customs duties.
D) The Court of Appeals has jurisdiction to review decisions of the Court of Tax
Appeals.
E) The Supreme Court has jurisdiction to review decisions of the Court of
Appeals.

Justify your answer or choice briefly. (5%)

SUGGESTED ANSWER:

B. 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). Province of Laguna et.
al 306 SCRA 750 [1999). Considering that inasmuch as the power to tax may be

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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:
Of 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
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. (BAR 2004)

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. (BAR 2001)

In view of the unfavorable balance of payment condition and the increasing


budget deficit, the President of the Philippines. upon recommendation of the
National Economic and Development Authority, issues during a recess of
Congress an Executive Order imposing an additional duty on all imports at the
rate of ten (10%) percent ad valorem. The Executive Order also provides that the
same shall take effect immediately. Ricardo San Miguel, an importer, questions
the legality of the Executive Order on the grounds that only Congress has the
authority to fix the rates of import duties and, in any event, such an Executive
Order can take effect only thirty (30) days after promulgation and the President
has no authority to shorten said period.

Are the objections of Mr. San Miguel tenable?

ANSWER:

No. the objections are not tenable as the Executive Order cannot take effect
immediately". Being an external law and having the effect of law, the Executive Order

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cannot become effective without publication, a requirement of due process (Tanada vs.
Tuvera, 136 SCRA27; Executive Order No. 202).

ALTERNATIVE ANSWER:

Under the Flexible Tariff Clause (Sec. 401, Tariff and Customs Code), any order issued
by the President thereunder can generally take effect only thirty (30) days after its
issuance. In cases however of an order imposing additional import duties, the law
provides that the same can take effect immediately. (BAR 1991)

xii. Exemption from real property taxes

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
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.

Was the assessment proper? (2013 Bar Question)

SUGGESTED ANSWER:

The assessment was proper.

Under Section 217 of the LGC, 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. A related and complementary provision is Section 234(a) of the LGC
which provides that a real property owned by the Republic of the Philippines or any of
its political subdivisions is exempt from realty taxes, except when the beneficial use
thereof has been granted, for consideration or otherwise, to a taxable person.

In the given problem, Mr. Arnado, as lessee of the land owned by the Municipality, is the
actual user of the land and is liable for the realty taxes. Therefore, the assessment was
proper.

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.

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A) Are the reclaimed properties registered in the name of LLL subject to real
property tax?

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 fastfood restaurants J Burgers, G Pizza, and K Chicken? (2015 Bar
Question)

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 fastfood restaurant, hence
the reclaimed properties are subject to real property tax.

The Constitution provides charitable institutions, churches, parsonages 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 income tax only
c) from value-added tax only
d) from real property tax only
e) from capital gains tax only

SUGGESTED ANSWER:

I choose (d), from real property tax only. This is the connotation of the phrase and all
lands, buildings and improvements" thereby limiting the exemption to real property taxes
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only (CIRv. CA, 298 SCRA 83 [1998]; Lladoc v. Commissioner, 14 SCRA 292 [1967];
Hodges v. Municipal Board of Iloilo City, 19 SCRA 28 [1965]). (BAR 2006)

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.
(5%)

SUGGESTED ANSWER:

No. The portions of the land occupied and used by the church, convent and school run
by the church are exempt from real property taxes while the portion of the land occupied
by commercial establishments and the portion, which is idle, are subject to real property
taxes. The usage of the property and not the ownership" is the determining factor
whether or not the property is taxable. [Lung Center of the Philippines v. Q.C., 433
SCRA 119 (2004)]. (BAR 2005)

Article VII, 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 exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.

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). (

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. (BAR 2000)

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The Constitution exempts from taxation charitable institutions, churches,
parsonages or convents appurtenant thereto, mosques and non-profit cemeteries
and lands, buildings and improvements actually, directly and exclusively used for
religious, charitable and educational purposes.

xiii. No appropriation or use of public money for religious purposes


Origin of Revenue and Tariff Bills

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.

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 latters 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). (BAR
1997)

b. Provisions indirectly affecting taxation


i. Due process
ii. Equal protection

What is the rational basis test? Explain briefly. (2%) (2010 BAR)

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

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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, GR No. 163583, April 15, 2009).

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 ordinance-imposed 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 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 the case at
bar, the imposition of the occupation tax to persons exercising various professions in
the city is well within the authority ofthe City of Manila (Punsalanet. al. v. City of Manila,
95 Phil. 46 [1954]). (BAR 2009)

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%)

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)] (BAR 2004)

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

SUGGESTED ANSWER:

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. Vaho, 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[1968D*
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}).

ANOTHER ANSWER:

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. (BAR 2004)

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%)

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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.

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 Appeals. et al,
G.R. No. 127410, January 20. 19991 (BAR 2000)

iii. Religious freedom


iv. Non-impairment of obligations of contracts

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 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. Philadelphia24 How. 300 [18601% 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. Insular Collector of Customs, 12 PhiL
146 [1915)]. (BAR 2004)

"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.

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The two laws extending the tax exemptions were revoked by Congress before
their expiry dates.

Were the revocations constitutional?

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. (BAR 1997)

J. Stages of taxation

Enumerate the 3 stages or aspects of taxation. Explain each. 5%

SUGGESTED ANSWER:

1. Levy. This refers to the enactment of a law by Congress authorizing the imposition of
a tax.
2. Assessment and Collection. This is the act of administration and implementation of
the tax law by the executive through its administrative agencies.
3. Payment. This is the act of compliance by the taxpayer, including such options,
schemes or remedies as may be legally available to him. (BAR 2006)

1. Levy
2. Assessment and collection

Is the approval of the court, sitting as probate or estate settlement court, required
in the enforcement and collection of estate tax? Explain. (10%)

SUGGESTED ANSWER:

No. The approval of the court, sitting in probate, is not a mandatory requirement in the
collection of estate tax. On the contrary, under Section 94 of the NIRC, it is the probate
or settlement court which is forbidden to authorize the executor or judicial administrator

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of the decedents estate, to deliver any distributive share to any party interested in the
estate, unless a certification from the Commissioner of Internal Revenue that the estate
tax has been paid is shown. [Marcos U v. Court of Appeals, 273 SCRA 47 (1997)].
(BAR 2005)

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 PI, 000,000. But he ignored the notice. Last month, the BIR affected
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 VCCs contention correct? (5%)

SUGGESTED ANSWER:

No. VCCs 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]). (BAR 2004)

3. Payment

True or False. The Tax Code allows an individual taxpayer to pay in two equal
installments, the first installment 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. (2010
Bar Question)

SUGGESTED ANSWER:

True. [Sec. 56(A)(A), NIRC]

4. Refund

The actual effort exerted by the government to effect the exaction of what is due
from the taxpayer is known as: (2011 Bar Question)
(A) assessment.
(B) levy.
(C) payment.
(D) collection.

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SUGGESTED ANSWER:

(D) collection

Although the power of taxation is basically legislative in character, it is NOT the


function of Congress to: (2011 Bar Question)
(A) fix with certainty the amount of taxes.
(B) collect the tax levied under the law.
(C) identify who should collect the tax.
(D) determine who should be subject to the tax.

SUGGESTED ANSWER:

(B) collect the tax levied under the law

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

SUGGESTED ANSWER:

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. (Secs. 76 and 204, NIRC). Moreover, the law provides
that the Commissioner may, even without a written claim therefore, 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). (BAR 2002)

K. Definition, nature, and characteristics of taxes


L. Requisites of a valid tax
M. Tax as distinguished from other forms of exactions
N. Kinds of taxes

Distinguish direct taxes from indirect taxes". Give examples. 5%

SUGGESTED ANSWER:

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 part of the purchase price (Maceda v. Macaraig, Jr., 223 SCRA 217
[1993]). Examples of direct taxes are income tax, estate tax and donors tax. Examples
of indirect taxes are value-added tax, percentage tax and excise tax on excisable
articles. (BAR 2006)

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Distinguish direct taxes from indirect taxes, and give an example for each one.
(2%)

SUGGESTED ANSWER:

Direct taxes are taxes wherein either 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 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. (Aban, Law of
Basic Taxation p. 20).

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. (BAR 2001)

Among the taxes imposed by the Bureau of Internal Revenue are income tax,
estate and donors tax, value-added 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. (BAR 2000)

Distinguish a direct from an indirect tax.

ANSWER:

A direct tax is one in which the taxpayer who pays the tax is directly liable therefor, that
is, the burden of pay-ing the tax falls directly on the person paying the tax.

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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) (BAR 1994)

II. National Internal Revenue Code (NIRC) of 1997, as amended

What kind of taxes, fees and charges are considered as National Internal Revenue
Taxes under the National Internal Revenue Code (NIRC)?

SUGGESTED ANSWER:

The following taxes, fees and charges are considered to be National Internal Revenue
Taxes under the National Internal Revenue Code:

a) Income tax;
b) Estate and donors 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). (BAR 2007)

A) Income taxation
1. Income tax systems
a. Global tax system

Discuss the meaning of the Global and Schedular systems of taxation.

ANSWER:

A global system of taxation is one where the taxpayer is required to lump up all items of
income earned during a taxable period and pay under a single set of income tax rules
on these different items of Income.

A schedular system of taxation provides for a different tax treatment of different types of
income so that a separate tax return is required to be filed for each type of income and
the tax is computed on a per return or per schedule basis. (BAR 1997)

Distinguish schedular treatment" from global treatment" as used in income


taxation.

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ANSWER:

Distinction between schedular treatment" and global treatment as used in income


taxation:

Under a schedular system, the various types/items of income (Le. 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.
(BAR 1994)

b. Schedular tax system


c. Semi-schedular or semi-global tax system

The Philippines adopted the semi-global tax system, which means that: (2012
BAR)

a) All taxable incomes, regardless of the nature of income, are added together to arrive
at gross income, and all allowable deductions are deducted from the gross income to
arrive at the taxable income;
b) All incomes subject to final withholding taxes liable to income tax under the schedular
tax system, while all ordinary income as well as income not subject to final
withholding tax under the global tax system;
c) All taxable incomes are subject to final withholding taxes under the schedular tax
system;
d) All taxable incomes from sources within and without the Philippines are liable to
income tax.

SUGGESTED ANSWER:

b) All incomes subject to final withholding taxes liable to income tax under the schedular
tax system, while all ordinary income as well as income not subject to final withholding
tax under the global tax system.

To which system would you say that the method of taxation under the National
Internal Revenue Code belongs?

ANSWER:

The method of taxation under the NIRC belongs to a system which is partly schedular
and partly global. (BAR 1997)

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2. Features of the Philippine income tax law

What are the basic features of the present income tax system"?

ANSWER:

OUT present income tax system can be said to have the following basic features:

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.

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:

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.

The income tax is generally imposed via the self- assessment system or pay-as-you-file
concept of imposing the tax although certain incomes, including income of non-
residents, are taxed on the pay-as-you-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 non-residents are not subject to Income tax. (BAR 1996)

a) Direct tax
b) Progressive

An example of a tax where the concept of progressivity finds application is the:


(2011 Bar Question)

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(A) income tax on individuals.
(B) excise tax on petroleum products.
(C) value-added tax on certain articles.
(D) amusement tax on boxing exhibitions.

SUGGESTED ANSWER:

(A) income tax on individuals.

c) Comprehensive
d) Semi-schedular or semi-global tax system

To which system would you say that the method of taxation under the National
Internal Revenue Code belongs?

ANSWER:

The method of taxation under the NIRC belongs to a system which is partly schedular
and partly global. (BAR 1997)

3. Criteria in imposing Philippine income tax


a) Citizenship principle
b) Residence principle
c) Source principle

Alain Descartes, a French citizen permanently residing in the Philippines,


received several items during the taxable year. Which among the following is NOT
subject to Philippine income taxation? (2011 Bar Question)
(A) Consultancy fees received for designing a computer program and installing the
same in the Shanghai facility of a Chinese firm.
(B) Interests from his deposits in a local bank of foreign currency earned abroad
converted to Philippine pesos.
(C) Dividends received from an American corporation which derived 60% of its annual
gross receipts from Philippine sources for the past 7 years.
(D) Gains derived from the sale of his condominium unit located in The Fort, Taguig City
to another resident alien.

SUGGESTED ANSWER:

(A) Consultancy fees received for designing a computer program and installing the
same in the Shanghai facility of a Chinese firm.

Income from the performance of services is treated as income from within the
Philippines, if: (2012 BAR)

a) The payment of compensation for the service is made in the Philippines;

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b) The contract calling for the performance of services is signed in the
Philippines;
c) The service is actually performed in the Philippines;
d) The recipient of service income is a resident of the Philippines.

SUGGESTED ANSWER:

c) The service is actually performed in the Philippines

Section 42, NIRC.

Pacific, Inc. is engaged in overseas shipping. It time chartered one of its ships to
a Japanese company on a five- year term. The charter was consummated through
the efforts of Kamino Moto, a Tokyo based broker. The negotiation took place in
Tokyo. The agreement calls for Pacific, Inc. to pay Kamino Moto $50,000.00. Your
opinion is sought whether Pacific, Inc. should withhold the tax before sending the
compensation of Kamino Moto.

ANSWER:

The compensation of Kamino Moto is not subject to withholding tax. Compensation for
labor or personal services performed outside the Philippines are considered as income
from sources without the Philippines (Sec. 36 (c) (3) and (a) (3). Kamino Motos efforts
in consummating the Charter are a form of labor or services. Considering further than
Kamino Moto is a Tokyo based broker, presumably a non-resident foreign corpora-tion,
it is taxable only on income within the Philippines. Since the contract was consummated
in Japan. Kamino Motos compensation, therefore, is not subject to withholding tax.

ALTERNATIVE ANSWERS:

Taxes should not be withheld as the income was derived from an activity outside the
country and. therefore, from sources outside the Philippines. It has been held in
Commissioner v. Japan Air Lines, 202 SCRA 450 that for the source of income to be
considered as coming from the Philippines, it is sufficient that the income is derived
from activities within the country. The time chartering of the ship occurred outside the
Philippine territory. Therefore, income derived therefrom is not subject to income taxes
that may be withheld at source.

Kamino Moto is a non-resident alien not engaged in trade or business in the Philippines.
According to Section 25 of the NIRC, he is liable to pay income tax if the compensation
paid by Pacific is compensation income derived from sources within, the Philippines.
However, the brokerage service of Kamino Moto was rendered in Tokyo. Applying the
source- rule in Section 36 of the NIRC, the income derived by the taxpayer is income
derived from sources outside the Philippines. Thus, the compensation of Kamino Moto
is not subject to Philippine income tax. Pacific Inc. should not withhold income tax on
the payment. (BAR 1993)

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4. Types of Philippine income tax
5. Taxable period
a) Calendar period

An individual taxpayer can adopt either the calendar or fiscal period for purposes
of filing his income tax return.

SUGGESTED ANSWER:

FALSE. [Sec. 43, NIRC.]

b) Fiscal period

An individual taxpayer can adopt either the calendar or fiscal period for purposes
of filing his income tax return.

SUGGESTED ANSWER:

FALSE. [Sec. 43, NIRC.]

c) Short period

An individual taxpayer can adopt either the calendar or fiscal period for purposes
of filing his income tax return. (2010 Bar Question)

SUGGESTED ANSWER:

False. (Sec. 43, NIRC)

Which among the following taxpayers is required to use only the calendar year
for tax purposes? (2011 Bar Question)

(A) Partnership exclusively for the design of government infrastructure projects


considered as practice of civil engineering.
(B) Joint-stock company formed for the purpose of undertaking construction projects.
(C) Business partnership engaged in energy operations under a service contract with
the government.
(D) Joint account (cuentas en participacion) engaged in the trading of mineral ores.

SUGGESTED ANSWER:

(A) Partnership exclusively for the design of government infrastructure projects


considered as practice of civil engineering.

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6. Kinds of taxpayers
a) Individual taxpayers
i. Citizens
ii. Aliens

Pierre de Savigny, a Frenchman, arrived in the Philippines on January 1, 2010 and


continued to live and engage in business in the Philippines. He went on a tour of
Southeast Asia from August 1 to November 5, 2010. He returned to the
Philippines on November 6, 2010 and stayed 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, Pierres taxable
status is that of: (2011 Bar Question)

(A) a non-resident alien not engaged in trade or business in the Philippines.


(B) a non-resident alien engaged in trade or business in the Philippines.
(C) a resident alien not engaged in trade or business in the Philippines.
(D) a resident alien engaged in trade or business in the Philippines.

SUGGESTED ANSWER:

(B) a non-resident alien engaged in trade or business in the Philippines.

iii. Special class of individual employees


a) Minimum wage earner

b) Corporations

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 bylaw 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

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Tiong Bio v. CIR, 4 SCRA 986 [1962D. 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. (BAR 2004)

i. Domestic corporations
ii. Foreign corporations

A resident corporation is one that is: (2012 BAR)


a) Organized under the laws of the Philippines that does business in another country;
b) Organized under the laws of a foreign country that sets up a regional headquarter in
the Philippines doing product promotion and information dissemination;
c) Organized under the laws of the Philippines that engages business in a special
economic zone;
d) Organized under the laws of a foreign country that engages in business in Makati
City, Philippines.

SUGGESTED ANSWER:

d) Organized under the laws of a foreign country that engages in business in Makati
City, Philippines
Section 22 (H), NIRC.

Aplets Corporation is registered under the laws of the Virgin Islands. It has
extensive operations in Southeast Asia. In the Philippines, Its products are
imported and sold at a mark-up by its exclusive distributor, Kim's Trading, Inc.
The BIR compiled a record of all the imports of Kim from Aplets and imposed a
tax on Aplets net income derived from its exports to Kim. Is the BIR correct?
(2011 Bar Question)

(A) Yes. Aplets is a non-resident foreign corporation engaged in trade or business in the
Philippines.
(B) No. The tax should have been computed on the basis of gross revenues and not net
income.
(C) No. Aplets is a non-resident foreign corporation not engaged in trade or business in
the Philippines.
(D) Yes. Aplets is doing business in the Philippines through its exclusive distributor
Kim's Trading. Inc.

SUGGESTED ANSWER:

(C) No. Aplets is a non-resident foreign corporation not engaged in trade or business in
the Philippine

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iii. Joint venture and consortium

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.

Does the JVA entered into by and between Weber and Prime create a separate
taxable entity? Explain briefly.

SUGGESTED ANSWER:

The JVA entered into between Weber and Prime does not create a separate taxable
entity. The joint venture is formed for the purpose of undertaking construction projects;
hence, is not considered as a corporation for income tax purposes. (Section 22(B),
NIRC). (BAR 2007)

c) Partnerships
d) General professional partnerships

A general professional partnership (GPP) is one: (2012 BAR)

a) That is registered as such with the Securities and Exchange Commission and
the Bureau of Internal Revenue;
b) That is composed of individuals who exercise a common profession;
c) That exclusively derives income from the practice of the common profession;
d) That derives professional income and rental income from property owned by it.

SUGGESTED ANSWER:

c) That exclusively derives income from the practice of the common profession
Section 26, NIRC.

[Note: The question is unfair because it gives an initial impression that the examiner is
asking the statement which best characterizes a GPP but the real question is found
after the enumeration of the choices which might not be not be noticed by the
examinee.]

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:

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Sec. 6. General Professional Partnership. -The general professional partnership
and the partners are covered by RA. 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.

Is Revenue Regulation No. 2-93 now considered as having adopted a gross


income method instead of retaining the net income taxation scheme? Explain.

ANSWER:

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.
(BAR 1995)

e) Estates and trusts

Johnny transferred a valuable 10-door commercial apartment to a designated


trustee, Miriam, naming in the trust instrument Santino, Johnnys 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.

What advice will you give the trustee? Explain. (3%)

SUGGESTED ANSWER:

I will advise the trustee that she has nothing to pay in annual income taxes because the
trusts 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 (Section 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%)

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SUGGESTED ANSWER:

No, the trustee has to pay the income tax on the trusts net income determined annually
if 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 o the beneficiary
depending on the provision for distribution of income following the one-layer taxation
scheme (Section 61(A), NIRC). (BAR 2009)

f) Co-ownerships

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 is-sued against each of them for the years 1989 to 1993,
inclusive, as having entered into an unregistered partnership. Were the
assessments justified?

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 at 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 dear intention of the co-owners who are only
awaiting liquidation of the estate. (BAR 1997)

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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 PI,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?

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 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 A by Noel and Jovy Langit
at a profit of PI,000,000.00. in the case of Pascual and Dragon u. 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.

The BIR also claims that the sale of parcel B should be taxed as a sale by a
corporation. Is the BIR correct?

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. (BAR 1994)

Roberto Ruiz and Conrado Cruz bought three (3) parcels of land from Rodrigo
Sabado on 4 May 1976. Then on 8 July 1977, they bought two (2) parcels of land
from Miguel Sanchez. In 1988, they sold the first three parcels of land to Central

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Realty, Inc. In 1989, they sold the two parcels to Jose Guerrero. Ruiz and Cruz
realized a net profit of P100,000.00 forthesalein 1988 and PI50,000.00for the sale
in 1989. The corresponding capital gains taxes were individually paid by Ruiz and
Cruz.

On 20 September 1990, however, Ruiz and Cruz received a letter from the
Commissioner of Internal Revenue assessing them deficiency corporate income
taxes for the years 1988 and 1989 because, according to the Commissioner,
during said years they, as co-owners in the real estate transactions, formed an
unregistered partnership or joint venture taxable as a corporation and that the
unregistered partnership was subject to corporate income tax, as distinguished
from profits derived from the partnership by them, which is subject to individual
income tax.

Are Robert Ruiz and Conrado Cruz liable for deficiency corporate income tax?

ANSWER:

Roberto Ruiz and Conrado Cruz are not liable for corporate income tax. Abandoning
evidently the Gatchalian rule, the Supreme Court in a recent ruling (Pascual vs. Court of
Tax Appeals, G.R No. 78133, 18 Oct. 1988), held that isolated transactions by two or
more persons do not warrant their being considered as an unregistered partnership.
They will instead be considered as mere co-owners; no corporate income tax is due on
mere co-ownerships. It was, therefore correct for Ruiz and Cruz to merely pay their
individual income tax liabilities on the real estate transactions. (BAR 1991)

7. Income taxation
a. Definition
b. Nature
c. General principles

8. Income
a. Definition
b. Nature
c. When income is taxable
i. Existence of income
ii. Realization of income

Income is considered realized for tax purposes when: (2011 Bar Question)

(A) it is recognized as revenue under accounting standards even if the law does not do
so.
(B) the taxpayer retires from the business without approval from the BIR.
(C) the taxpayer has been paid and has received in cash or near cash the taxable
income.

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(D) the earning process is complete or virtually complete and an exchange has taken
place.

SUGGESTED ANSWER:

(D) the earning process is complete or virtually complete and an exchange has taken
place.

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%)(2013 Bar Question)

(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) She had no taxable income since moral damages are compensatory.
Exemplary and moral damages awarded to a party-litigant are not considered taxable
income (America N.A.-Manila Branch vs. Commissioner of Internal Revenue, CTA Case
No. 6144, March 14, 2005).

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. (2014 Bar Question)

SUGGESTED ANSWER :

No. Since Hopeful Corporation exercised its right to redeem the property, Generous
Bank is not liable to pay capital gains tax on the foreclosure sale. As stated in the
analogous case of Supreme Transliner, Inc., v. BPI Family Savings Bank, Inc. (G.R. No.
165617, February 25, 2011, 644 SCRA 59), Rev. Regs. No. 4-99 expressly provides
that if a mortgagor exercises his right of redemption within one year from the issuance
of the certificate of sale, no capital gains tax shall be imposed because no sale or
transfer of real property was realized. It is only in case of non-redemption by Hopeful
Corporation that the obligation to pay capital gains tax arises, which shall be based on
the bid price of the highest bidder. The tax will be imposed only upon the expiration of

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the one-year period of redemption. Furthermore, the obligation to pay the capital gains
tax would primarily fall on the mortgagor, Hopeful Corporation, and not on Generous
Bank.

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.

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. 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-192- 2001, October 17, 2001).

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.

SUGGESTED ANSWER:

Yes. The sale by Weber and Prime of their respective shares to third parties is a closed
and completed transaction resulting in the realization of income, subject to income tax
and to the expanded withholding tax. (BIR Ruling DA-228-2006) (BAR 2007)

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.

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

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dividends will be subject to income tax. (Section 24(B)(2); Section 25(A)&(B); Section
28(B)(5)(b), 1997 Tax Code) (BAR 2003)

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?

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.

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. (BAR 1994)

Cebu Development Inc. (CDI) has an authorized capital stock of P5,000,000,00


divided into 50,000 shares with a par value of One Hundred Pesos (P100.00) per
share. Of the authorized capital stock, twenty-five thousand (25,000) shares have
been subscribed. Mr. Juan Legaspi is a stockholder of CDI where he has
subscription amounting to 13,000 shares. To fully pay his unpaid subscription in
the amount of P950.000.00, Mr. Legaspi transferred to the corporation a parcel of
land that he owns by virtue of a Deed of Assignment. Upon investigation, the BIR
discovered that Mr. Legaspi acquired said property for only P500,000.00.

Is Mr. Legaspi liable for any taxable gain?

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ANSWER:

The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his
unpaid subscription did not increase his stockholdings in the corporation. It cannot be
said that he acquired control of the corporation by virtue of the transfer of the land. His
percentage of stockholdings in the capital stock of the corporation remains the same
after the transfer as before. Therefore, Mr. Legaspi derived taxable gain for his
economic gain which was realized by virtue of the exchange of the land for the liability
for the subscription.

ALTERNATIVE ANSWER:

Mr. Legaspi is not liable for any taxable gain. The transaction amounted to an exchange
of shares of property for shares of stock as a result of which the property transferor
acquired control of the corporation. The 13,000 shares of stock acquired in exchange of
property was more than fifty percent (50%) of the total subscribed capital stock of Cebu
Development, Inc. (CDI) that qualified the transaction as a tax-exempt under the
provisions of Sec. 34 (c) (2) of the National Internal Revenue Code.

Is the CDI liable for any taxable gain?

ANSWER:

CDI Itself Is not liable for any taxable gain since subscription payments are not
considered as taxable income being merely investments in the corporation.
However, a taxable incidence may occur as and when the corporation sells the
parcel of land for a price over and above the value of the shares of stock or in this
case over and above P950,000.00. Until such time, however, there is no realizable
income on the part of the corporation. (BAR 1991)

iii. Recognition of income

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%)(2013 Bar Question)

(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.

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(D) Mr. A is guilty for failing to consult his accountant.

SUGGESTED ANSWER:

(A) Mr. A is not guilty of fraud as he simply followed the advice of his lawyer.

In Santos v. People of the Philippines and BIR, the Court of Tax Appeals (CTA)
acquitted Santos from the criminal case of tax evasion and ruled that failure to supply
correct and accurate information must be fully established as a positive act or state of
mind; it cannot be presumed nor attributed to mere inadvertent or negligent acts.
Moreover, the CTA reiterated the doctrine in Yulivo Sons hardware v. Court of Tax
Appeals (G.R. No. L- 13203), January 28, 1961, 1 SCRA 169) that mere
understatement of a tax is not itself proof of fraud for the purpose of tax evasion.
In the present case, Mr. A relied in good faith on the expertise of his lawyer in not
declaring his income for that year. Therefore, he is not guilty of fraud.

iv. Methods of accounting

A corporation may change its taxable year to calendar or fiscal year in filing its
annual income tax return, provided: (2011 Bar Question)

(A) it seeks prior BIR approval of its proposed change in accounting period.
(B) it simultaneously seeks BIR approval of its new accounting period.
(C) it should change its accounting period two years prior to changing its taxable year.
(D) its constitution and by-laws authorizes the change.

SUGGESTED ANSWER:

(A) it seeks prior BIR approval of its proposed change in accounting period.

The appropriate method of accounting for a contractor on his long-term


construction contract (i.e., it takes more than a year to finish) is: (2012 BAR)

a) Cash method;
b) Accrual method;
c) Installment sale method;
d) Percentage of completion method.

SUGGESTED ANSWER:

d) Percentage of completion method


Section 127, NIRC.

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d. Tests in determining whether income is earned for tax purposes
i. Realization test
ii. Claim of right doctrine or doctrine of ownership, command, or control

Mr. Lajojo is a big-time swindler. In one year he was able to earn PI 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:

The income tax applies only to legal income, not to illegal income:

Mr. Lajojos 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

How will you rule on each of the three grounds for the protest? Explain.

ANSWER:

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.

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 us. 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. (Janies us. U.S.) (BAR
1995)

iii. Economic benefit test, doctrine of proprietary interest


iv. Severance test
v. All events test

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What is the all event test? Explain Briefly. (2%)

SUGGESTED ANSWER:

The all events test is a test applied in the realization of income and expense by an
accrual-basic taxpayer. The test requires (1) the fixing to the 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 I the gross income
or deductions during the taxable year. (CIR v. Isabela Cultural Corporation, GR No.
172231, Feb 12, 2007).

The "all events test" refers to: (2012 BAR)

a) A person who uses the cash method where all sales have been fully paid by the
buyers thereof;
b) A person who uses the installment sales method, where the full amount of
consideration is paid in full by the buyer thereof within the year of sale;
c) A person who uses the accrual method, whereby an expense is deductible for the
taxable year in which all the events had occurred which determined the fact of the
liability and the amount thereof could be determined with reasonable accuracy;
d) A person who uses the completed method, whereby the construction project has
been completed during the year the contract was signed.

SUGGESTED ANSWER:

c) A person who uses the accrual method, whereby an expense is deductible for the
taxable year in which all the events had occurred which determined the fact of the
liability and the amount thereof could be determined with reasonable accuracy.

The accrual of income and expense is permitted when the all-events test has been met.
This test requires: (1) fixing of a right to income or liability to pay; (2) the availability of
the reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy. However, the test
does not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all- events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it must be determined with reasonable
accuracy. (Commissioner of Internal Revenue vs. Isabela Cultural Corporation, G.R.
No. 172231, February 12, 2007)

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YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to
defend the corporations 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 YYYs 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 is determined with
reasonable accuracy. The 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, SIS SCRA 556 [2007]). (BAR 2009)

9. Gross income
a. Definition

Congress enacts a law imposing a 5% tax on the 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 PI 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%

SUGGESTED ANSWER:

Yes. The term gross receipts is broad enough to include income not physically
received but constructively received by the taxpayer. After all, the amount withheld is
paid to the government on its behalf, in satisfaction of its withholding taxes. The fact that
it did not actually receive the amount does not alter the fact that it is remitted for its
benefit 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. Bank of
Commerce, 459 SCRA 638 (20051; CIR v. Solidbank Corp., 416 SCRA 436 [2003]; cm
v. China Bank, 403 SCRA 634 [20030. (BAR 2006)

What is "gross income" for purposes of the Income tax?

ANSWER:

Gross Income means all income from whatever source derived, including (but not
limited to) compensation for services, including fees, commissions, and similar items;

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gross Income from business; gains derived from dealings in property; interest: rents:
royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive
share of the gross income of general professional partnership (Sec. 28, NIRC).

ALTERNATIVE ANSWER:

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.

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 and from incidental or outside operations or sources (Sec. 43,
Rev. Reg. No. 2). (BAR 1995)

How does income" differ from capital"? Explain.

ANSWER:

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 Rafferty, 38 Phil. 414). (BAR 1995)

In 1990, X started constructing a commercial building with spaces for lease to the
public. X required Y, a prospective lessee to sign a pre-lease agreement, which
principally provided: (a) that the lessee shall extend to the lessor a noninterest
bearing loan of P100,000.00 payable within twelve (12) months: and

(b) that in consideration of the loan, the lessee shall be given preference in the
lease and his rentals shall not be increased while the loan remains unpaid. Upon
completion of the building, Y extended the loan ofP100.000.00 to X and he was
given a space in its ground floor. May the BIR consider the P100,000.00 as taxable
income of X. Reasons.

ANSWER:

Sec. 28 of the NIRC defines gross income as all income from whatever source derived
including but not limited to the following items.

Compensation for services, including fees, commissions, and similar items;


Gross income derived from business;
Gains derived from dealings in property:
Interest;

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Rents;
Royalties;
Dividends;
Annuities
Prizes and winnings;
Pensions; and
Partners distributive share of the gross income of general professional partnership.

Further, under Sec. 36 of Revenue Regulations No. 2, taxable income in a broad sense
means all wealth which flows into the taxpayer other than as a mere return of capital. It
includes the forms of the income specifically described as gains and profits, including
gains derived from the sale or other disposition of assets. Gross income, means income
(in the broad sense) less income which is by statutory provision or otherwise exempt
from the tax imposed by law.

Applying the above provision of law to the case at bar, the amount of P 100,000.00
being a loan or indebtedness is an outlay, not a taxable income or gain. (BAR 1993)

ALTERNATIVE ANSWER:

The P100,000.00 may not be considered taxable income of X. as the same is only a
loan that would eventually have to be paid. To the extent that X saved in interest
payments, the reasonable value thereof may perhaps be considered as income to X.
but the loan, however, may not strictly be considered interest-free as value therefor was
given by X in return.

b. Concept of income from whatever source derived

There is no taxable income until such income is recognized. Taxable income is


recognized when the: (2011 Bar Question)

(A) taxpayer fails to include the income in his income tax return.
(B) income has been actually received in money or its equivalent.
(C) income has been received, either actually or constructively.
(D) transaction that is the source of the income is consummated.

SUGGESTED ANSWER:

(C) income has been received, either actually or constructively.

In 2010, Juliet Ulbod earned P500,000.00 as income from her beauty parlor and
received P250,000.00 as Christmas gift from her spinster aunt. She had no other
receipts for the year. She spent P150,000.00 for the operation of her beauty
parlor. For tax purposes, her gross income for 2010 is: (2011 Bar Question)

(A) P750,000.00.

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(B) P500,000.00.
(C) P350,000.00.
(D) P600,000.00.

SUGGESTED ANSWER:

(B) P500,000.00.

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%) (2013 Bar Question)

(A) No, she had no income because she had no right to the mistakenly credited funds.
(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) Yes, income is income regardless of the source.

Section 32 of the NIRC defines gross income as all income derived from whatever
source. Consequently, the flow of wealth, without any distinction as to the lawfulness of
its source, is subject to income tax. In other words, the phrase income from whatever
source discloses a legislative policy to include all income not expressly exempted
within the class of taxable income under the law.

c. Gross income vis--vis net income vis--vis taxable income

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)
(BAR 2000)

d. Classification of income as to source


i. Gross income and taxable income from sources within the Philippines

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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?

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%; 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 are 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 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 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. (BAR 1997)

ii. Gross income and taxable income from sources without the Philippines

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.

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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:

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. (BAR 2002)

iii. Income partly within or partly without the Philippines

e. Sources of income subject to tax


i. Compensation income

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.
(2014 Bar Question)

SUGGESTED ANSWER :

No. Section 50 of Rev. Regs. No. 2, otherwise known as Income Tax Regulations,
provides that if a debtor performs services for a creditor who cancels the debt in
consideration for such services, the debtor realizes income to that amount as
compensation for his services. In the given problem, the cancellation of Mr. Gipits
indebtedness up to the amount of Php 75,000.00 gave rise to compensation income

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subject to income tax, since Mr. Maunawain condoned such amount as consideration
for the general cleaning services rendered by Mr. Gipit.

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 was reached
under the terms of which JR was paid the following amounts: P500,000 for his
hospitalization: P250,000.00 as moral damages: 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:

The amount of P200,000.00 that JR received from his employer is subject to income tax
except the money equivalent of ten (10) days unutilized vacation leave credits which is
not taxable. Amounts of vacation allowances or sick leave credits which are paid to an
employee constitutes compensation (Sec. 2.78(A)(7), RR No. 2-98, as amended by RR
No. 10-2000).

The amounts that JR received from the airline are excluded from gross income and not
subject to income tax because they are compensation for personal injuries suffered
from an accident as well as damages received as a result of an agreement (negotiation)
on account of such injuries. (Sec. 32(B)(4), NIRC). (BAR 2005)

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.

Assuming the shares of stocks were given to Mr. Y in consideration of his


services to the corporation, what are the tax implications? Explain.

ANSWER:

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. (BAR 1996)

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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.

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 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)(1) 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 payor 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 donors 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 donors tax on Mr
Perez company. (Sec. 28(b)(3), NIRC; Pirovano vs.
Commissioner. (BAR 1995)

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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 it was a gift.

Is Mr. Quiroz correct in claiming that the additional PI Million was gift and
therefore excluded from income? Explain.

ANSWER:

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 employers 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. (Stanton 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 PI 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) (BAR 1995)

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 ofP6,000.00 for each of the municipal employees.
a. Is the Christmas bonus subject to any tax?
b. How about the cash gift?
c. How about the transportation and representation allowances?

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ANSWER:

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

b. 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.

c. 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.
(BAR 1994)

The employees of Travellers, Inc. staged a strike. X, a non-union, member joined


the strike and volunteered to picket the company premises from 8:00 A.M. to
12:00 P.M., Monday to Friday. Six months into the strike. X ran out of money and
asked financial aid from the union since he has no other source of income and
needed financial assistance in order to live. The union gave him PI ,000.00 a
month to take care of his food requirements plus P500.00 to take care of his
monthly rent. When X filed his return, he excluded these benefits from his gross
income. The exclusion was denied by the BIR Decide.

ANSWER:

The P1,500.00 is not compensation income because compensation income arises out
of employer-employee relationship as payment for services without compensation. The
P1.500.00 is a gift from the labor union. According to Section 28 (b) (3) of the NIRC,
gifts are to be excluded from gross income. Thus, the BIR's denial is not valid.

ALTERNATIVE ANSWER:

Under the law, gross Income consists of all gains, profits, and income of the taxpayer
during a taxable year of whatever kind and in whatever form derived from any source,
whether legal or illegal, except items of gross income subject to final income tax and
income exempt from taxation under Sec. 28 (b) of the NIRC.

Moreover, in the case of Guitierrez vs. Collector of Internal Revenue. CTA Case No. 65.
31 August 1965, it was held that the phrase income from whatever source derived
covers all other forms of income. It discloses a legislative policy to include all income
not expressly exempted, as within the class of taxable income under our laws,
irrespective of the voluntary or involuntary action of the taxpayer in producing the gain.

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Therefore based on the foregoing considerations, the benefits subject in the case at bar,
not expressly exempted by law, are considered as income. (BAR 1993)

Oriental, Inc. holds a proprietary share of Capital Gold Club, Inc. It assigned
without any consideration this share to X, one of its foreign consultants, to
enable him to use its facilities for the duration of his stay in the Philippines. X
signed a Declaration of Trust where he acknowledged that the share is owned by
Oriental, Inc. and where he promised to transfer the same to whoever will
succeed him as consultant. When Xs contract with Oriental, Inc. expired, he left
the Philippines and assigned for free the share to Y, his successor in office. What
tax, if any, can be imposed by the BIR on the transaction?

ANSWER:

The BIR cannot impose any tax because there was no real transfer of the ownership of
the subject Capitol Golf

Club, Inc. (Capitol) proprietary share from X to Y. Oriental. Inc. is the true owner of the
Capitol proprietary share. It remained the true owner from the time of the Capitol shares
use by X, to the transfer of the Capitol shares use to Y. Oriental remained the legal
owner thereof all throughout, while X and Y are only the beneficial owners.

ALTERNATIVE ANSWERS:

The value of the use of the share may be considered compensation income to both X
and Y subject to income tax. The revocable trust may not be considered a disposition of
a share of stock subject to capital gains tax.

Since the transfer does not involve any consideration, X is not subject to income tax.
While the transfer is gratuitous, there is no donative intent. Thus, the transaction is not
subject to donors tax. However, since the certificate is evidence of interest in the
Property of a corporation, the transfer of the said certificate is subject to the
documentary stamp tax of P0.20 on each P200 or fractional part thereof, of the face
value of such certificate, in accordance with Section 178 of the NIRC (BIR Ruling 235-
89).

If the BIR puts value to the playing rights, then the transfer to the expatriate, that value
could be treated as compensation to the expatriate, hence, taxable. (BAR 1993)

ABC Computer Corp. purchased some years ago Membership,Certificate No. 7


from the Calabar Golf Club, Inc. for P300.000.00. In 4 September 1985, it
transferred the same to Mr. John Johnson, its American computer consultant, to
enable him to avail of the facilities of the Club during his stay here. The
consultancy agreement expired two (2) years later. In the meantime, the value of
the Club share appreciated and what was purchased by the corporation at

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P300,000.00, commanded a market value of P800.000.00 in 1987. Before he
returned home a few days after his tenure ended, Mr. Johnson transferred the
subject share to Mr. Robert James, the new consultant of the firm and the newly
designated playing representative, under a Deed of Declaration of Trust and
Assignment of Shares wherein the former acknowledged the absolute ownership
of ABC Computer Corp. over the share, that the assignment was without any
consideration, and that the share was placed in his name because the Club
required it to be done.

Is the assignment/transfer of the shares from Johnson to James subject to


Income tax?

ANSWER:

The assignment or transfer of shares from Johnson to James is not subject to income
tax. There had been no real change of ownership that took place. There having been no
actual sale or exchange, no income tax incidence can be said to have occurred, in
addition, there was really no income realized or received considering that in the Deed of
Declaration of Trust and Assignment of Shares, the absolute ownership of ABC
Computer Corporation was explicitly recognized. (BAR 1991)

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 month each.

Does the US$1,000 pension become taxable because he is now residing in the
Philippines? Reason briefly.

SUGGESTED 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) (BAR 2007)

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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 month each.

Will Z be liable to pay income tax on the P45.000 monthly income? Reason briefly.

SUGGESTED ANSWER:

Yes. The rental income from property located in the Philippines is considered as income
derived from within. Z, a non-resident citizen is taxable on income derived from sources
within the Philippines. (Section 42 in relation to Section 23, NIRC). (BAR 2007)

ii. Fringe benefits

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%) (2013 Bar Question)

(A) There was no taxable fringe benefit since it was for the 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:

(B) There was a taxable fringe benefit since the stay at the house was for free.

First, the company president is not a rank-and-file employee. Thus, the housing benefit
is subject to fringe benefits tax pursuant to Section 33 of the NIRC and Section 2.33 (A)
of the RR No. 03- 98. Although the housing benefit to the President may be for the
convenience of the employer (PRT Corp.) or necessary to its business, still, it also
inured to the benefit of the President as his stay therein is for free. RR No. 03-98 also
provides for the guidelines and valuation of fringe benefits for purposes of computing
the portion which shall be subject to fringe benefits tax in cases where the fringe
benefits entail joint benefits to the employer and employee.

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Thus, there was a taxable fringe benefit.

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.

SUGGESTED ANSWER:

There is no legal basis for the 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 PI,000, hence exempted from the fringe benefits
tax. (Section 33, NIRC as implemented by RR No. 10-2000).

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 health, goodwill, contentment and efficiency of the employee
which will not constitute taxable income of the recipient. (Section 2.78.1(A)(3) of RR No.
2-98). (BAR 2007)

State with reasons the tax treatment of the following in the preparation of annual-
income tax returns: De minimis benefits;

SUGGESTED ANSWER:

De minimis benefits are non-taxable fringe benefits. They are not to be reported in the
income tax return because they are tax exempt. They are also exempt from the
imposition of the fringe benefits tax. (Sec. 33(C), NIRC). (BAR 2005)

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.

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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. (BAR 2003)

X was hired by Y to watch over Ys 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 employer, hence does not constitute a taxable
fringe benefit. (Section 33, NIRC). (BAR 2001)

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.

What will be the basis of Xs income tax.

Will your answer in question (a) be the same if X's employer is an obstetrician?
Why?

ANSWER:

The basis of Xs income tax would depend on whether his employer is an employee or a
practising corporate lawyer. If his employer is an employee, the basis of Xs 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.

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If the employer is an obstetrician who is self-employed, the basis of Xs 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. (BAR 1996)

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.

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 service 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 dub 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). (BAR 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.

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Are these benefits income to Capt. Canuto? Explain.

ANSWER:

No, the free uniforms, free living quarters and the free meals inside the camp are not
income to Capt. Canuto because these are facilities or privileges furnished by the
employer for the employer's convenience which are necessary incidents to proper
performance of the military personnel's duties. (BAR 1995)

X is employed as security guard of Excel Supermarket, Inc. X lives in a room


within the compound of Excel but he is not charged any rent. The rental value of
the room is P300.00 a month. X wants your opinion on whether BIR can tax the
value of the free use of his room.

ANSWER:

The rental value of the room is not taxable. Section 2.2 of the Revenue Audit Memo
Order No. 1-87 provides that if the lodging is furnished in the business premises of the
employer and the employee is required to accept such lodging as a condition of his
employment, then the value of said lodging will be not taxable. It is merely for the
convenience, comfort and pleasure of the employer.

ALTERNATIVE ANSWER:

The BIR may not tax the value of the free use of the room, as the same may not strictly
be considered compensation income. Considering the nature of Xs employment and
the fact that free lodging was furnished within the business premises, it may reasonably
be said that the benefit therefrom inured to the employer more than to X and thus may
not actually be considered remuneration for services included in the computation of
taxable income.

It depends. If the lodging furnished to employee-X is within the business premises of the
employer and the employee is required to accept the lodging as condition for
employment the imputed rental value of the room used by X shall be excluded from X's
compensation income (BIR Audit Memo 1-87). (BAR 1993)

iii. Professional income


iv. Income from business

In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna
for PI00,000. 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

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and sale of real property. Alpha Corporation acquired the property in 2007 for P9
million.

Is Alpha Corporation subject to income tax on the exchange of property? If so,


what is the tax base and rate? Explain. (3%)

SUGGESTED ANSWER:

Yes. The gain from the exchange constitutes an item of gross income, and being a
business income, it must be reported in the annual income tax return of Alpha
Corporation. From the pertinent items of gross income, deductions allowed by law from
gross income can be claimed to arrive at the net income which is the tax base for the
corporate income tax rate of 35%. (Section 27 (A) and Section 31, NIRC). (BAR 2008)

v. Income from dealings in property

Income from dealings in property (real, personal, or mixed) is the gain or loss
derived: (2011 Bar Question)

(A) only from the cash sales of property.


(B) from cash and gratuitous receipts of property.
(C) from sale and lease of property.
(D) only from the sale of property.

SUGGESTED ANSWER:

(D) only from the sale of property.

Explain briefly whether the following items are taxable or non- taxable:

A. Gain arising from expropriation of property:

SUGGESTED ANSWER:

Taxable. There is a material gain, not excluded by law, realized out of a closed and
completed transaction. Gains from dealings in property are part of gross income. (Sec.
32(A)(3), NIRC).

B. Gain on the sale of a car used for personal purposes. (5%)

SUGGESTED ANSWER:

Gain on the sale of a car used for personal purposes is taxable. This is a gain derived
from dealings in property which is part of the taxpayer's gross income. (Sec. 32(A)(3),
NIRC). There is a material gain, not excluded by law, realized out of a closed and
completed transaction. (BAR 2005)

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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. (5%)

SUGGESTED ANSWER:

Generally, income realized from the sale of capital assets are not to be reported in the
income tax return as they are already subject to final taxes (capital gains tax on real
property and shares of stocks). What are to be reported in the annual income tax return
are the capital gains derived from the disposition of capital assets other than real
property or shares of stocks in domestic corporations which are not subject to final
taxes.

Income realized from the sale of ordinary assets is taxable and the said income shall be
declared in the annual income tax return. The income constitutes either income derived
from the conduct of trade or business or a gain derived from dealings in property. (Sec.
32 A(2) and (3), NIRC). (BAR 2005)

a. Types of properties

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 price of P700,000.00 was donated by him and registered in the
name of his son. The corresponding donors tax thereon was duly paid by the
father. (2012 BAR)

a. How much is the cost basis of the old car to Mr. Aguirre? Explain your answer
b. What is the nature of the old car capital asset or ordinary asset? Explain
your answer.
c. Is Mr. Aguirre liable to pay income tax on the gain from the sale of his old car?
Explain your answer.

Suggested Answer:
a. P700,000. The basis of the property in the hands of the donee is the carry-over
basis (Sec. 40(B)(3), NIRC).
b. The old car is a capital asset. It is property held by the taxpayer, 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

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subject to the allowance for depreciation; or real property used in trade or business
of the taxpayer (Sec. 39, NIRC).
c. YES. Capital gain is P100,000. The amount of the taxable gain is subject to the
holding period of the asset (Sec. 39,NIRC).

Income from dealings in property (real, personal, or mixed) is the gain or loss
derived: (2011 Bar Question)

(A) only from the cash sales of property.


(B) from cash and gratuitous receipts of property.
(C) from sale and lease of property.
(D) only from the sale of property.

SUGGESTED ANSWER:

(D) only from the sale of property.

Distinguish a capital asset" from an ordinary asset".

SUGGESTED ANSWER:

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:
- 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;
- property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
- 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
- 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.
(BAR 2003)

1. Ordinary assets

In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna
for PI00,000. This property has a current fair market value of P10 million in view of
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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.

What is the nature of the real properties exchanged for tax purposes - capital
asset or ordinary asset? Explain (3%)

SUGGESTED ANSWER:

The one hectare agricultural land owned by Juan Gonzales is a capital asset because it
is not a real property used in trade or business. The one-half hectare residential
property owned by Alpha Corporation is an ordinary asset because the owner is
engaged in the purchase and sale of real property. (Section 39, NIRC, Revenue
Regulations No. 7-03). (BAR 2008)

2. Capital assets

In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna
for PI00,000. 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.

What is the nature of the real properties exchanged for tax purposes - capital
asset or ordinary asset? Explain (3%)

SUGGESTED ANSWER:

The one hectare agricultural land owned by Juan Gonzales is a capital asset because it
is not a real property used in trade or business. The one- half hectare residential
property owned by Alpha Corporation is an ordinary asset because the owner is
engaged in the purchase and sale of real property. (Section 39, NIRC, Revenue
Regulations No. 7-03). (BAR 2008)

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.

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Is the land a capital asset or an ordinary asset? Explain.

Is there any income tax due on the sale? Explain.

ANSWER:

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).

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. (BAR 1995)

b. Types of gains from dealings in property

Income from dealings in property (real, personal, or mixed) is the gain or loss
derived: (2011 Bar Question)

(A) only from the cash sales of property.


(B) from cash and gratuitous receipts of property.
(C) from sale and lease of property.
(D) only from the sale of property.

SUGGESTED ANSWER:

(D) only from the sale of property.

1. Ordinary income vis--vis capital gain

An individual, who is a real estate dealer, sold a residential lot in Quezon City at a
gain of P100,000.00 (selling price of P900,000.00 and cost is P800,00.00). The sale
is subject to income tax as follows: (2012 BAR)

a) 6% capital gains tax on the gain;


b) 6% capital gains tax on the gross selling price of fair market value, whichever is
higher;
c) Ordinary income tax at the graduated rates of 5% to 32% of net taxable income;
d) 30% income tax on net taxable income.

SUGGESTED ANSWER:

c) Ordinary income tax at the graduated rates of 5% to 32% of net taxable income
Section 24, NIRC.

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What is the difference between capital gains and ordinary gains? [3%]

What does the term ordinary income include? [2%]

SUGGESTED ANSWER:

1. 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.

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. (BAR 1998)

X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land
is to be devoted strictly for religious purposes by the Church. When the Church
tried to register the title of the land, the Register of Deeds refused claiming that
the capital gains tax was not paid. Is the transaction exempt from the capital
gains tax? Reasons.

ANSWER:

No. Under Section 21 (e) in relation to Section 49 (a) (4) of the National Internal
Revenue Code, the seller is the one liable for the payment of the capital gains tax from
the sale of real property by an individual taxpayer. Meanwhile, the Church in this instant
case is the buyer. Hence, Section 28 (4) of the 1987 Constitution, which exempts
church lands, buildings, and improvements, does not apply because the obligation to
pay the capital gains tax herein is imposed on X, the seller, and not on the Church.
Since payment of the capital gains tax is a condition precedent for the registration of the
transfer certificate of title to real property, the nonpayment herein by the seller is a valid
reason for the Registry of Deeds to deny the transfer of title to the subject land.

ALTERNATIVE ANSWERS:

Assuming that in the hands of X, the piece of land is a capital asset, then the sale to the
Church is subject to capital gains tax for which X is liable. It is immaterial that the land

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will be used exclusively for religious purposes; if there is any exemption, then it applies
to Church, and not to X, the vendor.

No. The tax exemption granted to churches in the Constitution refers to property tax and
not to capital gains tax which is an income tax. Besides, the capital gains tax is the
liability of the seller X and not the purchaser. (BAR 1993)

An individual taxpayer, who owns a ten (10) door apartment with a monthly rental
of PI0.000 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. (BAR 1998)

2. Actual gain vis--vis presumed gain


3. Long term capital gain vis--vis short-term capital gain
4. Net capital gain, net capital loss
5. Computation of the amount of gain or loss

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)?

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

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schedular capital gains tax of 10% for the first PI00,000 and 20% for the excess thereof
(Section 21(d), NIRC).

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 safe. 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. (BAR 1997)

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?

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:

Sale of the assets received by the corporation shall be the original/historical cost (Le.
purchase price plus expenses of acquisition) of the property/assets given in exchange
of the shares of stock.

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 tax-free exchange under Sec. 34
(c) (2) is:

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.

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

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by the amount treated as dividend of the shareholder and the amount of any gain that
was recognized on the exchange.

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?

ANSWER:

In a qualified merger under Section 34 (c) (2) of the Tax Code, the tax basis for
computing the capital gains on:
- 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.
- 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. (BAR 1994)

6. Income tax treatment of capital loss


a. Capital loss limitation rule (applicable to both corporations and
individuals)

Mirador, Inc., a domestic corporation, filed its Annual Income Tax Return for its
taxable year 2008 on April 15, 2009. In the Return, it reflected an income tax
overpayment of PI,000,000.00 and indicated its choice to carry-over the
overpayment as an automatic tax credit against its income tax liabilities in
subsequent years.

On April 15,2010, it filed its Annual Income Tax Return for its taxable year 2009
reflecting a taxable loss and an income tax overpayment for the current year 2009
in the amount of P500,000.00 and its income tax overpayment for the prior year
2008 of PI ,000,000.00.

In its 2009 Return, the corporation indicated its option to claim for refund the total
income tax overpayment of P1,500,000.00

Choose which of the following statements is correct.

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 as refund the amount of P500,000.00 representing its income tax
overpayment for its taxable year 2009; or
C. No amount may be claimed as refund. Explain the basis of your answer. (5%)

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ANSWER:

It may claim as refund the amount of P500,000 representing its income tax
overpayment for its taxable year 2009.

b. Net loss carry-over rule (applicable only to individuals)

In March 2009, Tonette, who is fond of jewelries, bought a diamond ring for
P750,000.00, a bracelet for P250,000.00, a necklace for P500,000.00, and a brooch
for P500,000.00. Tonette derives income from the exercise of her profession as a
licensed CPA. In October 2009, Tonette sold her diamond ring, bracelet, and
necklace for 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 among the following describes the tax implications arising from the
above transactions? (2011 Bar Question)

(A) Tonette may deduct his 2009 loss only from her 2009 professional income.
(B) Tonette may carry over and deduct her 2009 loss only from her 2010 gain.
(C) Tonette may carry over and deduct her 2009 loss from her 2010 professional
income as well as from her gain.
(D) Tonette may not deduct her 2009 loss from both her 2010 professional income
and her gain.

SUGGESTED ANSWER:

(B) Tonette may carry over and deduct her 2009 loss only from her 2010 gain.

7. Dealings in real property situated in the Philippines

8. Dealings in shares of stock of Philippine corporations


a. Shares listed and traded in the stock exchange
b. Shares not listed and traded in the stock exchange

Federico, a Filipino citizen, migrated to the United States some six years ago and
got a permanent resident status or green card. He should pay his Philippine
income taxes on: (2011 Bar Question)

(A) the gains derived from the sale in California, U.S.A. of jewelry he purchased in
the Philippines.
(B) the proceeds he received from a Philippine insurance company as the sole
beneficiary of life insurance taken by his father who died recently.
(C) the gains derived from the sale in the New York Stock Exchange of shares of
stock in PLDT, a Philippine corporation.
(D) dividends received from a two year old foreign corporation whose gross
income was derived solely from Philippine sources.

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SUGGESTED ANSWER:

(C) the gains derived from the sale in the New York Stock Exchange of shares of stock
in PLDT, a Philippine corporation.

Keyrand, Inc., a Philippine corporation, sold through the local stock exchange
10,000 PLDT shares that it bought 2 years ago. Keyrand sold the shares for P2
million and realized a net gain of P200,000.00. How shall it pay tax on the
transaction? (2011 Bar Question)

(A) It shall declare a P2 million gross income in its income tax return, deducting
its cost of acquisition as an expense.
(B) It shall report the P200,000.00 in its corporate income tax return adjusted by
the holding period.
(C) It shall pay 5% tax on the first P100,000.00 of the P200,000.00 and 10% tax on
the remaining P100,000.00.
(D) It shall pay a tax of one-half of 1% of the P2 million gross sales.

SUGGESTED ANSWER:

(D) It shall pay a tax of one-half of 1% of the P2 million gross sales.

In 2006, Mr. Vicente Tagle, a retiree, bought 10,000 CDA shares that are unlisted
in the local stock exchange for P10 per share. In 2010, the said shares had a book
value per share of P60 per share. In view of a car accident in 2010, Mr. Vicente
Tagle had to sell his CDA shares but he could sell the same only for P50 per
share. The sale is subject to tax as follows: (2012 BAR)

a) 5%/10% capital gains tax on the capital gain from sale of P40 per share (P50
selling price less P10 cost);
b) 5%/10% capital gains tax on the capital gain of P50 per share, arrived at by
deducting the cost (P10 per share) from the book value (P60 per share);
c) 5%/10% capital gains tax on the capital gain from sale of P40 per share (P50
selling price less P10 cost) plus donors tax on the excess of the fair market
value of the shares over the consideration;
d) Graduated income tax rates of 5% to 32% on the net taxable income from the
sale of the shares.

SUGGESTED ANSWER:

c) 5%/10% capital gains tax on the capital gain from sale of P40 per share (P50 selling
price less P10 cost) plus donors tax on the excess of the fair market value of the shares
over the consideration
Section 24(C) in relation to Section 100, NIRC; RR No. 6-2008.

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9. Sale of principal residence

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 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. (2013 Bar
Question)

SUGGESTED ANSWER:

In computing the capital gains tax, a final tax of six percent (6%) based on the gross
selling price or current fair market value, whichever is higher, shall be imposed. In this
case, the basis of the tax is P6,000,000.00, the gross selling price, being higher than
P2,500,00.00, the fair market value of the residential house.

Nevertheless, if within thirty (30) days from the date of sale or disposition, Mr. Belen
notifies the Commissioner that he intends to utilize the whole P6,000,000.00 in
acquiring a new house within eighteen (18) calendar months from the sale, the gross
selling price shall be exempt from the capital gains tax.

If Mr. Belen does not utilize the whole P6,000,000.00 in acquiring a new residence
under the conditions above, the portion of the gain presumed to have been realized
from the sale or disposition shall be subject to capital gains tax. For this purpose,
P6,000,000.00 shall be multiplied by a fraction which the unutilized amount bears to the
gross selling price in order to determine the taxable portion and the 6% capital gains tax
shall be imposed thereon under Section 24(D) of the NIRC.

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? (2015 Bar Question)

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

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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 persons intention to avail of the tax
exemption; and (4) Exemption was availed only once every ten (10) years.

Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their principal residence
situated in Tandang Sora, Quezon City for Ten Million Pesos (PI0,000,000.00) 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 calendar months from the sale or disposition of the
principal residence or eighteen (18) months from July 12. 2000.
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) (BAR 2000)

vi. Passive investment income


a. Interest income

Interest income of a domestic commercial bank derived from a peso loan to a


domestic corporation in 2010 is: (2012 BAR)

a) Subject to the 30% income tax based on its net taxable income;
b) Subject to the 20% final withholding tax;
c) Subject to the 7.5% final withholding tax;
d) Subject to 10% final withholding tax.

SUGGESTED ANSWER:

a) Subject to the 30% income tax based on its net taxable income
Section 27 (A).

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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:

Interest on deposit with BPI Family Bank is a passive income subject to a final
withholding tax rate of 20%; the interest on deposit with a local offshore banking unit of
a foreign bank is a passive income subject to a final withholding tax rate of 7.5%. (Sec.
24(B)(1), NIRC). Both interest incomes are not to be declared as part of gross income in
the income tax return. (BAR 2005)

Under Article XIV, Section 4 (3) of the 1987 Philippine Constitution, all revenues
and assets of non-stock, non-profit educational institutions, used actually,
directly and exclusively for educational purposes, are exempt from taxes and
duties. Are income derived from interest 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 schools annual information return and duly audited financial statements
together with:
i. Certifications from depository banks as to the amount of interest income earned
from passive investments not subject to the 20% final withholding tax;
ii. Certification of actual, direct and exclusive utilization of said income for
educational purposes;
iii. 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. (BAR 2000)

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?

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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%; 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 are 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 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 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. (BAR 1997)

b. Dividend income

ABC Corp. was dissolved and liquidating dividends were declared and paid to the
stockholders.

What tax consequence follows? (1%) (2013 Bar Question)

(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:

(C) The dividends are exempt from tax.

Liquidating dividends are not income and are thus not subject to income tax.

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In Wise & Co., Inc. v. Meer (G.R. No. 48231, June 30, 1947), the Supreme Court
defined liquidating dividends as the dissolving corporations payments to the
stockholders for their surrender and relinquishment of interest in the dissolving
corporation. They are generally a return of capital. Liquidating dividends are unlike cash
and property dividends which are portions of corporate profits that are set aside for
distribution to the stockholders in proportion to their subscription to the capital stock of
the corporation.

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
its stockholders, all of whom are individuals.

Are the dividends taxable? (1%) (2013 Bar Question)

(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) The dividends are taxable; the tax exemption of MGC Corp. does not extend to its
stockholders.

MGC Corp. and its stockholders are separate tax entities under the NIRC.
Consequently, MGC Corp.s tax exemption does not extend to its stockholders.

Under the NIRC, stockholders who receive dividends from a domestic corporation are
subject to the following scheduler income tax rates: 10% for Filipino citizens and
individual resident aliens; 20% for non-resident aliens engaged in trade or business;
and 15% for non-resident foreign corporations. Thus, the stockholders claim for the tax
exemption is unmeritorious.

State with reasons the tax treatment of the following in the preparation of annual-
income tax returns: Dividends received by a domestic corporation from a foreign
corporation;

SUGGESTED ANSWER:

Dividends received by a domestic corporation from a foreign corporation is subject to


income tax and shall form part of the gross income. There is no law exempting this type
of dividend from income tax. (Section 32 (7), NIRC). (BAR 2005)

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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.

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) (BAR 2003)

What is 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 non-resident 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. (BAR 1994)

Gains realized by the investor upon redemption of shares of stock in a mutual


fund company are exempt from income tax.

SUGGESTED ANSWER:

TRUE [Sec 32(B)(7)(h),NIRC]

c. Royalty income

ABC, a domestic corporation, entered into a software license agreement with


XYZ, a non-resident foreign corporation based in the U.S. Under the 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

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consideration for such rights, ABC agreed to pay 5% of the revenues it receives
from customers who will use and apply the program in the Philippines.

Discuss the tax implication of the transaction. (5%)

SUGGESTED ANSWER:

The amount payable under the agreement is in the nature of a 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 the 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).

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. (BAR 2002)

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d. Rental income
1. Lease of personal property
2. Lease of real property
3. Tax treatment of
a. Leasehold improvements by lessee
b. VAT added to rental/paid by the lessee

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. (2015 Bar Question)

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 value-added 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.

c. Advance rental/long term lease

vii. Annuities, proceeds from life insurance or other types of insurance

Born of a poor family on 14 February 1944. Mario worked his way through college.
After working for more than 2 years in X Manufacturing Corporation, Mario
decided to retire and avail of the benefits under the very reasonable retirement
plan maintained by his employer. He planned to invest whatever retirement
benefits he would receive in a business that will provide his employer with the
needed raw materials. On the day of his retirement on 30 April 1985. he received
P400.000.00 as retirement benefit. In addition, his endowment insurance policy,
for which he was paying an annual premium of PI.520.00 since 1965. also
matured. He was then paid the face value of his insurance policy in the amount of
P50.000.00.

Is his P50.000.00 insurance proceeds exempt from income taxation?

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ANSWER:

The P50.000.00 insurance proceeds is not totally exempt from income tax. The
excluded amount is only that portion which corresponds to the premiums that he had
paid since 1965. At the rate of PI,520.00 per year multiplied by twenty (20) years which
was the period of the policy, he must have paid a total of P30.400.00. Accordingly, he
will be subject to report as taxable income the amount of P 19,600.00 (Sec. 28. NIRC)
(BAR 1991)

viii. Prizes and awards

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. (BAR
2000)

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 donors tax from Ayala Land Corporation,
which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.

ANSWER:

The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in
imposing the income tax. RA. 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 donors tax from Ayala Land Corporation. The
law is clear when it categorically stated That the donors of said prizes and awards
shall be exempt from the payment of the donors tax." (BAR 1996)

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Evelyn is a graduate student of U.P. In January, 1991, she won the Palanca Award
for an outstanding short story she wrote. The award was P25.000.00 in cash. In
February, 1991, she was also named most Valuable Player of the Varsity
volleyball team and she was given a trophy plus P10.000.00. Finally, in March,
1991, she received a Fellowship Award from the University of California to pursue
a master's degree in American literature. The fellowship is for $10,000.00 plus
freeboard and lodging for two (2) semesters. Should Evelyn include these awards
and fellowship in her gross income? Reasons.

ANSWER:

Gross income includes prizes and winnings (Section 27 of the National Internal
Revenue Code [NIRC"), except those stated in Section 28 B, (8), (E) of the NIRC, to
wit:

(E) Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civil achievement but only if:
i. The recipient was selected without any action on his part to enter the
contest or proceeding: and
ii. The recipient is not required to render substantial future services as a
condition to receiving the prize or award.

The first award granted to Evelyn was a Palanca award. This kind of award requires
submission of literary works. Hence, this is included in the gross income because it fails
to meet the legal requisites provided for in the aforequoted provisions of law specifically
item (i).

The second award granted to Evelyn was the Most Valuable Player Award. In this kind
of award, Evelyn did not file any application to enter into any contest. The award was
given to her in recognition for her outstanding performance in the field of sports.
However, the recognition in the field of sports is not among those stated in the
aforequoted provision of law. Thus, the award granted to her does not fall under the
aforequoted provision of law.

The last award granted to her was the Fellowship Award. This requires also submission
of application to qualify for such award. Hence, it fails to meet the necessary requisites
of the aforequoted provision of law specifically item (i).

ALTERNATIVE ANSWERS:

The award of P25.000.00 should be Included in Evelyn's gross Income for while it was
earned as a prize for literaiy achievement, it cannot be said that she won without any
action on her part to enter the contest. Her P100.000.00 prize as Most Valuable Player
cannot be excluded for the same reason. Both awards, however, may be considered
income subject to income tax.

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The fellowship award of $10,000.00 is, however, excluded from her income as she was
selected therefor without any action on her part and the same was given to her in
recognition of literaiy and educational achievement, presumably without her being
required to render future services for the grantor.

It depends. Section 28 (b) (8,E) of the NIRC enumerates the requirements in order to
exclude the item from taxation. The Tax Code requires that the prizes and awards are
given primarily in recognition of religious, charitable, scientific, educational, artistic,
literary or civil achievements. The awards mentioned were given to the taxpayer in
recognition of her literary achievement in the case of the Palanca Award, the most
valuable player award for civic/educational achievement and the fellowship award'for
educational achievement.

Section 28(b) further requires that the recipient must be selected without any action on
his part to enter the contest or proceeding and the taxpayer-recipient is not required to
render substantial future services as a condition to receiving the prize or award. If these
two requirements are met, then the items should not be included in the gross income.
(BAR 1993)

ix. Pensions, retirement benefit, or separation pay

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:

The separation benefits paid by Company A to its employees are excluded from gross
income being in the nature of benefits given to employees whose services were
terminated due to causes beyond their control. (Sec. 32(B)(6)(b), NIRC). The entire
benefits, thus, are not taxable and not subject to withholding tax under the Tax Code.
(BAR 2005)

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 arid 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%)

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SUGGESTED ANSWER:

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).

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:

1. 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.
2. 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 flve (5) years; and
ii. that he is not less than sixty (60) years of age but not more than
sixty five (65). (BAR 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.

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Consequently, since Mr. Javiers 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]. (BAR 2000)

A Co., a Philippine corporation, has two divisions manufacturing and


construction. Due to the economic situation, it had to close its construction
division and lay-off 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:


A. Employees who are at least 50 years of age and has at 10 years of
service at the time of termination of employment.
B. Employees who do no meet either the age or length of service A Co.
plans to give the following:

For category (A) employees - the benefits under the BIR approved plan plus an ex
gratia payment of one month of every year of service.

For category (B) employees - one month for every year of service. For both
categories, the cash equivalent of unused vacation and sick leave credits.

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.
96016, 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 WT.
The employees were laid off, hence separated for a cause beyond their control.

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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). (BAR 1999)

X, an employee of ABC Corporation died. ABC Corporation gave Xs widow an


amount equivalent to Xs salary for one year.

Is the amount considered taxable income to the widow? Why?

ANSWER:

No. The amount received by the widow from the decedents 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:
- the gift was made to the widow rather than the estate:
- there was no obligation for the corporation to make further payments to the
deceased;
- the widow had never worked for the corporation;
- the corporation received no economic benefit; and
- the deceased had been fully compensated for his services (Estate of Sydney
Carter us. Commissioner, 453 F. 2d 61 (2d Cir. 1971). (BAR 1996)

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.

ANSWER:

No. The commutation of leave credits, more commonly known as terminal leave pay,
Le., 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;

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Commissioner vs. CAandEfrenCastaneda, GRNo. 96016, October 17, 1991). (BAR
1996)

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 months 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.

Did Mr. Jacobo derive income when he received his separation pay? Explain.

ANSWER:

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
employees 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.

Did Mr. Kintanar derive income when he received his separation pay? Explain.

ANSWER:

No. Mr. Kintanar did not derive any income when he received his separation pay
because his separation from 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. (BAR 1995)

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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.

Is Mr. Quiroz correct in claiming that the additional PI Million was retirement pay
and therefore excluded from income? Explain.

Is Mr. Quiroz correct in claiming that the additional PI Million was gift and
therefore excluded from income? Explain.

ANSWER:

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.

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 employers 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. (Stanton 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 PI 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) (BAR 1995)

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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 service to the corporation.

Juan Cruz, another official of the same company, was separated for occupying a
redundant position. He was given PI.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.

Is the separation pay given to Reyes subject to income tax?


How about the separation pay received by Cruz?
How about the separation pay received by Bautista?

ANSWER:

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 strictissimijuris or the rule on strict interpretation of tax
exemptions.

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).

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. (BAR 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?

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). (BAR 1994)

Born of a poor family on 14 February 1944. Mario worked his way through college.
After working for more than 2 years in X Manufacturing Corporation, Mario

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decided to retire and avail of the benefits under the very reasonable retirement
plan maintained by his employer. He planned to invest whatever retirement
benefits he would receive in a business that will provide his employer with the
needed raw materials. On the day of his retirement on 30 April 1985. he received
P400.000.00 as retirement benefit. In addition, his endowment insurance policy,
for which he was paying an annual premium of PI.520.00 since 1965. also
matured. He was then paid the face value of his insurance policy in the amount of
P50.000.00.

Is Marios P400.000.00 retirement benefit subject to income tax?

ANSWER:

Marios P400.000.00 retirement benefit is subject to income tax. To be exempt, the


retirement pay must have been extended to an employee who is at least 50 years of
age and who would have worked for at least ten (10) years with the employer. The
amount cannot be considered as a separation pay that would have exempted benefits
from income tax since it was Mario who had decided to retire instead of being required
to do so (Sec.
NIRC) (BAR 1991)

Delstar Emmanuel Perez, a government employee, retires from the service upon
reaching the compulsory retirement age of 65. Would the amount he is entitled to
receive by way of commutation of his accumulated leave credits, of his terminal
leave pay, be subject to income tax?

ANSWER:

The amount that Emmanuel Perez is to receive should not be subjected to income tax,
and such was the ruling by the Supreme Court in the In Re Zialcita Administrative Case
(Adm. Matter No. 90-6015-SC, 18 Oct. 1990). The ruling apparently repudiated, or at
least is inconsistent with, its earlier decision in Commissioner vs. Victoriano (G.R. No.
83176, 10 August 1989). (BAR 1991)

x. Income from any source whatever


a. Forgiveness of indebtedness
b. Recovery of accounts previously written-off when taxable/when not
taxable

Explain briefly whether the following items are taxable or non- taxable: Recovery
of bad debts previously charged off;

SUGGESTED ANSWER:

Recovery of bad debts previously charged off is taxable to the extent of income tax
benefit of said deduction. (Sec. 34(E)(1), NIRC). (BAR 2005)

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c. Receipt of tax refunds or credit

Explain briefly whether the following items are taxable or non- taxable:
Taxes paid and subsequently refunded;

SUGGESTED ANSWER:

It depends. Taxes paid which are allowed as a deduction from gross income are taxable
when subsequently refunded but only to the extent of the income tax benefit of said
deduction. (Sec. 34(C)(1), NIRC). It follows that taxes paid which are not allowed as
deduction from gross income, i.e., income tax, donor's tax and estate tax, are not
taxable when refunded. (BAR 2005)

d. Income from any source whatever

Explain briefly whether the following items are taxable or non- taxable:
Income from jueteng;

SUGGESTED ANSWER:

It is taxable. The law imposes a tax on income from any source whatever* which means
that it includes income whether legal or illegal. (Sec. 32(A), NIRC). (BAR 2005)

What is meant by the tax benefit rule?

SUGGESTED ANSWER:

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. (BAR 2003)

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

SUGGESTED ANSWER:

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 PI, 000,000.00.

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Three years later, Y 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. (BAR 2003)

Mr. Lajojo is a big-time swindler. In one year he was able to earn PI 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: The
income tax applies only to legal income, not to illegal income:

Mr. Lajojos 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

How will you rule on each of the three grounds for the protest? Explain.

ANSWER:

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.

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 us. 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. (Janies us. U.S.) (BAR
1995)

e. Source rules in determining income from within and without


1. Interests
2. Dividends
3. Services

For income tax purposes, the source of the service income is important for the
taxpayer, who is a: (2012 BAR)

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a) Filipino citizen residing in Makati City;
b) Non-resident Filipino citizen working residing in London, United Kingdom;
c) Japanese citizen who is married to a Filipino citizen and residing in their family home
located Fort Bonifacio, Taguig City;
d) Domestic corporation.

SUGGESTED ANSWER:
b) Non-resident Filipino citizen working residing in London, United Kingdom
Section 23 in relation to Section 42, NIRC.

4. Rentals

During the audit conducted by the BIR official, it was found that the rental income
claimed by the corporation was not subjected to expanded withholding tax.
Accordingly, the claimed rental expense: (2012 BAR)

a) Is deductible from the gross income of the corporation, despite non-


withholding of income tax by the corporation;
b) Is deductible from the gross income of the corporation, provided that the 5%
expanded withholding tax is paid by the corporation during the audit;
c) Is not deductible from gross income of the corporation due to non-withholding
of tax;
d) Is deductible, if it can be shown that the lessor has correctly reported the
rental income in his tax return.

SUGGESTED ANSWER:

c) Is not deductible from gross income of the corporation due to non-withholding of tax;
Section 34(K), NIRC.
[Note: Percentage tax is outside of the coverage]

5. Royalties
6. Sale of real property
7. Sale of personal property

Ms. C, a resident citizen, bought ready-to-wear 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.

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. (2015 Bar Question)

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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. Bs 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.

8. Shares of stock of domestic corporation

f. Exclusions from gross income

Distinguish Exclusion from Gross Income" from Deductions From Gross


Income. Give an example of each. (2%)

SUGGESTED ANSWER:

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 is 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. (BAR 2001)

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1. Rationale for the exclusions
2. Taxpayers who may avail of the exclusions
3. Exclusions distinguished from deductions and tax credit

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.

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 income to arrive at the tax base. Since the law allowed 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. Central Luzon Drug Corp., Id.). (BAR 2006)

4. Under the Constitution


a. Income derived by the government or its political subdivisions
from the exercise of any essential governmental function
5. Under the Tax Code
a. Proceeds of life insurance policies

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 policy.

a) Will the proceeds of the insurance form 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 or 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 nothing flows to Noels
parents other than a mere return of capital, the capital being the life of the insured.
(BAR 2007)

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;

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SUGGESTED ANSWER:

The proceeds of life insurance received by a child as irrevocable beneficiary are not to
be reported in the annual income tax returns, because they are excluded from gross
income. This kind of receipt does not fall within the definition of income - Many wealth
which flows into the taxpayer other than a mere return of capital. Since insurance is
compensatory in nature, the receipt is merely considered as a return of capital.
(Section 32(B)(1), NIRC; Fisher v. Trinidad, 43 Phil. 73 (19221). (BAR 2005)

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 September 2003,
X died and his wife and son went to the insurer to collect the proceeds of Xs life
insurance policy.

Are the proceeds of the insurance subject to income tax on the part of Y and Z for
their respective shares? Explain.

SUGGESTED ANSWER:

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) (BAR 2003)

Born of a poor family on 14 February 1944. Mario worked his way through college.
After working for more than 2 years in X Manufacturing Corporation, Mario
decided to retire and avail of the benefits under the very reasonable retirement
plan maintained by his employer. He planned to invest whatever retirement
benefits he would receive in a business that will provide his employer with the
needed raw materials. On the day of his retirement on 30 April 1985. he received
P400.000.00 as retirement benefit. In addition, his endowment insurance policy,
for which he was paying an annual premium of PI.520.00 since 1965. also
matured. He was then paid the face value of his insurance policy in the amount of
P50.000.00.

Is his P50.000.00 insurance proceeds exempt from income taxation?

ANSWER:

The P50.000.00 insurance proceeds is not totally exempt from income tax. The
excluded amount is only that portion which corresponds to the premiums that he
had paid since 1965. At the rate of PI,520.00 per year multiplied by twenty (20)
years which was the period of the policy, he must have paid a total of P30.400.00.

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Accordingly, he will be subject to report as taxable income the amount of P
19,600.00 (Sec. 28. NIRC) (BAR 1991)

b. Return of premium paid


c. Amounts received under life insurance, endowment or annuity
contracts

True or False. Gains realized by the investor upon redemption of shares of stock
in a mutual fund company are exempt from income tax. (2010 Bar Question)

SUGGESTED ANSWER:

TRUE.

The proceeds received under a life insurance endowment contract is NOT


considered part of gross income: (2011 Bar Question)

(A) if it is so stated in the life insurance endowment policy.


(B) if the price for the endowment policy was not fully paid.
(C) where payment is made as a result of the death of the insured.
(D) where the beneficiary was not the one who took out the endowment contract.

SUGGESTED ANSWER:

(C) where payment is made as a result of the death of the insured.

All the items below are excluded from gross income, except: (2012 BAR)
a) Gain from sale of long-term bonds, debentures and indebtedness;
b) Value of property received by a person as donation or inheritance;
c) Retirement benefits received from the GSIS, SSS, or accredited retirement
plan;
d) Separation pay received by a retiring employee under a voluntary retirement
program of the corporate employer.

SUGGESTED ANSWER:

d) Separation pay received by a retiring employee under a voluntary retirement program


of the corporate employer.
Section 32(B)(6), NIRC.

d. Value of property acquired by gift, bequest, devise or descent

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.

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Are Mario and Maria subject to income tax for the value of the property donated
to them? Explain. (4%)

SUGGESTED ANSWER:

No. The value of a property acquired by gift is an exclusion from gross income. (Section
32(B)(3), NIRC). (BAR 2008)

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.

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 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)(1) 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 payor 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

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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 donors 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 donors tax on Mr
Perez company. (Sec. 28(b)(3), NIRC; Pirovano vs. Commissioner. (BAR 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 (b) it was a gift.

Is Mr. Quiroz correct in claiming that the additional PI Million was gift and
therefore excluded from income? Explain.

ANSWER:

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 employers 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. (Stanton 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 PI 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) (BAR 1995)

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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.

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.

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.

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.
Sonoras companionship. The transfer being gratuitous is subject to donors tax. Mr.
Rodrigo should be assessed deficiency donors tax and a 50% surcharge imposed for
fraudulently simulating a contract of sale to evade donors tax, (Sec. 91(b), NIRC). (BAR
1995)

ABC Computer Corp. purchased some years ago Membership,Certificate No. 7


from the Calabar Golf Club, Inc. for P300.000.00. In 4 September 1985, it
transferred the same to Mr. John Johnson, its American computer consultant, to
enable him to avail of the facilities of the Club during his stay here. The
consultancy agreement expired two (2) years later. In the meantime, the value of
the Club share appreciated and what was purchased by the corporation at
P300,000.00, commanded a market value of P800.000.00 in 1987. Before he
returned home a few days after his tenure ended, Mr. Johnson transferred the
subject share to Mr. Robert James, the new consultant of the firm and the newly
designated playing representative, under a Deed of Declaration of Trust and
Assignment of Shares wherein the former acknowledged the absolute ownership
of ABC Computer Corp. over the share, that the assignment was without any
consideration, and that the share was placed in his name because the Club
required it to be done.

Is the said assignment a gift and, therefore, subject to gift tax?

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ANSWER:

The assignment can neither be held to be a gift. To be considered a gift within the
context of the NIRC, there must be a transfer of ownership or a quantifiable interest.
More importantly, the transfer of the membership certificate was merely a designation of
the consultant to be the playing representative" of ABC Computer Corporation in the
Calabar Golf Club. (BAR 1991)

e. Amount received through accident or health insurance

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 were able to agree to a total
settlement of P10 Million. This is what Antonia would have earned as somebody
who was gainfully employed. Edgardo was her only heir.

Should Edgardo report the P10 Million as his income being Antonias only heir?
Reason briefly.

SUGGESTED ANSWER:

The PIOM should not be reported by Edgardo as his income. The amount received in a
settlement agreement with the airline company and insurance company is an amount
received from the accident insurance covering the passengers of the airline company
and is in the nature of compensation for personal injuries and for damages sustained on
account of such injuries, which is excluded from the gross income of the recipient.
(Section 32(B)(4), NIRC).

ALTERNATIVE ANSWER:

No. The P10M having been received for 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]). (BAR 2007)

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 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: 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.

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Which, if any, of the amounts he received are subject to income tax? Explain.
(5%)

SUGGESTED ANSWER:

The amount of P200,000.00 that JR received from his employer is subject to income tax
except the money equivalent of ten (10) days unutilized vacation leave credits which is
not taxable. Amounts of vacation allowances or sick leave credits which are paid to an
employee constitutes compensation (Sec. 2.78(A)(7), RR No. 2-98, as amended by RR
No. 10-2000).

The amounts that JR received from the airline are excluded from gross income and not
subject to income tax because they are compensation for personal injuries suffered
from an accident as well as damages received as a result of an agreement (negotiation)
on account of such injuries. (Sec. 32(B)(4), NIRC). (BAR 2005)

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.

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) (BAR 2003)

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 P10,000.00 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 P100,000.00 as
exemplary damages. He was able to collect in full from the judgment.

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How much income did he realize when he collected on the judgment? Explain.

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

f. Income exempt under tax treaty


g. Retirement benefits, pensions, gratuities, etc.

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:

The separation benefits paid by Company A to its employees are excluded from gross
income being in the nature of benefits given to employees whose services were
terminated due to causes beyond their control. (Sec. 32(B)(6)(b), NIRC). The entire
benefits, thus, are not taxable and not subject to withholding tax under the Tax Code.
(BAR 2005)

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 arid 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%)

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SUGGESTED ANSWER:

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).

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:

a. Under Republic Act No. 4917 (those received under a reasonable private benefit
plan):
i. the retiring official or employee must have been in service of the same
employer for at least ten (10) years;
ii. that he is not less than fifty (50) years of age at the time of retirement; and
iii. that the benefit is availed of only once.

b. Under Republic Act No. 7641 (those received from employers without any retirement
plan):
i. Those received under existing collective bargaining agreement and other
agreements are exempt; and
ii. 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:
a. retiring employee must have served at least flve (5) years; and
b. that he is not less than sixty (60) years of age but not more than sixty five
(65). (BAR 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%)

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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. Javiers 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]. (BAR 2000)

X, an employee of ABC Corporation died. ABC Corporation gave Xs widow an


amount equivalent to Xs salary for one year.

Is the amount considered taxable income to the widow? Why?

ANSWER:

No. The amount received by the widow from the decedents 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:

the gift was made to the widow rather than the estate:
there was no obligation for the corporation to make further payments to the deceased;
the widow had never worked for the corporation;
the corporation received no economic benefit; and
the deceased had been fully compensated for his services (Estate of Sydney Carter us.
Commissioner, 453 F. 2d 61 (2d Cir. 1971). (BAR 1996)

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.

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ANSWER:
No. The commutation of leave credits, more commonly known as terminal leave pay,
Le., 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 vs. CA and Efren Castaneda, GRNo. 96016, October 17, 1991). (BAR
1996)

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 months 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.

Did Mr. Jacobo derive income when he received his separation pay? Explain.

ANSWER:

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
employees 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.

Did Mr. Kintanar derive income when he received his separation pay? Explain.

ANSWER:
No. Mr. Kintanar did not derive any income when he received his separation pay
because his separation from employment is due to causes beyond his control. The

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separation was involuntary as it was a consequence of the closure of various
unprofitable departments pursuant to the redundancy program. (BAR 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

Is Mr. Quiroz correct in claiming that the additional PI Million was retirement pay
and therefore excluded from income? Explain.

Is Mr. Quiroz correct in claiming that the additional PI Million was gift and
therefore excluded from income? Explain.

ANSWER:

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.

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 employers 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. (Stanton 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 PI million is purely a

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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) (BAR 1995)

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 service to the corporation.

Juan Cruz, another official of the same company, was separated for occupying a
redundant position. He was given PI.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.

Is the separation pay given to Reyes subject to income tax?


How about the separation pay received by Cruz?
How about the separation pay received by Bautista?

ANSWER:

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 strictissi mijuris or the rule on strict interpretation of tax
exemptions.

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).

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 is exempt from
taxation. (BAR 1994)

Born of a poor family on 14 February 1944. Mario worked his way through college.
After working for more than 2 years in X Manufacturing Corporation, Mario
decided to retire and avail of the benefits under the very reasonable retirement
plan maintained by his employer. He planned to invest whatever retirement
benefits he would receive in a business that will provide his employer with the
needed raw materials. On the day of his retirement on 30 April 1985. he received
P400.000.00 as retirement benefit. In addition, his endowment insurance policy,
for which he was paying an annual premium of PI.520.00 since 1965, also

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matured. He was then paid the face value of his insurance policy in the amount of
P50.000.00.

Is Marios P400.000.00 retirement benefit subject to income tax?

ANSWER:

Marios P400.000.00 retirement benefit is subject to income tax. To be exempt, the


retirement pay must have been extended to an employee who is at least 50 years of
age and who would have worked for at least ten (10) years with the employer. The
amount cannot be considered as a separation pay that would have exempted benefits
from income tax since it was Mario who had decided to retire instead of being required
to do so (Sec. 28. NIRC) (BAR 1991)

Delstar Emmanuel Perez, a government employee, retires from the service upon
reaching the compulsory retirement age of 65. Would the amount he is entitled to
receive by way of commutation of his accumulated leave credits, of his terminal
leave pay, be subject to income tax?

ANSWER:

The amount that Emmanuel Perez is to receive should not be subjected to income tax,
and such was the ruling by the Supreme Court in the In Re Zialcita Administrative Case
(Adm. Matter No. 90-6015-SC, 18 Oct. 1990). The ruling apparently repudiated, or at
least is inconsistent with, its earlier decision in Commissioner vs. Victoriano (G.R. No.
83176, 10 August 1989). (BAR 1991)

h. Winnings, prizes, and awards, including those in sports


competition

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?
b) May Mr. A's prize money qualify as an exclusion from his gross income? Why?
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? (2015
Bar Question)

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

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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.

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. (BAR
2000)

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:

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). & derived from sources without the Philip-pines, it is not subject to withholding of
final tax because the Philippine tax law and regulations could not reach out to foreign
jurisdictions.

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

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

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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 (Phpl0,000) and suffer imprisonment of not less than one (1) year but
not more than ten (10) years (1st par., Sec. 255, NIRC).

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:

The payor shall be liable for the payment of the tax which was not withheld.
The payor/withholding agent shall be liable to both civil and criminal penalties imposed
by the Tax Code. (BAR 1998)

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 donors tax from Ayala Land Corporation,
which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.

ANSWER:

The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in
imposing the income tax. RA. 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 donors tax from Ayala Land Corporation. The
law is clear when it categorically stated That the donors of said prizes and awards
shall be exempt from the payment of the donors tax." (BAR 1996)

6. Under special laws


a. Personal Equity and Retirement Account

g. Deductions from gross income

Distinguish Exclusion from Gross Income" from Deductions From Gross


Income. Give an example of each. (2%)

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SUGGESTED ANSWER:

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 taxpayeris 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. (BAR 2001)

1. General rules
a. Deductions must be paid or incurred in connection with the
taxpayers trade, business or profession

Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock
of San Miguel

Corporation. For failure to file a donors return on the donation within the
statutory period, the taxpayer was assessed the sum of PI02,000.00, as donors
tax plus 25% surcharge or P25.500.00 and 20% interest or P20.400.00which he
paid on June 24. 1985.

On April 10, 1986, he filed his income tax return for 1985 claiming among others,
a deduction for interest amounting to P9.500.00 and reported a taxable income of
P96.000.00.

On November 10. 1986, the taxpayer filed an amended income tax return for the
same calendar year 1985, claiming therein an additional deduction in the amount
of P20.400.00 representing interest paid on the donors gift tax.

A claim for refund of alleged overpaid income tax for 1985 was filed with the
Commissioner which was subsequently denied.

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Upon appeal with the Court of Tax Appeals, the Commissioner took Issue with the
Court of Tax Appeals determination that the amount paid by the taxpayer for
interest on his delinquent taxes is deductible from the gross income for the same
year pursuant to Sec. 29 (b) (1) of the National Internal Revenue Code.

The Commissioner of Internal Revenue pointed out that a tax is not an


indebtedness. He argued that there is a fundamental distinction between a tax"
and a "debt". According to the Commissioner, the deductibility of interest on
indebtedness from a persons income tax cannot extend to interest on taxes."

What is your opinion on the argument of the Commissioner that a tax is not an
indebtedness so that deductibility on the interest on taxes should not be
allowed?

ANSWER:

The Commissioners argument is misplaced because the interest on the donors tax is
not one that can be considered as having been incurred in connection with the
taxpayers trade, business or exercise of profession.

ALTERNATIVE ANSWER:

While a tax may be considered a debt for purposes of deducting from gross income, the
interest on taxes cannot be so considered, as such interest is in the nature of a penalty,
the imposition of which is designed to discourage delinquent payment of taxes. To allow
the deductibility of such interest would be to diminish the punitive and deterrent effects
of the imposition, and thus to diminish the importance of the prompt payment of taxes.

The argument of the Commissioner is wrong. Because while a tax as a general rule is
not a debt, interest on a non-payment of a tax has been considered like interest on
indebtedness by the Supreme Court. (Note: Whether or not the interest is deductible
under the present aw no apparently in question). (BAR 1992)

b. Deductions must be supported by adequate receipts or


invoices (except standard deduction)
c. Additional requirement relating to withholding

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2. Return of capital (cost of sales or services)
a. Sale of inventory of goods by manufacturers and
dealers of properties
b. Sale of stock in trade by a real estate dealer and dealer
in securities
c. Sale of services
3. Itemized deductions
a. Expenses
1. Requisites for deductibility

The Filipinas Hospital for Crippled Children is a charitable organization. X visited


the hospital, on his birthday, as was his custom. He gave P100,000.00 to the
hospital and P5.000.00 to a crippled girl whom he particularly pitied. A crippled
son of X is in the hospital as one of its patients. X wants to exclude both the
P100,000.00 and the P5.000.00 from his gross income. Discuss.

ANSWER:

Under Sec. 29 (h) 11) of the National Internal Revenue Code charitable contributions to
be deductible must be:

actually paid or made to domestic corporations or associations organized and operated


exclusively for religious. charitable, scientific, youth and sports development, cultural or
educational purposes or for rehabilitation of veterans or to social welfare institutions no
part of which inures to the benefit of any private individual; made within the taxable
year; not more than 6% (for individuals) of 3% (for corporations) of the taxpayers
taxable income to be computed without including the contribution.

Applying the above-provisions of law to the case at bar, it is clear therefore that only the
PI00,000.00 contribution of X to Filipinas Hospital for Crippled Children qualified as a
deductible contribution.

Sec. 29 (h) (1) of the NIRC expressly provides that the same must be actually paid to a
charitable organization to be deductible. Note that the law accorded no privilege to
similar contributions extended to private individuals. Hence, the P5,000.00 contribution
to the crippled girl cannot be claimed as a deduction.

ALTERNATIVE ANSWER:

The P100,000.00 donation may properly be deducted from Xs gross income, but not
the P5.000.00 donated to the crippled girl, as charitable and other contributions that
may be deducted from taxable income do not contemplate those given to individuals.
While it may be that Xs son is a patient in the hospital, it cannot be said that part of its
net income inures to the benefit of X as to be disallowed as a deduction from taxable
income.

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Assuming X is a self-employed Individual, he may not deduct the donations made
because under Section 29 of the NIRC as amended by RA 7496 better known as
SNITS, only contribution to the government or to an accredited relief organization for the
rehabilitation of calamity stricken areas declared by the President may be deducted for
income tax purposes. Clearly, the donees do not qualify as relief organizations.

Assuming X is receiving purely compensation income, he can only deduct from gross
compensation income personal exemption, additional personal exemption and special
additional personal exemption (Section 29. NIRC as amended).

Note:

The problem does not refer to any particular taxable period, so if the contributions were
effected prior to the effectivity of R.A. 7496, then the contribution of P100,000.00 can be
allowed, subject to the limitations prescribed under Sec. 29 (h) (i) of the NIRC. (BAR
1993)

X just hurdled the bar examinations and immediately engaged in the practice of
law. In preparing his income tax return, he listed the following as deductible
items: (a) fees paid to the Supreme Court to be able to take the bar examinations;
(b) fees paid to a law school to enroll in its pre- bar review classes; (c)
malpractice insurance and (d) amount spent to entertain a judge who decided his
first case. Which deductions are allowable? Reasons.

ANSWER:

Sec. 29 of the National Internal Revenue Code on deductions, among other things
provides:

"(a) Expenses

(1) Business Expenses (a) In general - All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal services actually
rendered; travelling expenses while away from home in the pursuit of a trade,
profession or business; rentals or other payments required to be made as a condition to
the continued use or possession, for the purpose of the trade, profession or business of
property to which the taxpayer hasnot taken nor is not taking title or in which he has no
equity."

Further, Sec. 69 of Revenue Regulations No. 2.as amended, otherwise known as


Income Tax Regulations" reads:

Sec. 69. Professional Expenses A professional may claim as deductions the cost of
supplies used by him or in the practice of his profession, expenses paid in the operation
and repair of transportation equipment used in making professional calls, dues to

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professional societies and subscriptions to professional journals, the rent paid for office
rooms, the expenses of the fuel, light, water, telephone, etc. used on such offices, and
the hire of office assistants. Amounts currently expended for books, furnitures and
professional instruments and equipment, the useful life of which is short, may be
deducted. But amounts expended for books, furniture and professional instruments and
equipment of a permanent character are not allowable deductions."

From the foregoing provisions of law that ordinary and necessary expenses incurred
during a taxable year pertaining directly to the practice of a profession may be allowed
as deductions, it may be inferred from a keen reading of Sec. 69 of Revenue
Regulations No. 2 that aside from personal exemptions, only direct costs or overhead
expenses incurred in the actual practice of a profession may be claimed, i.e. supplies,
fuel, light, electricity, salaries, etc.

Applying the above considerations in the case at bar, it appears that among the
expenses incurred by X. only the premiums he paid for malpractice insurance qualifies
as a deductible expense, the same being an ordinary and necessary expense in the
pursuit of a profession as defined by Sec. 29 of the NIRC and further qualified by
Revenue Regulations No. 2. The tuition fees for pre- bar classes and the bar
examination fees paid to the Supreme Court by X do not qualify as deductible expenses
under Revenue Regulations No. 2. As for the amount spent by X to entertain the judge
who decided his first case, the same may not be claimed as an expense. A business
expense to be deductible must be sustained by adequate proof and that the same must
not be against the law or public policy [Consolidated Mines, Inc. us. Court of Tax
Appeals, L-18863 29 August 1974).

Moreover, it may be worthwhile to note that under Sec. 3 (B) of Revenue Regulations
No. 2-93, implementing Republic Act No. 7496, otherwise known as An Act Adopting
The Simplified Net Income

Taxation Scheme for the Self-Employed and Professionals Engaged In the Practice Of
Their Profession, amending Section 21 and 29 of the National Internal Revenue Code,
as amended", only the following direct costs are deductible:

Raw materials

Salaries of employees directly performing services for the taxpayer in the course of or
pursuant to his business or practice of his profession. This includes salaries and wages
paid for janitorial, security, bookkeeping, administrative and sales personnel, by a self-
employed taxpayer or a professional in the exercise of his profession:

telecommunication, electricity, fuel, light and water;


business rental;
depreciation;
Contribution made to the Government and accredited relief organizations for the
rehabilitation of calamity- stricken areas declared by the President.

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The deductibility of the contributions is based on two criteria, to wit:
1. The donee or recipient must be the government or accredited relief organization: and
2. The contribution must be utilized for the rehabilitation of calamity-stricken areas
declared by the President.

The term Government" as used in the law refers to the Philippines or any of its
agencies or political subdivisions and includes:

Departments, agencies, bureaus, commissions and authorities, including state colleges


and universities:

Autonomous regions, provincial, city or municipal governments;

Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been paid or incurred in connection
with the conduct of a taxpayer's profession, trade or business.

ALTERNATIVE ANSWER:

None of the expenses are allowable. With respect to individuals engaged in the practice
of a profession, the NIRC limits deductions only to direct costs incurred in the exercise
of the profession, which costs do not include the items being claimed by X.

Note:

Again, the problem did not refer to any particular taxable period. (BAR 1993)

Xs favorite charity organization is the Philippine National Red Cross. To raise


money, PNRC sponsored a concert featuring the Austria Boys Choir. X advanced
P100,000.(X) to the PNRC for which he was issued a promissory note. Before its
maturity, X cancelled and returned the note to PNRC. An advertising man, X also
undertook the promotions of the Austria Boys Choir. Part of the promotions
campaign was to ask prominent personalities to publicly donate blood to the
PNRC a day before the concert. X himself donated 100 cc of blood. X intends, to
claim as deductions the value of the note, the cash value of the promotions
campaign and the cash value of the blood he donated. Give your legal advice.

ANSWER:

The value of the note can be claimed as deduction as charitable contribution. While the
amount was originally a loan, it can be considered to have become a gift or contribution
when X cancelled and returned the note to PNRC, a charitable organization.

On the other hand, the cash value of the promotions campaign cannot be claimed as a
deduction. Advertising expenses can only be deducted from the revenues where the

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expenses was incurred. In the case at hand, PNRC is the revenue-producing entity not
X. X did not derive any revenue. Thus, the cash value of his promotions campaign
cannot be claimed as deduction.

Finally, the cash value of the blood donated by X cannot be claimed as deduction.
Blood has no monetary value in this case as it is not disbursed in the form of expense.

ALTERNATIVE ANSWERS:

The value of the note qualifies as a contribution to a charitable institution which may be
deducted from gross income but only to the extent that it does not exceed 6% of his
taxable income derived from business.

X cannot claim deductions for the other items. Charitable and other contributions, to be
deductible, must actually have been paid, which is not true of the value of the
advertising promotions, and must represent some economic benefit to the recipient,
which is not true of the blood donation.

Section 29 as amended by RA 7496 allows the deduction of donation to an accredited


relief organization for the rehabilitation of calamity stricken areas declared by the
President. Clearly, the PNRC will qualify as donee relief organization. The P100,000.00
- note maybe allowed to the extent of its cash value considering that the maker of the
note is the donee itself. The rule is, donation made in kind shall be determined at its fair
market value as of the date such donations or gifts are made. (Section 10 BIR-NEDA
Regulation 1-81) The services rendered by the taxpayer to promote the show and the
100 cc. blood may not be allowed because of the difficulty in getting the fair-market
value of these noncash donations.

Note:

If the donation is made before the effectivity of RA. 7496. It is deductible but subject to
limitations under Sec. 29 h (i) of the NIRC. (BAR 1993)

X is the proprietor of Vanguard, which is a security and detective agency. X was


able to get the contract to provide the security services of a government agency.
He signed the Security Agreement with the director of the government agency
calling for the deployment of 100 security guards on a 24 hour basis. The contract
was revocable at the will of the director. To please the director, X gives him at the
end of the month P100,000.00 per guard hired. May X deduct from his income the
money he paid to the director? Reasons.

ANSWER:

The money paid to please the director is not deductible. This is a form of bribery.
Deductions shall not be allowed if the expense is contrary to law, public policy or for
immoral purposes (Zamora vs. Collector, SCRA 163; Roxas vs. CTA, 23 SCRA 276).

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ALTERNATIVE ANSWERS:

No. The money given to the director was paid merely to please" him and was not paid
for services actually rendered and therefore does not qualify as compensation for
services deductible as ordinary and necessary expense. Moreover, deductions are
allowable only if incurred for legal purposes.

No. A taxpayer may not deduct a business expense which is against the law or public
policy. The payment made to the director is a bribe given to a government employee.
Bribery is a crime punishable under the Revised Penal Code. (BAR 1993)

a. Nature: ordinary and necessary

X is the Advertising Manager of Mang Douglas Hamburger, Inc. X had dinner with
Y, owner of a chain of restaurants, to convince the latter to carry Mang Douglas
hamburger. After Y agreed, both X and Y went their separate ways. X celebrated
by going to a singles bar. He picked up a partner and consumed a bottle of beer.
He drove home at 3:00 a.m. On his way, he sideswiped a pedestrian who died as a
result of the accident. X settled the case extrajudicially by paying the heirs of the
pedestrian P50.000.00. The money, however, came from Mang Douglas
Hamburger, Inc. Discuss whether the P50.000.00 can be claimed by Mang
Douglas Hamburger, Inc. as an ordinary and necessary expense.

ANSWER:

No. As the expenditure had not been incurred in carrying on his trade or
business, the same cannot be considered an ordinary and necessary expense for
which deduction may be claimed. Such expense is a personal expense which is
not deductible from the gross income.

ALTERNATIVE ANSWERS:

(a) In the case of Helvering vs. Humpton (1935; CCA 9th 79F [2dl 358, it was held that:

Restitution is ordinarily expected to be made by a person in the course of whose


business a wrong is committed, so that he may deduct the amount thereof as an
ordinary and necessary business expense."

In the case at bar, the money advanced by Mang Douglas Hamburger, Inc. to pay off
the civil liability of X, which arose from the accident after a business deal has been
struck for Mang Douglas Hamburger, Inc. was in fact reparation/restitution to the
aggrieved heirs. However, the same cannot be considered as an ordinary and
deductible expense, since the law poses as a condition for its deductibility that the
wrong or tort should have been committed in the course of the business.

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If Mang Douglas Hamburger, Inc. treats the advances as salary or compensation of Y
who is an employee of Mang Douglas and withholds the corresponding tax thereon then
there is a possibility of deducting. (BAR 1993)

b. Paid and incurred during taxable year


c. Others (not in the syllabus)

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 Php 100,000 constitutes a bribe, it is not allowed as a deduction
from gross income of Corporation A- (Section 34(A)(1)(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). (BAR
2001)

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)(1)(c). NIRC). (BAR 1998)

2. Salaries, wages and other forms of compensation for personal


services actually rendered, including the grossed-up monetary value
of the fringe benefit subjected to fringe benefit tax which tax should
have been paid

Gold and Silver Corporation gave extra 14th month bonus to all its official 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

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corporation claimed that the bonus is an ordinarily and necessary expense that
should be allowed.

If you were the BIR Commissioner, how will you resolve the issue? 5%

SUGGESTED ANSWER:

I will rule against the deductibility of the bonus. The extra bonus is both not normal to
the business and unreasonable. Admittedly, there is no fixed test for determining the
reasonableness of a bonus as an additional compensation. This depends upon many
factors such as: the payment must be made in good faith; the character of the
taxpayers 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 (C.M Hoskins and Co., Inc. v. CIR, 30 SCRA
434 [1969]. Giving an extra bonus at a time that the company suffers operating losses is
not a payment in good faith and is not normal to the business, hence unreasonable and
would not qualify as ordinary and necessary expense. (BAR 2006)

3. Travelling/transportation expenses
4. Cost of materials
5. Rentals and/or other payments for use or possession of property
6. Repairs and maintenance
7. Expenses under lease agreements
8. Expenses for professionals
9. Entertainment/Representation expenses
10. Political campaign expenses

Political campaign contributions are NOT deductible from gross income: (2011
Bar Question)

(A) if they are not reported to the Commission on Elections.


(B) if the candidate supported wins the election because of possible corruption.
(C) since they do not help earn the income from which they are to be deducted.
(D) since such amounts are not considered as income of the candidate to whom
given.

SUGGESTED ANSWER:

(C) since they do not help earn the income from which they are to be deducted.

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 donors tax. What would your answer

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be? Will your answer be the same if he were to donate to Political Party Z instead
of to Y directly?

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). (BAR 2003)

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%]

SUGGESTED ANSWER:

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.

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[Al(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[A](I)(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. (BAR 1998)

11. Training expenses


12. Advertising expenses

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 s deduction from gross income,
claiming it as an ordinary business expense. Is MFC correct? Explain. (3%)

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SUGGESTED ANSWER:

No. The protection of taxpayers brand franchise is analogous to the maintenance of


goodwill or title to ones property which is in the nature of a capital expenditure. An
advertising expense, 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]). (BAR 2009)

b. Interest

A Co., a Philippine corporation. Issued preferred shares of stock with the


following features:

1. Non-voting;
2. 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;
3. 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
4. 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 really 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 is issued and,
therefore, dividends paid thereon are not considered interests which are allowed to be
deducted from the gross income of the corporation. (Revenue Memorandum Circular
No. 17-71, July 12, 1971). (BAR 1999)

1. Requisites for deductibility

Pursuant to the National Internal Revenue Code, for interest to be deductible,


what are the requirements to be met? Explain.

ANSWER:

For interest to be deductible, the following requirements must be met:


1. That there must be an indebtedness:
2. That there is an interest on such indebtedness:
3. Such interest was paid or accrued within the taxable year

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4. Interest was paid on a debt related to ones profession, trade or business. (BAR
1992)

2. Non-deductible interest expense

Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock
of San Miguel Corporation. For failure to file a donors return on the donation
within the statutory period, the taxpayer was assessed the sum of PI02,000.00, as
donors tax plus 25% surcharge or P25.500.00 and 20% interest or
P20.400.00which he paid on June 24. 1985.

On April 10, 1986, he filed his income tax return for 1985 claiming among others,
a deduction for interest amounting to P9.500.00 and reported a taxable income of
P96.000.00.

On November 10. 1986, the taxpayer filed an amended income tax return for the
same calendar year 1985, claiming therein an additional deduction in the amount
of P20.400.00 representing interest paid on the donors gift tax.

A claim for refund of alleged overpaid income tax for 1985 was filed with the
Commissioner which was subsequently denied.

Upon appeal with the Court of Tax Appeals, the Commissioner took Issue with the
Court of Tax Appeals determination that the amount paid by the taxpayer for
interest on his delinquent taxes is deductible from the gross income for the same
year pursuant to Sec. 29 (b) (1) of the National Internal Revenue Code.

The Commissioner of Internal Revenue pointed out that a tax is not an


indebtedness. He argued that there is a fundamental distinction between a tax"
and a "debt". According to the Commissioner, the deductibility of interest on
indebtedness from a persons income tax cannot extend to interest on taxes."

What is your opinion on the argument of the Commissioner that a tax is not an
indebtedness so that deductibility on the interest on taxes should not be
allowed?

ANSWER:

The Commissioners argument is misplaced because the interest on the donors tax is
not one that can be considered as having been incurred in connection with the
taxpayers trade, business or exercise of profession.

ALTERNATIVE ANSWER:

While a tax may be considered a debt for purposes of deducting from gross income, the
interest on taxes cannot be so considered, as such interest is in the nature of a penalty,

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the imposition of which is designed to discourage delinquent payment of taxes. To allow
the deductibility of such interest would be to diminish the punitive and deterrent effects
of the imposition, and thus to diminish the importance of the prompt payment of taxes.

The argument of the Commissioner is wrong. Because while a tax as a general rule is
not a debt, interest on a non-payment of a tax has been considered like interest on
indebtedness by the Supreme Court. (Note: Whether or not the interest is deductible
under the present aw no apparently in question). (BAR 1992)

3. Interest subject to special rules


a. Interest paid in advance
b. Interest periodically amortized
c. Interest expense incurred to acquire property for use in
trade/business/profession

Explain if the following items are deductible from gross income for income tax
purposes. Disregard who is the person claiming the expense. (5%)

Interest on loans used to acquire capital equipment or machinery.

SUGGESTED ANSWER:

This 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). (BAR
1999)

d. Reduction of interest expense/interest arbitrage

The interest expense of a domestic corporation on a bank loan in connection with


the purchase of a production equipment: (2012 BAR)

a) Is not deductible from gross income of the borrower-corporation;


b) Is deductible from the gross income of the borrower-corporation during the
year or it may be capitalized as part of cost of the equipment;
c) Is deductible only for a period of five years from date of purchase;
d) Is deductible only if the taxpayer uses the cash method of accounting.

SUGGESTED ANSWER:

b) Is deductible from the gross income of the borrower-corporation during the year or it
may be capitalized as part of cost of the equipment.
Section 34(B)(3), NIRC.

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c. Taxes

Distinguish between the legal concept of "taxes" and "debts".

ANSWER:

A tax may be considered a debt in the Civil Code sense for the following purposes:
a. Collection being enforced by court action:
b. Statute of limitations: and
c. Deduction from gross income.

Strictly speaking, however, a tax is not a debt in that there can be no set-off between
the taxpayer and the Government. (BAR 1992)

1. Requisites for deductibility


2. Non-deductible taxes
3. Treatments of surcharges/interests/fines for delinquency
4. Treatment of special assessment
5. Tax credit vis--vis deduction

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.

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 income to arrive at the tax base. Since the law allowed 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. Central Luzon Drug Corp., Id.). (BAR 2006)

d. Losses
1. Requisites for deductibility

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.
(2010 Bar Question)

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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 employer-employee relationship are not allowed to claim deduction
except those allowed under Sec. 34(M) of the Tax Code referring only to Php 2,400
health and hospitalization insurance premiums. Therefore, the claim of casualty loss
has no legal basis.

Give the requisites for deductibility of a loss. [5%]

SUGGESTED ANSWER:

The requisites for deductibility of a loss are a) loss belongs to the taxpayer; b) actually
sustained and charged off during the taxable year; c) evidenced by a closed and
completed transaction; d) not compensated by insurance or other forms of indemnity; e)
not claimed as a deduction for estate tax purposes in case of individual taxpayers; and
f) 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](I); 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)(1)(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 deductibility of any of the above losses be
given full credit. (BAR 1998)

X is a travelling salesman in Jolo, Sulu. In the course of his travel, a band of


MNLF seized his car by force and used it to kidnap a foreign missionary. The next
day, X learned that the military and the MNLF band had a chance encounter.
Using heavy weapons, the military fired at the MNLF band that tried to escape
with the use of Xs car. All the members of the band died and Xs car was a total
wreck. Can X deduct the value of his car from his income as casualty loss?
Reasons.

ANSWER:
Sec. 29 (i) (c) of the National Internal Revenue Code provides that in cases of individual
taxpayers, losses to be deductible must be:

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a) actually sustained and charged off within the taxable year;
b) have been incurred in trade, profession or business or in any transaction entered into
for profit, though not connected with trade, profession, or business;
c) Moreover, Sec. 1 of Revenue Regulations No. 12-77, defined casualty as complete or
partial destruction of property resulting from an Identifiable event of sudden,
unexpected, or unusual nature.

It denotes accidents, some sudden Invasion by hostile agency, and excludes


progressive deterioration.

Based on the above-mentioned laws and the circumstances of the case at bar, the
value of the wrecked car is deductible as casualty loss, provided the regulations
governing substantiation requirements for losses are complied with.

ALTERNATIVE ANSWERS:

a) No. With respect to individuals engaged in business, the NIRC limits deductions only
to certain direct costs incurred In connection with the business, which costs, however,
do not include casualty losses.

b) No. Section 29 of the NIRC, as amended by RA7496, better known as the SNTTS,
does not include among the allowable items of deductions for self-employed individuals
like X, casualty losses even if the property destroyed is used in business. A taxpayer
claiming deduction must point to some specific provision of the statute in which that
deduction is authorized and must be able to prove that he is entitled to the deduction
which the law allows (Adas Consolidated Mining, 102 SCRA 246).

Note:
It depends. If he is an employee of a company, that is not deductible. On the other
hand, if he is a businessman it will be deductible to his gross income provided he can
recover only up to the amount of the casualty loss that does not exceed its book value,
provided further, that it is not compensated by insurance or otherwise.

Under the SNITS Law (R-A 7496) losses of any kind are no longer deductible from
gross income of individuals. (BAR 1993)

2. Other types of losses


a. Capital losses

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

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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 nonbusiness 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).

ALTERNATIVE ANSWER:

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 ordinary gains which are subject to a higher rate of income tax.
(Chirelstein, Federal Income Taxation, 1977 Ed.) (BAR 2003)

b. Securities becoming worthless

Explain if the following items are deductible from gross income for income tax
purposes. Disregard who is the person claiming the deduction. (5%)

Worthless securities

SUGGESTED ANSWER:

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(B)(2), NIRC). (BAR 1999)

c. Losses on wash sales of stocks or securities


d. Wagering losses
e. Net Operating Loss Carry-Over (NOLCO)
e. Bad debts

PQR Corp. claimed as a deduction in its tax returns the amount of PI, 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 hold in determining whether or not the debts
are bad debts?" Answer and explain briefly. (5%)

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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 neither 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 11996];
Revenue Regs. No. 5-99). (BAR 2004)

Explain if the following items are deductible from gross income for income tax
purposes. Disregard who is the person claiming the deduction. (5%)

Reserves for bad debts.

SUGGESTED ANSWER:

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(B),
NIRC). (BAR 1999)

1. Requisites for deductibility


2. Effect of recovery of bad debts

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Explain briefly whether the following items are taxable or non- taxable:
Recovery of bad debts previously charged off;

SUGGESTED ANSWER:

Recovery of bad debts previously charged off is taxable to the extent of income tax
benefit of said deduction. (Sec. 34(E)(1), NIRC). (BAR 2005)

f. Depreciation

Explain if the following items are deductible from gross income for income tax
purposes. Disregard who is the person claiming the expense. (5%)
Depreciation of goodwill.

SUGGESTED ANSWER:

Depreciation for goodwill is not allowed as deduction 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. (BAR 1999)

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 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.

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

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.

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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:

a) The lessor may report as income the market value of the building at the time when
such building is completed; or
b) 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
PI,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:

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. (BAR 1995)

1. Requisites for deductibility


2. Methods of computing depreciation allowance

What is the proper allowance for depreciation of any property used in trade or
business? (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 P10,000
after its useful life? [2%]

SUGGESTED ANSWER:

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)

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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).

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 100,000-Php10,000) of
Php90,000 by the estimated useful life (20 years).

Note:
The bar candidate may give a different figure depending on the method he used in
computing the annual depreciation. The facts given in the problem are sufficient to
compute the annual depreciation either under the declining-balance 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. (BAR 1998)

a. Straight-line method
b. Declining-balance method
c. Sum-of-the-years-digit method

g. Charitable and other contributions


1. Requisites for deductibility

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)?

SUGGESTED ANSWER :

No. the donation is not deductible. The chapel is owned by a 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

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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 stock holders which is a
clear violation of the law appertaining to the so-called private inurement doctrine
thereby making the donation non-deductible (Section 34(H)(1), NIRC).

In order that donations to non-stock, non-profit educational Institution may be


exempt from the donors gift tax, what conditions must be met by the donee?
(3%)

SUGGESTED ANSWER:

In order that donations to non-stock, non-profit educational institution may be exempt


from the donors 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). (BAR
2002)

2. Amount that may be deducted

On December 06, 2001, LVN Corporation donated a piece of vacant lot situated in
Mandaduyong City to an accredited and duty registered non-stock, non-profit
educational institution to be used by the latter in building a sports complex for
students.

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:

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). (BAR 2002)

h. Contributions to pension trusts


1. Requisites for deductibility
i. Deductions under special laws
4. Optional standard deduction
a. Individuals, except non-resident aliens

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

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Dr. K so he could maximize the deductions from his gross income? (2015 Bar
Question)

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.

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 profession-connected 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:

No. Since Ernesto has elected to claim the optional standard deduction, said election is
irrevocable for the taxable year for which the return is made (Section 34(L), NIRC).
(BAR 2009)

b. Corporations, except non-resident foreign corporations

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. (2010 Bar
Question)

SUGGESTED ANSWER:

FALSE. The OSD should not exceed 40% of its gross income.

c. Partnerships
5. Personal and additional exemption (R.A. No. 9504, Minimum Wage
Earner Law)

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:

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As to amount Allowable deductions generally refer to actual expenses incurred in the
pursuit of trade, business or practice of profession while 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.
(BAR 2001)

a. Basic personal exemptions

Charlie, a widower, has two sons by his previous marriage. Charlie lives with
Jane who is legally married to Mario. They have a child name Jill. The children are
all minors and not gainfully employed.

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 (Sec. 35(A)t NIRC). (BAR 2006)

Maria Clara, a Filipino citizen, married Ha Wa, a Hongkong national in 1988 in


Hongkong. In 1989, the two separated and Maria returned to the Philippines. The
two lost contact with each other. In 1990, Maria filed her income tax return and
claimed a personal exemption of P12.000.00 under Sec. 21(a) of the Tax Code.
Decide.

ANSWER:

Maria may file a separate return as a married individual because it is impossible to file a
consolidated return. However, according to Section 29 of the NIRC prior to the
effectivity of R.A. 7167, husband and wife electing to compute their income tax
separately shall be entitled to a personal exemption of P6.000.00 each.

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ALTERNATIVE ANSWERS:

Revenue Regulations No. 1-92. prescribing the implementing guidelines for R.A. No.
7167. provides that the new basic personal exemptions of individuals taxpayers are as
follows:

For single individual or married individuals but Judicially decreed as legally separated
with no qualified dependents - P9.000.00.

For married couples with both spouses employed- P9.000.00

For married couples with only one spouse employed - P 18,000.00.

For head of the family - P 12,000.00.

Based on the foregoing provisions of law, Maria's claim of P 12,000.00 as personal


exemption cannot be allowed. While she is married and not judicially separated, it does
not appear that she has dependents to qualify her as head of the family and to entitle
her to the claim of P12,000.00 personal exemption.

Not being legally separated. Maria may claim a higher personal exemption of
PI8.000.00 for married individuals, and not merely PI2,000.00 which applies to the Head
of a Family. The exemption for the Head of a Family requires that one be unmarried or
legally separated, which Maria Clara is not.

Maria may not claim the PI2,000.00 personal exemption as head of the family in
accordance with Section 29 of the NIRC as amended by RA 7167 and RA 7496. The
Supreme Court ruled in the case of Umali v. Estanislao (209 SCRA446) that the
increased personal exemptions shall take effect on January 29, 1992 and shall be
applied on income earned for taxable year 1991. (BAR 1993)

b. Additional exemptions for taxpayer with dependents

Spouses Pablo Gonzales and Teresita Gonzales, both resident citizens acquire
during their marriage a residential house and lot located in Makati City, which is
being leased to a tenant for a monthly 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 June 2010, he was immediately
brought to the hospital because of the heart 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. (2012 BAR)

a. Is Mr. Pablo Gonzales required to file income tax for 2010? If so, how much
income must he declare for the year? How much personal and additional
exemption is he entitled to? Explain your answer.

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b. Is Mrs. Teresita Gonzales required to file income tax return for 2010? If so,
how much income must she declare for the year? How much personal
exemption is she entitled to? Explain your answer.
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.

Suggested Answer:
a. YES. Income to be declared: P600,000 (Rental Income P300,000 and Salary
P300,000); Personal and Additional Exemption P75,000 (Basic of P50,000 and
P25,000 for one minor child)
b. YES. Rental Income P600,000 (P300,000 share for January to June 2010 and
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 return of the parent
pursuant to Sec. 51(E) of the Tax Code.
c. 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 representative interest in the inheritance.

Dondon and 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, with
Dondon directed to provide full financial support for them as well. The court
awarded the 6th child to Dondon's father with Dondon also providing full financial
support. Assuming that only Dondon is gainfully employed while Helena is not,
for how many children could Dondon claim additional exemptions when he files
his income tax return? (2011 Bar Question)

(A) Six children.


(B) Five children.
(C) Three children.
(D) Two children.

SUGGESTED ANSWER:

(D) Two children.

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.(2010 Bar Question)

SUGGESTED ANSWER:

False. (Sec. 34(M), NIRC)

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Charlie, a widower, has two sons by his previous marriage. Charlie lives with
Jane who is legally married to Mario. They have a child name Jill. The children are
all minors and not gainfully employed.

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

SUGGESTED ANSWER:

Each legitimate children from his previous marriage and his illegitimate child with Jane
entitled 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 (Sec. 35(B), NIRC). (BAR 2006)

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.

For income tax purposes, may Arnold be considered as head of a family?" [3%]

Is Arnold entitled to deduct from his gross income, an additional exemption for
each of his illegitimate child? [2%]

SUGGESTED ANSWER:

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). (BAR 1998)

c. Status-at-the-end-of-the-year rule

RAM got married to LISA last January 2003. On November 30, 2003, LISA gave
birth to twins. Unfortunately, however, USA 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 (TTR) 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?

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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[C], NIRC). (BAR 2004)

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 PI50,000.00. The spouses
were both employed in 1991 by the same company. On 30 December 1992, their
first child was bom, and a second child was bom on 07 November 1993. In 1994,
they sold the condominium unit and bought a new unit.

Under the foregoing facts, what were the events in the life of the spouses that had
income tax incidences?

ANSWER:

The events in the life of spouses Mar and Joy which have income tax incidences are the
following:
a) Their marriage in 1990 qualifies them to claim personal exemption for married
individuals;
b) Their employment in 1991 by the same company will make them liable to the income
tax imposed on gross compensation income;
c) Birth of their first child in December 1992 would give rise to an additional exemption
of P5.000 for taxable year 1992;
d) 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 P10,000
for taxable year 1993; and 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. (BAR 1997)

d. Exemptions claimed by non-resident aliens

True or False. 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. (2010 Bar Question)

SUGGESTED ANSWER:

False. [Sec. 25(A)(1) in relation to Sec. 35, NIRC]

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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.)

6. Items not deductible


a. General rules
b. Personal, living or family expenses
c. Amount paid for new buildings or for permanent improvements
(capital expenditures)
d. Amount expended in restoring property (major repairs)
e. Premiums paid on life insurance policy covering life or any other
officer or employee financially interested

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.

SUGGESTED ANSWER:

FALSE [Sec. 34(M), NIRC.]

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
[1940D. Paying premiums for the insurance of a person not connected to the company
is not normal, usual or customary.

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

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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][1][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][4], NIRC). (BAR 2004)

f. Interest expense, bad debts, and losses from sales of property


between related parties
g. Losses from sales or exchange or property
h. Non-deductible interest
i. Nondeductible taxes
j. Non-deductible losses
k. Losses from wash sales of stock or securities

7. Exempt corporations
a. Propriety educational institutions and hospitals

The head priest of the religious sect Tres Personas Solo Dios, as the corporation
sole, rented 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: (2011 Bar Question)

(A) not exempt from real property taxes because the user is organized for profit.
(B) exempt from real property taxes since it is actually, directly, and exclusively
used for religious purposes.
(C) not exempt from real property taxes since it is the rents, not the land, that is
used for religious purposes.
(D) exempt from real property taxes since it is actually, directly, and exclusively
used for educational purposes.

SUGGESTED ANSWER:

(D) exempt from real property taxes since it is actually, directly, and exclusively used for
educational purposes.

b. Government-owned or controlled corporations


c. Others

10. Taxation of resident citizens, non-resident citizens, and resident aliens


a. General rule that resident citizens are taxable on income from all sources
within and without the Philippines
i. Non-resident citizens

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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 examinees answer only cover the
first two paragraphs. (BAR 2000)

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 Ps salary to Ps 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 non-resident 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 non-resident citizen is taxable only on income derived from
Philippine sources. (Section 23, NIRC). The salaries and allowances received from
being employed abroad are incomes from without because these are compensation for
services rendered outside of the Philippines. (Section 42, NIRC).

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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). (BAR 1999)

b. Taxation on compensation income


i. Inclusions
a. Monetary compensation
1. Regular salary/wage
2. Separation pay/retirement benefit not otherwise exempt
3. Bonuses, 13th month pay, and other benefits not exempt
4. Directors fees
b. Non-monetary compensation
1. Fringe benefit not subject to tax

X was hired by Y to watch over Ys 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 employer, hence does not constitute a taxable
fringe benefit. (Section 33, NIRC). (BAR 2001)

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.

A. What will be the basis of Xs income tax.


B. Will your answer in question (a) be the same if X's employer is an obstetrician?
Why?

ANSWER:

The basis of Xs income tax would depend on whether his employer is an employee or a
practising corporate lawyer. If his employer is an employee, the basis of Xs 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

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and for his convenience and that the free lodging was given to X as a condition for
employment.

If the employer is an obstetrician who is self-employed, the basis of Xs 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. (BAR 1996)

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.

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 service 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 dub 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). (BAR 1995)

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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.

ANSWER:

No, the free uniforms, free living quarters and the free meals inside the camp are not
income to Capt. Canuto because these are facilities or privileges furnished by the
employer for the employer's convenience which are necessary incidents to proper
performance of the military personnel's duties. (BAR 1995)

X is employed as security guard of Excel Supermarket, Inc. X lives in a room


within the compound of Excel but he is not charged any rent. The rental value of
the room is P300.00 a month. X wants your opinion on whether BIR can tax the
value of the free use of his room.

ANSWER:

The rental value of the room is not taxable. Section 2.2 of the Revenue Audit Memo
Order No. 1-87 provides that if the lodging is furnished in the business premises of the
employer and the employee is required to accept such lodging as a condition of his
employment, then the value of said lodging will be not taxable. It is merely for the
convenience, comfort and pleasure of the employer.

ALTERNATIVE ANSWER:

The BIR may not tax the value of the free use of the room, as the same may not strictly
be considered compensation income. Considering the nature of Xs employment and
the fact that free lodging was furnished within the business premises, it may reasonably
be said that the benefit therefrom inured to the employer more than to X and thus may
not actually be considered remuneration for services included in the computation of
taxable income.

It depends. If the lodging furnished to employee-X is within the business premises of the
employer and the employee is required to accept the lodging as condition for
employment the imputed rental value of the room used by X shall be excluded from X's
compensation income (BIR Audit Memo 1-87). (BAR 1993)

ii. Exclusions
a. Fringe benefit subject to tax
b. De minimis benefits

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Which of the following is an exclusion from gross income? (2014 Bar Question)

(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

What are de minimis benefits and how are these taxed? Give three (3) examples
of de minimis benefits. (2015 Bar Question)

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 not exceeding P5,000 per annum;
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
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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

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.

SUGGESTED ANSWER:

There is no legal basis for the 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 PI,000, hence exempted from the fringe benefits
tax. (Section 33, NIRC as implemented by RR No. 10-2000).

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 health, goodwill, contentment and efficiency of the employee
which will not constitute taxable income of the recipient. (Section 2.78.1(A)(3) of RR No.
2-98). (BAR 2007)

State with reasons the tax treatment of the following in the preparation of annual-
income tax returns:
De minimis benefits;

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SUGGESTED ANSWER:

De minimis benefits are non-taxable fringe benefits. They are not to be reported in the
income tax return because they are tax exempt. They are also exempt from the
imposition of the fringe benefits tax. (Sec. 33(C), NIRC). (BAR 2005)

c. 13th month pay and other benefits, and payments specifically


excluded from taxable compensation income

State with reasons the tax treatment of the following in the preparation of annual-
income tax returns:
13th month pay

SUGGESTED ANSWER:

13th month pay is excluded from the gross income for income tax purposes to the
extent of P30,000.00. Any excess will be included in the gross income per income tax
return as part of gross compensation income. (Sec. 32(B)(7)(e), NIRC). (BAR 2005)

iii. Deductions

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 employer-employee relationship are not allowed to claim deduction
except that allowed under Section 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).

Taxpayers whose only income consist of salaries and wages from their
employers have long been complaining 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%)

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SUGGESTED ANSWER:

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.
(BAR 2001)

a. Personal exemptions and additional exemptions

In January 2013, your friend got his first job as an office 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%)


(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?
(2014 Bar Question)

SUGGESTED ANSWER :

(A) Yes. The law allows a basic personal exemption of Php 50,000.00 for each
individual taxpayer (Section 35(A), NIRC).

(B) No. While his parents and minor sibling 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 children (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 taxable
income while tax credits reduce the tax liability (Central Drug Corporation v. CIR).

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: (2015 Bar Question)

a) For 2010
b) For 2011

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c) For 2013

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.

Charlie, a widower, has two sons by his previous marriage. Charlie lives with
Jane who is legally married to Mario. They have a child name Jill. The children are
all minors and not gainfully employed.

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 (Sec. 35(A)t NIRC).

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

SUGGESTED ANSWER:

Each legitimate children from his previous marriage and his illegitimate child with Jane
entitled 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 (Sec. 35(B), NIRC). (BAR 2006)

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:

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As to amount Allowable deductions generally refer to actual expenses incurred in the
pursuit of trade, business or practice of profession while 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.
(BAR 2001)

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.

For income tax purposes, may Arnold be considered as head of a family?" [3%]

Is Arnold entitled to deduct from his gross income, an additional exemption for
each of his illegitimate child? [2%]

SUGGESTED ANSWER:

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). (BAR 1998)

Maria Clara, a Filipino citizen, married Ha Wa, a Hongkong national in 1988 in


Hongkong. In 1989, the two separated and Maria returned to the Philippines. The
two lost contact with each other. In 1990, Maria filed her income tax return and
claimed a personal exemption of P12.000.00 under Sec. 21(a) of the Tax Code.
Decide.

ANSWER:

Maria may file a separate return as a married individual because it is impossible to file a
consolidated return. However, according to Section 29 of the NIRC prior to the
effectivity of R.A. 7167, husband and wife electing to compute their income tax
separately shall be entitled to a personal exemption of P6.000.00 each.

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ALTERNATIVE ANSWERS:

Revenue Regulations No. 1-92. prescribing the implementing guidelines for R.A. No.
7167. provides that the new basic personal exemptions of individuals taxpayers are as
follows:

For single individual or married individuals but Judicially decreed as legally separated
with no qualified dependents - P9.000.00.

For married couples with both spouses employed- P9.000.00

For married couples with only one spouse employed - P 18,000.00.

For head of the family - P 12,000.00.

Based on the foregoing provisions of law, Maria's claim of P 12,000.00 as personal


exemption cannot be allowed. While she is married and not judicially separated, it does
not appear that she has dependents to qualify her as head of the family and to entitle
her to the claim of P12,000.00 personal exemption.

Not being legally separated. Maria may claim a higher personal exemption of
P18.000.00 for married individuals, and not merely PI2,000.00 which applies to the
Head of a Family. The exemption for the Head of a Family requires that one be
unmarried or legally separated, which Maria Clara is not.

Maria may not claim the PI2,000.00 personal exemption as head of the family in
accordance with Section 29 of the NIRC as amended by RA 7167 and RA 7496. The
Supreme Court ruled in the case of Umali v. Estanislao (209 SCRA446) that the
increased personal exemptions shall take effect on January 29, 1992 and shall be
applied on income earned for taxable year 1991. (BAR 1993)

b. Health and hospitalization insurance


c. Taxation of compensation income of a minimum wage earner
1. Definition of statutory minimum wage
2. Definition of minimum wage earner
3. Income also subject to tax exemption: holiday pay, overtime pay,
night-shift differential, and hazard pay

c. Taxation of business income/income from practice of profession


d. Taxation of passive income

Passive income includes income derived from an activity in which the earner
does not have any substantial participation. This type of income is: (2011 Bar
Question)

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(A) usually subject to a final tax.
(B) exempt from income taxation.
(C) taxable only if earned by a citizen.
(D) included in the income tax return.

SUGGESTED ANSWER:

(A) usually subject to a final tax.

i. Passive income subject to final tax


a. Interest income

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
income and remitted the same to the BIR.

Are the interest incomes on the bank deposits of spouses Renato and Judy
Garcia subject to income tax? Explain. (4%)

SUGGESTED ANSWER:

Yes. The Interest income from the peso bank deposit is subject to 20% final withholding
tax. The interest income from the dollar deposit is subject to 7.5% final withholding tax
but only on the portion of the interest attributable to Judy or $500. The interest on the
dollar deposit attributable to Renato, a non-resident, is exempt from income tax.
(Section 24(B)(1), NIRC).

b) Is the bank correct in withholding the 20% final tax on the entire interest
income? Explain. (3%)

SUGGESTED ANSWER:

No. Only the interest income on a peso deposit is subject to 20%. The interest income
from a dollar deposit is subject to 7.5% if the earner is a resident individual. (Section
24(B), NIRC). (BAR 2008)

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;

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SUGGESTED ANSWER:

Interest on deposit with BPI Family Bank is a passive income subject to a final
withholding tax rate of 20%; the interest on deposit with a local offshore banking unit of
a foreign bank is a passive income subject to a final withholding tax rate of 7.5%. (Sec.
24(B)(1), NIRC). Both interest incomes are not to be declared as part of gross income in
the income tax return. (BAR 2005)

i. Treatment of income from long-term deposits


b. Royalties

ABC, a domestic corporation, entered into a software license agreement with


XYZ, a non-resident foreign corporation based in the U.S. Under the 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 apply the program in the Philippines.

Discuss the tax implication of the transaction. (2010 Bar Question)

SUGGESTED ANSWER:

The amount payable under the agreement is in the nature of a 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 the application or enjoyment of
any such property or right. The royalties paid to the non-resident US 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.

c. Dividends from domestic corporations

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.

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

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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) (BAR 2003)

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?

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%; 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 are 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 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 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. (BAR 1997)

d. Prizes and other winnings

Informers reward is subject to a final withholding tax of 10%.

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SUGGESTED ANSWER:

TRUE. [Sec. 282, NIRC.}

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 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.

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) (BAR 2002)

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),

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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. (BAR
2000)

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 donors tax from Ayala Land Corporation,
which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.

ANSWER:

The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in
imposing the income tax. RA. 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 donors tax from Ayala Land Corporation. The
law is clear when it categorically stated That the donors of said prizes and awards
shall be exempt from the payment of the donors tax." (BAR 1996)

ii. Passive income not subject to final tax

e. Taxation of capital gains


i. Income from sale of shares of stock of a Philippine corporation
a. Shares traded and listed in the stock exchange

A resident Filipino citizen (not a dealer in securities) sold shares of stocks of a


domestic corporation that are listed and traded in the Philippine Stock Exchange.
(2012 BAR)

a) The sale is exempt from income tax but subject to the 12 of 1% stock
transaction tax;
b) The sale is subject to income tax computed at the graduated income tax rates
of 5% to 32% on net taxable income;
c) The sale is subject to the stock transaction tax and income tax;
d) The sale is both exempt from the stock transaction tax and income tax.

SUGGESTED ANSWER:

a) The sale is exempt from income tax but subject to the 12 of 1% stock transaction tax
Section 127, NIRC.

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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 Philippines 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.

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%)

SUGGESTED ANSWER:

No. The gain on the sale or disposition of shares of stock of a domestic corporation held
as capital assets will not be subject to income tax if these shares sold are listed and
traded in the stock exchange. (Section 24(C), NIRC). However, the seller is subject to
the percentage tax of 1/2 of 1% of the gross selling price. (Section 127 (A), NIRC).
(BAR 2008)

b. Shares not listed and traded in the stock exchange

A dealer in securities sold unlisted shares of stocks of a domestic corporation in


2010 and derived a gain of P1 Million therefrom. The gain is: (2012 BAR)

a) Taxable at 30% regular corporate income tax based on net taxable income;
b) Taxable at 5%/10% capital gains tax based on net capital gain;
c) Taxable at 1/2 of 1% stock transaction tax based on the gross selling price or
fair market value, whichever is higher
d) Exempt from income tax

SUGGESTED ANSWER:

a) Taxable at 30% regular corporate income tax based on net taxable income
Section 22 (U) in relation to Section 27, NIRC.

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 Philippines 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.

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? Explain. (3%)

SUGGESTED ANSWERS:

Yes. The sale of shares of stocks of a domestic corporation held as capital asset, not
through a trading in the local stock exchange, is subject to capital gains tax based on

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the net capital gain during the taxable year. The tax rate is 5% for a net capital gain not
exceeding P100,000 and 10% for any excess. (Section 24(C), NIRC). (BAR 2008)

ii. Income from the sale of real property situated in the Philippines

Which statement is correct? A non-stock, non-profit charitable association that


sells its idle agricultural property is: (2012 BAR)

a) Not required to file an income tax return nor pay income tax on the transaction
to the BIR, provided the sales proceeds are invested in another real estate
during the year;
b) Required to pay the 6% capital gains tax on the gross selling price of fair
market value, whichever is higher;
c) Mandated to pay the 30% regular corporate income tax on the gain from sale;
d) Required to withhold the applicable expanded withholding tax rate on the
transaction and remit the same to the BIR.

SUGGESTED ANSWER:

b) Required to pay the 6% capital gains tax on the gross selling price of fair market
value, whichever is higher
Section 30, NIRC.

Melissa inherited from her father a 300-square-meter lot. At the time of her
fathers 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%)

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 of P54,000.00. The capital gains tax is due on the sale of a real property
classified as a capital asset (Section 24(D)(1), NIRC). (BAR 2009)

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' P2.0 Million as the selling
price.

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Discuss the tax implications and consequences of the action taken by the parties.
(5%)

SUGGESTED ANSWER:

The capital gains tax due on the sale shall be based on the actual selling price of P2.5
million which is higher than the zonal value of the property. (Section 24(D)(1), NIRC).
The documentary stamp tax on the conveyance of real property shall likewise be based
on the higher value. (Sec. 196, NIRC). Accordingly, a deficiency capital gains tax and
documentary stamp tax are due from Josel plus the 50% surcharge imposable on a
fraudulent return.

Both Josel and his tax consultant are criminally liable for tax evasion. Here, it is clear
that the three requisite factors to constitute tax evasion are present, viz: (1) the end to
be achieved which is the payment of less than that known by them to be legally due; (2)
an accompanying state of mind which is evil, in bad faith, willfull or deliberate and not
merely accidental; and (3) a course of action which is unlawful. [CIR v. Estate of
Benigno P. Toda, Jr., 438 SCRA 290 (2004)]. (BAR 2005)

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. (BAR 2001)

Juan Panalo won a damage suit for P500,000.00 against Juana Talo. Panalo got a
writ of execution and made a levy on the lot of Talo. The lot was sold at public
auction where Panalo was the highest bidder for P500.000.00. Panalo refused to
pay any capital gains tax on his purchase of said lot. Your opinion.

ANSWER:

The capital gains tax from sales of real property is payable by the seller (Section 21 (e)
in relation to Section 49 (a) (4) of the NIRC).

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Hence, Panalo cannot refuse to pay the capital gains tax on his purchase of said lot.

ALTERNATIVE ANSWER:

Panalo is not liable for capital gains tax as only the vendor, in this case, Talo, is liable
therefor, if at all. (BAR 1993)

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 month each.

Is his purchase of the three condominium units subject to any tax? Reason
briefly.

SUGGESTED ANSWER:

Yes. The purchase will be subject to the capital tax imposed on the sale of real property
and the documentary stamp tax on conveyance of real property, if these units are
acquired from individual unit owners or domestic corporations who hold them as capital
assets. (Section 24(D), 27(D)(5) and 196, NIRC). If these properties, however, were
acquired from dealers and/or lessors of real property the purchase will give rise to the
imposition of the regular income tax, value-added tax and documentary stamp tax.
(Section 24-28 and 196, NIRC).

ALTERNATIVE ANSWER:

Yes, the purchase of the three condominium units is subject to the following taxes:
i. capital gains tax, if held as capital assets by the seller (Section 24(D) and 27(D)(5),
NIRC), otherwise, the regular income tax (Section 24-28, NIRC);
ii. documentary stamp tax (Section 196, NIRC);
iii. local transfer tax (Section 135, LGC); and
iv. value-added tax if acquired from real estate developers or lessors of real property.

ALTERNATIVE ANSWER:

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

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purchase price if, by the nature of the tax, the economic incidence can be shifted to him.
(BAR 2007)

iii. Income from the sale, exchange, or other disposition of other capital assets

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 PI.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 PI5 million) x 35% = PI.75 million, without the capital
gains tax paid being allowed as tax credit. Manalo consulted a real estate broker
who said that the PI.2 million capital gains tax should be credited from the PI.75
million deficiency income tax.

Is the BIR officers tax assessment correct? Explain.

SUGGESTED ANSWER:

The BIR officers tax assessment is wrong for two reasons. First, the rate of income tax
used is the corporate income tax although the taxpayer is an Individual. Second, the
computation of the gain recognized from the sale did not consider the holding period of
the asset. The capital asset having been held for more than twelve months, only 50% of
the gain is recognized. (Section 39(B), NIRC).

If you were hired by Manalo as his tax consultant, what advice would you give
him to protect his interest? Explain. (3%)

SUGGESTED ANSWERS:

I will advise him to ask for the Issuance of the final assessment notice and request for
the crediting of the capital gains tax paid against the income tax due. The taxpayer
should explain that the capital gains tax was paid in good faith because the property
sold is a capital asset, and considering that what was paid is also an income tax it
should be credited on grounds of equity against the income tax assessment. Once the
final assessment is made, 1 will advise him to protest it within thirty days from receipt,
invoking the holding period and the wrong rate used. (BAR 2008)

A corporation, engaged in real estate development, executed deeds of sale on


various subdivided lots. One buyer, after going around the subdivision, bought a
comer lot with a good view of the surrounding terrain. He paid PI .2 million, and
the title to the property was issued. A year later, the value of the lot appreciated
to a market value of PI.6 million, and the buyer decided to build his house

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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 comer lot with an
equal area but affording a better view.

Is the buyer liable for capital gains tax on the exchange of the lots?

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). (BAR 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
comer 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 PI.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 comer lot with an
equal area but affording a better view.

Is the buyer liable for capital gains tax on the exchange of the lots?

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.

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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). (BAR 1997)

An individual taxpayer, who owns a ten (10) door apartment with a monthly rental
of PI0.000 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. (BAR 1998)

11. Taxation of non-resident aliens engaged in trade or business


a. General rules

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 examinees answer only cover the
first two paragraphs. (BAR 2000)

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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?

ANSWER:

The following are liable to pay Income taxes:

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
promoting and operating the Binatra Show, they engaged in an activity conducted for
profit. (Ibid.)

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. (BAR 1994)

b. Cash and/or property dividends


c. Capital gains

Exclude: non-resident aliens not engaged in trade or business

12. Individual taxpayers exempt from income tax


a. Senior citizens
b. Minimum wage earners
c. Exemptions granted under international agreements

13. Taxation of domestic corporations

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 transactions were
done in Shanghai, these incomes are not taxable in the Philippines. (2012 BAR)

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.

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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 Sec. 28 (A)(5) of the 1997 Tax Code? Explain your answer

Suggested Answer:
a. NO. A Domestic Corporation is a taxable on all income derived from sources
within and without the Philippines (Sec. 23, 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. 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 profit that is subject to the tax not the inbound profits (Sec.
28(A)(5), NIRC).

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%) (2013 Bar Question)

(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) The plan is improper; the veil of corporate fiction can be pierced so that the second
sale will be considered the taxable sale.

The given problem is similar to the case of Commissioner of Internal Revenue v. Norton
and Harrison Company (G.R. No. L-17618, August 31, 1964). The Supreme Court held
that a taxpayer may gain advantage of doing business thru a corporation if he pleases,
but the revenue officers in proper cases, may disregard the separate corporate entity
where it serves but as a shield for tax evasion and treat the person who actually may
take benefits of the transactions as the person accordingly taxable.

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To allow a taxpayer to deny tax liability on the ground that the sales were made through
another and distinct corporation when it is proved that the latter is virtually owned by the
former or that they are practically one and the same is to sanction a circumvention of
our tax laws.

a. Tax payable
i. Regular tax

ABS Corporation is a PEZA-registered export enterprise which manufactures


cameras and sells all its finished products abroad. Which statement is NOT
correct? (2012 BAR)

a) ABS Corporation is subject to the 5% final tax on gross income earned, in lieu
of all national and local taxes;
b) ABS Corporation is exempt from the 30% corporate income tax on net income,
provided it pays value added tax;
c) ABS Corporation is subject to the 30% corporate income tax on net income;
d) ABS Corporation is exempt from all national and local taxes, except real
property tax.

SUGGESTED ANSWER:

a) ABS Corporation is subject to the 5% final tax on gross income earned, in lieu of all
national and local taxes
Sections 23 & 24, RA 7916.

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?

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. (BAR 1994)

ABC, a domestic corporation sold in 1989 two (2) condominiun units of Legaspi
Towers in Roxas Blvd. for P8,158,142.00. Taxpayer corporation declared in its
income tax return for taxable year 1989, its gains derived from the sale of the two
(2) condominium units as follows:

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Without going into computations, answer the following question:

Since ABC derived gains from the sale of the condominium units, should it pay
the 5% capital gains tax, 35% corporate income tax or none of the above because
the corporation is not a real estate dealer? Discuss.

ANSWER:

ABC Corporation must pay the 35% corporate income tax.

The National Internal Revenue Code does not provide for the payment by corporations
of 5% capital gains tax on the sale of real property, whether considered capital assets or
not. Such income is included in the computation of net income (Gross taxable income
less deductions) and is subject to the tax rate of 35%.

ALTERNATIVE ANSWER:

The capital gains derived will only form part of the taxable income of the taxpayer
susceptible to deductions. Accordingly, the net capital gain on the sale may not
necessarily be subject to the 35% tax.

The taxpayers total income and deductions for the year must be considered. It is
immaterial whether the corporation is a real estate dealer or not. (BAR 1992)

ii. Minimum Corporate Income Tax (MCIT)


a. Imposition of MCIT

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.

UNIT A UNIT B
(316.5 sq.ft.) (322 sq.ft.)
Proceeds from sale P3,933,679 + P4,224,463= P8.158,142
LESS:
a) AcquisitionCosts PI,501,295 + PI,529,755 = P3,031,050
(Deed of Sale 9/9/83)
b) Payments ofRealty Tax P49.248 + P55.413 = P104.661
Total (a) (b) PI.550,543 + PI,585,168 = P3,135,711
Gains P2.383.136 + P2,639,295 =P5.022.431

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a) As Ms. J's supervisor, what will be your advice?
b) What are the distinctions between regular corporate income tax and minimum
corporate income tax? (2015 Bar Question)

SUGGESTED ANSWER:

a. As Ms. Js 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.

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). (BAR 2001)

b. Carry forward of excess minimum tax


c. Relief from the MCIT under certain conditions
d. Corporations exempt from the MCIT

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

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. (BAR 2001)

e. Applicability of the MCIT where a corporation is governed both under the


regular tax system and a special income tax system

b. Allowable deductions

Which of the following should not be claimed as deductions from gross income?
(2014 Bar Question)

(A) discounts given to senior citizens on certain goods and services.


(B) advertising expense to maintain some form of goodwill for the taxpayers
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 taxpayers business.

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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 officers revelation of Frosty
Corporations trade secrets.

May Freezy Corporation claim the payment to the officer as deduction from its
gross income? Explain. (2014 Bar Question)

SUGGESTED ANSWER :

No. The payments made in exchange for the revelation of a competitors trade secrets is
considered an expense which is against law, morals, good customs, or public policy,
which is not deductible (3M Philippines, Inc. v. CIR, G.R. No. 82833, September 26,
1988). Also, the law will not allow the deduction of bribes, kickback, 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).

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:

As to amount Allowable deductions generally refer to actual expenses incurred in the


pursuit of trade, business or practice of profession while 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.
(BAR 2001)

i. Itemized deductions
ii. Optional standard deduction

The excess of allowable deductions over gross income of the business in a


taxable year is known as: (2011 Bar Question)

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(A) net operating loss.
(B) ordinary loss.
(C) net deductible loss.
(D) NOLCO.

SUGGESTED ANSWER:

(A) net operating loss.

A corporation can claim the optional standard deduction equivalent to 40% of its
gross sales or receipts, as the case may be.

SUGGESTED ANSWER:

FALSE [Sec. 34(L), NIRC, as amended by RA No. 9504.]

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 profession-connected 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:

No. Since Ernesto has elected to claim the optional standard deduction, said election is
irrevocable for the taxable year for which the return is made (Section 34(L), NIRC).
(BAR 2009)

c. Taxation of passive income


i. Passive income subject to tax
a. Interest from deposits and yield, or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements and royalties

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?

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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%; 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 are 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 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 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. (BAR 1997)

b. Capital gains from the sale of shares of stock not traded in the stock
exchange
c. Income derived under the expanded foreign currency deposit system
d. Inter-corporate dividends

State with reasons the tax treatment of the following in the preparation of annual-
income tax returns:
Dividends received by a domestic corporation from another domestic
corporation;

SUGGESTED ANSWER:
Dividends received by a domestic corporation from another domestic corporation are
not subject to income tax hence should not be declared in the income tax return. (Sec.
27 (D)(4), NIRC). (BAR 2005)

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;

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(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?

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%; 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 are 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 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 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. (BAR 1997)

e. Capital gains realized from the sale, exchange, or disposition of lands


and/or buildings

In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna
for PI00,000. 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.

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b) Is Juan Gonzales subject to income tax on the exchange of property? If so,
what is the tax base and rate? Explain. (3%)

SUGGESTED ANSWER:

Yes. The tax base in a taxable disposition of a real property classified as a capital asset
is the higher between two values: the fair market value of the property received in
exchange and the fair market value of the property exchanged. Since the fair market
value of two properties are the same, the said fair market value should be taken as the
tax base which is P10 million. The income tax rate is 6%. (Section 24(D) (1), NIRC).
(BAR 2008)

An individual taxpayer who owns a ten (10) door apartment with a monthly rental
of PI0.000 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. (BAR 1998)

ii. Passive income not subject to tax


d) Taxation of capital gains
i. Income from sale of shares of stock
ii. Income from the sale of real property situated in the Philippines

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
PI,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 banks valuation list which is practically
double the existing zonal value. The RDO also wanted to assess a donors tax on
the difference between the selling price based on the zonal value and the fair
market value appearing in a nearby banks valuation list.

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.

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SUGGESTED ANSWER:

No. The RDO has no authority to use a fair market 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(B), NIRC). The use of the fair market value appearing in a nearby banks
valuation list, therefor, is not allowed for purposes of computing internal revenue taxes.
(BAR 2007)

In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna
for PI00,000. 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.

b) Is Juan Gonzales subject to income tax on the exchange of property? If so,


what is the tax base and rate? Explain. (3%)

SUGGESTED ANSWER:

Yes. The tax base in a taxable disposition of a real property classified as a capital asset
is the higher between two values: the fair market value of the property received in
exchange and the fair market value of the property exchanged. Since the fair market
value of two properties are the same, the said fair market value should be taken as the
tax base which is P10 million. The income tax rate is 6%. (Section 24(D) (1), NIRC).
(BAR 2008)

iii. Income from the sale, exchange, or other disposition of other capital
assets

Sale of residential house and lot by an official of a domestic corporation to


another official in the same corporation for a consideration of P2.5 Million in 2011
is: (2012 BAR)
a) Exempt from VAT because the gross sales do not exceed P2.5 Million;
b) Exempt from VAT because the property sold is a capital asset, regardless of
the gross selling price;
c) Exempt from VAT because the seller is not a person engaged in real estate
business;
d) Taxable at 12% VAT output tax on the gross selling price of P2.5 Million.

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SUGGESTED ANSWER:

b) Exempt from VAT because the property sold is a capital asset, regardless of the
gross selling price
Section 106, NIRC.

e. Tax on proprietary educational institutions and hospitals

Lualhati Educational Foundation, Inc., a stock educational institution organized


for profit, decided to lease for commercial use a 1,500 sq. m. portion of its school.
The school actually, directly, and exclusively used the rents for the maintenance
of its school buildings, including payment of janitorial services. Is the leased
portion subject to real property tax? (2011 Bar Question)

(A) Yes, since Lualhati is a stock and for profit educational institution.
(B) No, since the school actually, directly, and exclusively used the rents for
educational purposes.
(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.

SUGGESTED ANSWER:

(D) Yes, since the leased portion is not actually, directly, and exclusively used for
educational purposes.

XYZ Colleges is an educational institution run by the Archdiocese of BP City. It


collected and received the following:

Tuition fees
Dormitory fees
Rentals from canteen concessionaires
Interest from money-market
Donation of a lot and building by school alumni

Suppose that XYZ Colleges is a proprietary educational institution owned by the


Archbishops 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)). Accordingly, all of the
income enumerated in the problem will be taxable.

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The donation of lot and building will likewise be subject to the donors 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(A)(3), NIRC) (BAR 2004)

f. Tax on government-owned or controlled corporations, agencies or


instrumentalities

14. Taxation of resident foreign corporations


a) General rule
b) With respect to their income from sources within the Philippines
c) Minimum Corporate Income Tax
d) Tax on certain income
i. Interest from deposits and yield, or any other monetary benefit from deposit
substitutes, trust funds and similar arrangements and royalties
ii. Income derived under the expanded foreign currency deposit system
iii. Capital gains from sale of shares of stock not traded in the stock exchange
iv. Inter-corporate dividends

Exclude:
i. International carrier

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

SUGGESTED ANSWER:

No. While the tickets are sold here by the international airline, this is for carriage of
persons, excess baggage, cargo and mail not originating from the Philippines because
the airline has no landing rights in the Philippines. The income from the sale of tickets is
actually the gross revenue derived from the carriage of persons, excess baggage, cargo
and mail and these revenues are considered as income from Philippine sources only if
the flight originates from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of payment of the ticket or passage document. (Sec.
28(A)(3)(a), NIRC). Accordingly, the income mentioned is not derived from Philippine
sources. (BAR 2005)

ii. Offshore banking units


iii. Branch profits remittances
iv. Regional or area headquarters and regional operating headquarters of
multinational companies

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15. Taxation of non-resident foreign corporations
a. General rule
b. Tax on certain income
i. Interest on foreign loans
ii. Inter-corporate dividends
iii. Capital gains from sale of shares of stock not traded in the stock
exchange

Foster Corporation (FC) is a Singapore-based foreign corporation engaged in


construction and installation projects. In 2010, Global Oil Corporation (GOC), a
domestic corporation engaged in the refinery of petroleum products, awarded an
anti-pollution project to Foster Corporation, whereby FC shall design, supply
machinery and equipment, and install an anti-pollution device for GOCs refinery
in the Philippines, 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 the FC with the 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 P20Million;
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 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.

Is FC liable to Philippines income tax, and if so, how much revenue shall be
reported by it in 2010 and in 2011? Explain your answer. (2012 BAR)

Suggested Answer:
NO. FC is not liable to Philippine income tax. The revenues from the design and
supply contracts having been all done in Singapore are income from without,
hence, not taxable to a foreign corporation in the Philippines (Sec. 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 or permanent
establishment in the Philippines, business profits earned by it pursuant to our treaty with
Singapore are exempt from income tax.

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.

Zygomite Minerals, Inc., a corporation registered and holding office in Australia,


not operating in the Philippines, may be subject to Philippine income taxation on:

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(2011 Bar Question)

(A) gains it derived from sale in Australia of an ore crusher it bought from the
Philippines with the proceeds converted to pesos.
(B) gains it derived from sale in Australia of shares of stock of Philex Mining
Corporation, a Philippine corporation.
(C) dividends earned from investment in a foreign corporation that derived 40% of
its gross income from Philippine sources.
(D) interests derived from its dollar deposits in a Philippine bank under the
Expanded Foreign Currency Deposit System.

SUGGESTED ANSWER:

(B) gains it derived from sale in Australia of shares of stock of Philex Mining
Corporation, a Philippine corporation.

Exclude:
i. Non-resident cinematographic film-owner, lessor or distributor
ii. Non-resident owner or lessor of vessels chartered by Philippine
national
iii. Non-resident owner or lessor of aircraft machineries and other
equipment

16. Improperly accumulated earnings of corporations

What is the immediacy test? Explain briefly. (2%)

SUGGESTED ANSWER:

The immediacy test is applied to determine whether the accumulation of the 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, 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, GR No. L-26145, Feb. 20, 1984).

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. 2-2001 implementing Sec. 29, NIRC.]

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In 2009, Spratz, Inc.s net profit before tax was P35 million while its operating
expenses was P31 million. In 2010, its net profit before tax was P40 million and its
operating expenses was P38 million. It did not declare dividends for 2009 and
2010. And it has no proposed capital expenditures for 2011 and the immediate
future. May Spratz be subject to the improperly accumulated tax on its retained
profits for 2009 and 2010? (2011 Bar Question)

(A) Yes, since the accumulated amounts are reasonable for operations in relation
to what it usually needed annually.
(B) Yes, since the accumulation is not reasonably necessary for the immediate
needs of the business.
(C) No, because there is no showing that the taxpayer's 2009 and 2010 net profit
before tax exceeded its paid-up capital.
(D) No, because the taxpayer is not shown to be a publicly-listed corporation, a
bank, or an insurance company.

SUGGESTED ANSWER:

B) Yes, since the accumulation is not reasonably necessary for the immediate needs of
the business.

17. Exemption from tax on corporations


18. Taxation of partnerships
19. Taxation of general professional partnerships

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? (2013 Bar Question)

SUGGESTED ANSWER:

The BIR is wrong in disallowing the deductions.

Under Section 26 of the NIRC, a genreal professional partnership is exempt from


income tax and, thus, cannot claim deductions. However, partners in a general
professional partnership are liable, in their separate and individual capacities, for the
payment of income tax computed on their distributive share of the general professional
partnerships profits. Consequently, these partners may claim deductions under Section

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34 of the NIRC from their gross income.

In the given problem, Atty. Gambinos expenses for the purchase of law books and the
availment of car insurance are allowable deductions because they are ordinary and
necessary expenses in the exercise of his profession. Law books are directly
attributable to Atty. Gambinos development and conduct as a lawyer pursuant to
Section 34(A)(1)(a) of the NIRC. Meanwhile, car insurance is an ordinary and necessary
expense in the purchase of a car. It should be noted that cars are ordinarily used by
lawyers who travel from one place to another for purposes of attending hearings,
meeting clients, signing agreements, and the like. For these same reasons, a
reasonable allowance for the cars depreciation is deductible under Section (34)(F)(1) of
the NIRC. A reasonable allowance for entertainment or representation expenses can
also be claimed as deduction from gross income, as these expenses are directly
connected or in the furtherance of the conduct of Atty. Gambinos profession as a
lawyer, applying Section (34)(A)(1)(a)(iv) of the NIRC and Revenue Regulation No. 10-
2002.

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? (2013 Bar Question)

SUGGESTED ANSWER:

Preliminarily, XYZ Law Offices is a general professional partnership which is defined


under Sec. 22(B) of the NIRC as a partnership formed by persons for the sole purpose
of exercising their common profession, no part of the income of which is derived from
engaging in any trade or business. On the other hand, Gainsburg is considered as a
nonresident foreign corporation under Sec. 22(I) of the NIRC. The tax implications are
as follows:

As to VAT: XYZ Law Offices, as a general professional partnership, is subject to VAT as


it rendered services to Gainsburg. Pursuant to Sec. 105 of the NIRC, any person who,
in the course of business, renders services shall be subject to VAT.

In the given problem, the XYZ Law Offices rendered services to a nonresident person
not engaged in business and which is outside the Philippines. The consideration for the

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services was paid in an acceptable foreign currency. Therefore, the transaction in the
given problem is subject to zero percent (0%) rate of VAT provided under Sec. 108
(B)(2) of the NIRC.

As to income tax: XYZ Law Office is not subject thereto because it is a general
professional partnership. Sec. 26 of the NIRC expressly provides that a general
professional partnership shall not be subject to the income tax. Persons engaging in
business as partners in a general professional partnership shall be liable for income tax
only in their separate and individual capacities.

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:

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 Firms 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? (2014 Bar
Question)

SUGGESTED ANSWER :

(A) The three (3) items of earnings should be included in the computation of ABC Law
Firms 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
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computers and laptops should also be included as part of the firms 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 general professional partnership is entitled to the
same deductions allowed to corporation (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 shares, actuality or constructively received, in the net income of the
partnership. The partnership is merely treated for income tax purposes as a pass-
through entity so that its net income is not taxable at the level of the partnership bur said
net income should be attributed to the partners, 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).

20. Withholding tax


a. Concept
b. Kinds
i. Withholding of final tax on certain incomes

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: (2015 Bar Question)

a) A resident citizen
b) Non-resident alien engaged in trade or business
c) Non-resident alien not engaged in trade or business
d) Domestic corporation
e) Non-resident foreign corporation

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

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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.

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 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.

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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.
(BAR 2001)

ii. Withholding of creditable tax at source

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 WT. 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 nonresident 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 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 therefrom 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.

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Note:
The bar candidate might have relied on the provision of the Tax Code of1997 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
the seller from the sale.

For this reason, any of the foregoing suggested answers should be given full credit.
(BAR 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). (BAR 1999)

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?

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)(1), Tax Code). (BAR 1994)

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c. Withholding of VAT
d. Filing of return and payment of taxes withheld

Indicate whether each of the following individuals is required or not required to


file an income tax return: (2015 Bar Question)

a) Filipino citizen residing outside the Philippines on his income from sources
outside the Philippines.
b) Resident alien on income derived from sources within the Philippines.
c) Resident citizen earning purely compensation income from two employers
within the Philippines, whose income taxes have been correctly withheld.
d) Resident citizen who falls under the classification of minimum wage earners. e)
An individual whose sole income has been subjected to final withholding tax.

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.

i. Return and payment in case of government employees


ii. Statements and returns

Raffy and Wena; husband and wife, are both employed by XXX Corporation. After
office hours, they jointly manage a coffee shop at the ground floor of their house.
The coffee shop is registered in the name of both spouses. Which of the following
is the correct way to prepare their income tax return? Write the letter only. DO
NOT EXPLAIN YOUR ANSWER. (2%)

A. Raffy will declare as his income the salaries of both spouses, while Wena will
declare he income from the coffee shop.

B. Wena will declare the combined compensation income of he spouses, and


Raffy will declare the income from the coffee shop.

C. All the income will be declared by raffy alone, because only one consolidated
return is required to be filed by the spouses.

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D. Raffy will declare his own compensation income and Wena will declare hers.
The income from the coffee shop shall be equally divided between them. Each
spouse shall be taxed separately on their corresponding taxable income to be
covered by one consolidated return for the spouses.

E. Raffy will declare his own compensation income and Wena will declare hers.
The income from the coffee shop shall be equally divided between them. Raffy
will file one income tax return to cover all the income of both spouses, and the
tax is computed on the aggregate taxable income of the spouses.

SUGGESTED ANSWER:

[d] Raffy will declare his own compensation and Wena will declare hers. The income
from the coffee shop shall be equally divided between them. Bach spouse shall be
taxed separately on their corresponding taxable income to be covered by one
consolidated return for the spouses. (BAR 2009)

How often does a domestic corporation file income tax return for income earned
during a single taxable year? Explain the process. (3%)

What is the reason for such procedure? (2%)

SUGGESTED ANSWER:

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).

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:

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. (BAR
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.

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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, and (2) the income tax has been
correctly withheld, meaning the tax withheld is equal to the tax due. (Section
51(A)(2)(b), NIRC).

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. (BAR 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 cannot
require persons outside 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). (BAR 2001)

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 part-time 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?

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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). (BAR 1997)

Robert Patterson is an American who first arrived in the Philippines in 1944 as a


member of the U.S. Armed Forces that liberated the Philippines. After the war, he
returned to the United States but came back to the Philippines in 1958 and stayed
here up to the present He is presently employed in the United States Naval Base.
Olongapo City. For the year 1985, he earned US$10,856.00. Sometime in 1986, the
District Revenue Office of the Bureau of Internal Revenue served him a notice
informing him that he did not file his income tax return for the year 1985 and
directing him to file said return in 10 days. He refused to file any return claiming
that he is not a resident alien and is therefore not required to file any income tax
return.

Is Pattersons claim correct?

ANSWER:

Pattersons claim is not correct. While Paterson is exempt from income tax, an
exemption from income tax does not, however, necessarily mean an exemption likewise
from the filing of an income tax return {Garrison vs. Court of Appeals, 187 SCRA 525).
(BAR 1991)

The Tax Code allows an individual taxpayer to pay in two equal installments, the
first installment 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.

SUGGESTED ANSWER:

TRUE. [Sec. 56(A)(2), NIRC.]

e. Final withholding tax at source

True or False. Informers reward is subject to a final withholding tax of 10%.


(2010 Bar Question)

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SUGGESTED ANSWER:

True. (Sec. 282, NIRC)

f. Creditable withholding tax


i. Expanded withholding tax
ii. Withholding tax on compensation

X owns a half-hectare property In Bacoor, Cavite which in 1980 was expropriated


by the national government, through the Department of Public Works and
Highways. After ten years, X was paid P2.000.000.00 as just compensation plus
6% annual interest by the DPWH but minus the withholding tax. Is the action of
DPWH proper? Reasons.

ANSWER:

No, the action of DPWH is not proper.

In the case of Province of Tayabas vs. Perez, 66 Phil. 467. Just compensation was
defined as the just and complete equivalent of the loss which the owner of a thing
expropriated has to suffer by reason of the expropriation".

Further, in BIR Ruling 61-91 just compensation was defined as that which is paid by the
Government equivalent to the value of the property at the time of its taking. It is the fair
and full equivalent for the indemnity.

Based in the foregoing it is clear therefore that the amount received after 10 years as
just compensation is not in any way a profit, gain or income on the part of X In the same
vein, the 6% annual interest paid by DPWH is not income. The same partakes of the
nature of a penalty or indemnity due and accruing to X for having been deprived of the
use and benefit by not being paid of the fair market value of the property since its taking
10 years ago. Hence, the DPWH should not have withheld taxes.

ALTERNATIVE ANSWERS:

No. the withholding tax (presumably on capital gains) should have been based on the
fair market value of the property at the time of the expropriation. Thus, in this case, for
purposes of computing the withholding tax on capital gains, the amount representing the
6% annual interest should have been excluded from the withholding tax base.

No. With respect to capital gains on sales of realty to the government, X may elect to
include the same in his gross compensation income or to pay the corresponding capital
gains tax. By withholding the taxes on the just compensation (for which the basis should
only be P2,000,000.00) excluding the interest) DPWH denied such option to X.

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Assuming the property is an ordinary asset, the expropriation proceedings in 1980 is not
subject to the creditable withholding tax under Revenue Memorandum Circular 7-90
clarifying Revenue Regulations Nos. 12-89 and 1 -90 implementing Section 50 (b) of the
NIRC, the transfer of the property was effected in 1980. The above mentioned revenue
rules and regulations are applicable only to sales, exchange or transfers of real
properties consummated on or after 1 January 1990 (BIR Ruling 040-91). The 6%
interest on the just compensation" is not in the nature of an interest on Philippine
currency bank deposit and yield or any other monetary benefit from deposit substitutes
from trust fund and similar arrangements, the same is not subject to the 20% final
withholding tax under Sec. 21 of the NIRC (BIR Ruling 040-91). (BAR 1993)

g. Timing of withholding

The payor of passive income subject to final tax is required to withhold the tax
from the payment due the recipient. The withholding of the tax has the effect of:
(2011 Bar Question)
(A) a final settlement of the tax liability on the income.
(B) a credit from the recipient's income tax liability.
(C) consummating the transaction resulting in an income.
(D) a deduction in the recipient's income tax return.

SUGGESTED ANSWER:

(A) a final settlement of the tax liability on the income.

III. Estate tax

Don Fortunato, a widower, died in May, 2011. In his will, he left his estate of P100
million to his four children. He named his compadre, Don Epitacio, to be 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 resignation, who may be held liable for the payment of the estate
tax? (2011 Bar Question)

(A) Don Epitacio since the tax became due prior to his resignation.
(B) The eldest child who would be reimbursed by the others.
(C) All the four children, the tax to be divided equally among them.
(D) The person designated by the will as the one liable.

SUGGESTED ANSWER:

(C) All the four children, the tax to be divided equally among them.

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1. Basic principles

Is the approval of the court, sitting as probate or estate settlement court, required
in the enforcement and collection of estate tax? Explain. (10%)

SUGGESTED ANSWER:

No. The approval of the court, sitting in probate, is not a mandatory requirement in the
collection of estate tax. On the contrary, under Section 94 of the NIRC, it is the probate
or settlement court which is forbidden to authorize the executor or judicial administrator
of the decedents estate, to deliver any distributive share to any party interested in the
estate, unless a certification from the Commissioner of Internal Revenue that the estate
tax has been paid is shown. [Marcos U v. Court of Appeals, 273 SCRA 47 (1997)].
(BAR 2005)

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 PI, 000,000. But he ignored the notice. Last month, the BIR affected
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 VCCs contention correct? (5%)

SUGGESTED ANSWER:

No. VCCs 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]). (BAR 2004)

2. Definition
3. Nature
4. Purpose or object
5. Time and transfer of properties

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%)

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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. (BAR 2001)

Are donations inter vivos and donations mortis causa subject to estate taxes?

ANSWER:

Donations inter vivos are subject to donors 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 transferors 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 takes effect during the lifetime of the donor. The transfer is therefore subject to
the donors 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. (BAR 1994)

6. Classification of decedent
7. Gross estate vis--vis net estate
8. Determination of gross estate and net estate

Jose Ceman, Filipino citizen, married to Maria Ceman, 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.

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The Administrator of the Estate of Jose Ceman 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.

Is the BIR correct in valuing the real property at P40 million? Explain. (3%)

SUGGESTED ANSWER:

No. The value of the property for estate tax purposes shall be the fair market value
thereof at the time of death. (Section 88(B), NIRC).

b) If you disagree, what is the correct value to use for estate tax purposes?
Explain. (3%)

SUGGESTED ANSWER:

The correct value to use for estate tax purposes is P20 million which is the current fair
market value of the property at the time of the decedent's death. (Section 88(B), NIRC).
(BAR 2008)

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 were able to agree to a total
settlement of P10 Million. This is what Antonia would have earned as somebody
who was gainfully employed. Edgardo was her only heir.

Is the P10 Million subject to estate tax? Reason briefly.

SUGGESTED ANSWER:

No. The estate tax is a tax on the privilege enjoyed by an individual in controlling the
disposition of her properties to take effect upon her death. The PIOM is not a property
existing as of the time of decedents death; hence, it cannot be said that she exercised
control over its disposition. Since the privilege to transmit the property is not exercised
by the decedent, the estate tax cannot be imposed thereon. (Definition of Estate Tax p.
184, Vitug, Compendium of Tax Law and Jurisprudence, Third Revised Edition). (BAR
2007)

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

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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.

Does the condition that the basis of the estate tax will be the value at the time of
the payment have legal basis? Reason briefly.

SUGGESTED ANSWER:

No. The valuation of properties comprising the estate of a decedent is the fair market as
of the time of death. No other valuation date is allowed by law. (Section 88, NIRC).
(BAR 2007)

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 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 PLDT; (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:

Being a resident of the Philippines at the time of his death, the gross estate of Ralph
Donald shall include all his property, real or personal, tangible or intangible, wherever
situated at the time of his death. (Section 85, NIRC). Thus, the following shall be
included in his taxable gross estate in the Philippines: .

bank deposits with Citibank Makati and Citibank Orlando, Florida:


a resthouse in Orlando, Florida;
a condominium unit in Makati;
shares of stock in the Philippine subsidiary of the U.S. company where he worked;
shares in San Miguel Corp. and PLDT;
shares of stock in Disney World in Florida; and
U.S treasury bonds

The proceeds from a life insurance policy issued by a U.S. corporation is included as
part of the gross estate of Ralph Donald, if the designation of the beneficiary is

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revocable or irrespective of the nature of designation, if the designated beneficiary is
either the estate, the executor or administrator. If the designated beneficiary is other
than the estate, executor or administrator and the designation is irrevocable, the
proceeds shall not form part of his gross estate. (Section 85 (E), NIRC). (BAR 2005)

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) (BAR 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? (3%)

SUGGESTED ANSWER:

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]

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 (Ej, NIRC of 1997] (BAR 2000)

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9. Composition of gross estate

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 PI-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 PI.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 Zandros
death. Zandro died in 2007, and Wilma succeeded to the property.

[a] 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 transferred by the owner by death (Section 85, NIRC), (BAR 2009)

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?

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". (BAR 1994)

10. Items to be included in gross estate

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:

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 inherited from
his father 2,000,000

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Car which is being used by his brother in Cavite 500,000
Proceeds of life insurance where he named his estate as
irrevocable beneficiary 1,000,000
Household furnitures and appliances 1,000,000
Claims against a cousin who has assets of P10,000 and
liabilities of PI00,000 100,000
Shares of stock in ABC Corp, a domestic enterprise 100,000

The expenses and charges on the estate are as follows:


Funeral Expenses P 250,000
Legal fees for the settlement of the estate 500,000
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:

A. What are the properties and interests that should be included in the
computation of the gross estate of the decedent? Explain. (2.5%)
B. What is the net taxable estate of the decedent? Explain. (2.5%)
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%)
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 implication of Xs renunciation?
What about the other coheirs? (2.5%) (2010 Bar Question)

SUGGESTED ANSWER:

A. All the properties and interests enumerated in the problem should be included in the
gross estate of the decedent. The composition of the gross estate of the decedent who
is a citizen of the Philippines includes all properties, real or personal, 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).

B. The net taxable estate of the decedent is Php 3.7M. From the gross estate of Php
7.0M, the following deductions are allowed: (1) Funeral expenses of Php 200K which is
the maximum allowed by law, (2) legal fees amounting to Php 500K; (3) medical
expenses not to exceed Php 500K incurred one year prior to death and substantiated
with receipts; (4) claims against the estate of Php 300K; (5) family home equivalent to
its FMV (not to exceed Php 1.0M) of Php 800K and (6) standard deduction of Php 1.0M
or a total allowable deduction of Php 3.3M. The claim against the cousin amounting to
Php 100K although includible in the gross estate cannot be claimed as a deduction
because the debtor is not yet declared insolvent. Likewise, the inherited property cannot
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give rise to a vanishing deduction for want of sufficient factual basis.

C. The tax return and the payment of the estate tax are both due within six (6) months
from death. The filing of the return is extendible for a maximum period of 30 days under
meritorious cases as maybe determined by the CIR. Whereas, the payment of the
estate tax may also be extended when the CIR finds that the payment thereof would
impose undue hardship upon the estate or any of the heirs. The period of extension to
pay shall not exceed 5 years from death if the estate is settled through the courts or
shall not exceed 2 years from death if settled extra-judicially. The CIR may require the
executor or administrator or the beneficiary to furnish a bond in an amount not more
than double the amount of the estate tax due.

D. If the renunciation is a general renunciation (in favor of 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 co-heirs by inheritance; hence,
it has no tax implication. There is no donation of property because the property had
never become the property of the donor. Such being the case, the renunciation is not
subject to donors 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 donors tax. In both cases, however, the renunciation has no
tax implication to the other co-heirs.

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? (2013 Bar Question)

SUGGESTED ANSWER:

The BIR is not correct in imposing donors tax on the renounced inheritance of Mrs.
Barbera from Mr. Barbera. According to Section 11 of the RR No. 2-2003: General
renunciation by an heir, including the surviving spouse, of his/her share in the hereditary
estate left by the decedent is not subject to donors tax, unless specifically and
categorically done in favor of identified heir/s to the exclusion or disadvantage of other
co-heirs in the hereditary estate.

On the other hand, the BIR is correct in imposing donors tax on the renounced conjugal
share of Mrs. Barbera. This is because Section 11 of RR No. 2-2003 provides that
renunciation by the surviving spouse of his/her share in the conjugal partnership or
absolute community after the dissolution of the marriage in favor of the heirs of the
deceased spouse or any other person/s is subject to donors tax. This proceeds from
the rule that the share of the conjugal property is the share of the surviving spouse.
Thus, the surviving spouse is effectively donating property when he or she makes a
renunciation.
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Tong Siok, a Chinese billionaire and a Canadian resident, died and left assets in
China valued at P80 billion and in the Philippines assets valued at P20 billion. For
Philippine estate tax purposes the allowable deductions for expenses, losses,
indebtedness, and taxes, property previously taxed, transfers for public use, and
the share of his surviving spouse in their conjugal partnership amounted to P15
billion. Tong's gross estate for Philippine estate tax purposes is: (2011 Bar
Question)

(A) P20 billion. (B) P5 billion. (C) P100 billion. (D) P85 billion.

SUGGESTED ANSWER:

(A) P20 billion

While he was traveling with friends, Mr. Jose Francisco, resident Filipino citizen,
died on January 20, 2011 in a California Hospital, USA, leaving personal and real
properties with market values as follows: House and Lot in Quezon City P10
Million; Cash in bank in California US$10,000.00; Citibank in New York
US$5,000.00; Cash in BPI Makati P4 Million; Car in Quezon City P1 Million;
Shares of stocks of Apple Corporation, US corporation listed in NY Stock
Exchange US$1 = Php50. His gross estate for the Philippine estate tax purposes
shall be: (2012 BAR)

a) P13 Million; b) P14 Million; c) P15 Million; d) P16 Million.

SUGGESTED ANSWER:

b) P14 Million
Section 85, NIRC.

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%) (2013 Bar
Question)

(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.

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SUGGESTED ANSWER:

(A) The property will form part of Mr. Mayuga's gross estate when he dies.

Applying Section 85 (B) of the NIRC, the donated property will still form part of the gross
estate of the decedent when in the deed of donation, the donor has retained for his life
or for any period which does not in fact end before his death 91) the possession or
enjoyment of, or the right to the income from the property.

Therefore, the property will form part of Mr. Mayugas gross estate when he dies
because he donated the property in contemplation of death.

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.

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? (2013 Bar Question)

SUGGESTED ANSWER:
The BIR is not correct.

Pursuant to Section 85(B) of the NIRC, properties that are transferred in contemplation
of death form part of the gross estate of the decedent. An exception to this is a bona
fide sale for an adequate and full consideration in money.

Therefore, the house and lot which Mr. Agustin sold to his son for a valuable and
sufficient consideration should not be considered as forming part of Mr. Agustins gross
estate.

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 Pias 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.

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(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? (2014 Bar Question)

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).

(B) All the items of expenses are deductible from his 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 Php
200,000.00. Likewise, the deductible medical expenses must be limited to those
incurred within one year prior to his death but not to exceed Php 500,000.00 (Section
86, NIRC).

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
Xs life insurance policy.

Are the proceeds of the insurance to form part of the gross estate of X? Explain.

SUGGESTED ANSWER:

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. (Section 85(E), 1997 Tax Code) (BAR 2003)

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 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?

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ANSWER:

All of Mr. Robertsons assets consisting of10, 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 (Secs. 77, 78 and 98, Tax Code). (BAR 1994)

11. Deductions from estate

Jose Ramos, single, died of a heart attack on October 10, 2011, leaving a
residential house and lot with a market value of P1.8 Million and cash of
P100,000.00. Funeral expenses paid amounted to P250,000.00. (2012 BAR)

a) His estate will be exempt from estate tax because the net estate is zero;
b) His estate will be subject to estate tax because net estate is P1,650,000.00;
c) His estate will be subject to estate tax because net estate is P1,700,00.00;
d) His estate will be subject to estate tax because net estate is P800,000.00.

SUGGESTED ANSWER:

a) His estate will be exempt from estate tax because the net estate is zero
Section 85 & 86, NIRC.

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. (2014 Bar Question)

SUGGESTED ANSWER :

Yes. Unpaid mortgages upon, or any indebtedness with respect to property are
deductible from the gross estate only if the value of the decedents 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. Sakitins death is not deductible as Claims against the Estate.

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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:

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 inherited from
his father 2,000,000
Car which is being used by his brother in Cavite 500,000
Proceeds of life insurance where he named his estate as
irrevocable beneficiary 1,000,000
Household furnitures and appliances 1,000,000
Claims against a cousin who has assets of P10,000 and
liabilities of PI00,000 100,000
Shares of stock in ABC Corp, a domestic enterprise 100,000

The expenses and charges on the estate are as follows:


Funeral Expenses P250,000
Legal fees for the settlement of the estate 500,000
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%)

SUGGESTED ANSWER:

The net taxable estate of the decedent is P3,700,000.00. From the gross estate of P7
million the following deductions are allowed: (1) funeral expenses of P200,000 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 PI million) of P800,000; and (6)
standard deduction of PI million, or a total allowable deduction of P3,300,000 (Sec. 86,
NIRC).

The claim against the cousin amounting to P100,000, although includable in the gross
estate, cannot be claimed as a deduction because the debtor is not yet declared
insolvent. Likewise, the inherited property cannot give rise to a vanishing deduction for
want of sufficient factual basis (Sec. 86, NIRC).

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 PI-million.
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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 PI.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 Zandros
death.

Zandro died in 2007, and Wilma succeeded to the property.

[c] May a vanishing deduction be allowed in either or both of the estates?


Explain. (3%)

SUGGESTED ANSWER:

Vanishing deduction shall be allowed to the estate of Xavier but only to the extent of Ya
of the property which is the portion acquired by gift (Section 100, NIRC), The donation
took place within 5 years (1999 to

2001) from the death of Xavier; hence, there is a vanishing deduction. However,
Zandros estate will not be entitled to claim vanishing deduction 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. (BAR 2009)

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 P 10,000,000 P I,200,000


Cars P 2,000,000 500,000
Land P 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%)

SUGGESTED ANSWER:

No. The estate comprised of properties of only PI.2 million is not liable to any estate tax.
The estate is entitled to a standard deduction of PI million deductible from the gross
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estate without the benefit of substantiation, thereby placing the net estate at only
P200,000. Under the graduated tax rates of the estate tax, a net estate of P200,000 is
exempt. (Section 86(A)(5) and Section 84, NIRC).

Is vanishing deduction applicable to the Estate of Assunta Asuncion? Explain.


(4%)

SUGGESTED ANSWERS:

Yes. The cash amount of PI .2 million transferred to his parents by his death is a
property previously taxed in so far as that portion attributable to his mother who died a
day later is concerned. An estate tax is considered to have been paid in the previous
estate if a return was filed even if there was no tax due in that return. The filing of a
return is a means employed for the payment of the tax under the pay-as-you-file
system. Considering that all the legal requirements of vanishing deduction are present,
the estate of Assunta can validly claim the same. (Section 86, NIRC). (BAR 2008)

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:

I choose (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(AX2) and 86(3X2), NIRC]). (BAR 2006)

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%)

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).

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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). (BAR 2001)

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.
What deductions may be claimed by the estate? (3%)

SUGGESTED ANSWER:

The deductions that may be claimed by the estate are:


- 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 1P200,000.00). [Sec. 86 (A) (1) (a). NIRC of 1997]
- The Judicial expenses in the testate or Intestate proceedings.(Sec. 86(A)(1)
- The value of the decedent's family home located in Valle Verde, Pasig City in an
amount not exceeding one million pesos (PI,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]
- The standard deduction of PI .000.000. (Sec. 86(A)(5)
- Medical expenses incurred within one year from death in an amount not
exceeding P500,000.(Sec. 86(A)(6)

What is Vanishing deductions in estate taxation?

ANSWER:

Vanishing deductions or property previously taxed in estate taxation refers to the


diminishing deductibility/ 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 decedents death. (BAR 1994)

12. Exclusions from estate

Which among the following reduces the gross estate (not the net estate) of a
citizen of the Philippines for purposes of estate taxation? (2011 Bar Question)

(A) Transfers for public use


(B) Property previously taxed
(C) Standard deduction of P1 million
(D) Capital of the surviving spouse

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SUGGESTED ANSWER:

(D) Capital of the surviving spouse

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
b. Medical expenses (2015 Bar Question)

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 moneys 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).

13. Tax credit for estate taxes paid in a foreign country


14. Exemption of certain acquisitions and transmissions

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 PI-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 PI.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 Zandros
death.

Zandro died in 2007, and Wilma succeeded to the property.

[b] Should the painting be included in the gross estate of Zandro in 2007 and
thus, be subject to estate tax? Explain. (3%)
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Car which is being used by his brother in Cavite 500,000

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
(Section 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 (Section 85(D), NIRC). (BAR 2009)

15. Filing of notice of death


16. Estate tax return

Gerardo died on July 31, 2011. His estate tax return should be filed within: (2011
Bar Question)

(A) six months from filing of the notice of death.


(B) sixty days from the appointment of an administrator.
(C) six months from the time he died on July 31, 2011.
(D) sixty days from the time he died on July 31, 2011.

SUGGESTED ANSWER:

(C) six months from the time he died on July 31, 2011.

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:

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 inherited from
his father 2,000,000

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Proceeds of life insurance where he named his estate as
irrevocable beneficiary 1,000,000
Household furnitures and appliances 1,000,000
Claims against a cousin who has assets of P10,000 and
liabilities of PI00,000 100,000
Shares of stock in ABC Corp, a domestic enterprise 100,000

The expenses and charges on the estate are as follows:


Funeral Expenses P250,000
Legal fees for the settlement of the estate 500,000
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:

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 the 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 upon 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. 92, NIRC).

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.

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Does the Commissioner of Internal Revenue have the power to extend the
payment of estate tax? If so, what are the requirements to allow such extension?

SUGGESTED ANSWER:

Yes. The Commissioner may allow an extension of time to pay the estate tax if 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 hot under
judicial settlement or 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 extrajudicially; 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). (BAR 2007)

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.
When and where shall the return be filed and estate tax paid? (3%)

SUGGESTED ANSWER:

The estate tax return shall be filed within six (6) months from the decedents 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) (BAR 2000)

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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. (BAR 1999)

On September 10, 1991, a Bank Manager of Peoples Bank, Inc. (PBI), upon
reading an obituary announcing the death of Mr. Roberto Diaz refused to allow
one of his heirs to withdraw Mr. Diaz deposit amounting to P2 Million.

A week later, immediately following said denial, the administrator of the estate
sued the Bank/Bank Manager to compel them to release the money since such
act was arbitrary and constituted a denial of property/constitutional rights.

If you are retained as counsel by the Bank/Bank Manager to defend their stand in
refusing to release the P2 Million to the heirs, what would you raise as a legal
defense? Discuss.

ANSWER:

I would raise the defense that under Sec. 90 of the NIRC a bank with knowledge of the
death of a person who maintains a deposit account with such bank shall allow
withdrawals therefrom only if the mandatory requirement of a certification from the
Commissioner that the taxes due thereon have been paid could be presented by an
heir. Absent such certification, a bank is authorized to withhold the release of deposits
of a decedent.

Under the same set of facts, would you, as administrator of the estate, rather file
an administrative appeal with the Commissioner of Internal Revenue or a petition
for review with the Court of Tax Appeals? Explain.

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ANSWER:

An administrative appeal to the Commissioner of Internal Revenue would not be a


proper remedy without an original proceeding having first been filed with the BIR

A petition for review with the Court of Tax Appeals, on the other hand, requires a final
decision of the Commissioner, the CTA being a court of exclusive appellate jurisdiction.

As administrator, I would cause the payment of the proper taxes on the deposits and
thereafter, secure the required certification from the Commissioner. (BAR 1992)

If the Commissioner of Internal Revenue allows the administrator of the estate or


the heirs of the decedent to withdraw from the deposit account, what are the
conditions under the Tax Code which have to be met first?

ANSWER:

Before withdrawals on deposits of a decedent could be permitted, the proper taxes


should first be paid and a certification of such payment secured from the Commissioner.
However, the Commissioner may authorize the withdrawal without a certification
provided the amount to be withdrawn shall not exceed P 10,000.00.

ALTERNATIVE ANSWER:

Payment of the tax or the filing of a bond would, in substance, be enough for the
Commissioner to allow the withdrawal. (BAR 1992)

IV. Donors tax


1. Basic principles
2. Definition
3. Nature
4. Purpose or object
5. Requisites of valid donation
6. Transfers which may be constituted as donation
a. Sale/exchange/transfer of property for insufficient consideration

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:

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 inherited
from
his father 2,000,000

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Car which is being used by his brother in Cavite 500,000
Proceeds of life insurance where he named his
estate as
irrevocable beneficiary 1,000,000
Household furnitures and appliances 1,000,000
Claims against a cousin who has assets of P10,000
and
liabilities of PI00,000 100,000
Shares of stock in ABC Corp, a domestic enterprise100,000
The expenses and charges on the estate are as
follows:
Funeral Expenses P250,000
Legal fees for the settlement of the estate 500,000
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:

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 co-heirs 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 had never 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 donors
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).

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
PI,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 banks valuation list which is practically
double the existing zonal value. The RDO also wanted to assess a donors tax on

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the difference between the selling price based on the zonal value and the fair
market value appearing in a nearby banks valuation list.

Should the difference in the supposed taxable value be legally subject to donors
tax? Reason briefly.

SUGGESTED ANSWER:

No. The difference in the supposed taxable value cannot be legally subject to the
donors 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).

ALTERNATIVE ANSWER:

The difference in value is not subject to donors tax, because the sale is not for an
insufficient consideration. A deemed 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). (BAR 2007)

b. Condonation/remission of debt

An insolvent company had an outstanding obligation of P100.000.00 from a


creditor. Since it could not pay the debt, the creditor agreed to accept payment
through dacion enpago a property which had a market value of P30,000.00. In the
dacion en pago document, the balance of the debt was condoned.

What is the tax effect on the discharge of the unpaid balance of the obligation on
the debtor corporation?

Insofar as the creditor is concerned, how is he effected taxwise as a consequence


of the transaction?

ANSWER:

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);

For the difference of P70.000, the creditor shall be subject to donors tax at the
applicable rates provided for under the National Internal Revenue Code.

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ALTERNATIVE ANSWER:

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 debt which has no tax consequence to the debtor.

The write-off of the bad debt will entitle the creditor to claim the same as a deduction
from its gross income. (BAR 1997)

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.

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
latters gross income. (BAR 1995)

7. Transfer for less than adequate and full consideration

A, an individual, sold to B. his brother-in-law, his lot with a market value of


P1,000.000 for P600.000. As 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. As cost in the shares sold is PI ,000,000.
The purpose of A in selling the shares is to enable his key executives to acquire a
propriety of A in selling the shares is to enable his key executives to acquire a
propriety interest in the business and have a personal 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. (BAR 1999)

8. Classification of donor

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 donors tax? Why or why not? (3%)

SUGGESTED ANSWER:

No. The donation is not subject to the Philippine donor's tax because the donor is a 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. (Section 104, NIRC). (BAR 2009)

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.

What is the tax liability, if any, of X corporation?

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ANSWER:

Foreign corporations effecting a donation is subject to donors 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 employees, is not subject to donors 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.

9. Determination of gross gift

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? (2015 Bar Question)

SUGGESTED ANSWER:

The valuation of Mr. Ls gift to his children is the fair market value (FMV) of the property
at the time of donation. It is the higher of the 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 donors 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.

10. Composition of gross gift

In May 2010, Mr. And Mrs. Melencio Antonio donated a house and lot with a fair
market value of P10 Million to their sob, Roberto, who is to be married during the
same year to Josefina Angeles. Which statement below is INCORRECT? (2012
BAR)

a) There are four (4) donations made two (2) donations are made by Mr.
Melencio Antonio to Roberto and Josefina, and two (2) donations are made by
Mrs. Antonio;
b) The four (4) donations are made by the Spouses Antonio to members of the
family, hence, subject to the graduated donors tax rates (2%-15%);
c) Two (2) donations are made by the spouses to members of the family, while
two (2) other donations are made to strangers;
d) Two (2) donations made by the spouses to Roberto are entitled to deduction
from the gross gift as donation proper nuptias.
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SUGGESTED ANSWER:

d) Two (2) donations made by the spouses to Roberto are entitled to deduction from the
gross gift as donation proper nuptias.
Section 101, NIRC; Tang Ho v. Court of Appeals.

11. Valuation of gifts made in property

The spouses Helena and Federico wanted to donate a parcel of land to their son
Dondon who is getting married in December, 2011. The parcel of land has a zonal
valuation of P420,000.00. What is the most efficient mode of donating the
property? (2011 Bar Question)

(A) The spouses should first donate in 2011 a portion of the property valued at
P20,000.00 then spread the P400,000.00 equally for 2012, 2013, 2014 and 2015.
(B) Spread the donation over a period of 5 years by the spouses donating
P100,000.00 each year from 2011 to 2015.
(C) The spouses should each donate a P110,000.00 portion of the value of the
property in 2011 then each should donate P100,000.00 in 2012.
(D) The spouses should each donate a P100,000.00 portion of the value of the
property in 2011, and another P100,000.00 each in 2012. Then, in 2013, Helena
should donate the remaining P20,000.00.

SUGGESTED ANSWER:

(C) The spouses should each donate a P110,000.00 portion of the value of the property
in 2011 then each should donate P100,000.00 in 2012.

Kenneth Yusoph owns a commercial lot which he bought many years ago for PI
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.

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.

Dino subsequently sold the land to a buyer for P 20 Million. How much did Dino
gain on the sale? Explain.

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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.

ANSWER:

The value of the gifts for purposes of computing the gift tax shall be P 7.5 million in
1994 and P7.5millionin 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.

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.

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 PI 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 PI million from the amount realized which is P20 million.

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 Dinos 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. (BAR 1995)

12. Tax credit for donors taxes paid in a foreign country


13. Exemptions of gifts from donors tax

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Exempted from donors taxation are gifts made: (2011 Bar Question)
(A) for the use of the barangay.
(B) in consideration of marriage.
(C) to a school which is a stock corporation.
(D) to a for-profit government corporation.

SUGGESTED ANSWER:

(A) for the use of the barangay.

Levox Corporation wanted to donate P5 million as prize money for the world
professional billiard championship to be held in the Philippines. Since the Billiard
Sports Confederation of the Philippines does not recognize the event, it was held
under the auspices of the International Professional Billiards Association, Inc. Is
Levox subject to the donor's tax on its donation? (2011 Bar Question)

(A) No, so long as the donated money goes directly to the winners and not
through the association.
(B) Yes, since the national sports association for billiards does not sanction the
event.
(C) No, because it is donated as prize for an international competition under the
billiards association.
(D) Yes, but only that part that exceeds the first P100,000.00 of total Levox
donations for the calendar year.

SUGGESTED ANSWER:

(B) Yes, since the national sports association for billiards does not sanction the event.

A non-stock, non-profit school always had cash flow problems, resulting in


failure to recruit well- trained 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, wages, and benefits of
administrative personnel. The donation represents less than 10% of Don Leon's
taxable income for the year. Is he subject to donor's taxes? (2011 Bar Question)

(A) No, since the donation is actually, directly, and exclusively used for
educational purposes.
(B) Yes, because the donation is to be wholly used for administration purposes.
(C) Yes, since he did not obtain the requisite NGO certification before he made
the donation.
(D) No, because the donation does not exceed 10% of his taxable income for
2010.

SUGGESTED ANSWER:

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(B) Yes, because the donation is to be wholly used for administration purposes.

On January 10, 2011, Maria Reyes, single-mother, donated cash in the amount of
P50,000.00 to her daughter Cristina, and on December 20, 2011, she donated
another P50,000.00 to Cristina. Which statement is correct? (2012 BAR)

a) Maria Reyes is subject to donors tax in 2011 because gross gift is P100,000.00;
b) Maria Reyes is exempt from donors tax in 2011 because gross gift is
P100,000.00;
c) Maria Reyes is exempt from donors tax in 2011 only to the extent of
P50,000.00;
d) Maria Reyes is exempt from donors tax in 2011 because the donee is minor.

SUGGESTED ANSWER:

b) Maria Reyes is exempt from donors tax in 2011 because gross gift is P100,000.00
Section 99(A), NIRC.

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 donors tax? (2014 Bar Question)

SUGGESTED ANSWER :

The answer must be qualified. Section 99(C) of the NIRC explicitly 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, as amended. On the other
hand, Section 13 of the Republic Act No. 7166 specifically states that any provision of
law to the contrary notwithstanding, any contribution in cash or kind to any candidate or
political party or coalition of parties for campaign purposes, duly reports to the
Commission on Elections (COMELEC) shall not be subject to the payment of any gift
tax.

Thus, if Mr. De Almacen reported his campaign contributions of Php 500,000.00 in


cash, tarpaulins, t-shirts, umbrellas, caps, and other campaign materials to the
COMELEC, then the BIR cannot impose donors tax on such contributions. Conversely,
if Mr. De Almacen failed to report these campaign contributions to the COMELEC, such
contributions would be subject to donors tax.

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,

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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.

Is Miguel entitled to claim a dowry exclusion? Why or why not? (3%)

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 (Section 101(AX1),
NIRC). (BAR 2009)

The Congregation of the Mary Immaculate donated a land and a dormitory


building located along Espana St. in favor of the Sisters of the Holy Cross, a
group of nuns operating a free clinic and high school teaching basic spiritual
values. Is the donation subject to donors tax? Reason briefly.

SUGGESTED ANSWER:

No. Gifts in favor of an educational and/or charitable, religious, social welfare


corporation, or cultural institution, accredited non-government organization, trust or
philanthropic organization or research institution or organization are exempt 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). (BAR 2007)

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
donors tax under Section 101

(a) of the Tax Code? (3%)

SUGGESTED ANSWER:

The following are the conditions:

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) (BAR 2000)

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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, 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[Hl(2)(a) in relation
to Sec. 34[H](1), NIRC).

The Municipality of Pateros is not subject to any donors 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.

Alterative 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

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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.
(BAR 1998)

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 donors tax from Ayala Land Corporation,
which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.

ANSWER:

The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in
imposing the income tax. RA. 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 donors tax from Ayala Land Corporation. The
law is clear when it categorically stated That the donors of said prizes and awards
shall be exempt from the payment of the donors tax." (BAR 1996)

In 1991. Imelda gave her parents a Christmas gift of P 100.000.00 and a donation
of P80.000.00 to her parish 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.

Is the Christmas gift of P100.000.00 to Imelda's parents subject to tax?

How about the donation to the parish church?

How about the donation to the P.U.P, Alumni Association?

ANSWER:

The Christmas gift of PI00,000.00 given by Imelda to her parents is taxable up to


P50.000.00because under the law (Sec. 92 (a) of the Tax Code), net gifts not exceeding
P50.000.00 are exempt.

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The donation of P80.000.00 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 [Uadoc v. Commissioner,
14 SCRA 292).

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. (BAR 1994)

Can you name one kind of gift that is exempt from donors tax which is extendible
to both residents and nonresidents or non-citizens of the Philippines? Include
qualifications, If any.

ANSWER:

Gifts made to or for the use of the National Government or any entity created by any of
its agencies which is not conducted for profit, or to any political subdivision of the said
Government are exempt from gift tax with respect to both residents and non-residents.
(BAR 1992)

14. Person liable

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.

Rule on the CIR's action. (1%)(2013 Bar Question)

(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.

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SUGGESTED ANSWER:

(D) The CIR is correct; there was animus donandi since the children had no
financial capacity to be co-purchasers.

The present case is similar to the case of Sps. Hordon H. Evono and Maribel C. Evono
v. CIR, et al., [CTA EB No. 705, (CTA Case No. 7573),June 4, 2012]. The CTA held that
the inclusion of the minor childrens names in the transfer of the titles/properties shall be
deemed a donation or gift from their parents. This is so because the minor children, at
an early age, have no source of income. There is a clear animus donandi. Therefore,
the imposition of donors tax is in accordance with Section 98 of the NIRC.

(Note:Although the cited case was only decided by the CTA, it provides an authoritative
insight on the answer to the given problem, considering that there is no exact applicable
law and jurisprudence on the matter.)

15. Tax basis

Celia donated P110,000.00 to her friend Victoria who was getting married. Celia
gave no other gift during the calendar year. What is the donor's tax implication on
Celias donation? (2011 Bar Question)

(A) The P100,000.00 portion of the donation is exempt since given in


consideration of marriage.
(B) A P10,000.00 portion of the donation is exempt being a donation in
consideration of marriage.
(C) Celia shall pay a 30% donor's tax on the P110,000.00 donation.
(D) The P100,000.00 portion of the donation is exempt under the rate schedule for
donor's tax.

SUGGESTED ANSWER:

(C) Celia shall pay a 30% donor's tax on the P110,000.00 donation.

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.

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%)

SUGGESTED ANSWERS:

Yes. Jose and Clara are subject to donors tax. Since the real property is either conjugal
or absolute community property, each spouse is deemed to have made separate

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donation of one-half of the value of the property [Tang Ho v. Board of Tax appeals, 97
Phil. 899 [1955]).

For Jose, he is considered to have made two donations: one, is in favor of his son who
is a relative, and two, in favor of his sons wife who is a stranger. The taxable gift to the
son is P490,000 computed by deducting from the gross gift the dowry exclusion of
P10,000. The net gift is subject to the graduated tax rates of 2% to 15%. The taxable
gift to his sons wife is P500,000 subject to the 30% flat rate on donation to strangers.
(Sections 99 and 101, NIRC).

Clara is subject to the donors tax in exactly the same manner as Jose, being
considered to have effected likewise two donations. (BAR 2008)

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 donors 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 100,000.00on Christmas
2001 and the other Php 100,000.00 on January 1, 2002. Please explain your
advice. (5%)

SUGGESTED ANSWER:

I would advise 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 Php100,000 given on two different years will
totally relieve the donor form the donor is tax because the first Php l00, 000 donation in
the graduated brackets is exempt. (Section 99, NIRC). While the donor is tax is
computed on the cumulative donations, the aggregation of all donations made by a
donor is allowed only over one calendar year. (BAR 2001)

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:

Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal


descendant; or
Relative by consanguinity in the collateral line within the fourth degree of relationship."
[Sec. 98 (B), NIRC of 1997] (BAR 2000)

Kenneth Yusoph owns a commercial lot which he bought many years ago for PI
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

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1994, and the other one-half pro-indiviso interest to the same son on 2 January
1995.

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.

ANSWER:

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. (BAR 1995)

Mr. Bill Morgan, a Canadian citizen and a resident of Scarborough, Ontario, sends
a gift check of $20,000.00 to his future Filipino daughter-in-law who is to be
married to his only son in the Philippines.

Is the donation by Mr. Morgan subject to tax? Explain.

ANSWER:

Yes. While the gift has been made on account of marriage, to qualify for exemption to
the extent of the first P10, 000 (now P50.000.00) of the value thereof, such gift should
have been given to a legitimate, recognized natural or adopted child of the donor.

ALTERNATIVE ANSWER:

It is not subject to tax because the gift was made outside the Philippines.

What is the tax consequences, if any, to the donee (Filipino daughter-in-law of Mr.
Morgan)?

ANSWER:

The gift, with respect to the donee, is excluded from gross income and is exempt from
Income taxation.

There is no donees gift tax. (BAR 1992)

V. Value-Added Tax (VAT)


1. Concept

Your client. United Market Cooperative is requesting the Commissioner of


Internal Revenue to exempt it from the payment of VAT on its purchase of prime

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commodities from food suppliers/manufacturers on the ground that it is exempt
from all taxes, including VAT, under RA. No. 6938, the Cooperative Code of the
Philippines.

Do you think your client can obtain the necessary exemption from the BIR? If
your answer is in the affirmative, explain the basis for the grant. If in the negative,
state the basis for the rejection of the request.

ANSWER:

An exemption is not necessary. The value added tax is not on the purchase but on the
sellers, except in importation.

No. The exemption to which the taxpayers are entitled to refers to those taxes that are
levied on the exempt taxpayer or directly imposed on the exempted goods. The value
added tax is imposed on the sellers of goods and services, not the purchaser.

ALTERNATIVE ANSWER:

Yes. Under the NIRC, transactions which are exempted by special laws from the
payment of value-added taxes shall be so exempt. RA 6938.the Cooperative Code of
the Philippines is a special law entitling the United Market Cooperative in the case at
bar to exemption from VAT. (BAR 1992)

Newtex International (Phils.) Inc. is an American firm duly authorized to engage in


business in the Philippines as a branch office. In its activity of acting as a buying
agent for foreign buyers of shirts and dresses abroad and performing liason work
between its home office and the Filipino garment manufacturers and exporters.
Newt ex does not generate any income. To finance its office expenses here, its
head office abroad regularly remits to it the needed amount. To oversee its
operations and manage its office here, which had been in operation for two (2)
years, the head office assigned three (3) foreign personnel.

Is Newtex International (Phils.) Inc. subject to VAT?

ANSWER:

Newtex International (Phils.) Inc.. is not subject to VAT. The VAT is imposed on sellers
and not on buyers. The branch office did not derive any income or compensation so as
to possibly permit the imposition of a VAT on compensation for services rendered. In
addition, since the transactions are direct export sales, the VAT does not apply. Export
sales are among those that are either zero rated or exempt from VAT (Secs. 99-100,
NIRC). (BAR 1991)

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2. Characteristics/Elements of a VAT-Taxable transaction

What are the characteristics of the Value-Added Tax?

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:


- It is an indirect tax where tax shifting is always presumed:
- It is consumption-based;
- It is imposed on the value-added in each stage of distribution;
- It is a credit-invoice method value-added tax; and
- It is not a cascading tax. (BAR 1996)

3. Impact of tax
4. Incidence of tax
5. Tax credit method

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.

Are the importations of motor vehicles from abroad subject to customs duties
and value added taxes? Explain. (4%)

SUGGESTED ANSWER:

No. The importation from abroad to the Subic Bay Freeport Zone is exempt from
customs duties and value-added taxes. The Freeport Zone is an extension of a foreign
territory so that the vehicles imported while still within its secured perimeter is not
subject to Philippine taxes. (RMC No. 50-2007; Seagate Technology Inc., v.
Commissioner, 451 SCRA 132 [2005]). (BAR 2008)

6. Destination principle
7. Persons liable

An importer of flowers from abroad in 2011: (2012 BAR)


a) Is liable for VAT, if it registers as a VAT person;
b) Is exempt from VAT, because the goods are treated as agricultural products;

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c) Is exempt from VAT, provided that his total importation of flowers does not
exceed P1.5 Million;
d) Is liable for VAT, despite the fact that it did not register as a VAT person and its
total annual sales of flowers do not exceed P1.5 Million.

SUGGESTED ANSWER:

d) Is liable for VAT, despite the fact that it did not register as a VAT person and its total
annual sales of flowers do not exceed P1.5 Million
Section 107, NIRC.

MBM Corporation is the owner-operator of movie houses in Cavite. During the


year 2010, it received a total gross receipts of P20 Million from the operation of
movies. It did not register as a VAT person. Which statement below is correct?
(2012 BAR)

a) MBM Corporation is exempt from the 12% VAT, but liable for the 20%
amusement tax on admissions under the Local Government Code;
b) MBM Corporation is both liable for the 12% VAT and 20% amusement tax on
admissions;
c) MBM Corporation is both exempt from the 12% VAT and 20% amusement tax
on admissions; d) MBM Corporation is liable for the 12% VAT, but exempt from
the 20% amusement tax on admissions.

SUGGESTED ANSWER:

a) MBM Corporation is exempt from the 12% VAT, but liable for the 20% amusement
tax on admissions under the Local Government Code
CIR v. SM Prime Holdings Inc., G.R. No. 183505, February 26, 2010.

The public market vendor below, who is not a VAT-registered person is liable to
VAT in 2010, if: (2012 BAR)

a) She sells raw chicken and meats and her gross sales during the year is P2
Million;
b) She sells vegetables and fruits in her stall and her gross sales during the year
is P1 Million;
c) She sells canned goods, processed coconut oils, and cut flowers in her stall
and her gross sales during the year is P2.5 Million;
d) She sells live fish, shrimps, and crabs and her gross sales during the year is
P5 Million.

SUGGESTED ANSWER:

c) She sells canned goods, processed coconut oils, and cut flowers in her stall and her
gross sales during the year is P2.5 Million

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Section 105 & 109, NIRC.

Melissa inherited from her father a 300-square-meter lot. At the time of her
fathers 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, 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
(Section 105 and Section 109(1)(P), NIRC). (BAR 2009)

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

ANSWER:

The persons liable for the value-added tax are:

i. Sellers of goods and properties in the course of trade or business:


ii. Sellers of services in the course of trade or business, including lessors of goods and
properties:
iii. Importers of taxable goods, whether in the course of business or not (BAR 1996)

8. VAT on sale of goods or properties

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.

Sale of orchids by a flower shop which raises its flowers in Tagaytay. (3%)

SUGGESTED ANSWER:

The sale of orchids is subject to VAT at 12%. This is a sale of agricultural non-food
product in its original state which is no longer one of the exempt transactions. (Sec. 109,
NIRC, as amended by RA No. 9337).

Melissa inherited from her father a 300-square-meter lot. At the time of her
fathers 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.

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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 (Section 39 and Section 106, NIRC). (BAR 2009)

State whether the following transactions are a) VAT Exempt, b) subject to VAT at
10%; or c) subject to VAT at 0%:

Sale of tractors and other agricultural implements by Bungkal Incorporated to


local farmers. [1%]

SUGGESTED ANSWER:

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[A](1), NIRC, the sales of which are subject to VAT at 10%. (BAR 1998)

State whether the following transactions are


a) VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at 0%:

Sale of RIW by Cely's Boutique, a Filipino dress designer, in her dress shop and
other outlets. (1%)

SUGGESTED ANSWER:

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[A](1), NIRC, the sales of which are subject to VAT at 10%. (BAR 1998)

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

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. (BAR 1996)

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a. Requisites of taxability of sale of goods or properties

Under the VAT system, there is no cascading because the tax itself is not again
being taxed. However, in determining the tax base on sale of taxable goods under
the VAT system: (2012 BAR)

a) The professional tax paid by the professional is included in gross receipts;


b) The other percentage tax (e.g., gross receipts tax) paid by the taxpayer is
included in gross selling price;
c) The excise tax paid by the taxpayer before withdrawal of the goods from the
place of production or from customs custody is included in the gross selling
price;
d) The documentary stamp tax paid by the taxpayer is included in the gross
selling price or gross receipts.

SUGGESTED ANSWER:

c) The excise tax paid by the taxpayer before withdrawal of the goods from the place of
production or from customs custody is included in the gross selling price
Section 106, NIRC; RR No. 16-2005.

Which transaction below is subject to VAT? (2012 BAR)

a) Sale of vegetables by a farmer in Baguio City to a vegetable dealer;


b) Sale of vegetables by a vegetable dealer in Baguio City to another vegetable
dealer in Quezon City;
c) Sale of vegetables by the QC vegetable dealer to a restaurant in Manila;
d) Sale of vegetables by the restaurant operator to its customers.

SUGGESTED ANSWER:

d) Sale of vegetables by the restaurant operator to its customers

Section 109, NIRC.

[Note: This is not absolutely true because a restaurant may sell the vegetables in their
original state which will be exempt from VAT under Section 109(A), irrespective of who
is the seller.]

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

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the delivery van by MKI to MGSC subject to VAT? (2014 Bar Question)

SUGGESTED ANSWER :

Yes. The sale of the delivery van by MKI to MGSC was incidental to its trade or
business, and therefore subject to VAT. Pursuant to the case of Mindanao Geothermal
Partnership II v. Commissioner of Internal Revenue (G.R. No. 193301, 194637, March
11, 2013), an isolated transaction may be considered a transaction incidental to the
taxpayers.

9. Zero-rated sales of goods or properties, and effectively zero-rated sales of goods or


properties

Royal Mining is a VAT-registered domestic mining entity. One of its products is


silver being sold to the Bangko Sentral rig 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 are considered export sales subject to
zero-rated VAT.

Is Royal Minings 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 as export sale subject to zero-
rated VAT (Section 106(A)(2)(a), NIRC).

Note:
There seems to be confusion as to the inclusion of the E-VAT Law in the coverage of
the examination. The first notice given during the Chairmans meeting with the Law
Deans explicitly excludes the E-VAT Law from the coverage. The subsequent notice
includes E-VAT Law but the reference to the ABAKADA Guro case gave many bar
review lecturers in Taxation the impression that only the said case is included and not
the entire EVAT Law, as it has been excluded for several years now. For the above
reason, it is respectfully recommended that any answer be given credit. (BAR 2006)

Colawin Marketing Corp. (CMC) sells goods and renders services to Pinatubo
Inc., a contractor for the U.S. Base. CMC applies for zero rate. Is it qualified for
zero rating under the pertinent Tax Code provisions on VAT?

ANSWER:

CMC is not qualified for zero rating. The goods and services rendered to Pinatubo, Inc..
evidently a domestic corporation, cannot be considered as an export sale. Pinatubo Inc.
is but a contractor for the U.S. Base.

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The sales which are subject to zero percent are export sales and sales to persons or
entities whose exemption under special laws or by an International Agreement where
the Philippines is a signatory effectively subjects such sales to zero rate (Sec. 100,
NIRC). (BAR 1991)

10. Transactions deemed sale

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'?

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:
c. Shareholders or investors as share in the profits of VAT-registered persons: or
d. Creditors in payment of debt:
e. Consignment of goods if actual sale is not made within 60 days following the date
such goods were consigned: and
f. Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation. (BAR 1997)

a. Transfer, use or consumption not in the course of business of goods/properties


originally intended for sale or use in the course of business
b. Distribution or transfer to shareholders, investors or creditors
c. Consignment of goods if actual sale not made within 60 days from date of
consignment
d. Retirement from or cessation of business with respect to inventories on hand

11. Change or cessation of status as VAT-registered person


a. Subject to VAT
i. Change of business activity from VAT taxable status to VAT-exempt status
ii. Approval of request for cancellation of a registration due to reversion to exempt
status
iii. Approval of request for cancellation of registration due to desire to revert to
exempt status after lapse of 3 consecutive years

b. Not subject to VAT


i. Change of control of a corporation

Cebu Development Inc. (CDI) has an authorized capital stock of P5,000,000,00


divided into 50,000 shares with a par value of One Hundred Pesos (P100.00) per

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share. Of the authorized capital stock, twenty-five thousand (25,000) shares have
been subscribed. Mr. Juan Legaspi is a stockholder of CDI where he has
subscription amounting to 13,000 shares. To fully pay his unpaid subscription in
the amount of P950.000.00, Mr. Legaspi transferred to the corporation a parcel of
land that he owns by virtue of a Deed of Assignment. Upon investigation, the BIR
discovered that Mr. Legaspi acquired said property for only P500,000.00.

Is Mr. Legaspi liable for any taxable gain?

ANSWER:

The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his
unpaid subscription did not increase his stockholdings in the corporation. It cannot be
said that he acquired control of the corporation by virtue of the transfer of the land. His
percentage of stockholdings in the capital stock of the corporation remains the same
after the transfer as before. Therefore, Mr. Legaspi derived taxable gain for his
economic gain which was realized by virtue of the exchange of the land for the liability
for the subscription.

ALTERNATIVE ANSWER:

Mr. Legaspi is not liable for any taxable gain. The transaction amounted to an exchange
of shares of property for shares of stock as a result of which the property transferor
acquired control of the corporation. The 13,000 shares of stock acquired in exchange of
property was more than fifty percent (50%) of the total subscribed capital stock of Cebu
Development, Inc. (CDI) that qualified the transaction as a tax-exempt under the
provisions of Sec. 34 (c) (2) of the National Internal Revenue Code. (BAR 1991)

ii. Change in the trade or corporate name


iii. Merger or consolidation of corporations

12. VAT on importation of goods

Which of the following transactions is subject to Value-Added Tax (VAT)? (2014


Bar Question)
(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 employer-employee
relationship
(D) Gross receipts from lending activities by credit or multi-purpose cooperatives
duly registered with the Cooperative Development Authority

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SUGGESTED ANSWER :

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

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.

If they are taxable, upon sale to custom territory, 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%)

SUGGESTED ANSWER:

When these motor vehicles are sold to the customs territory, the duties and taxes must
be paid before they are physically brought out of the Freeport Zone. The introduction of
the motor vehicles to the customs territory is considered as technical importation subject
to the customs duties and VAT. The tax base for the customs duties is the transaction
value while for VAT purposes, the tax base is the value used in computing customs
duties plus customs duties, excise taxes and other charges incident to importation.
(Section 107 (A), NIRC). These taxes on importation must be paid to the Bureau of
Customs before the Authority to Release Imported Goods will be issued by the BIR.
(Revenue Regulations No. 16-2005). (BAR 2008)

a. Transfer of goods by tax exempt persons

Which importation in 2011 is subject to VAT? (2012 BAR)


a) Importation of fuels by a person engaged in international shipping worth P20
Million;
b) Importation of raw, unprocessed, refrigerated Kobe beef from Japan by a beef
dealer for sale to hotels in Makati City with a fair market value of P10 Million;
c) Importation of wines by a wine dealer with a fair market value of P2 million for
sale to hotels in Makati City;
d) Importation of books worth P5 Million and school supplies worth P1.2 million.

SUGGESTED ANSWER:

c) Importation of wines by a wine dealer with a fair market value of P2 million for sale to
hotels in Makati City

Sections 107 & 109, NIRC.

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[Note: d) may also be a correct choice because only importation of books is exempt
from VAT. The importation of school supplies is not exempt.]

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:

Yes. The sale is subject to tax. Section 107 (B) of the NIRC provides that: "In the case
of tax-free importation of goods into the Philippines by persons, entities or agencies
exempt from tax where such goods are subsequently sold, transferred or exchanged in
the Philippines to non-exempt persons or entities, the purchasers, transferees or
recipients shall be considered the importer thereof, who shall be liable for any internal
revenue tax on such importation.

Note:

The question seems to be outside the coverage of the bar examination because it
involves an application of the provision of the VAT Law. It is suggested, therefore, that
any answer shall be given full credit. (BAR 2005)

13. VAT on sale of service and use or lease of properties

Greenhills Condominium Corporation incorporated in 2001 is 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.

Will the association be liable for value added tax in 2008 if it increases the rental
to PI50,000 a month beginning January 2008? Explain. (3%)

SUGGESTED ANSWERS:

Yes. When it increased the rentals to P150,000 per month, its gross annual receipts will
now exceed PI.5 million. It is liable to the VAT beginning January 2008. (Section 109(V),
NIRC). (BAR 2008)

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a. Requisites for taxability

A VAT-registered contractor performed services for his customer in 2010 and


billed him P11.2 Million, broken down as follows: P10 Million cost of services,
plus P1.2 Million, 12% VAT. Of the contract price of P10 Million, only P8 Million
plus VAT thereon was received from the customer in 2010, and the balance of P4
Million plus VAT was received by the contractor in 2011. How much is the taxable
gross receipts of the contractor for 2010, for VAT purposes? (2012 BAR)

a) P10 Million, the total cost of services performed in 2010;


b) P8 Million, the amount received from the customer in 2010;
c) P8 Million plus VAT received from the customer in 2010;
d) P11.2 Million, the total cost of services performed plus 12% VAT.

SUGGESTED ANSWER:

b) P8 Million, the amount received from the customer in 2010


Section 108, NIRC.

A hotel operator that is a VAT-registered person and who leases luxury vehicles
to its hotel customers is: (2012 BAR)
a) Subject to the 3% common carriers tax and 12% VAT;
b) Subject to the 3% common carriers tax only;
c) Subject to the 12% VAT only;
d) Exempt from both the 3% common carriers tax and 12% VAT.

SUGGESTED ANSWER:

c) Subject to the 12% VAT only


Section 108, NIRC.

A pawnshop shall now be treated, for business tax purposes: (2012 BAR)
a) As a lending investor liable to the 12% VAT on its gross receipts from interest
income and from gross selling price from sale of unclaimed properties;
b) Not as a lending investor, but liable to the 5% gross receipts tax imposed on a
non-bank financial intermediary under Title VI (Other Percentage Taxes);
c) As exempt from 12% VAT and 5% gross receipts tax; d) As liable to the 12%
VAT and 5% gross receipts tax.

SUGGESTED ANSWER:

b) Not as a lending investor, but liable to the 5% gross receipts tax imposed on a non-
bank financial intermediary under Title VI (Other Percentage Taxes)
RR No. 10-2004; H. Tambunting Inc. v. CIR, G.R. No. 172394, October 13, 2010.

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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 RMCs 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. (2014 Bar Question)

SUGGESTED ANSWER :

The argument of the condominium corporation is correct. The association dues should
not be subject to VAT because the condominium corporation does not realize any gain
or profit. They merely hold the fees in trust for administrative expenses. This, it does not
form part of the gross income of the corporation, and consequently, is not subject to
VAT. (RTC Resolution SCA No.12-1236 on RMC 65- 2012, Petition for Declaratory
Relief).

14. Zero-rated sale of services

Foster Corporation (FC) is a Singapore-based foreign corporation engaged in


construction and installation projects. In 2010, Global Oil Corporation (GOC), a
domestic corporation engaged in the refinery of petroleum products, awarded an
anti-pollution project to Foster Corporation, whereby FC shall design, supply
machinery and equipment, and install an anti-pollution device for GOCs refinery
in the Philippines, 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 the FC with the 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 P20Million;
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 certificates issued by the architects and engineers
working on the project. GOC paid FC as follows: P60 Million in 2010 and P40

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Million in 2011, and FC paid PCC ion foreign currency through a Philippine bank
as follows: P10 Million in 2010 and P20 Million in 2011.

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.
(2012 BAR)

Suggested Answer:
YES. PCC is liable to the VAT as seller of services for a fee. However, the sale of
services to FC is subject to VAT at zero percent rate. Services rendered to a person
engaged in business outside the Philippines or to a non-resident person not engaged in
business who is outside the Philippines when the services are performed paid in foreign
currency inwardly remitted through the banking system are zero-rated sales of services
(Sec. 108(B)(2), NIRC).

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.

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 zero-rated (Sec. 108(B)(3), NIRC).

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 sale of services is subject to VAT at 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).

Sale of orchids by a flower shop which raises its flowers in Tagaytay. (2010 Bar
Question)

SUGGESTED ANSWER:

The sale of orchids is subject to VAT at 12%. This is a sale of agricultural non-food

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product in its original state which is no longer one of the exempt transactions.

State whether the following transactions are a) VAT Exempt, b) subject to VAT at
10%; or c) subject to VAT at 0%:

Services rendered by Jake's Construction Company, a contractor to the World


Health Organization in the renovation of its offices In Manila. [1%]

SUGGESTED ANSWER:

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. 108IB](3), NIRC). (BAR 1998)

15. VAT exempt transactions


a. VAT exempt transactions, in general
b. Exempt transaction, enumerated

Except for one transaction, the rest are exempt from value added tax. Which one
is VAT taxable? (2012 BAR)
a) Sales of chicken by a restaurant owner who did not register as a VAT person
and whose gross annual sales is P1.2 Million;
b) Sales of copra by a copra dealer to a coconut oil manufacturer who did not
register as a VAT person and whose gross annual sales is P5 Million;
c) Gross receipts of CPA during the year amounted to P1 Million; the CPA
registered as a VAT person in January 2011, before practicing his profession;
d) Sales of a book store during the year amounted to P10 Million; it did not
register as a VAT person with the BIR.

SUGGESTED ANSWER:

c) Gross receipts of CPA during the year amounted to P1 Million; the CPA registered as
a VAT person in January 2011, before practicing his profession
Section 108, NIRC.

A lessor or real property is exempt from value added tax in one of the
transactions below. Which one is it? (2012 BAR)

a) Lessor leases commercial stalls located in the Greenhills Commercial Center


to VAT- registered sellers of cell phones; lessors gross rental during the year
amounted to P12 Million;
b) Lessor leases residential apartment units to individual tenants for P10,000.00
per month per unit; his gross rental income during the year amounted to P2
Million;
c) Lessor leases commercial stalls at P10,000.00 per stall per month and

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residential units at P15,000.00 per unit per month; his gross rental income
during the year amounted to P3 Million; d) Lessor leases two (2) residential
houses and lots at P50,000.00 per month per unit, but he registered as a VAT
person.

SUGGESTED ANSWER:

b) Lessor leases residential apartment units to individual tenants for P10,000.00 per
month per unit; his gross rental income during the year amounted to P2 Million
Section 109(Q), NIRC.

IBP Bank extended loans to debtors during the year, with real properties of the
debtors being used as collateral to secure the loans. When the debtors failed to
pay the unpaid principal and interests after several demand letters, the bank
foreclosed the same and entered into contracts of lease with tenants. The bank is
subject to the tax as follows: (2012 BAR)
a) 12% VAT on the rental income, but exempt from the 7% gross receipts tax;
b) 7% gross receipts tax on the rental income, but exempt from VAT;
c) Liable to both the 12% VAT and 7% gross receipts tax;
d) Exempt from both the 12% VAT and 7% gross receipts tax.

SUGGESTED ANSWER:

b) 7% gross receipts tax on the rental income, but exempt from VAT
Section 121, NIRC.

Which statement is correct? A bar review center owned and operated by lawyers
is: (2012 BAR)
a) Exempt from VAT, regardless of its gross receipts during the year because it is
an educational center;
b) Exempt from VAT, provided that its annual gross receipts do not exceed P1.5
Million in 2011;
c) Subject to VAT, regardless of its gross receipts during the year;
d) Subject to VAT, if it is duly accredited by TESDA.

SUGGESTED ANSWER:

b) Exempt from VAT, provided that its annual gross receipts do not exceed P1.5 Million
in 2011
Section 109(V), NIRC.

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 PI0,000.00. His gross rental income for one year is PI,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%)

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SUGGESTED ANSWER:

I will advise Emiliano ttyat 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 (Section 109(1X0,b NIRC). (BAR 2009)

Greenhills Condominium Corporation incorporated in 2001 is 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.

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%)

SUGGESTED ANSWER:

No. Since the associations annual gross receipts do not exceed PI.5 million, it is
exempt from the VAT.

(Section 109(V), NIRC). It is, however, liable to the 3% percentage tax which is the
imposed on persons exempt from value-added tax on account of failure to reach the
P1.5 million treshhold. (Section 116, NIRC).

Will the association be liable for value added tax in 2008 if it increases the rental
to PI50,000 a month beginning January 2008? Explain. (3%)

SUGGESTED ANSWERS:

Yes. When it increased the rentals to P150,000 per month, its gross annual receipts will
now exceed PI.5 million. It is liable to the VAT beginning January 2008. (Section 109(V),
NIRC). (BAR 2008)

State whether the following transactions are


a) VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at 0%:

Sale of fresh vegetables by Aling Ining at the Pamilihang Bayan ng Trece


Martirez. [1%]

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SUGGESTED ANSWER:

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). (BAR 1998)

State whether the following transactions are


a) VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at 0%:

Fees for lodging paid by students to Bahay-Bahayan Dormitory, a private entity


operating a student dormitory (monthly fee. P1,500). 11%]

SUGGESTED ANSWER:

VAT Exempt. The monthly fee paid by each student falls under the lease of residential
units with a monthly rental per unit not exceeding Php8,000, 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, RR No. 7-95). (BAR 1998)

Give at least three (3) real estate transactions which are not subject to the Value-
Added Tax.

ANSWER:

Real estate transactions which are exempt from the value-added tax are:

- Sale of real property not primarily held for sale or lease In the ordinary course of
trade or business;
- Sale of real property utilized for socialized housing under RA. No. 7279;
- 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:

- Transfer of real property to a trustee if the property is to be held merely in trust


for the trustor.
- 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.
- Advance payment by the lessee in a lease contract, when the same is actually a
loan to the lessor from the lessee.
- Security deposits for lease arrangements to insure the faithful performance of
certain obligations of the lessee to the lessor.

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- 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. (BAR 1996)

16. Input tax and output tax, defined

17. Sources of input tax


a. Purchase or importation of goods
b. Purchase of real properties for which a VAT has actually been paid
c. Purchase of services in which VAT has actually been paid
d. Transactions deemed sale
e. Presumptive input
f. Transitional input

18. Persons who can avail of input tax credit

Claim for tax credit or refund of excess input tax is available only to: (2012 BAR)
a) A VAT-registered person whose sales are made to embassies of foreign
governments and United Nations agencies located in the Philippines without
the BIR approval of the application for zero-rating;
b) Any person who has excess input tax arising from local purchases of taxable
goods and services;
c) A VAT-registered person whose sales are made to clients in the Philippines;
d) A VAT-registered person whose sales are made to customers outside the
Philippines and who issued VAT invoices or receipts with the words "ZERO
RATED SALES" imprinted on the sales invoices or receipts.

SUGGESTED ANSWER:

d) A VAT-registered person whose sales are made to customers outside the Philippines
and who issued VAT invoices or receipts with the words "ZERO RATED SALES"
imprinted on the sales invoices or receipts.
KepcoPhils. Corp. v. CIR, G.R. No. 179961, January 31, 2011.

19. Determination of output/input tax; VAT payable; excess input tax credits
a. Determination of output tax
b. Determination of input tax creditable
c. Allocation of input tax on mixed transactions
d. Determination of the output tax and VAT payable and computation of VAT
payable or excess tax credits

20. Substantiation of input tax credits

Input tax is available to a VAT-registered buyer, provided that: (2012 BAR)


a) The seller is a VAT-registered person;
b) The seller issues a VAT invoice or official receipt, which separately indicates

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the VAT component;
c) The goods or service is subject to or exempt from VAT, but the sale is covered
by a VAT invoice or receipt issued by VAT-registered person;
d) The name and TIN of the buyer is not stated or shown in the VAT invoice or
receipt Which statement shown above is NOT correct?

SUGGESTED ANSWER:

b) The seller issues a VAT invoice or official receipt, which separately indicates the VAT
component
Section 113(B), NIRC.

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:

a) The VAT invoice or receipt of the seller is registered with the BIR;
b) The VAT invoice or receipt of the seller does not separately indicate the gross
selling price or gross receipts and the VAT component therein;
c) The VAT invoice or receipt is issued in the name of the VAT-registered buyer
and his TIN is shown in said invoice or receipt;
d) The VAT invoice or receipt issued by the seller shows the Taxpayer
Identification Number plus the word "VAT" or "VAT registered person".

SUGGESTED ANSWER:

b) The VAT invoice or receipt of the seller does not separately indicate the gross selling
price or gross receipts and the VAT component therein
Section 113, NIRC.

21. Refund or tax credit of excess input tax


a. Who may claim for refund/apply for issuance of tax credit certificate
b. Period to file claim/apply for issuance of tax credit certificate

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.
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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? (2014 Bar Question)

SUGGESTED ANSWER :

(A) No. The CTA is not correct. The two-year period to file a claim for refund refers to
the administrative claim and does not refer to the 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 (Section112 (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 on VAT refunds
is two years to file the claim with the BIR, plus 120 for the Commissioner to act and
inaction after 120 days is a deemed adverse decision on the claim, appealable to the
CTA within thirty (30) days from the lapse of the 120-day period. (CIR v. Aichi Forging
Company of Asia, Inc., G.R. No. 184823, October 6, 2010).
(
B) Yes. The two-year prescriptive period to file a claim for refund refers to the
administrative claim with the BIR and not 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 elevation the claim to the CTA is premature and the
CTA has no jurisdiction to rile thereon. (CIR v. Aichi Forging Company of Asia, Inc.,
G.R. No. 184823, October 6, 2010).

For calendar year 2011, FFF, Inc., a VAT-registered 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.?
b) Discuss the proper procedure and applicable time periods for administrative
and judicial claims for refund/credit of unutilized excess input VAT. (2015 Bar

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Law on Taxation

Question)

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 period after the expiration of the 120-day period fixed by law for the
Commissioner of Internal Revenue to act on the claim for refun