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VOLUME I

GENERAL PRINCIPLES

1. The City of Manila passed an ordinance imposing a license fee on all motor vehicles
entering the city between the hours of 8:00 am - 4:00 pm. Commuters assailed the
validity of the law. If you were the judge, what would be your ruling? Indicate and explain
your choice among the following?

A: It is valid because it is a legitimate exercise of police power. This would regulate the numbers
of vehicles and relieve traffic congestion.

2. The City of Manila passed an ordinance imposing an annual tax of P5,000.00 to be paid by
an operator of a massage clinic and an annual fee of P50.00 to be paid by every attendant
or helper in the said clinic. Is the imposition a tax or license fee?

A: The imposition on the operator of the massage clinic is both a tax and license fee.

The amount of P5,000.00 exceeds the cost of regulation, administration and control but it is
likewise imposed to regulate a non-useful business in order to protect the health, safety and
morals of the citizenry in general.

The P50.00 impositions on the helpers or attendants are license fee sufficient only for
regulation, administration and control.

3. 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 am to 9:00 am from Mondays to Fridays, but exempts those cars carrying
more than two occupants, excluding the driver. Is the ordinance valid?

A: Yes. The ordinance is valid as it is an imposition under police power and does not violate the
equal protection and uniformity clause of the Constitution.

It is an imposition to protect the health and safety because it reduces the traffic problem which
in turn contributes to health hazards coming from the pollution and thus promotes general
welfare.

There is a valid classification because there are substantial distinctions between the private and
public vehicles, the former being required for the conduct of public service. The classification of
more than two occupants leading to the exemption is valid because the number of occupants is
determinative of the number of vehicles that enter the city.

UPLC: No. It is premised upon the violation of the rule of uniformity and equality taxation.

4. A municipal ordinance was passed by the Sangguniang Bayan imposing an occupation tax
upon owners of fishponds within the municipality. The owners thereof, whose fishponds
were already subject to property tax, contested in the court the validity of the ordinance
on the ground that it constituted double taxation. Is their theory tenable or not?
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A: No. There is no double taxation which could nullify the tax ordinance because taxes covered
different subjects and objects, and are for different purposes. The first is a property tax while
the second is an occupation tax.

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5. A Deed of Sale of Real Property was acknowledged before a Notary Public and
presented to the Register of Deeds for registration. The said official required the payment
and affixture of two documentary stamps, one for the deed of sale and another
acknowledgment. Is the said requirement against the principle of double taxation? Why?

A: No, because the taxes are imposed on different transactions. The deed of sale is different from
the acknowledgment.

6. Municipality X enacted an ordinance which imposes an occupation tax upon owners of


fishponds. The validity of the ordinance is being challenged on the ground that it
constitutes double taxation because the fishpond is already subject to a land tax. Is the
ordinance valid?

A: Yes. There is no double taxation which could nullify the tax ordinance because taxes covered
different subjects and objects, and are for different purposes. The first is a property tax while
the second is an occupation tax.

7. J is the owner of various real estate properties in a number of cities and municipalities.
Most of these properties are for lease and yield rental income to J. Every year, J pays to
the national government a real estate dealers tax of P1,000.00 computed in accordance
with a schedule provided in the NIRC, related to his gross income from real estate
properties. The various local governments where Js properties are located also collect
from him a lessors tax in accordance with a schedule of amount related to his gross
income from real properties within the territory of each local government. Are the local
ordinances imposing these lessors taxes valid, or do they not constitute in effect, double
taxation?

A: The lessors taxes are valid and they do not constitute double taxation.

The real estate dealers tax is to be paid to the national government while the lessors taxes are
to be paid to the local government units. Since there are two taxing authorities, there is no
double taxation.

8. The Manila Electric Company paid fees for the inspection of its boiler by the inspectors of
the DOLE pursuant to Labor Code. The same steam boilers of the company were also
subject to tax and inspection by the City Engineer of Manila. Is there a conflict between
the power of City of Manila on one hand, and the power of the Department on the other?

A: No. The police power and the power to tax are exercised by two different authorities. The
national government through the DOLE, and the local government through the City of Manila.
There is no conflict because the powers exercised are different.

9. Your neighbor owns a row of apartments, one suit of which he occupies as his residence
and the rest, he leases to tenants. He complains to you that he has to pay the following
taxes:
a. real estate taxes on the properties;
b. real estate dealers tax based on his rental receipts;
2 c. income tax for said rental receipts;
d. community tax based on the assessed value of the same properties.

He asks you whether or not the various impositions constitute double taxation and
therefore violative of the Constitution. What will your answer be? Explain.

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A: The various impositions constitute double taxation because my neighbor is taxed twice.

However, this type of double taxation is not prohibited by the Constitution because it is not
direct duplicate taxation violative of equal protection and uniformity in taxation. The reason is
that the taxes are imposed for different purposes and by different taxing authorities.

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

A: There is double taxation because X is taxed twice.

However, this type of double taxation is not prohibited by the Constitution because it is not
direct duplicate taxation violative of equal protection and uniformity in taxation. The reason is
that the taxes are imposed for different purposes and by different taxing authorities.

11. A municipality, BB, has an ordinance which requires that all stores, restaurants, and
other establishments selling liquor should pay a fixed annual fee of P20,000.00.
Subsequently, the municipal board proposed an ordinance imposing sales tax equivalent
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.

A: No. There is no double taxation because there are two different subjects and objects of
taxation. The first, the fixed annual fee is a tax for the privilege of engaging in business while the
second, is a tax on purchase or construction.

12. A Filipino citizen receives dividend income from the United States on his capital
investments in that foreign country. The dividend being remitted to him is taxed in the
United States and at the same time is also being taxed in the Philippines. Is this what is
called double taxation? Has our Tax Code provided any remedy for such taxpayer?

A: Yes, because he is taxed twice on the same income. In this case, there is indirect duplicate
taxation because the taxes are imposed by different taxing authorities, hence not prohibited.

Yes. He could use the foreign income taxes as a tax credit or deduction from the Philippine
income taxes that may be due from the taxpayer.

13. In 2012, Caruso a resident Filipino citizen, received dividend income from a US-based
corporation which owns a chain of Filipino restaurants in the West Coast, USA. The
dividend being remitted to Caruso is subject to US withholding tax with respect of a non-
resident alike like Caruso. What will be your advice to Caruso in order to lessen the
impact of possible double taxation on the same income?
A: Caruso could choose whether to avail of a tax credit deducting the withheld amount from his
tax due in the Philippines or deducting withheld amount from his gross income in the
Philippines.
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14. Silkair PTE, Ltd., an international carrier, purchased aviation gas from Petron
Corporation, which it uses for its operation. It now claims for refund or tax credit for the
excise taxes it paid claiming that it is exempt from payment of excise taxes under the
provisions of Sec. 135 of the NIRC 1997 which provides that petroleum products are

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exempt from excise taxes when sold to exempt entities or agencies covered by tax
treaties, conventions, and other international agreements for their use and consumption.

Silkair further anchors its claim on Article 4(2) of the Air Transport Agreement between
the Philippines and Singapore which exempts fuel, lubricants, spare parts, regular
equipment and aircraft of the contracting parties from the customs duties, inspection
fees, and other duties or taxes.

Silkair likewise argues that it is exempt from indirect taxes because the Air Transport
Agreement grants exemption from the same customs duties, inspection fees and other
duties or taxes imposed in the territory of the Contracting Party. It invokes Maceda v.
Macaraig Jr. (G.R. No. 88291, May 31, 1991, 197 SCRA 771), which upheld the claim for tax
credit or refund by the NPC on the ground that NPC is exempt even from the payment of
indirect taxes.

Is Silkair entitled to the tax refund or credit it seeks? Reasons.

A: No.
a. The excise tax on aviation fuel is an indirect tax. The proper party to question, or seek
refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the burden thereof to another.

The NIRC provides that the excise tax should be paid by the manufacturer or producer
before removal of domestic products from place of production.

Thus Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim
a refund based on Section 135 of the 1997 NIRC and Article 4(2) of the Air Transport
Agreement.

Even if Petron Corp. shifts the burden of tax, the additional amount billed to Silkair for
jet fuel is not a tax but a part of the price which Silkair had to pay as a purchaser.

b. Silkair could not seek refuge under Maceda v. Macaraig Jr. In CIR v. PLDT (G.R. No.
140230, December 15, 2005, 478 SCRA 61), the SC clarified the ruling in Maceda v.
Macaraig Jr., viz: It may be so that in Maceda v. Macaraig Jr., the Court held that an
exemption from all taxes granted to NPC under its charter includes both direct and
indirect taxes.

An exemption from all taxes excludes indirect taxes, unless exempting statute, like NPCs
charter, is so couched as to include indirect tax from exemption.

15. A sold electric cables, etc. to the NEA, government corporation granted an exemption
from all taxes under its charter. Is the sale taxable? Suppose the sales tax is shown in the
invoices as billed or chargeable to the said buyer, would your conclusion be the same?
Explain.

A: Yes, the sale is taxable. The sales tax is a tax on the seller and not on the buyer NEA, hence the
4 buyers exemption does not flow to the seller.

My conclusion would still be the same although the sales tax is billed to NEA in the invoice. Sales
taxes are indirect taxes, the economic burden of which may be shifted to the buyer is of no
moment. The method of listing the price separately and defining taxable gross receipts as the

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amount received less the amount of tax added merely avoids payment by the seller of a tax on
the amount of the tax. It is still the seller who is subject to the tax and not the buyer. The
additional amount paid by the buyer NEA is not the payment for the tax but payment for the
purchase of the electric cables, etc.

16. The NPC bought manufactured products from GranPhil for which GranPhil passed on the
sales tax to NPC. NPC claims it should not pay the sales tax because it is exempt from the
payment of all taxes under its Charter. How would you decide this case?

A: The contention of NPC is without merit. The tax is due from GranPhil, who is not exempt
because it is a sales tax. NPCs tax exemption does not flow to GranPhil who must show a specific
provision of law under which it is exempt.

17. As an incentive for investors, a law was passed giving new established companies in
certain economic zones 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 the subject to a sales tax.

XYZ, Inc. claims, however, that since it sold the equipment to ABC Corp. which is a tax
exempt, XYZ should not be liable to pay the sales tax. Is this claim tenable?

A: No. Tax exemptions are to be strictly construed against the taxpayer. Since XYZ, Inc. has not
shown a specific law under which it could claim exemption, then such claim of exemption should
be denied.

Assuming arguendo that XYZ had to and did pay the sales tax. ABC Corp. later found out,
however, that XYZ merely shifted the amount of the sales tax by increasing the purchase
price. ABC Corp. now claims for a refund from the BIR in an amount corresponding to the
tax passed on to it since it is a tax exempt. Is the claim of ABC Corp. meritorious?

A: No. ABC has nothing to claim because it was not the one that paid the tax but XYZ. Shifting of
the economic burden of the tax by the seller XYZ to the buyer ABC is of no moment. It is still the
seller who paid the tax and not the buyer.

18. A after studying his tax problems, decided to withdraw his bank deposits and to buy non-
taxable or tax exempt securities. Does As acts constitute tax evasion?

A: No. There is nothing illegal about the method used by A.

19. Mr. Pascuals income from leasing his property reaches the maximum rate of tax under
the law. He donated of his said property to a non-stock, non-profit educational
institution whose income and assets are usually directly and exclusively used for
educational purposes and therefore qualified for tax exemption under Article XIV Section
4 (3) on the Constitution and Section 30 (h) of the NIRC. 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.
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A: There is tax avoidance because it is legally permissible for Mr. Pascual to make the donation.

20. Josel agreed to sell his condominium unit to Jess for P2.5 M. At the time of the sale, the
property had a zonal value of P2.0 M. Upon the advice of a tax consultant, the parties

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agreed to execute two deeds of sale, one indicating the zonal value of P2.0 M as the selling
price and the other showing the true selling price of P2.5 M. The tax consultant filed the
capital gains tax return using the deed of sale showing the zonal value of P2.0 M as the
selling price.

Discuss the tax implications and consequences of the actions taken by the parties.

A: There is tax evasion because there was a deliberate intention to deprive the government of its
right to collect taxes. The basis for the capital gains taxes as well as documentary stamp tax
should have been the true gross selling price. This is so, because the basis for the presume
capital gains tax is whichever is the higher between the zonal valuation and the gross selling
price.

A deficiency tax is thus due for both capital gains tax and documentary stamp tax which should
be paid plus a fraud surcharge of 50% deficiency for filing a fraudulent return. Furthermore, the
buyer and the seller together with the tax consultant may be the subject of the criminal
prosecution for tax evasion.

21. Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1985 at a price of P1 M.
Said property has been leased to MAS Corp., a domestic corporation engaged in
manufacturing paper products, owned 99% by Maria Suerte. In October 2012, EIP Corp., a
real estate developer, expressed its desire to buy the Makati property at its fair market
value of P300 M, payable as follows:
(a) P60 M downpayment;
(b) balance, payable equally in 24 monthly consecutive installments

Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property for shares
of stock of MAS Corp. 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 where the property was located.
Subsequently, she sold her entire stockholdings in MAS Corp. to EIP Corp. for P300 M. In
view of the tax advice, Maria Suerte paid only the capital gains tax of P29,895.00
(P100,000 x 5% plus P298,900.00 x 10%), instead of corporate income tax of P89,700
(30% on P299 M 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.

A: There was tax evasion.

The above scheme employed by Maria Suerte is not a legitimate tax planning but one tainted
with fraud. It is obvious that the exchange of the lot with shares of MAS was to reduce the
amount of tax to be paid specially that the disposition of the MAS shares would then subject the
capital gains to the 5% tax on the first P100,000 and 10% on the amounts exceeding P100,000
and not the 30% corporate income tax.

The exchange of the lot with MAS Corp. was merely a tax ploy, a sham, and without business
6 purpose and economic substance. This is so, because Maria already had a control of MAS up to
the extent of 99%.

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The intermediary transction, i.e., the exchange of the shares of stock, which was prompted more
on the mitigation of tax liabilities than for legitimate business purpose constitutes one of tax
evasion.

22. In a document, Corp. B donated P,100,000.00 in cash to Rev. Fr. A as head of a Catholic
Parish. As stipulated, the full amount was to be spent for the construction of a new parish
church in the locality. Actually, 25% of the money was expended for the construction of a
private school; and the remainder for the aforesaid new parish church. The CIR assessed
donors tax on the P1,000,000.00 against the corporation. The donor lodged a protest and
claimed exemption alleging that the imposition is a violation of the Constitution. Decide
the case. Reason.

A: There is no constitutional violation. The constitution exempts only the land, building and
improvements actually, directly or exclusively used for religious or educational purposes, from
real property taxes. There is no constitutional exemption for donors taxes.

23. The Church of Nazarene is a duly registered religious non-stock and non-profit
corporation managed by a Board of Trustees. Apart of its religious activities, it is also
engaged in charitable works such as providing shelter and food to abandoned children.
Recently, it acquired a donation of P1,000,000.00 from its parent company in the US
intended to finance its religious and charitable activities. of P500,000.00 was spent in
one year and with respect to the balance of P500,000.00, the BoT decided that the
interest earned would also be used exclusively for religious and charitable purposes.

Is the donation, as well as the interest earned, subject to income tax?

A: The donation shall tax exempt as not more than 30% was utilized for administration
purposes. The interest income is subject to income tax because it was earned in a profit taking
activity. This is so, irrespective of the purpose for which it shall be devoted.

24. XYZ Colleges is a non-stock, non-profit educational institution run by Archdiocese of BP


City. It received a donation of a lot and building by school alumni. Is the donation exempt
from tax?
A: Yes. The donation is exempt from tax provided that the donated properties are actually,
directly and exclusively used for educational purposes because XYZ Colleges is a non-stock, non-
profit educational institution.

Supposed that XYZ Colleges is a proprietary education institution owned by the


Archbishops family, rather than the Archdiocese, is the donation exempt from tax?

A: No. Only donations made to non-stock, non-profit educational institution that are actually,
directly and exclusively used for educational purposes are exempt.

25. Due to the uncertainty whether or not a new tax law is applicable to printing companies,
DEF Printers submitted a legal query to the BIR 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.
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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?

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A: Yes. A BIR ruling favorable to the taxpayer would not necessarily create a perpetual
exemption in his favor. The government is never estopped from collecting taxes because of
mistakes or errors on the part of its agents.

26. X is the owner of residential lot situated at Quirino Avenue, Pasay City. The lot has an area
of 300 square meters. On June 1, 2008, 100 square meters of the said lot was
expropriated by the government to be used in the widening of Quirino Avenue, for
P300,000.00 representing the estimated assessed value for the said portion. From 2008
to 2012, X, who is a businessman, has not been paying income taxes in the total amount of
P150,000.00. X claims his income tax liabilities has already been compensated by the
amount of P300,000.00 which the government owes him for the expropriation of the
property. Decide.

A: Compensation should not be allowed because taxes are nod contractual obligations but arise
out of a duty under the law. X and the government are not mutually debtors and creditors of
each other.

27. XYZ Corp. was engaged in the assembly of semi-conductor devices and the corp. was
considered as a pioneer enterprise under the provisions of EO No. 226. Its tax exemption
certificates provide that all articles goods or materials used exclusively in the new and
the necessary industry are exempt from taxes. The corp., during the height of the
shortage of supply in the local market, imported cement and pre-fab steel braces for use
in the construction of the annex of its factory building which was needed because of the
increased demands of its products. The BoC imposed duties and taxes on these
importations on the ground that these materials are not included in the exemptions
because they are not utilized in the assembly of semi-conductor devices. The XYZ Corp.
maintains otherwise. Decide. Reason.

A: I would sustain the view of the BoC considering that tax exemptions are to be construed in
strictissimi juris against the taxpayer. XYZ Corp. has not shown that is likewise exempt from the
payment of customs duties and taxes on its importations of construction materials.

28. A law was passed condoning unpaid real property taxes. Will this law benefit the taxpayer
who has property taxes. Will this law benefit the taxpayers who have been prompt in
paying their taxes?

A: No. Condonation is in the nature of tax exemptions which must be strictly construed against
the claimant. Since there is no showing in the problem of any provision of the law on
condonation expressly extending the benefit of condonation to those who have been prompt in
paying their taxes, then they could not benefit from it.

The taxpayer must point to a provision of the law on condonation that explicitly provides for a
refund to taxpayers who paid their taxes. Failure to cite such benefits does not entitle the paying
taxpayer to a refund.

29. To encourage the production of newsprint, the Rizal Paper Mill was accorded tax
exemption privileges under RA No. 901 by virtue of which no internal revenue taxes
8 directly payable could be collected from it. Is it likewise exempt from wharfage dues?
Explain.

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A: No. Tax exemptions are to be strictly construed against the taxpayer, hence there must be an
express provision of RA No. 901 exempting payment of wharfage dues. The exemption from
internal revenue taxes should be strictly construed so it will not include wharfage dues.

30. ABC Construction Co. was granted a contract by the government for the construction and
installation of an airfield in Cebu. As inducement for the undertaking, ABC Construction
Co. was granted tax exemption for its materials and supplies used in connection with the
construction of the airfield. ABC Construction Co. imported oil which it used in its
machineries equipment for the construction of the base. The CIR imposed tax on the oil
products imported by ABC Construction Co. ABC Construction Co. questions the tax
imposition reasoning that the oil importation is covered by its tax exemption. Is the
contention of the construction form tenable? Reasons.

A: No. The contention of the construction is not tenable.

Tax exemptions are to be strictly construed against the taxpayer. The construction materials and
supplies that are tax exempt are those that must necessarily be incorporated in the construction
of the airfield, such as cement, sand, lumber, and other similar materials.

Oil products do not fall under the category of construction materials or supplies because they
are not incorporated in the construction of the airfield, instead used for the operation of
machines and equipment.

31. An Asian employee of the ADB who is retiring has offered to sell his car to you which was
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.
A: Yes. The tax exemption does not flow to subsequent transfers of the car to non-tax exempt
persons such as myself. Tax exemptions are to be construed strictly and are not considered
transferrable in character.

32. In 1996, Rosemarie, a nonresident citizen, was collected Philippine income taxes on her
incomes derived from sources without the Philippines. Upon the enactment of the NIRC
1997 which took effect on January 1, 1998, she filed a claim for refund of the taxes she
paid praying for the retroactive application of the provision that subjects nonresident
citizens to tax only on their incomes from within.

A: Rosemarie is not entitled to refund because tax laws, unlike remedial laws, are not be applied
retroactively. Revenue laws are substantive laws and their application must not be equated with
remedial laws.

Revenue laws are not intended to be liberally construed, and exemptions are not given
retroactive application, considering that taxes are the lifeblood of the government. In Holmes
memorable metaphor, the price we pay for civilization tax laws must be faithfully and strictly
implemented.

33. A law is passed imposing a tax of P2.00 on every citizen for the purpose of raising the
9 funds to be given as loans to earthquake victims in Mindanao. The victims are required to
give collaterals for the loans and pay interest. Is the tax valid? Reasons.

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A: Yes, because it is for public purpose. The rehabilitation of the victims of natural calamities is
one of the functions of government and a tax so levied is for public purpose. The fact that the
collaterals are required and interest paid does not detract from this public purpose.

34. A statute is enacted levying a tax of P100.00 annually on every inhabitant of the
Philippines above 21 years of age, the proceeds of which are earmarked for the support
of the public educational system. The statute is assailed by a taxpayer on the ground,
among others, that he does not send and has never sent any of his children to public
schools, but only to exclusive private local and foreign schools. Decide with reasons.

A: The tax law is valid. An individual need not derive direct benefits from the tax because the
paramount consideration is the welfare of the greater portion of the population. The legislature
has the right to select the subjects of taxation because of the lifeblood doctrine so long as there
is valid classification.

35. The Congress passed a law imposing a tax on the manufacturer of sugar by sugar centrals
and another tax on owners of land planted to sugar cane. The collections from said taxes
were to accrue a special fund to be used exclusively for the rehabilitation of the sugar
industry. The constitutionality of the law is assailed on the grounds that it is
discriminatory and that the levy is not for a public purpose. Decide with reasons.

A: The levy is for public purpose. It is an exercise of police power which is for the general
welfare of the entire country because the sugar industry is one of the pillars of the Philippine
economy which affects the welfare of the State.

36. Peter seeks to recover from the CIR the amount of P10,000.00 paid by him under Section
3 of CA No. 567 (Sugar Adjustment Act). He claims that the tax is unconstitutional and
void, being levied for the aid and support of the sugar industry exclusively, which he
contends, is not a public purpose for which a tax may be constitutionally levied. Decide
with reasons.

A: The tax is for public purpose. It is an exercise of police power which is for the general welfare
of the entire country because the sugar industry is one of the pillars of the Philippine economy
which affects the welfare of the State.

37. A law was enacted imposing a tax on the manufacturers of coconut oil, the proceeds of
which are to be used exclusively for the protection and promotion of the coconut
industry, namely, to improve the working conditions in coconut mills and to conduct
research on the use of coconut oil in motor fuel. Some of the manufacturers of coconut oil
challenge the validity of the law, contending that the tax law is to be used for a private
purpose, and therefore, the law violates the rule that public revenues shall not be
appropriated for anything but a public purpose. Decide with reasons.

A: The levy is for public purpose. It cannot be denied that the coconut industry is one of the
major industries supporting the national economy. It is, therefore, the states concern to make it
a strong and secure a source not only for the livelihood of the significant segment of the
population, but also of export earnings, the sustained growth of which is one of the imperatives
10 of economic growth.

38. An ordinance of Quezon City on the operation of its market stalls and the collection of
market stall fees created a market committee to formulate, recommend and adopt;
subject to ratification of the Sangguniang Panglunsod and approval by the City Mayor,

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policies and rules and regulations in the operations of the market stalls. It also entrusted
the collection of the market stall fees to private corp. does the entrusting of the collection
of the market stall fees shall destroy the public purpose of the ordinance?

A: Yes, because a portion of the fees collected would be diverted as fees to the private
corporation. Entrusting of the collection of the market stall fees violates the limitation that LGUs
shall in no case let to any private person the collection of local taxes, fees, charges and other
impositions.

As a result of this prohibition, public funds are utilized for private purpose, which is to pay the
private corporation for its services.

39. An ordinance of Quezon City on the operation of its market stalls and the collection of
market stall fees created a market committee to formulate, recommend and adopt
subject to ratification of the Sangguniang Panglunsod and approval by the City Mayor,
policies and rules and regulations in the operations of the market stalls. Is the creation
of the committee a violation of non-delegation of the legislative power of taxation?

A: No, because the authority to make the law has not been delegated. This is clear from the
requirement that the recommendations of the market committee are subject to ratification of
the SP and approval by the City Mayor.

40. A domestic broker received commission for negotiating and consummating the sales in
Japan of all products obtained from the mining properties of a domestic corporation,
which mining properties are located in the Philippines. Are the commissions received by
the said broker subject to Philippine income taxes?

A: Yes. A Philippine resident (in this case a domestic broker) is taxed on all income sourced from
within and without the Philippines.

41. Juan dela Cruz, a resident of the Philippines, left for Australia on August 24, 2012 to
reside permanently thereat. During his stay in the Philippines, he received income of
P1,500,000.00 from January 1, 2012 up to the date of his departure. In Australia, he
received during the remainder of the year 2012 an additional income of $10,000.00 from
sources within that country. Are these two incomes taxable in full?

If Juan dela Cruz is not a citizen but a resident, on what amount is he taxable in full?

A: Yes. Two incomes (P1,500,000.00 and $10,000.00) are taxable in full. Juan is considered as a
resident citizen. The reason that he stayed only in Austrialia for about 4 months from August to
December during the taxable year.

To be considered a non-resident citizen, Juan must have stayed in Australia most of the time
during the taxable year with no intention to return to the Philippines. Since he is a resident
citizen, his taxable income includes all income derived from sources within and without the
Philippines.

11 If Juan is a resident alien, he shall be taxed only on all his income derived from sources within
the Philippines.

42. John Doe, a US citizen hired for 5 years as plant manager of a local mining company,
derives income from investments and real property he owns in the US. Besides his salary

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and bonuses from the local mining company, he is provided with a house and allowances
for the salaries of his driver and three maids. The mining company reimburses all his
gasoline and oil expenses for the use of the company car, plus expenses for his grocery.

a. What income items, if any, should be declared in his Philippine income tax return?
Explain.

Under the same facts, except that John Doe is a Filipino citizen working in Saudi Arabia
and his investments and real property are located in the Philippines?

b. What income items, if any, should be declared in his Philippine income tax return?

A: a) Only his income derived from sources within the Philippines such as his salary and
bonuses from the local mining company and the expenses for his grocery. This is so because
being a resident alien he shall be subject to tax only on the income derived from sources within
the Philippines.

b) Since John Doe is an overseas contract worker he is taxable only on his income derived from
sources within the Philippines. Thus, he is to be taxed only on his income derived from his
investments and properties located in the Philippines.

43. Newtex International Inc. is an American firm duly authorized to engage in business in
the Philippines as a branch office. It its activity as an acting buying agent for foreign
buyers of shirts and dresses abroad and performing a liason work between its home
office and the Filipino garment manufacturers and exporters, Newtex 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 operation and manage its office here, which had
been in operation for 2 years, the head officer assigned three foreign personnel.

Are the three foreign personnel subject to Philippine income tax?

A: Yes, they are considered resident aliens having stayed in the Philippines for more than 2
years. They shall be taxed on the incomes derived from sources within the Philippines. They
performed services within the Philippines, hence taxable.

44. Juan, a Filipino citizen, has immigrated to the US, 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 US on
which the US income tax is paid.

On which of the above income is he taxable, if at all, in the Philippines, and how, in
general terms, would such income/s be taxed?

A: The income derived by Juan in his income-earning property in the Philippines is taxable in the
Philippines being income derived from sources within the Philippines. This is so because Juan
being a non-resident citizen, is to be taxed only on his income derived from sources within the
Philippines.
12
45. AA Co., a Philippine corporation, has an executive (JP) who is a Filipino citizen. AA Co. has
a subsidiary in Hong Kong and will assign JP for an indefinite period to work full time in
HK Co. JP will bring his family to reside in HK and will lease out his residence in the
Philippines. The salary of JP will be shouldered 50% by AA Co. while the other 50% plus

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housing, cost of living and educational allowances of JPs dependents will be shouldered
by HK Co. AA Co. will credit the 50% of JPs salary to the latters Philippine bank account.
JP will sign the contract of employment in the Philippines and will also be receiving rental
income for the lease of his Philippine residence.

Are these salaries, allowances and rentals subject to Philippine income tax?

A: The salaries and allowances of JP, being derived from labor or personal services rendered
outside of the Philippines us considered as income derived from sources without the
Philippines. Since JP is an OCW, then he is to be taxed only on his income derived from within
the Philippines such as the rentals on his Philippine residence, and not on his income from
without.

46. Cortez is a non-resident alien based in Hong Kong. During the calendar year of 2012, he
came to the Philippines several times and stayed in the country for an aggregate period of
more than 180 days. How will Cortez be taxed on his income derived from sources within
the Philippines and from abroad?

A: Cortez stayed in the Philippines for an aggregate period of more than 180 days so he is
considered a non-resident alien engaged in trade in business in the Philippines. As such, he
is going to be taxed only on his income derived from sources within the Philippines.

47. Sebastian is a Filipino seaman employed by Norwegian company which is engaged


exclusively in international shipping. He and his wife, who manages their business, filed a
joint income tax return for 2009 on March 15, 2010. After an audit on return, the BIR
issued on April 20, 2012 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, 2012
warrants of distraint and levy to enforce collection of the tax.

What is the rule on income taxation with respect to Sebastians income in 2008 as seaman
on board the Norwegian vessel?

A: The income earned by Sebastian is considered as an income from without hence not subject
to Philippine income taxation. Seamen are to be taxed only on their income derived from
sources from within and not on incomes from without.

48. Z is a Filipino immigrant living in the US for more than 10 years. He is retired and he came
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 US
amounting to US $1,000 a month. While in the Philippines, with his pension pay, 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 P45,000.00 monthly income? Explain.

A: Yes, Z is liable to pay income tax on the P45,000.00 monthly income is from without the
13 Philippines.

49. In 2012, Caruso a resident Filipino citizen, received dividend income from a US-based
corporation which owns a chain of Filipino restaurants in the West Coast, USA. The
dividend being remitted to Caruso is subject to US withholding tax with respect of a non-

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resident alike like Caruso. If Caruso became a US immigrant and had become a non-
resident citizen, how should he be taxed? Explain.

A: If Caruso has become a non-resident citizen, then he is to be taxed in the Philippines only
upon his income derived from sources within the Philippines. He is not subject to Philippine
income taxation on the dividends from US which are considered as income from sources without
the Philippines.

50. ABC Corp., which was organized in 2002 and existing under the laws of the Philippines
and owned by the Sy Family of Makati City, set up in 2012 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 to not include the P20
M net income of the Shanghai branch in the annual Philippine income tax return filed
with BIR, which showed a net taxable income of P30 M, because the Shanghai Branch is
treated as a foreign corporation and is taxed only on income derived from sources within
the Philippines, and since the loans and other business transactions were done in
Shanghai, these incomes are not taxable in the Philippines.

Is the bank correct in excluding the net income of its Shanghai Branch in the computation
of its annual corporate income tax for 2012?

A: No. The Shanghai Branch does not have a corporate personality separate and distinct from
ABC Corp. which is a domestic corporation organized and existing by virtue of Philippine Law.
The income of Shanghai Branch is income derived by ABC Corp. from sources without the
Philippines. As a domestic corporation, ABC is to be taxed on its income derived from sources
within and without the Philippines.

51. In 2012, spouses Renato and Judy Garcia opened a peso and dollar deposits at the
Philippine branch of 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 P10,000.00 on the peso deposit and US $1,000.00 on the dollar deposit. The
bank withheld final income tax equivalent to 20% of the entire income and remitted the
same to the BIR.

a. Are the interest incomes on the bank deposits of spouses Renato and Judy subject to
income tax?

b. Is the bank correct in withholding the 20% final tax on the entire interest income?

A: a) Yes. The interest income from the peso deposit is subject to the 20% fwt. One-half of dollar
deposit interest income ($500 pertaining to Judy) is subject to 7.5% fwt. The other half
pertaining to Renato is not subject to tax because this is considered as income from without of
an overseas worker.

b) No. only the interest on the peso deposit is subject to the 20% fwt. The one-half share of Judy,
who is a resident citizen, on the interest in the dollar deposit is subject to 7.5% fwt.

14 52. Pilipinas Company which is engaged in the business of exporting Philippine handicrafts.
In order to boost its business, it engaged an American corporation to look for customers
in the US and to sell its products to those customers. Pilipinas Co. will pay the American
corporation a commission based on the volume of sales in the US. Pilipinas Co. also
entered into an agreement with the same American corporation whereby the latter will

PEREZ|PRUDENTE|SARANGAY|
render technical assistance to Pilipinas Co. to enable it to meet international export
standards for which the American corporation will receive a royalty fee.

State whether the royalties and the commissions payable to the American corporation
are subject to Philippine tax.

A: The royalties are subject to the Philippine income taxes. They are considered as income from
sources within the Philippines, hence subject to income tax even if received by non-resident
Philippine corporation.

On the other hand, the commissions being earned from activities outside the Philippines are not
subject to tax.

53. GWMC is a corporation incorporated and operating under the laws of the Peoples
Republic of China. GWMC and DCC plan to enter into US $100,000.00 contract, on C&F
basis, whereby GWMC shall sell to DCC a GWMC manufactured ball mill. Under the
proposed contract which will be signed in Hong Kong, GWMC will ship the ball mill from
Shanghai to Davao City. GWMC will also send its Chinese technicians to Davao City to
install the ball mill and to train DCC personnel on how to run the ball mill. The
installation and training will take 30 days to complete. The airfare, hotel accommodation
and salaries of GWMC personnel will be sent to Davao City will be paid for by GWMC. The
contract will be fully performed by GWMC within 65 days from signing. Under the
contract, DCC will remit payment in US dollars to GWMCs bank account in Hong Kong.
This is the first contract that GWMC will sign with a customer in the Philippines. And
GWMC has no intention of securing license to do business in the Philippines.

a. Will GWMC be subject to pay any Philippine tax on its sale of the said ball mill to DCC?
Explain.

b. Will said GWMC personnel sent to Davao City be subject to Philippine income tax on
their salaries while they work in Davao City? Explain.

A: a) The transaction having being consummated outside the Philippines is not subject to
Philippine income taxes. Since GWMC is a foreign corporation, and its income from the sale is
considered derived from without the Philippines, the same is not subject to the Philippine
income taxes.

b) Yes, the foreign personnel are subject to Philippine income taxation. This is so because the
personnel are considered as non-resident aliens not engaged in trade or business within
the Philippines. They are not citizens of the Philippines and they are not also residents of the
Philippines, not having stayed therein for an aggregate period of more than 180 days during the
calendar year. Consequently, they should be subject to income taxes on all their incomes
received within the Philippines which includes compensation.

54. 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
15 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.

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A: No. Pacific should not withhold taxes on the compensation of Kamino Moto. The activity was
the source of the income occurred from without the Philippines; this is compensation for
personal services which was performed outside the Philippines. The basis for taxation is the
place where the activity was conducted and not the source of income. Since Kamino Moto is
presumably a non-resident alien, he is not subject to tax on income derived from without the
Philippines arising from personal services. He is thus, not subject to withholding.

55. Bates Advertising Co. 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 Inc., 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 taxes?

A: No. The services are for commercial services performed outside the Philippines hence income
within if the source of the funds is the Philippines. Since the source of the funds is the
Philippines, they are considered as incomes from within. It is not the place of activity but the
source of the funds which determines whether it is income from within or without. Since Bates
is a foreign corporation, it shall be subject to tax only on its income from within and not on its
income derived from sources without the Philippines.

56. ABC, a domestic corporation, entered into a software license agreement with XYZ, a non-
resident foreign corporation based in the US. Under agreement which the parties forged
in the US. 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.

A: The 5% payment is considered as royalty income of XYZ, a non-resident foreign corporation,


derived from sources within the Philippines subject to Philippine income taxation. ABC should
therefore withhold the appropriate taxes before remitting the same to XYZ.

It is considered as royalty income because it is paid for the use of right or privilege to use in the
Philippines XYZs computer system program which is presumably covered by a copyright or
patent as well as the supply of technical know-how that is ancillary and subsidiary to, and is
furnished as a means of enabling the application or enjoyment of the computer system program.

Since the service is rendered within the Philippines, it is considered as income derived from the
Philippines of a non-resident foreign corporation. Consequently, the royalty income is subject to
a fwt of 30% based on the amount to be remitted to XYZ.

57. 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 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
16 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
US and that the title to A and B Cos. Shares will pass from HK Co. to P Co. in HK where
stock certificates will be delivered. P Co. seeks your advice as to whether or not it will
subject the payments of the purchase price to WT. Explain.

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A: the payment of purchase price will be subject to WT. considering that all the activities
(including the consummation of the sale) occurred within the Philippines, the income is
considered as income from within, subject to Philippine income taxation. HK Co., being a foreign
corporation is to be taxed on its income derived from sources within the Philippines.

58. HK Co. is a Hong Kong company, which has a duly licensed Philippine branch engage in
trading activities in the Philippines. HK Co. also invested directly in the 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 Philippines branch. In 2005, A Co. declared
dividends to its stockholders. Before remitting the dividends to HK Co. seeks your advice
as to whether it will be subject the remittance to WT.

A: A Co. should subject the remittance to WT. Since A Co. is a Philippine corporation, its shares of
stock have obtained a business situs in the Philippines, hence the dividends are considered as
income from within. Since HK Co. is a foreign corporation, it should be subject to taxed on its
income from within.

59. KIA is a foreign international corporation, organized under the laws of Kenya. It is not
licensed to do business in the Philippines. Its commercial planes do not operate within
the Philippine territory, or service passengers embarking from Philippine airports. The
firm is represented in the Philippines by its general agent, 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
2012 amounted to P2,968,156.00. The CIR assessed KIA deficiency income taxes at the
rate of 30% on its gross 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 the Philippine territory. Is the position of KIA tenable?

A: No. KIA is subject of tax because the activity that generated the income is the sales of the
tickets that look place in the Philippines, not where the flight is going to be undertaken.

60. X, a private individual leased his piece of land to a school, which is being operated for
profit. A building was caused to be constructed by the school on the leased property to be
used as its library. Is the school subject to the real property tax?

Can the school claim exemption from payment of the permit fees for the construction of
the building?

A: The school is not subject to real property tax because the land is actually, directly and
exclusively used for educational purposes. The basis for real property taxation is the use not the
ownership.

17 The school is not exempt from the payment of permit fees for the construction of the building.
This is so because the permit fee is in the form of a license imposed under the police power. The
school exemptions from certain taxes do not cover exemption from permit fees.

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61. A is the owner of a 2-hectare lot in Espana Street, Sampaloc, Metro Manila. He leased the
property for P1,200,000.00 a year to religious congregation for a period of 15 years. The
religious congregation built on 1 hectare a seminary and a chapel for its exclusive use. On
the remaining one hectare, it constructed a building which rented out to a big import-
export corporation, the proceeds of which go to the support of the seminaries. Is the 2-
hectarelot exempt from property tax?

A: No, only the one hectare on which a seminary and a chapel was built is exempt. Such portion
is actually, directly and exclusively used for religious purposes. The other portion used for the
building that is rented out, is used for business purposes.

62. SACFI is a non-stock, non-profit educational institution. SACFI owns a 5-hectare lot, one-
half of which is used as SACFIs school campus while the other one-half is vacant. Ro cope
with increasing operating costs to upgrade its facilities, SACFI plans to do the following
effective January 1, 2012: (1) rent out to Supermarkets, Inc. vacant proportion of the lot
for P1 M a year and (2) import 30 computers for use in its computer courses. Is SACFI
subject to real estate tax on its 5-hectare lot for calendar years 2011 and 2012. Explain.

A: For calendar year 2011, SACFI shall be subject to real estate tax on the one-half portion which
is vacant and which was subsequently rented out to Supermarkets, Inc. the reason being that the
basis for real property taxation is use. Consequently, since the one-half portion is not actually,
directly and exclusively used for educational purposes, it is not exempt from property taxes. On
the other hand, the one-half portion being used for the school campus is exempt because it is
directly and exclusively used for educational purposes.

For calendar year 2012, SACFI shall not be liable for the real estate tax on the one-half portion
being used for the school campus because it is directly and exclusively used for educational
purposes. It shall not also be subject to real estate tax on the one-half leased out to
Supermarkets, Inc. because it is not the one using the same. The basis for real estate taxation is
use and not ownership. Since Supermarkets is using the same, it should pay the real estate tax.

63. In a loan of agreement between the BSP, as borrower, and private international banks, as
lenders, it is stipulated that all payments of interests by the Central Bank to the tenders
shall be made free and clear from all Philippine taxes which may be imposed thereon. Is
the stipulation valid?

A: Yes. It is clear from the problem that there is no tax exemption granted. The BSP merely
agreed to assume and pay for the Philippine taxes due from the lenders.

64. The President of the Philippines and the PM of Japan entered into an executive
agreement in respect of a loan facility to the Philippines from Japan whereby it was
stipulated that the interest on loans granted by private Japanese financial institutions to
private financial institutions in the Philippines shall not be subject to Philippine income
tax. Is the exemption valid?

A: No. The Constitution provides that tax exemptions may be granted only upon the concurrence
of a majority of the members of the Congress. The President could not by executive agreement
18 extend tax exemptions.

65. In view of the unfavorable balance of payment condition and the increasing budget
deficit, the President of the Philippines, upon the recommendation of NEDA, issues during
a recess on all imports at the rate of 10% ad valorem. The EO also provides that the same

PEREZ|PRUDENTE|SARANGAY|
shall take effect immediately. Ricardo San Miguel, an importer questions the legality of
the EO on the grounds that only Congress has the authority to fix the rates of import
duties. In any event, such an EO can take effect only 30 days after the promulgation and
the President has no authority to shorten said period. Are the objections of San Miguel
tenable?

A: No. The Constitution gives Congress the authority to delegate to the President of the
Philippines the power to fix tariff rates. In the exercise of this authority, Congress has, through
Flexible Tariff Clause of the Tariff and Customs Code, delegated this power to the President.

Furthermore, any EO issued by the President changing the tariff rates, imposing additional duty
not exceeding 10% shall take effect 30 days after promulgation. In the case at bar, the additional
duty does not exceed 10% hence it could take effect at the discretion of the President.

66. The President of the Philippines issued an EO imposing an additional duty of 15% ad
valorem on all imported commodities. The move of the President was done upon
recommendation ny NEDA that the collection would alleviate the cash flow of the
government because the delay in the legislative approval of the additional 2% VAT. Is the
EO valid?

A: No, because it exceed the scope of the presidential prerogative under the Flexible Tariff
Clause. The President is authorized to impose additional duty not exceeding 10%.

67. The Roman Catholic Church is the owner and possessor of a parcel of land. The eastern
side of which is occupied by the Church itself, the priests house, and a vegetable garden
on the western side, a dormitory building used by the visitors of the parish priest and
people who participate in religious activities during fiestas. Is the entire land subject to
real property tax?

A: No, only the eastern side of which is occupied by the Church itself, the priests house which
appears to be actually, directly and exclusively used for religious purposes is exempt from real
property taxation.

The portions on the western side on which a vegetable garden is situated and that where the
dormitory building is located, are not actually, directly and exclusively used for religious
purposes hence subject to real property tax.

There is indirect use for religious purposes for that portion of the land where the dormitory
building is located hence it is not tax exempt.

68. X & Company a non-stock corporation which owns and operates a memorial park,
contests the real estate assessment made by Municipality Y. Sued by the Municipality, X &
Company contends that burial grounds are exempt from real estate tax. It appears that
two years before the assessment issued by Municipality Y, X & Company had declared
dividends to its stockholders. Is the X & Company justified in disputing the assessment?

A: No. the requirement for exemption is that the cemetery must be a non-profit. When X &
19 Company declared dividends, it was a showing that it was a profit cemetery which is not entitled
to exemption.

69. The Municipality of Calasiao, Pangasinan enacted an ordinance levying a special


assessment for paving Domagas Street fronting all the lots along it. Among of these lots is

PEREZ|PRUDENTE|SARANGAY|
one on which the Roman Catholic Church and the Shrine of Senor Tesoro, an object of
religious adoration and worship are located.

a. The priest and parish counsel seek your advice on whether or not the ordinance
violates the constitutional exemption from taxation on all churches or convents
appurtenant thereto.

b. Suppose that instead of special assessment, the Municipal Ordinance fixed the rate of
real property tax under its power to do so granted by the LGC. Will your advice be the
same?

A: a) There is no violation of the constitutional exemption because the imposition is not a tax but
a levy for the purpose of recovering the public works expenditure of the local government unit
concerned. However, the levy of special assessment violates the LGC because the lands are
exempt from the basic real property tax, such as the land where the church and the shrine are
located, are also exempt from special assessment.

b) No, because there would be a violation of the provisions of both the Constitution and the LGC
on exemptions from real property taxation of properties that are actually, directly and
exclusively used for religious purposes. The lot on which the church and the shrine are located is
actually, directly and exclusively used for religious purposes.

70. The RCC owns a 2-hectare lot in a town in Tarlac province. The southern side and middle
part are occupied by the church and a covenant, 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 and unoccupied. May the church
claim tax exemption on the entire land?

A: No. The southern side middle part and the eastern side are exempt from real estate tax
because they are actually, directly and exclusively used for religious purposes.

The church may not claim tax exemption on the southeastern side used by some commercial
establishments because it is not actually, directly and exclusively used for religious purposes.

The northwestern side being idle and unoccupied is not exempt from tax because it is apparent
that it is not actually, directly and exclusively used for charitable, religious or educational
purposes.
71. RPC is a GOCC engaged in the supply, generation and transmission of electric power. In
2010, in order to provide electricity to Southern Tagalog provinces, RPC entered into an
agreement with JEC, for lease of JECs power barges which shall be berthed at the port of
Batangas City. The contract provides that JEC shall own the power barges, and the
fixtures, fittings, machinery, and equipment therein, all of the which JEC shall supply at its
own cost, and that JEC shall operate, manage and maintain the power barges for the
purpose of converting the fuel of RPC into electricity. The contract also stipulates that the
real estate taxes and assessments, rates and other charges, in respect of the power
barges, shall be for the account of RPC.

20 In 2012, JEC received an assessment of real property taxes in the power barges from the
Assessor of Batangas City. JEC sought the reconsideration of the assessment on the
ground that the power barges are exempt from real estate taxes under Section 234 (c) of
RA 7160 as they are actually, directly and exclusively used by RPC, a GOCC. Furthermore,

PEREZ|PRUDENTE|SARANGAY|
even assuming that the power barges are subject to real property tax, RPC should be held
liable therefor, in accordance with the terms of the lease agreement.

Is the contention of JEC correct?

A: No. Real property taxes are to be paid by the user of the property, which in this case is JEC,
and not RPC. In using the power barges to convert the fuel to electricity, it is evident that the one
using the power barges is JEC. Furthermore, it is clear from the problem that RPC does not enjoy
an exemption because it is not an instrumentality of the Philippine Government. GOCCs are not
exempt from payment of real property taxes.

The contract between JEC and RPC does not bind local government of Batangas City not being a
party to the contract. Finally, who should pay taxes is determined by law and not the contractual
relation between parties.

72. AA inherited a two-storey building in Makati from his father, a real estate broken in the
60s. A group of Tibetan monks approached AA and offered to lease the building in order
to use it as a venue for their Buddhist rituals and ceremonies. AA accepted the rental for P
1 M for the whole year. The following year, the City Assessor issued an assessment against
AA for non-payment of real property tax. Is the Assessor justified in assessing AA
deficiency real property taxes?

A: No. The basis for real property taxation is use and not ownership. The use of to which the
property is devoted actually, directly and exclusively used for religious purposes

*** While the Assessor may be considered correct because the problem does not show that AA in
fact has shown proof of actual, direct and exclusive used for religious purposes by the Tibetan
monks.

73. The House of Representatives introduced HB 7000 which envisioned to levy a tax on
various transactions. After the bill was approved the House, the bill was sent to the
Senate as so required by the Constitution. In the upper house, instead of a deliberation of
the HB, the Senate introduced SB 8000 of the same tax. The Senate deliberated on this SB
and approved the same. The SB and HB 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 the
revenue bills should originate from the HR had been violated. Resolve the issue.

A: There is no constitutional violation. What is prohibited is for the bill to originate from the
Senate. The bill that originates from the House need not be the one that should finally be enacted
to law. This is so because the Senate is empowered to propose and concur with amendments.
Thus, the bill that originates from the House may undergo some changes during the
deliberations in the Senate.

74. In a document, B corporation donated P200,000.00 in cash to Rev. Fr. A as head of a


Catholic parish. As stipulated, the full amount was to be spent for the construction of a
21 new parish church in the locality. Actually 25% of the money was expended for the
construction of a private school; and the remainder for the aforesaid new parish church.
The CIR assessed donors tax on the P200,000.00 against the corporation. The donor
lodged a protest and claimed exemption alleging that the imposition is a violation of the
Constitution. Decide the case.

PEREZ|PRUDENTE|SARANGAY|
A: The imposition does not violate the Constitution because constitutional tax exemption for
donations for educational purposes is subject to conditions provided by law.

While this may be so, the donation is exempted under the provisions of the NIRC because there
is no showing that more than 30% of the gift was used by the done for administration purposes.

75. A Sangguniang Bayan passed an ordinance imposing an occupational tax of P100.00 a


year on the occupation of installation manager. X happened to be the only salaried person
with such title or designation within the municipality. Can X successfully challenge the
validity of such ordinance on the ground of discrimination since at the time of passage of
the ordinance, he was the only one affected?

A: No, because the occupation tax could be imposed no any person who would in the future be
practicing the occupation of installation manager.

76. The Sangguniang Bayan of Taal, Batangas passed an ordinance which reads: An
ordinance imposing upon Asis Candy Company or any other person or entity operating a
candy factory within the municipality an annual tax of P1,000.00. At the time the
ordinance was approved, ACC was the only candy factory operating in Taal. Is the
ordinance valid?

A: Yes, because the ordinance does not only apply to ACC but to all other candy companies
within the municipality which are similar to ACC. Furthermore, there is valid classification. Thus,
there is no violation of the requirement on equal protection and uniformity in taxation.

77. It is well-known that charters of various cities created by Congress contain varying
provisions authorizing the said cities respectively to impose taxes different from those
authorized to be imposed by Manila and Baguio. May a taxpayer in Manila or Baguio
object to a tax imposed by these cities which are not imposed by other cities on the
ground that the tax is violative of the constitutional rule on uniformity in taxation?
A: No. Uniformity in taxation is territorial in character. There is no violation of uniformity
because the taxable subjects are imposed the same rate by the taxing authority within their
respective territorial jurisdictions.

78. A city ordinance of Davao City provided that any agent and/or consigned of any dealer
engaged in selling soft drinks and carbonated beverages in the city shall pay a tax of 10
centavos per case of 24 bottles, to be based on, and computed from, the cargo manifest or
bill of lading or any other similar documents showing the number of cases of soft drinks
received within a month. A soft drinks company which bottled its products in Cebu and
shipped said to its Davao City warehouse for distribution and sale in said city and
municipalities of Davao assailed the validity of the city ordinance on the ground that it is
violative of the uniformity required by the Constitution. Decide.

A: The ordinance does not violate the uniformity rule which is territorial in character. There is
no violation of uniformity because the taxable subjects are imposed the same rate by the taxing
authority within their respective territorial jurisdictions.
22
79. A law granted tax amnesty to those who had not paid income taxes for a certain year.
Those who had paid their income taxes for the said year assailed the law as violative of
the constitutional guaranty on uniformity of taxation and for being tantamount to class

PEREZ|PRUDENTE|SARANGAY|
legislation, since the EO did not provide for the refund of taxes to those who had already
paid them. Would you sustain the objection and why?

A: No, there is valid classification between those who had already paid their taxes and those who
did not. Furthermore, the taxing authority has the prerogative to select the subjects and objects
of taxation, including those whom amnesty could be granted.

80. X, a resident of Metro Manila, filed an action for the refund of amounts paid representing
energy tax collected from him on his electric power consumption under BP Blg. 36, which
imposes a tax on the domestic electric consumption of all Metro Manila residents,
depending on the amount of consumption in accordance with the schedule provided for
in said Batsa. BP Nlg. 26 is assailed in Court on the ground that is violative of: (1) the
equal protection clause; (2) the rule on uniformity and equity of taxation. Will the action
prosper?

A: No. The action will not prosper. (1) there is a valid classification since the tax depends upon
the amount of consumption. There are thus substantial distinctions between those who
consume more and those who consume less. (2) there is no violation of uniformity and equity of
taxation because the tax applies with the same force and effect upon members of the same class.

81. An electric light company operates by virtue of a legislative franchise which provided,
inter alia, that it would only pay a tax of 2% on its gross receipts from the operation of the
franchise and that said taxes would be in lieu of all taxes on every nature and
description provided that all government buildings are provided electricity free of
charge.

Subsequently, a statue was enacted providing that: The provisions of existing law to the
contrary notwithstanding, all corporate taxpayer not specifically exempt under Section
30 of the NIRC (which enumerates organizations not subject as a GR to income tax such as
chambers of commerce, social clubs, labor organizations not organized for profit, etc.)
shall pay the corporate income tax (32%) of the net taxable income imposed thereunder.
On account of the latter enactment, the BIR assessed corporate income taxes on the
electric light company in addition to the 2% franchise tax provided for in its charter. If
you were the lawyer for the electric company, what arguments would you raise to resist
the assessment of corporate income taxes?

A: I would argue that the imposition of the tax is violative of the non-impairment clause of the
Constitution. The imposition of the tax has the effect of withdrawing the tax emptions which was
granted in exchange for a consideration, providing for free electricity to government buildings.
There is thus, a contractual relation which could not be breached by withdrawing the tax
exemption.

82. X Corporation was a recipient in 2010 of two tax exemption both from Congress, one law
exempting the companys bond issues from taxes and the other exempting the company
from taxes in the operation of its public utilities. The two laws extending the tax emptions
were revoked by Congress before their expiry dates. Was the revocation constitutional?

23 A: Yes. There is no contractual relation, because the grants of tax exemptions were gratuitous in
character which could be withdrawn at any time without impairing the obligation of the
contracts.

PEREZ|PRUDENTE|SARANGAY|
83. A law was passed granting tax exemption to certain industries and investments for a
period of 5 years. But 3 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.

NPV and KTR companies questioned the assessments on the ground that, having made
their investments in full reliance with the period of exemptions granted by the law, its
repeal violated their constitutional right against the impairment of the obligations of
contract. Is the contention of the companies tenable or not?

A: The contention of the two companies is not tenable.

There is no constitutional relation entered into between two companies and the State. A
contract which is protected by non-impairment clause is one which the government, acting in a
private capacity sheds its cloak of authority and waives its government immunity. There was no
material consideration received by the government as a result of tax exemption. The grant of tax
exemptions does not fall within the purview of a contract protected by the non-impairment
clause.

Finally, granting arguendo that there was a contractual relation created when the law was
passed granting tax exemption, it was once held that a contract clause has never been thought as
a limitation on the exercise at the states power of taxation, save only where a tax exemption has
been granted for a valid consideration.

84. During the period of deficiency but prior to assessment, a law was passed providing that
interest would be collectible on the amount of income tax not paid. Accordingly, the CIR
included such amount in the assessment made. The taxpayer refused to pay contending
that to require him to pay such interest would be to violate the prohibition against ex
post facto laws. Decide.

A: The taxpayers contention is without merit. The ex post facto prohibition finds application
only to penal laws. Laws on taxation are civil and not penal in character and the prohibition
against ex post facto laws does not apply.

24

PEREZ|PRUDENTE|SARANGAY|
VOLUME II-A
CHAPTER 1

1. Mr. Cortes is a non-resident alien based in Hongkong. During the calendar year 2012, he came
to the Philippines several times and stayed in the country for an aggregated period of more than
180 days.

Q: How will Mr. Cortes be taxed on his income from sources within the Philippines and from
abroad?

A: Mr. Cortez having stayed in the Philippines for more than 180 days is considered a non-resident alien
engaged in trade or business in the Philippines. As such, he should be subject to taxation in the same
manner as an individual citizen or resident alien on his taxable income received from all sources within
the Philippines.

2. Oro, a millionaire with a five and 5 minor children has the following assets xxx Oro thus earns
an annual gross income of P405,000. He comes to you and says: I want you to lessen the taxes
my estate will have to pay, as well as lessen my current income tax. However, until my children
reach 21 years of age, I dont want them to control any of my properties. At my age, I need a gross
income of only P75,000 annually.

Q: What would you do to reduce Oros estate taxes and his current income tax, and at the same
time prevent his children from obtaining control of a substantial portion of his properties until
they reach the age of 21?

A: I would suggest the creation of an irrevocable trust over all the assets of Mr. Oro, except the cash in
money market which earns P75,000 administered in the Philippines, registered with and approved by
the BIR xxx The tax to be collected on the return from cash in money market and the stock investments
would be the same whether Mr. Oro constitutes a trust or not. All of these incomes would be subject to
final taxes. Xxx

3. Mr. David created an irrevocable trust in favor of his two minor grandchildren. The trust
stipulates that 50% of the net income should be distributed yearly to the grandchildren, share
and share alike, the balance to accumulate for eventual distribution to the grandchildren at age
25. The income for 2012 was P1 million.

a) Q: How will the income of the trust be taxable?

A: The net income of the irrevocable trust amounting to P1 million should be reduced by the following:

1. The income given to the beneficiaries;


2. P20,000 exemption
After the allowable deductions mentioned above, the taxable income shall be subjected to the same tax
rates as individuals.
25
b) Q: Will your answer remain the same if the trust established by Mr. David is revocable?

PEREZ|PRUDENTE|SARANGAY|
A: No, because the income of such part of an irrevocable trust shall be included in computing the net
income of Mr. David, the grantor.

c) Q: When is a trust considered revocable?

A: A trust is considered revocable where at any time the power to revest in the grantor title to any part
of the corpus of the trust is vested (1) in the grantor either alone or In conjunction with any person not
having a substantial adverse interest in the disposition of such part of the corpus or the income
thererfrom, or (2) in any person not having a substantial adverse interest in the disposition of such part
of the corpus or the income therefrom.

4. 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 instructed to distribute the yearly rentals amounting to P720,000. The trustee consults
you if she has to pay the annual income tax out of the rentals received from the commercial
apartment.

a) Q: What advice will you give the trustee? Explain.

A: The trustee need not pay taxes on the income of the trust if she constituted an irrevocable trust and
distributes to Santino the yearly income. She could deduct from the gross income the distribution made
to the beneficiary hence there is no income subject to tax.

b) Q: 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?

A: No, this time the trust shall be subject to tax on the accumulated income. Since there are no
distributions that could be deductible then there is income subject to tax.

5. E died in December 2010 leaving to his 3 sons A, B and C an apartment building. They decided
not to partition the property and just divided the rentals among themselves for the year 2011.

Q: Was a partnership formed which is subject to the corporate income tax for the year 2011?

In 2012, A, B and C did not divide the income from the apartment building; instead they invested
the same in the purchase of a house to be rented out.

Q: What is the status of their enterprise for income tax purposes for the year 2008? Explain your
answer.

A: There was no partnership formed subject to the corporate income tax for the year 2010, when the 3
sons did not partition the apartment they inherited. However, with respect to the house they purchased
in 2012 from the common fund, there was a partnership formed. xxx For tax purposes, the purchase of a
26 house to be rented out is in fact a contribution of the incomes of A, B and C to a common fund for the
purpose of dividing the rentals earned among themselves. With respect to the purchase of a house, a
partnership was thus formed in 2012, subjecting them to corporate income taxes.

PEREZ|PRUDENTE|SARANGAY|
6. Mrs. Carmen Reyes died in 2005 leaving as heirs her husband, Pedro Reyes, and 6 children. She
left real properties in Manila, Pasay City and Quezon City, with a total value of P5,000,000. The
husband was appointed administrator of the estate. In 2011, the project of partition was
approved by the court and upon satisfaction that the estate and inheritance taxed had already
been paid, the special proceedings on the estate of the deceased was closed and terminated.
However, Mr. Reyes continued to administer properties with the consent of his children. He
leased some of the properties, the rental income of which he accumulated and later used in the
purchase of other properties. By 2012, he and his children had acquired real property with a
total value of P2,000,000.

Investigation revealed that during the period 2011 to 2012, the annual rental income of the
properties administered by Mr. Reyes was P120,000. He reported half of said annual income in
his annual income in his income tax return, while each of his children added to his income the
amount of P10,000, as his share in the rental income of the properties.

Q: If you were the Commissioner of Internal Revenue, how would you tax the yearly rental
income of P120,000? What in your opinion should be the tax status of Mr. Reyes and his children?
Explain, citing the legal basis of your answer.

A: As the Commissioner of Internal Revenue, I would determine which portion of the yearly income of
P120,000 is attributable to the inherited properties and the portion coming from the properties from
the accumulated rentals of the inherited properties.

The income from the inherited properties should be taxed as income from the separate properties of Mr.
Reyes and his children. They should be taxed separately as they are merely co-owners of the properties.

The income from the properties purchased from the rental income of the properties is partnership
income taxable like corporations. With respect to the purchased properties, the tax status of Mr. Reyes
and his children is a taxable partnership.

Co-heirs who own properties which produce income should not automatically be considered partners of
an unregistered partnership, or a corporation, within the purview of the income tax law. To hold
otherwise would subject the income of all co-ownerships of inherited properties to the tax on
corporations resulting in oppressive taxation and confirm the dictum that the power to tax involves the
power to destroy. This eventually should be obviated.

7. Rosa Arroyo died in 2012. Her heirs executed a project of partition of her estate which was
approved by the Court. However, Rosas estate was not actually distributed among the heirs but
remained under the management of their father (widower-spouse) who used the properties in
business and so their value increased yearly. The profits were credited on the books of account
of the common fund to the heirs in proportion to their respective hereditary shares. The heirs
allowed their father to continue using their shares for his ventures, although they paid income
27
taxes on their respective shares of the profits of their common business.

Q: Is there a partnership here subject to corporate income tax under the Tax Code? Why?

PEREZ|PRUDENTE|SARANGAY|
A: There was no partnership formed subject to corporate income tax, when her widower-spouse and her
heirs did not partition the estate they inherited from Rosa. However, when the heirs allowed their father
to continue using their shares for his ventures, resulting in common business, there was formed a
partnership.

8. EL, GL and XL, all of legal age, inherited from their parents, who both died in a car accident on
January 1, 2007 a 10-door apartment building situated on a 2,500 square meter lot in Pasay City.
The estate proceedings with the RTC of Pasay City were terminated on 31 December 2008 with
the 3 sisters remaining equal and pro-indiviso co-owners of the apartment building. The rent
was divided equally among the 3 sisters after deducting the expenses (like real estate taxes and
major repairs) on the apartment building. The 3 sisters then reported their shares of the net
income in their individual income tax returns from 2008 to 2012. Now, a buyer has offered to
purchase the apartment building for P10.0 million.

a) Q: Were the 3 sisters correct in reporting their shares of said net income in their respective tax
returns from 2008 to 2012? Explain.

A: Yes. Co-heirs who own inherited properties which produce income should not automatically be
considered as an unregistered partnership or corporation subject to income tax. REASONS: Sharing of
gross returns does not by itself establish a partnership, there must be an unmistakable intention to form
a partnership or joint venture. There is no contribution or investment of additional capital to increase or
expand the inherited properties, merely continuing the dedication of the property to the use to which it
had been put by their forebears.

b) Q: If the 3 sisters decide to sell the apartment building, how will they be taxed on the sale?
Explain.

A: They shall be taxed on their ordinary income from the sale. The properties are not capital assets
because they are used in trade or business.

9. Roberto Ruiz and Conrado Cruz bought 3 parcels of land from Roberto Sabado on 4 May 1994.
Then on 8 July 2005, they bought 2 parcels of land from Miguel Sanchez. In 2010, they sold the
first 3 parcels of land to Central Realty Inc. In 2012, they sold the 2 parcels to Jose Guerrero. Ruiz
and Cruz realized a net profit of P100,000 for the sale in 2010 and P150,000 for the sale in 2012.
The corresponding capital gains taxes were individualy by Ruiz and Cruz.

On 20 September 2012, however, Ruiz and Cruz received a letter from the Commissioner
assessing them deficiency corporate income taxes for the years 2010 and 2012 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.

Q: Are Roberto Ruiz and Conrado Cruz liable for deficiency corporate income tax?
28
A: No. Roberto Ruiz and Conrado Cruz have not formed a partnership subject to corporate tax rates.
Mere sharing of gross returns does not of itself establish a partnership.

PEREZ|PRUDENTE|SARANGAY|
There must be an unmistakable intention to form a partnership or joint venture. There is no showing
that the joint purchase was for the purpose of earning profits to be divided among them.

10. 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 the SEC, which bought another parcel of land (Parcel B). Both parcels of land
were sold, realizing a net profit of P1,000,000 for Parcel A and P500,000 for Parcel B.

a) Q: The BIR claims that the sale of Parcel A should be taxed as a sale by an unregistered
partnership. Is the BIR correct?

A: No. The brothers have not formed a partnership subject to corporate tax rates. Mere sharing of gross
returns does not of itself establish a partnership.

There must be an unmistakable intention to form a partnership or joint venture. There is no showing
that the joint purchase was for the purpose of earning profits to be divided among them.

b) Q: The BIR also claims that the sale of Parcel B should be taxed as a sale by a corporation. Is
the BIR correct?

A: Yes, because the Parcel B was bought after the brothers have formed a taxable partnership.
Registration of the partnership with the SEC is a manifest showing of the brothers intention to engage in
business together and divide the profits.

11. Mr. Santos died intestate in 2009 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 among 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 2012, the income tax returns of the heirs were examined and deficiency income tax
assessments were issued against each of them for the years 2009 to 2011, inclusive, as having
entered into an unregistered partnership. Were the assessments justified?

A: No. Co-heirs who own inherited properties which produce income should not automatically be
considered as an unregistered partnership or corporation subject to income tax. REASONS: Sharing of
gross returns does not by itself establish a partnership, there must be an unmistakable intention to form
a partnership or joint venture. There is no contribution or investment of additional capital to increase or
expand the inherited properties, merely continuing the dedication of the property to the use to which it
had been put by their forebears.

12. Mr. Cruz bought a residential house and lot in 1995 for P120,000. In 2012, curious as to how
much his property then cost, he asked a real estate broker to reappraise the same. The real
29 estate broker reported that the value of his property increased to P1,800,000.

Q: Should Mr. Cruz report the P1,680,000 increase in his income tax return for the year 2012?
Reasons.

PEREZ|PRUDENTE|SARANGAY|
A: No. The P1,680,000 increase in the value of the residential house and lot is not considered as income
reportable as income of Mr. Cruz because such increase has not yet been received by Mr. Cruz, either
physically or constructively.

Besides, capital gains of individuals on dispositions of real property are subject to final tax, the
presumed capital gains tax. Consequently, increases in valuation of real property are not subject to
income tax, hence not reportable in the income tax return.

13. Romulus, 48 years of age and a retired employee had the following properties and
transactions at the end of the 2012 taxable year:

a) Shares of stock in Sabinian Corporation which he bought in 2004 for P50,000 and which were
worth P70,000 as of the end of 2012.

Q: Are the above items subject to the regular tax rates found in the schedule under Sec. 24 (A) of
the NIRC which states the tax rates on citizens and residents? Explain your answer.

A: No, because the shares have not yet been disposed of. Thus, there is no gain to be taxed.

b) Shares of Visigoth Corporation which he bought for P40,000 in 2003 and which he sold for
P100,000 in 2012.

Q: Are the above items subject to the regular tax rates found in the schedule under Sec. 24 (A) of
the NIRC which states the tax rates on citizens and residents? Explain your answer.

A: Assuming that the shares of Visigoth Corporation are capital assets of Romulus, not listed and traded
through a local stock exchange, then the sale is not subject to the regular tax rates found in the schedule
under Sec. 24 (A) because the actual gains are subject to the final tax under Sec. 21 (B) (C).

14. Manananggol, a lawyer, has among his clients a recruitment agency which regularly pays him
a monthly retainer of P10,000. In order to reduce his income tax liability, M arranged for the
retainer to be paid directly to his daughter, Cristina. This year, Ms gross income from his law
practice, exclusive of the P10,000 monthly retainer fee is P2,000,000.

Q: How much gross income must M report this year? Explain.

A: P2,120, which consists of his gross income from his law practice plus the total amount of P120,000
retainer fee. There was no visible service rendered by Cristina to the recruitment agency, hence it is
clear that said payment is a mere subterfuge on the part of M to evade taxes.

15. In 2002, Corporation X had a capital stock of 1,000 shares without par value. At the time of its
incorporation, the value of each no par value share was P10. In 2012, due to its profitable
operations, the corporation earned a surplus of P200,000. The corporations board of directors
increased the stated value of each share by P190 making each share worth P200. The BIR, for
income tax purposes, assessed each stockholder for the P190 increase.
30
Q: Is the BIR correct? Explain.

PEREZ|PRUDENTE|SARANGAY|
A: No. The stockholders have not physically of constructively received any income subject to tax. There
was no realization of the income through the change in stated value. When the stockholder disposes of
the shares, then the same would be subject to capital gains tax.

16. A was engaged by Premiere Movies to perform a pantomime act in a movie it was making. A
was to be paid P20,000 for his performance and the parties signed the necessary contract. A then
gratuitously assigned his rights under the contract to his son, B. B later on collected the P20,000
from the Premiere Movies.

Q: Is the P20,000 taxable to A? Reasons.

A: Yes. The P20,000 A received for his performance is income from the practice of his profession as an
artist. The fact that he gratuitously gave the same to his son does no detract from As having received the
income in exchange for his professional services.

17. The employees of Travellers, Inc. staged a strike. X, a non-union member joined the strike
and volunteered to picket the company premises from 8am to 12nn, Monday to Friday. 6 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 P3,000 a
month for food plus P1,000 for rent. He excluded these benefits from his gross income. The
exclusion was denied by BIR.

Q: Decide.

A: The denial of the exclusion is not valid.

I would consider the amount given as gift, which should be excluded from gross income because there is
no legally demandable obligation on the part of the union to give X money. The money was in the nature
of a donated financial assistance and not compensation for having joined the picket.

18. Mr. Jose Castillo is a resident Filipino citizen. He purchased a parcel of land in Makati City in
1970 at a consideration of P1 million. In 2011, the land, which remained undeveloped and idle,
had a fair market value of P20 million. Mr. Antonio Ayala, another Filipino citizen, offered to buy
the same for P20 million. The Assessor of Makati reassessed the property in 2011 at P10 million.

Q: Is Mr. Castillo liable for income tax in 2011 based on Mr. Ayalas offer to buy?

A: No. There is no realization yet of income because there is no exchange of economic value for
economic value. Mr. Castillo merely received an offer not the cash that is taxable and has not yet parted
with his property.

19. YYY Corporation engaged the services of the Manananggol Law Firm in 2010 to defend the
corporations title over a property used in the business. For the legal services rendered in 2011,
the law firm billed the corporation only in 2012. The corporation duly paid. YYY Corporation
claimed this expense as a deduction from gross income in its 2012 return because the exact
31
amount was determined only in said year.

Q: Is YYYs claim of deduction proper? Reasons.

PEREZ|PRUDENTE|SARANGAY|
A: No. Since YYY is a corporation, it should be using the accrual method. As such, it should have
recognized the expense in 2010 when the amount of legal services was agreed upon.

20. 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.

Q: Would it be the employer or the employee who is legally required to pay an income tax on it?
Explain.

A: The employer should pay the tax. It is a final tax subject to withholding. As such, the obligation
devolves upon the withholding agent, the employer, to collect.

21. ABC Computer Corp. purchased some years ago Membership Certificate No. 7 from the
Calabar Golf Club, Inc. for P300,000. It then transferred the same to John Johnson, American
computer consultant, to enable him to avail of the facilities of the club during his stay here. In the
meantime, the value of the club share appreciated from P300,000 to a market value of P800,000
in 2012. Before he returned home, Johnson transferred the share to Robert James, new
consultant, under a Deed of Declaration of Trust and Assignment of Shares.

Q: Is the transfer subject to income tax?

A: No. There was no transfer of ownership since it was retained by ABC Corp.

22. Oriental, Inc. holds a proprietary share of Capital Golf Club, Inc. It assigned without any
consideration this share to X, one of its foreign consultants, to enable him to use its facilities. X
signed a Deed of Trust where he acknowledged Orientals ownership and promised to transfer
the share to his successor. Xs contract expired and he transferred the share to Y, his successor.

Q: What, if any, can be imposed by BIR on the transaction?

A: None, as there was no transfer of ownership. The same was retained by Oriental, Inc.

23. 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 limousine and membership in a country club where he can entertain
customers of the corporation.

Q: Which of these benefits, if any, must Mr. Adrian report as income? Explain.

A: None. All are subject to the fringe benefits tax, except the value of the country club which is not
taxable as it is for the convenience of the corporation. The fringe benefits tax is a final tax, hence the
terms that are subject to it are not reportable anymore in the annual income tax return.

32 24. A and B are employed as drivers by Y and Z, respectively, with a monthly salary of P10,000
each. In addition, A and B are provided free meals and living quarters with a monthly value of
P1,800. A eats and lives at Ys residence because he is a bachelor and could help in other
household chores. B stays with Z because the latter is a doctor available 24 hours a day.

PEREZ|PRUDENTE|SARANGAY|
Q: What is the gross income of A and B? Explain briefly.

A: As gross income should be his monthly salary plus the monthly value of his free meals and living
quarters. Bs gross income should be his monthly salary only.

A is not qualified to avail of the convenience of the employer rule because his employers business is
not the place of business where a significant portion of his business is conducted. Ys providing A with
free meals and living quarters is not part of the employment conditions. B could avail of the same rule
because the free meals and quarters enable Dr. Z to avail of Bs services at the latters convenience. It is
likewise a precondition for Bs employment to stay with Z on a 24-hour basis.

25. 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 P1,500 a
month.

Q: X wants your opinion on whether BIR can tax the value of the free use of his room.

A: The BIR can tax the rental value of the room because there is no showing the the problem that X is
required to accept such lodging as a condition of his employment.

26. Capt. Canuto is a member of the AFP. 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.

Q: Are these benefits income to Capt. Canuto? Explain.

A: No. All of the above are under the convenience of the employer rule. This would enable the
government to avail of the services of Capt. Canuto anytime his services are desired.

27. X was hired by Y to watch over Ys fishpond with a P10,000 salary. 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.

Q: Is the fair market value of the hut a fringe benefit subject to 32% tax under the NIRC?

A: No. X is merely a watchman, a rank-and-file employee. The fringe benefits tax is not imposed upon
fringe benefits to rank-and-file employees such as X.

28. Perlas inherited from his parents large parcels of undeveloped land acquired by them years
ago at the total cost of P500,000. Perlas sells all of these parcels for P2,000,000.

Q: How much of the gains should he report for income tax purposes?

A: None. The sale is subject to the final tax of 6% on the presumed capital gains because the property is
33 capital asset not used in trade or business

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Suppose then that when Perlas inherited these parcels, they were already fully developed real
estate subdivisions, with small lots being sold on installment basis. He now sells all these parcels
for P4,000,000.

Q: How much of the gain should he report for income tax purposes?

A: His taxable ordinary income after deducting deductions and/or personal and additional exemptions
from his gross income of P4,000,000.

Since the properties are fully developed real estate subdivisions, these are ordinary assets being
property held by Perlas primarily for customers in the ordinary course of his trade or business.

29. In 2003, Mr. Naval bought a lot for P1,000,000 in a subdivision with the intention of building
his residence on it. In 2012, he abandoned his plan because the surrounding area became a
depressed area and land values in the subdivision went down; instead he sold it for P800,000.

Q: Is the land a capital asset or an ordinary asset?

A: It is a capital asset. It is not used for trade or business because it was intended for Mr. Navals
residence.

30. An individual taxpayer who owns a 10-door apartment with a monthly rental of P10,000 each
residential unit sold this property to another individual taxpayer.

Q: Is the seller liable to pay capital gains tax?

A: No. Said tax is imposed only upon the disposition of a capital asset, which is one not used in trade or
business. Since the 10-door apartment is being rented out on a regular basis, it is used in trade or
business. Thus, it is an ordinary asset and any gains derived therefrom shall be subject to ordinary
income taxation and not capital gains tax.

31. In Jan. 1974, Juan Gonzalez bought 1 hectare of agricultural land in Laguna for P100,000. It
now has a fair market value of P10 million in view of the construction of a concerete road
traversing the property. Gonzalez agreed to exchange his lot for a hectare residential property
located in Batangas with a fair market value of P10 million, owned by Alpha Corp., a domestic
corporation engaged in the purchase and sale of real property. Alpha acquired the property in
2011 for P9 million.

Q: What is the nature of the real properties exchanged, ordinary or capital assets?

A: Gonzalezs land is a capital asset because there is no showing that he is using it in trade or business,
neither is he engaged in the business of buying and selling real property.

34 Alpha Corp.s property is considered as an ordinary asset because the land is part of its inventory that is
held for sale, it being engaged in the real estate business.

32. In 2008, Florencio inherited from his late father a house and lot, which he used as family
home. In early 2010, Florencios immigrant application to the US was approved so he decided to

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sell the property. While looking for buyers, he rented out the property to Antonio who occupied
the same until it was finally sold.

Q: For tax purposes, the house and lot is

a. a long-term asset
b. an ordinary asset
c. a capital asset
d. neither a capital nor an ordinary asset

A: C *The fact that is was rented out to Antonio did not make the house and lot property used in trade or
business as it was rented out while waiting for buyers. There was no intention to continue renting out the
property, hence, it is a capital asset.

33. An individual resident citizen taxpayer who owns a 10-door apartment with a monthly rental
of P10,000 each residential unit sold this property to another individual taxpayer.

Q: The sale is subject to

a. presumed capital gains tax


b. percentage tax
c. schedular tax on taxable income
d. excise tax

A: C *The apartment is an ordinary asset. Gains derived from the disposition of ordinary assets are subject
to the schedular tax rate under the NIRC.

34. Salvacion Banking Corporation participated in the auction sale of its foreclosed residential
house and lots. It won in the bidding having bidded for the amount it lent plus accumulated
interest.

Q: The properties acquired are

a. investment assets
b. capital assets
c. ordinary assets
d. non-performing assets

A: C *Real properties acquired by banks through foreclosure sales are considered as their ordinary assets.
However, banks shall not be considered as habitually engaged in the real estate business for purposes of
determining the application rate of withholding tax imposed.

35. Mr. Pedro Aguirre, a resident citizen was promoted as VP in a real estate company in 2010. In
2011, he decided to buy a new car worth P2 million and traded in his old car with a fair market
value of P800,000 and paid the difference of P1.2 million. The old car was bought 3 years ago by
Aguirres father at P700,000, which he donated to Aguirre and registered in the latters name.
35 The corresponding donors tax was duly paid by the father.

Q: a) How much is the cost basis of the old car to Mr. Aguirre? Explain.

A: P700,000 or the value at the time of donation

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Q: b) What is the nature of the old car capital asset or ordinary asset?

A: Capital asset because it is not used in trade or business of Mr. Aguirre

Q: c) Is Mr. Aguirre liable to pay income tax on the gain from the sale of his old car?

A: Yes because after determining the net gain he derived from the exchange of the car and applying the
holding period, the net amount shall be included as part of the gross income of Mr. Aguirre.

36. Q: A feature of ordinary gains as distinguished from capital gains:

a) Gains from sales of assets not stock in trade

b) May or may not be taxable in full

c) Sources are capital assets

d) No holding period

A: D *In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss
recognized upon the sale or exchange of a CAPITAL ASSET shall be taken into account in computing net
capital gain, net capital loss and net income:

1) 100% if the capital asset has been held for NOT more than 12 months
2) 50% if the capital asset has been held for more than 12 months

37. Q: 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

A: The capital gains being subject to final tax shall not be reportable anymore in the income tax returns
while the ordinary income shall be reportable in the ITR.

38. Q: On Feb. 17, 2013, Johnny sold a Valencia painting from his private collection for P180,000.
He bought the painting in 2010 for P200,000. Johnny should treat the transaction as one
resulting in

a) long-term capital loss deductible from capital gains

b) short-term capital loss deductible from capital gains

c) ordinary loss

d) non-deductible loss

A: A *because the property is NOT held for trade or business and was held for MORE THAN 12 months

36 39. Aristarchus is engaged in business as an art dealer. His inventory of paintings includes
several masterpieces which he acquired 10 years ago. Aristarchus invests part of his savings in
private corporations belonging to his friends. The shares of these corporations are not traded in
the stock market. Among his existing investments are shares of stock of Crescent Corporation

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and Ethereal Corporation. Consider the following transactions of Aristarchus during the taxable
year 2012.

Q: 1) In May 2012, he sold his shares in Etheral Corp. which he held since 2009 for the price of
P100,000. He sold them for P200,000.

A: Capital gain because his selling price is higher than his acquisition price. He is not engaged in buying
or selling shares of stock, neither is there a showing that the shares are listed and traded in the local
stock exchange. He realized the gain in 2012 because it was at that time the shares were sold.

Q: 2) In Sept. 2012, he sold one of his masterpieces for P2 million. The buyer gave him a
managers check which he can deposit anytime. However, he plans to wait until 2013 before
depositing the check. He acquired the painting in 1998 for P100,000.

A: Ordinary gain because he is an art dealer engaged in the business of buying and selling paintings and
because the selling price was higher than the acquisition price. When the check was given in 2012, he
had full disposition of the same, hence, it was in 2012 that he realized the income. The date of deposit in
2013 has no effect on the realization of the income.

Q: 3) He bought the Crescent shares in 2005 for P400,000 and are presently worth only
P200,000. His son is getting married so he sold the shares for P200,000 and donated the cash
proceeds to his son.

A: Capital loss because his selling price is lower than his acquisition price. He is not engaged in buying or
selling shares of stock, neither is there a showing that the shares are listed and traded in the local stock
exchange. He incurred the loss in 2012 because it was at that time the shares were sold.

40. Q: Heidi purchased 1,000 shares of stock of Spinach Canning Corp. for P250,000 in 2007. In
2012, she sold all her shares to her daughter Trisha for P150,000. Heidi had no other capital
transactions for the year. Heidi incurred

a) long-term capital loss

b) short-term capital loss

c) no gain, no loss

d) non-deductible capital loss

A: D *No deduction shall in any case be allowed in respect of losses from sales or exchange or property
directly or indirectly between related parties the family of an individual include only his brothers and
sisters, whether full of half-blood, spouse, ancestors and lineal descendants; a corporation more than 50%
in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual
37
41. Mrs. G received as gift from her mother several pieces of jewelry purchased from 10 years ago
for P100,000. At the time of the gift, they had a fair market value of P2 million. After possessing
them for 18 months, Mrs. G sold them for P2.5 million.

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Q: a) What are the tax consequences?

A: Mrs. G shall determine her capital gain after applying the holding period. The capital gain is then
included in the annual ITR subject to the schedular rate.

Q: b) Explain briefly whether the following items are taxable or non-taxable: Gain from the sale
of a car used for personal purposes

A: The gain is taxable being gain derived from dealings in property.

42. A corporation engaged in real estate development executed deeds of sale on various
subdivided lots. One buyer bought a corner lot with a good view of the surrounding terrain for
P1.2 million. A year later, the value appreciated to P1.6 million. The buyer built his house
thereon but a huge tower had been erected which blocked his view. When he complained, the
company exchanged the lot with another corner lot with an equal area but a better view.

Q: Is the buyer liable for capital gains tax on the exchange of lots?

A: Yes because he is in effect the seller when he exchanged the property.

43. In Jan. 1974, Juan Gonzalez bought 1 hectare of agricultural land in Laguna for P100,000. It
now has a fair market value of P10 million in view of the construction of a concerete road
traversing the property. Gonzalez agreed to exchange his lot for a hectare residential property
located in Batangas with a fair market value of P10 million, owned by Alpha Corp., a domestic
corporation engaged in the purchase and sale of real property. Alpha acquired the property in
2011 for P9 million.

Q: Is Gonzalez subject to income tax? If so, what is the tax base and rate?

A: Yes, Gonzalez is subject to presumed capital gains tax which is considered an income tax. The tax base
is whichever is higher between the gross selling price or the fair market value as determined by the CIR
(zonal valuation) or the fair market value as shown in the schedule of values of the Provincial assessors.

44. The real property of Mr. Pedro Cruz was expropriated by the government in 2008. He
acquired said property in 1991 for only P50,000, but the government paid him P1 million which
was the fair market value at the time of expropriation.

Q: How shall Mr. Cruz be taxed on the proceeds?

A: He shall be taxed on his option, either on the presumed capital gains tax basis or he could report the
gain in his annual ITR.

45. Juan Panalo won a damage suit for P500,000 againt Juana Talo. Panalo got a writ of execution
38 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. Panalo refused to pay any capital gains tax on his purchase of the
lot.

Q: Your opinion.

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A: Panalo is correct. The presumed capital gains tax is imposed when there is a transfer of real property
ownership, but here, there is no such transfer yet because Juana has a right of redemption for one year.
If she does not redeem and there is a consolidation of title in Juans favor, then that is the time the PCG
tax shall be paid.

46. Z is a Filipino immigrant living in the US for more than 10 years. He is retired and came back
to the Philippines as a balik-bayan. Everytime he comes back, he stays here for a month. He
regularly receives a P1,000/month pension from his employer in the US. While in the Phils., with
pension pay from his former employer, he purchased 3 condominium units in Makati which he is
renting out for P15,000/month each.

Q: Is his purchase subject to any tax?

A: Documentary stamps and transfer taxes imposed by Makati where the properties are located. He is
not required to pay the presumed capital gains tax or ordinary income tax because these taxes are due
from the seller, not the purchaser.

47. X bought a house and lot on March 19, 1999 for P900,000. He sold the same property on April
10, 2008 for P2 million.

Q: How much taxable income on this capital asset transaction should be reported by X? Reason.

A: There is no taxable income to be reported in the annual ITR because the transaction is subject to the
6% presumed capital gains tax. There is no showing that the house and lot is used in Xs trade or
business or that he is engaged in the realty business. The property is thus classified as capital asset.

48. X-land Condominium Corp. 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 Corp., the
developer of the building, conveyed the common areas in favor of the X-land Condominium Corp.

Q: Is the conveyance subject to any tax?

A: No. There was no separate sale, exchange or other disposition that is taxable. When the owners
purchased their units, the common areas were already included in the sales prices that were already
subject to income taxes.

49. A, a doctor by profession, bought in 2001 a parcel of land worth P1 million. He sold the same
for P800,000 to B. A used the proceeds to finance his US trip. 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.

Q: Is his contention correct? Why or why not?

A: A is not correct. The presumed capital gains tax is imposed irrespective of whether there is a gain or
loss from the sale.

39 50. In June 2012, A, a Filipino, sold for P5 million a 500 sq. m. lot that he bought in 1999 for
P50,000. His brother B sold in the same year at P1 per share 500,000 shares of stock of Black
Gold Corp. whose shares were being traded at the Makati Stock Exchange. B bought the shares 2
years ago at P0.10 each

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Q: What would be the respective income tax liabilities of the 2 brothers?

A: A would be subject to 6% presumed capital gains tax because the property is considered as a capital
asset not used in trade or business.

B would be subject to the transfer tax of of 1% on the gross selling price since the shares were traded
in the stock exchange. Whether the shares are capital assets or not, as well as the holding period, does
not apply to sales of shares of stock in the stock exchange.

51. Romulus, 48 years of age and a retired employee, had the following properties and
transactions at the end of 2012 taxable year:

a) Shares of stock in Sabinian Corp. which he bought in 2005 for P50,000 and which were worth
P70,000 at the end of 2008

b) Shares of Vision Corp. which he bought for P40,000 in 2007 and which he sold for P100,000 in
2008

Q: Are the above items subject to the regular tax rates (tax rates on individual citizens and
individual resident alien of the Phils.)?

A: a) No. There is no income yet that has been realized which could be subject to taxation. Mere
increments in value without realization are not taxable.

b) No. If Vision Corp. is a domestic corp. and the shares are not traded through the local stock exchange,
they shall be subject to a final tax, hence not to the regular rates. If traded, the sale shall be subject to
transaction tax which is also a final tax. If not a domestic corp., the proceeds shall be included in the
annual ITR subject to the rates on ordinary income.

52. 3 brothers inherited in 2010 a parcel of land valued for real estate purposes at P3 million
which they held in co-ownership. In 2012, they transferred the property to a newly organized
corporation as their equity which was placed at the zonal value of P6 million. In exchange for the
property, the 3 brothers thus each received shares of stock in the corporation with a total par
value of P2 million, or altogether, P6 million. No business was done by the corporation and the
property remained idle. In the early part of 2012, one of the brothers, who was in dire need of
funds, sold his shares to the 2 brothers for P2 million.

Q: Is the transaction subject to any internal revenue tax other than documentary stamp tax?

A: The transaction shall be subject to the capital gains tax on the sale of shares of stock in domestic
corporation outside of the stock exchange, if there is taxable gain.

53. John McDonald, a US citizen residing in Makati City, bought shares of stock of a domestic corp.
40 whose shares are listed and traded in the Phil. Stock Exchange at the price of P2 million.
Yesterday, he sold the shares through his favorite Makati stockbroker at a gain of P200,000.

Q: a) Is McDonald subject to Phil. Income tax on the sale? Is he liable for any other tax?

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A: a) No, he is not subject to income tax. McDonald is subject to transaction tax at the rate of of 1%
based on the gross selling price of gross value in money of the shares of stock sold, bartered and
exchanged or otherwise disposed of which shall be assumed and paid by him through the remittance of
the stock transaction tax by his broker.

The stock transaction tax is not an income tax categorized as a capital gains tax but a percentage tax in
the nature of a transaction tax.

Q: b) If McDonald directly sold the shares to his best friend, who is another US citizen residing in
Makati, at a gain of P200,000, is he liable for Phil. Income tax? If so, what is the tax base and rate?

A: Yes, 5% if not over P100,000; 10% on any amount in excess of P100,000.

54. Don Juan is engaged in extensive farming activities on his 50-hectare farm in Tanauan,
Batangas. He bought his farm in 2003 for only P50,000. In 2012, it has a fair market value of P5
million. Don Juan now intends to transfer his farm to X Inc., an existing domestic corp. in which
Don Juan already owns 95% of the stockholdings, for P4.5 million worth of shares and P500,000
in cash.

Q: Don Juan consults you concerning the tax consequence of his proposed transaction.

A: The exchange is one that is NOT a tax-free exchange because it is not one solely in kind (a portion was
cash) and that the exchange did not result to control as Don Juan was already in control, Don Juan has a
tax liability on his realized gain. He is to be taxed on the P450,000 cash exceeding his acquisition of
P50,000. He is going to be taxed on the shares of stock only when he disposes of them.

55. Cebu Devt Inc. (CDI) has an authorized capital stock of P5 million divided into 50,000 shares
with a par value of P100 per share. Of the authorized capital stock, 25,000 shares have been
subscribed. Mr. Juan Legaspi is a stockholder of CDI where he has a subscription amounting to
13,000 shares. To fully pay his unpaid subscription of P950,000, Mr. Legaspi transferred to the
corp. a parcel of land he owns by virtue of a Deed of Assignment. Upon investigation, the BIR
discovered that Mr. Legaspi acquired said property for only P500,000.

Q: Is Mr. Legaspi and/or CDI liable for any taxable gain?

A: Both of them are NOT liable for any taxable gain. The transaction is an exchange solely in kind. Thus,
no gain is recognized as the transfer resulted in Mr. Legaspis gaining control of CDI because he acquired
ownership of 13,000 or more than 50% of the total authorized shared of 25,000.

56. In Jan. 1974, Juan Gonzalez bought 1 hectare of agricultural land in Laguna for P100,000. It
now has a fair market value of P10 million in view of the construction of a concerete road
traversing the property. Gonzalez agreed to exchange his lot for a hectare residential property
located in Batangas with a fair market value of P10 million, owned by Alpha Corp., a domestic
41
corporation engaged in the purchase and sale of real property. Alpha acquired the property in
2011 for P9 million.

Q: Is Alpha subject to income tax on the exchange of property? If so, what is the tax base and rate?

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A: Yes. Alpha is subject to income tax as the exchange was in connection with engaging in trade and
business of buying and selling real property. It shall be taxed on whichever is higher between the normal
rate of 30% and 2% MCIT.

Its tax base is net income for the taxable year subject to tax and the corporate rate is 30% of the net
income subject to tax. This is then compared with the MCIT which is computed upon a tax base of gross
income for the taxable year at a rate of 2%

57. Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 for P1 million. Said
property has been leased to MAS Corp., a domestic corp. engaged in manufacturing paper
products, owned 99% by Suerte. In Oct. 2007, EIP Corp., a real estate developer, expressed its
desire to buy the lot at its fair market value of P300 million. xxx Upon advice of a tax lawyer,
Suerte exchanged her Makati property for shares of stock of MAS Corp. A BIR ruling confirming
the tax-free exchange was then secured. Subsequently, Suerte sold her entire stockholdings in
MAS Corp. to EIP for P300 million. Suerter paid only P29,895,000 capital gains tax instead of
P89,700,000 corporate income tax. The RDO wrote Suerte a letter stating that the latter
committed tax evasion.

Q: Is the RDO correct? Or was it tax avoidance that Suerte resorted to?

A: The RDO is correct. Suerte committed tax evasion despite the tax-free ruling because the government
is NOT bound by the errors of its agents.

The exchange is NOT a tax-free exchange because 1) Suerte already had control of 99% of MAS when the
exchange was made and 2) it was between related parties considering that Suerte has control of MAS.

Suerte is to be taxed on her ordinary income on the basis of P1 million value of the land. The gain from
the sale of MAS shares shall be the excess of the amount realized therefrom (P300,000) over the basis
(P1M).

When she sold the shares for P300M, she had a net gain of P299,000,000 which should be subject to tax
using the schedular rate for individuals.

58. Mar and Joy got married in 2011. A week before their marriage, Joy received, by way of
donation, a condominium unit worth P750,000 from her parents. After marriage, some
renovations were made at a cost of P150,000. In 2012, they sold the unit and bought a new one.

Q: What is the income tax implications of the sale?

A: The sale is subject to 6% presumed capital gains tax. There is no showing that the condominium is
used in trade or business. The sale is not exempted from capital gains taxes because the problem does
not show that the condominium unit is the principal residence of Mar and Joy.

59. Passive income includes income derived from an activity in which the earner does not have
any substantial participation.
42
Q: This type of income is

a) usually subject to a final tax

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b) exempt from income taxation
c) taxable only if earned by a citizen
d) included in the ITR

A: A

60. During the taxable year, a domestic corporation derived interests from money placements in
the banks as revenue. What should be the tax treatment on this item?

A: The interests are not to be included in the corporate income tax return because they are not subject to
a final tax.

61. Maribel Santos, a retired public school teacher, relies on 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?

A: Her pension is not subject to tax as it is an exclusion from income.

The interest from the time deposit is subject to the final tax of 20% as passive income.

62. 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?

A: Yes. Mr. Javier does not have any income which is required to be reported in the income tax return.
His pension is not subject to tax as it is an exclusion from income. The interest from which the time
deposit is subject to the final tax of 20% as passive income and therefore not required to report in an
income tax return.

62. From the following list of taxpayers receipts during a taxable year, select and write down
all the items that would fall under his taxable income under Section 31 of the NIRC; as well as
what falls under gross compensation income:

a. Salaries received from a private firm;


b. Proceeds from life insurance;
c. Sweepstakes prize;
d. Annual bonus
e. Christmas bonus;
f. Per diems;
g. Dividends on life insurance;
h. Rentals;
i. Government backpay under R.A. 304;
j. Compensation for his injuries;
k. Sales of crops;
l. Interest on money loaned;

A: The following falls under the taxpayers taxable income having been earned from trade or business:
43 h. rentals;

k. sales of crops

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l. interest on money loaned

Comprising his compensation income which was earned as a result of employer-employee relations are:

a. Salaries received from a private firm


d. Annual bonus

e. Christmas bonus

f. Per diems

provided that for d., e., and f., only the amount exceeding P30,000 should be includible in his
compensation.

Item nos. b. proceeds from life insurance and j. compensation for injuries are not considered as income,
hence part of the exclusions from gross income.

Item nos. c. sweepstakes prize, g. dividends on life insurance, and i. government backpay under R.A. 305
are exempt from income taxation.

63. Romulus, 48 years of age and retired employee, had the following properties and
transactions at the end of the 2012 taxable year.

a. Cash dividends received by Romulus from Sabinian Corp. during 2012 in the
amount of P5,000.00.
b. Interest on time deposits with United Banana Bank received in 2012 in the
amount of P80,000.00.

Are these above items subject to regular tax rates found in the schedule under Section 24 of the
NIRC, which states that tax rates on individual citizens and individual resident aliens in the
Philippines?

A: a. No. The cash dividends received by Romulus are not subject to the regular tax rates. They are
subject to a final tax of 10% on the gross amount of the dividends.

b. No, because the interests on bank deposits are subject to a final tax of 20% on the gross
interests earned.

64. 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 PSE; (e) proceeds under an insurance policy on the loss of goods.

In preparing the corporate income tax return, what should be the tax treatment of each of the
above items?
44
A: Only the gross receipts from trading business should be included as part of the gross income
reportable in the corporate income tax return. The proceeds under an insurance policy should not be

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included as it is not income being merely compensation for the loss suffered. All the other items are
subject to a final tax and should not be reportable.

65. On January 3, 2011, a Filipino citizen residing in the Philippines purchased 100 shares in
the capital stock of Y Corp., a domestic corporation. On January 3, 2013, Y Corp. declared, out of
the profits of the company earned after January 1, 2013, a 100% stock dividends on all
stockholders of record as of December 31, 2012 as a result of which X holding in Y Corp. became
200 shares. Are the stock dividends received by Y subject to income tax?

A: The stock dividend declared under the circumstances obtaining in the problem may or may not be the
subject of income taxation.

As a general rule, stock dividends are given as returns on investment, the dividends are subject to tax
when the distribution results in changes in the proportionate interest of the stockholder.

It appears in the problem that the stock dividends were given only to stockholders on record as of
December 31, 2012. If all the stockholders are stockholders as of the said date, then there would be
no proportionate change in ownership, hence not taxable.

If not all re stockholders of record as of December 31, 2012, then the declaration of the stock
dividends would result in disproportionate change in ownership. In such case, the stock dividend would
be taxable.

66. Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriquez for 10 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 P1 M.
At the end of the lease, the building is worth only P900,000.00 due to the depreciation.

Will Mr. Domingo have an 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?

A: Whether Mr. Domingo, the lessor, will have income when the lease expires and he becomes the owner
of the building depends upon the method of recognition he shall use. Mr. Domingo may report as income
the fmv of the improvements as the time of the completion of construction. In such a case, he need not
report any income at the expiration of the lease.

If Mr. Domingo spreads over the life of the lease the estimated depreciated value of the improvement at
the termination of the lease and report as income for each year of the lease an aliquot part thereof, he
also need not report any income at the expiration of the lease.

On the other hand, Mr. Domingo may recognize as income the P900,000.00 fmv of the building at the
expiration of the lease, if he did not recognize income in the above described manner.
45 67. Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriquez for 10 years
at a rental of P120,000.00 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.

PEREZ|PRUDENTE|SARANGAY|
Mr. Enriquez erects the building. Upon completion, the building had a fair market value of P1 M.
At the end of the lease, the building is worth only P500,000.00 due to the depreciation.

What are the tax implications when the lease expires and Mr. Domingo becomes the owner of the
building with a fmv of P500,000.00 (MCQ)

A: Mr. Domingo would have an income of P500,000.00 because that is the depreciated value of the
property at the time ownership vested in him.

68. W was notified by her depository bank on June 3, 2009 that P50 M had been credited to
her savings account because of the remittance of US $1 M through a US bank by her sister in the
US. W lost no time in spending most of the money for various purposes, such as the purchase of
luxurious condominium unit and a luxury car, money market placement, gifts to relative, etc.
Soon thereafter, the US bank discovered that Ws sister remitted only US $1,000.00 and not US $1
M. on June 29, 2009, the US bank filed a complaint for the recovery of the excess amount with the
appropriate Manila court against W, as the remittance of so huge an amount arose from a clerical
error. W was also charged with estafa on account of the same money.

On March 15, 2010, W filed her income tax return for the calendar year 2009, without a
declaration of P50 M but with a footnote to the tax return which reads: Taxpayer was the
recipient of some money from abroad which she presumed to be a gift but turned out to be an
erroneous remittance and is now the subject of litigation.

On March 7, 2012, the CIR assessed W a deficiency on the P40 M, imposed a 50% surcharge for
filing a false and fraudulent tax return, and charged interest covering three years for late
payment.

W contended that the erroneous remittance is not gross income within the meaning of the Tax
Code. She also disputed the imposition of 50% surcharge.

If you were the Judge, how would you rule on the legal points of W?

A: Ws contention that the erroneous remittance is not a gross income is devoid of merit. It is considered
under the 1997 NIRC as falling within the ambit of income from whatever source derived because it
is not expressly excluded or exempted from the class of taxable income. This is irrespective of the
voluntary or involuntary action of W in producing the income. As a matter of fact the source of income
may be legal or illegal.

W was correct in her contention that she should not be subjected to the 50% surcharge. There was no
actual and intentional fraud through willful and deliberate misleading of BIR. The government was not
induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents
from proper assessment of tax liabilities because W did not conceal anything. Ws notation on her
46 income tax return was an error or mistake of fact or law not constituting fraud. So also such notation
was practically on invitation for investigation and that W had literally laid cards on the table.

PEREZ|PRUDENTE|SARANGAY|
69. X issued a check drawn on a bank in which he has no funds. He negotiated the check and
received P10,000.00. He tried his luck in casino but lost. Thereafter, he was charged and
convicted for passing a worthless check. The BIR wants to tax him for the P10,000.00 he for from
negotiating the check. Decide.

A: X should be taxed. The P10,000.00 is considered as his income from whatever source derived. The
phrase is so broad that it includes all income not expressly excluded or exempted from the class of
taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the
income.

70. Lajojo is abig-time swindler. In one year, he was able to earn P1 M from his swindling
activities. When the CIR discovered his income from swindling, the Commissioner assessed him a
deficiency income tax for such income.

a. The lawyer of Lajojo protested the assessment on the ground that the income tax
applies only to legal income, not illegal income;

b. Lajojos receipt from his swindling did not constitute income because he was never
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;

c. If he has to pay the deficiency income tax assessment, there will be hardly anything
left to return to the victims of swindling.

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

A: a) The first ground should be denied for the reason that all incomes not excluded or exempted from
the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in
producing the income are subject to tax.

b) Contentions b and c are without merit. Since Lajojo has unfettered ability to dispose of the amounts
swindled, then it is income to him subject to tax.

71. 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 P P100,000.00 as a bribe to the
approving official. Is the P100,000.00 deductible from the gross income of Corporation A? On the
other hand, is the P100,000.00 taxable income of the approving official?

A: The P100,000.00 bribe is not allowed to be deducted from gross income because it is an illegal
expenditure.

The bribe is considered as income of the recipient subject to tax. All incomes not expressly included or
exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the
taxpayer in producing the income are subject to tax. There is no distinction whether the income may be
47 legal or illegal.

72. Is income from jueteng taxable or non-taxable?

PEREZ|PRUDENTE|SARANGAY|
A: Income from jueteng is considered as his income from whatever source derived, which is so broad
that it includes all income not expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary or involuntary action of the taxpayer in producing the income.

73. In 2010, 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 non-interest bearing loan of P100,000.00 payable
within 12 months; (b) that in consideration of the loan, the lessee and his rentals shall not be
increased while the loan remains unpaid. Upon completion of the building in 2012, Y extended
the loan of P100,000.00 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?

A: No. there was no gain realized by X whether as payment for services, interest or profit from
investment because he is required to repay the P100,000.00 loan.

74. A, an architect owes Z, a businessman, the sum of P10,000.00. Z engaged the services of A
to remodel his residence at Magallanes Village, Makati. The value of the services rendered by A is
P100,000.00. Accordingly, Z cancelled the debt of A. Is the P100,000.00 value of the services
considered income subject to tax?

A: Yes. Whether A uses the accrual method or cash method accounting. If A uses the accrual method of
accounting, then he has recognized income up to the total extent of P100,000.00 as there is now
constructive receipt of income. On the other hand, if he uses the cash method, he should be subject to tax
only up to the extent of P10,000.00 the amount condoned. This is so because the condonation was in
exchange of the services rendered. The P90,000.00 value of the services is not yet deemed collected.

75. Under the same facts, suppose Z paid paid A P100,000.00 for the services rendered and at
the same time condoned As indebtedness. Is the amount condoned considered income subject to
tax? Explain.

A: Yes. When Z pays A P100,000.00, then the same is considered income from the exercise of As
profession because of the physical receipt of the money. The amount of P10,000.00 condoned is
considered as a gift because the cancellation was without consideration.

76. Onesiphorus, a junior executive, owed his employer P4,000.00. The money was advanced
to him to pay for his personal bills. Just recently, he submitted an excellent report to his
employer who became very pleased because it attracted a big client to their company. The
employer, therefore, decided to cancel the debt of Onesiphorus and, in addition, gave him a
round trip ticket to Hong Kong plus pocket money of P500. How are the above items to be treated
on the income tax return of Onesiphorus?

A: The P4,000.00 is considered as part of the compensation income of Onesiphorus to be reported in his
income tax return because the condonation was in exchange of services performed by him for his
employer as a result of employer-employee relations.

The value of the round trip ticket to Hong Kong including the pocket money may be treated as income to
48 be reported in the income tax return if Onesiphorus is a rank and file employee, because income
includes everything of value not necessary in money.

PEREZ|PRUDENTE|SARANGAY|
If Onesiphorus is not a rank and file employee, then the value of the round trip ticket to Hong Kong,
including the P5,000.00 pocket money are fringe benefits taxable to the employer and not reportable by
the employee in his income tax return.

77. In 2010, Sally a fruit market operator in Manila, received an assessment for customs
duties for her imported market equipment in the amount of P75,000.00. Believing that the
amount is excessive, she paid the same under protest. Because of assurances from her retained
CPA that she stands a good chance of being able to secure refund of P50,000.00 she did not
deduct the same anymore from her income tax return. She deducted only the P25,000.00 which
she believed was due from her. She received the refund amounting to only P50,000.00 in 2012.
What should have been the proper tax treatment of payment of P75,000.00 in 2006?

A: D. Sally should have deducted the total P75,000.00 customs duties in 2010. When she received the
refund of P50,000.00 in 2010, she should have included the amount as her income in 2012.

78. ABCD Corporation, a corporation created and organized in the Philippines under its laws
is composed wholly of resident aliens. It shall not be subject to Philippine income on taxation:

A: C. Dividends received from a domestic corporation wholly owned by Filipino citizens.

79. 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?
A: A. Consultancy fees received for designing a computer program and installing the same in Shanghai
facility of a Chinese firm.

80. Federico, a Filipino citizen migrated to the US some 6 years ago and was able to obtain a
green card. He should pay Philippine income taxes on:

A: B. The gains derived from the sale in New York Stock Exchange of shares of stock in PLDT, a
Philippine corporation.

81. Guidant Resources Corp., a corporation registered in Norway, has a 50 MW electric power
plant in San Jose, Batangas. Aside from Guidants income from its power plant, which among the
following is considered as part of its income from sources within the Philippines?

A: A. Gains from the sale to an Ilocos Norte power plant of generators bought from the US.

82. Which of the following receipts is excluded from the gross income because they are
exempt from income taxation?

A: B. Income derived by a local government unit.

83. These are various reasons from the exclusion of certain receipts from gross income. This
receipt is excluded because it is not income.

49 A: Life insurance proceeds.

84. Marie bought a tax-exempt government bonds. As such the interest she received is not
includible as part of her gross income. Why?

PEREZ|PRUDENTE|SARANGAY|
A: B. The interest is excluded from gross income because of public policy to encourage purchase of
government bonds.

85. X Corporation took a keymen insurance on the life of its President, Rodel Cruz. The policy
designated Cruzs wife as its revocable beneficiary in the event of death of Cruz. Will the
insurance proceeds be treated as income subject to tax by the wife?

A: No. Proceeds of life insurance policies are paid to the beneficiary, in this case the wife, upon the death
of the insured are excluded from gross income. Life insurance proceeds represent indemnity not
income.

86. Y received the following income and you were asked to prepare his income tax return. Is
he required to include as part of his gross income the proceeds from a life insurance policy
received from the estate of his deceased parents? Explain.

A: No. Life insurance proceeds are excluded from gross income, being compensation or indemnity for
loss and not income.

87. On June 30, 2008, X took out a life insurance policy on his own life in the amount of P2 M.
He designated his wife, Y, as irrevocable beneficiary to P1 M and his son Z, to the balance of P1 M
but, in the latter designation, reserving his right to substitute him for another. On September 1,
2012, X died and his wife and son went up to the insurer to collect the proceeds of Xs life
insurance policy. Are the proceeds of the insurance policy subject to income tax on the part of Y
and Z for their respective shares?
A: No. The proceeds of the insurance policy are excluded from gross income being compensatory or
indemnity for loss and not income.

88. Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard.
To entice him to accept the offer for employment, he was offered the arrangement that part of his
compensation would be insurance policy with a face value of P20 M. The parents of Noel are
made beneficiaries of the insurance policy. Will the proceeds of the insurance policy form part of
the parents of Noel and be subject to income tax?

A: No. The proceeds of life insurance policy are excluded from gross income being compensatory or
indemnity for loss and not income.

*** The matter of revocability or irrevocability of the designation of the beneficiary does not affect
inclusion or exclusion of the proceeds as part of gross income. Irrevocability or revocability of the
designation of the beneficiary is a concept to be considered in inclusion or exclusion of the proceeds of
life insurance as part of the gross estate of the deceased. Thus, the proceeds of life insurance policy
where the designation of the beneficiary is irrevocable, are NOT INCLUDED as part of the GROSS
ESTATE for ESTATE TAX PURPOSES.

89. The widow of your best friend has just been paid P1 M on account of the life insurance
policy of the deceased husband. She asks you whether she should declare the amount for income
tax purposes or for estate tax purposes.
50 1ST ADVICE: The proceeds of life insurance paid to the beneficiary upon the death of the insured
are exempt from income tax and need not be declared for income tax purposes.

PEREZ|PRUDENTE|SARANGAY|
2nd ADVICE: The proceeds of life insurance would have to be declared for estate tax purposes if
the designation of the beneficiary was irrevocable, otherwise it need not be declared.

A: B. 1st advice is CORRECT; 2nd advice is WRONG;

90. Mr. Uy requested you to prepare his income tax return. Among his receipts for the year
are the proceeds from a life insurance policy received from the estate of his deceased parents.
Evaluate the following advice:

1st advice: Include the insurance proceeds as part of the income tax reportable in the income tax
return.

2nd advice: Do not report the insurance proceeds in the income tax return because they are
subject to a final tax.
3rd advice: Exclude the life insurance proceeds from the gross income to be reported in the
income tax return.

A: D. Only the 3rd advice is VALID.

91. Which among the following is not excluded from gross income?

A: A. Life insurance proceeds received by a building contractor on the life insurance of his client to
secure payment for services rendered.

92. Benigno insured his own life for P1 M. he assigned the insurance to Aquino for valuable
consideration in the amount of P800,000.00. Benigno died and Aquino was able to collect the P1
M. Prior to Benignos death, Aquino, had in the meantime paid P50,000.00 insurance premiums
on the policy. What should be the income tax treatment of the P1 M life insurance proceeds
considering the above circumstances?

A: D. Aquino should report only P150,000.00 of the P1 M he received because the P850,000.00 is
considered as a return of investment.

93. Paquito insured his life for P1 M naming his son as his solitary beneficiary. When he died
and his son received the P1 M from the insurance company he was told that the life insurance
proceeds he received are considered excluded from gross income and not subject to income tax.
He does not want to get into trouble with the BIR so he comes to you as a tax consultant and asks
why life insurance proceeds are exempted from income taxation. What would you tell him?

A: C. They are considered merely as compensation for loss and they partake more of indemnity rather
than gain to the recipient.

94. Ellen insured the life of her father for P2 M paying a premium of P200,000.00. the term of
the insurance was for 20 years. Part of the agreement was for Ellen to be paid P2 M, in case her
father survives the 20-year period. Supposing Ellen gets the P2 M, how much would you be
excluded from her gross income?
51 A: A. P200,000.00

Any amount received by the insured as a return of premiums paid by her under life insurance, at
maturity of the term mentioned in the contract are excluded from gross income.

PEREZ|PRUDENTE|SARANGAY|
95. Crisostomo took out a life insurance policy for P1 M naming his wife as beneficiary. Under
the terms of the policy, the insurer will pay Crisostomo the amount of P1 M after the 20 th year of
the policy, and his beneficiaries, should she die before the date. Crisostomo outlived the policy
and received P1 M. The premiums paid on the policy was P250,000.00. Is the whole of the P 1 M
subject to tax?

A: No. The amount of P250,000.00 is excluded from gross income, hence not subject to tax because it is
the amount received by Crisostomo, as a return of premiums paid by him under a life insurance policy at
the maturity of the term mentioned in the contract. The premiums returned are not income but
return of capital. They represent the earnings which were previously taxed.

On the other hand, the amount of P750,000.00 is subject to tax because it represents income being
interest or earnings of the premium and not return of capital.

96. Born of poor family on February 14, 1954, Crisostomo worked his way through college.
After working for more than 12 years in Ellen Manufacturing Corp., Crisostomo decided to retire
and avail of the benefits under the very reasonable retirement plan maintained by his employer.
On the day of his retirement on April 30, 2008, his endowment insurance policy, for which he was
paying an annual premium of P1,520.00 since 1988 also matured. He was then paid the face
value of his insurance policy in the amount of P50,000.00. The amount which Crisostomo could
exclude from his gross income is:

A: B. P30,400.00

The amount of P30,400 is excluded from gross income, hence not subject to tax because it is the amount
received by Crisostomo, as a return of premiums paid by him under a life insurance policy at the
maturity of the term mentioned in the contract. The premiums returned are not income but return
of capital. They represent the earnings which were previously taxed.

On the other hand, the amount of P750,000.00 is subject to tax because it represents income being
interest or earnings of the premium and not return of capital.

97. Y, the wife of a deceased employee, received financial benefits voluntarily voted upon by
the BoD of the employer-company in recognition of her husbands long and loyal service and
primarily to help meet her financial needs. Explain whether or not Y is subject to income tax.

A: No, because there were no services rendered by Y. It could not also be considered as income of the
deceased employee because the giving was not in payment for services rendered. Since there is no
consideration given, it is a gift and not income.

98. X asked you to prepare his income tax return. Is he required to include as part of gross
income his promissory note amounting to P10,000.00 which was condoned by the creditor?

A: No. There is no showing in the facts that the condonation was in exchange of services rendered by X.
the condonation amounts to gift.

52 99. Osorio, bank executive, while playing golf with 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 Perezs 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 foreign importer.

PEREZ|PRUDENTE|SARANGAY|
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 as a business
expense.

The CIR included the fmv of the car as income of Osorio who protested that the car was a gift and
therefore excluded from income. Who is correct, the CIR or Osorio?

A: Osorio is correct. When the taxpayer receives a car from a corporation for furnishing the names of
potential customers, the same is a gift excluded from income taxation although the done claims the value
of the car as a deduction from gross income representing finders fee.

There is no income because there is no legal obligation on the part of Perez or his company to give the
car to Osorio.

100. Rodrigo, an 80-year old retired businessman, fell in love with 20-year old Tetchi Sonora, a
night club hospitality girl. Although she refused to marry him, she agreed to be his live-in
partner.

In gratitude, Rodrigo transferred to a condo unit, whereby they both live, under a deed of sale for
P10 M. Rodrigo paid the capital gains tax of 6% of P10 M.

The CIR found that the property was transferred to Tetchi Sonora by Rodrigo because of the
companionship she was providing him. Accordingly, the CIR made a determination that Sonora
had compensation income of P10 M in the year of the condo unit was transferred to her and
issued a deficiency income tax assessment.

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

A: Protest granted. There was no legally demandable obligation on the part of Sonora to get the condo
unit. This is because there was no consideration she gave to Rodrigo in exchange of the condo unit. The
giving stemmed from a pure act of liberality on the part of Rodrigo which is a gift excluded from gross
income.

101. Francisco borrowed P10,000.00 from Gutierrez payable in one year without interest.
When the loan became due, Francisco told Gutierrez that he was unable to pay because of
business reverses. Gutierrez took pity on Francisco and condoned the loan. Francisco was
solvent at the time he borrowed the P10,000.00 and at the time the loan was condoned. Did
Francisco derived any income from the cancellation of his indebtedness?

A: No. It is clear that the creditor Gutierrez merely desired to benefit the debtor, Francisco, and without
any consideration therefor cancelled the debt. The amount of the debt cancelled is a gift and not income.

53 102. X, multinational corporation doing business in the Philippines donated 100 shares of
stocks of said corporation to Y, its resident manager in the Philippines. Assuming the shares of
stocks were given to Y in consideration of his services to the corporation, what are the tax
implications?

PEREZ|PRUDENTE|SARANGAY|
A: The tax implications would be that the 100 shares of stock would be considered as donation because
there was no legally demandable obligation on the part of X to donate shares of stock to Y. Consequently,
X could not deduct the value of the shares of stock as a business expense. Neither could it deduct the
value of the shares as a charitable contribution.

103. 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 en pago a
property which had a fmv of P30,000.00. In the dacion en pago document, the balance of the debt
was condoned.

a. What is the effect of the discharge of the unpaid balance of the obligation on debtor
corporation?

b. Insofar as the creditor is concerned, how is she affected taxwise as a consequence of the
transaction?

A: a) The creditor of the corporation is deemed to have received a gift from its creditor to the extent of
the difference between the debt (P100,000.00) and the value of the property paid (P30,000.00) which is
P70,000.00. It is clear that the creditor merely desires to benefit the debtor corporation and without any
consideration therefor cancels the debt. Thus, the amount forgone which is P70,000.00 is considered a
gift and not to be reported as income in the debt or corporations return.
b) Since the P70,000.00 is considered a gift, the creditor shall be subject to the appropriate rate for
donors tax.

104. Spouses Jose Pedro and Clara 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 fmv of P2 M.
Are Maria and Mario subject to income tax for the value of the real property donated to them?

A: No. Donations are not considered as income subject to tax because they are excluded from gross
income.

105. Mia Corporation, a multinational corporation, doing business in the Philippines donated
100 shares of stock of said corporation to Therese, its resident manager in the Philippines.
Assuming that the shares of stocks were given to Therese in consideration of her services to the
corporation, what are the tax implications?

A: A. The value of the stocks forms part of Thereses compensation income.

The stocks were paid as a result of employee-employer relationship.

106. Tomas Lucero was the president of Ace Marketing Corporation, engaged in the marketing
of Toyota cars. When Luceros son got married to the daughter of a Congressman, the corporation
gave the newly-wedded couple a brand new Toyota Corona sedan, worth P2 M and entered the
wedding gift in its books as a representation expense. As a result of the above, the Toyota car is:

54 A: C. Not taxable income to the couple nor deductible expense of the corporation of the corporation.

PEREZ|PRUDENTE|SARANGAY|
The car is a gift which was given out of a pure act of liberality, which does not constitute a legally
demandable obligation, hence excluded from gross income. The value of the car is not allowed as a
deductible expense because it is not allowed as a deductible expense because it is not an ordinary and
necessary expenses, nor an allowable charitable contribution.

107. Are moral damages awarded a litigant for mental anguish an account of a libelous article
written about him taxable as income or not? Why?

A: Yes. Moral damages are taxable as income. Mental anguish is not physical injuries, therefore moral
damages awarded due to moral anguish are not excluded from income.

Amounts received as a compensation for personal injuries plus the amounts of any damages received on
account of such injuries are excluded from taxable income if the personal injuries are physical in
character.

Exclusions from taxable income are considered as exemptions from taxation, hence to be interpreted in
strictissimi juris against the taxpayer. The words personal injuries should be given a restrictive
meaning to refer only to physical injuries. This interpretation finds basis in NIRC 1997 refers to
Accident or Health Insurance or under Workmens Compensation Acts, both which refers to personal
injuries or sickness. This could only mean , physical injuries.

108. In a certain civil cases, the plaintiff was awarded damages by the court in the sum of
P20,000.00 representing profit he failed to realize on account of defendants failure to comply
with his obligation to the said plaintiff. Are those damages taxable income against him?

A: Yes, because damages which are excluded from gross income are only those that paid as a result of
injuries or sickness. Furthermore, since this is unearned income then he would have paid income taxes
on the income if he was not previously deprived of such income. It is only just upon recovery he should
pay income taxes on the same.

109. The widow and children of a passenger who died in an airplane crash were paid P1.2 M
by their airline. This figure was reached after negotiation between the heirs of the deceased and
the insurer of the airline, the latter having received indubitable evidence that the deceased had
a net income of P120,000.00 at the time of his death, and that 10 productive years would have
insured financial stability for his family. Should the heirs declare this amount in their income tax
returns?

A: No, the amount of P1.2 M should not be declared in their income tax returns. The amount represents
damages received on account of personal injuries (which include death), by agreement, hence to be
excluded from gross income. The reason for the exclusion is that the payment is mere compensation for
injuries suffered and not income. Furthermore, the amounts were not existing at the time of the death of
the decedent.

110. Accidents solely attributable to the criminal negligence of the driver of B Bus Company
resulted in the death of Xs wife, physical injuries to X that prevented him from working for a
month, and the total wreck of Xs brand new car which he had bought for P400,000.00.

55 In the action for damages awarded by X against B Bus Company, the Court awarded the following:
(a) P30,000.00 for Xs injuries consisting mainly in the loss of his right hand; (b) P25,000.00 for
Xs loss of one month salary; (c) P25,000.00 for the death of his wife and (d) P100,000.00 moral

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damages on account of such loss; (e) P800,000.00 for the loss of Xs car, the value of which had in
the meantime doubled the account of inflation.

How would you treat each income of the above items of damages for income tax purposes?

A: The amount of P30,000.00 for Xs injuries consisting in the loss of his right hand, P25,000.00 for the
death of his wife, and P100,000.00 moral damages arising from the death of Xs wife are all excluded
from gross income. They represent amounts of damages received by suit as compensation for injuries.
Consequently, such amounts are not considered as income.

The P800,000.00 is partly taxable. The first P400,000.00 representing the value of the damaged car is
not taxable because it is merely compensation or replacement of what X lost. Consequently, there is no
income. The increase in the value of the car in the amount of P400,000.00 is taxable income because it
was a damage payment arising from the destruction of the car and not from physical injuries arising
from sickness or accident.

The P25,000.00 compensation for unearned income resulting from personal injuries or illness are to be
excluded from gross income. The reason is that the NIRC does not distinguish with respect to the nature
of the damages received whether by suit or agreement.

111. Patrocolus was injured in vehicular accident in 2010. He incurred and paid medical
expenses of P10,000.00 and legal fees of P5,000.00 during that year. In 2012, he recovered
P35,000.00 as settlement from the insurance company which insured the car owned by the
owner party involved in the accident. From the above payments and transactions, the amount
taxable to Patrocolus in 2012 is:

A: E. None of the above.

All of the recovered amounts are not income because they are merely compensation for actual losses
suffered. They do not constitute taxable gain as they were not received as payment for services, interest
or profit from investment.

112. Infant 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, P60,000.00 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. How much income did he realize when
he collected on the judgment? Explain.

A: NONE. All of the receipts are excluded from gross income. They represent amounts of damages
received by suit as compensation for injuries. Consequently, such amounts are not considered as
income.

113. 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
56 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?

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A: None of the foregoing awards are taxable. All of the awards are excluded from gross income. They
represent amounts of damages received by suit as compensation for injuries. Consequently, such
amounts are not considered as income that should be taxed.

114. 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: (a) P500,000.00 for his hospitalization; (b) P250,000.00 as moral
damages; and (c) 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 for his earned vacation, and sick leaves.

Which, if any, of the amounts he received are subject to income tax?

A: The portion of the P200,000.00 which exceeds the monetized equivalent of 10 days unutilized
vacation and sick leave credits.

The P300,000.00 is subject to tax because it is merely a replace of income which should have been
subjected to tax if earned.

All of the other receipts are excluded from gross income. They represent amounts of damages received
by suit as compensation for injuries. Consequently, such amounts are not considered as income.

115. Antonia Santos, 30 years old, gainfully employed, is the sister of Eduardo Santos. She died
in an airplane crash. Eduardo 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 M. This is what
Antonio would have earned as somebody who was gainfully employed. Eduardo was her only
heir. Should Eduardo report the P10 M as his income being Antonios only heir?

A: No. They represent amounts of damages received by Eduardo as compensation for Antonias death as
a result of the plane crash. Consequently, such amounts are not considered income that should be taxed.

116. RSV was retired by his employer corporation in 2012 and paid P100,000.00 as retirement
gratuity without any deduction of withholding tax. The corporation subsequently became
bankrupt. Can the BIR subject the P100,000.00 retirement gratuity to income tax?

A: No. It is clear that RSV was retired by his employer. The only conclusion that could be drawn is that he
was separated beyond his control. Thus, the retirement gratuity he received is excluded from gross
income and not subject to income tax.

117. Romulus, 48-years old and a retired employee had among his properties and transactions
at the end of the 2012 taxable year:

Retirement benefits in the amount of P200,000.00 received by him in 2012 under a qualified
retirement plan maintained by his former employer company. Romulus voluntarily retired after
20 years of service.
57
Is the above item subject to the regular tax rates found in the schedule under Section 24 (A) of
the NIRC, which states that tax rates on citizens and residents?

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A: Yes, because it is not among excluded incomes. There is no showing that Romulus retirement was
compulsory, hence it could not be said that his separation was beyond his control. The amount of
P200,000.00 could not also be considered as tax-exempt retirement because Romulus is only 48 years
old which is below 50 years. Neither is there statement in the facts that he has worked for the same
employer for at least 10 years or that he has not previously enjoyed tax-free retirement benefits.

118. Retiree from AG & P receiving retirement benefits from the company retirement plan,
qualified by the BIR.

A: The retirement benefits would be subject to tax because there is no showing that the retiree is
qualified tax-free retiree. The problem does not show that the retiree is above 50 years, that he has
served his employer for more than 10 years and that he has not previously availed of tax-free
retirement. Furthermore, there is no showing that the separation through retirement was beyond
retirees control.

119. A worked for Z from 1980-2010. Beginning 2013, As employment was terminated as he
could no longer perform his duties. A was informed by Z that he will get his pension of P5,000.00
a month for the rest of his life. Z has neither a standardized pension plan nor a qualified pension
plan. As pension was paid from Zs operating revenues and Z deducted the payments as
necessary and ordinary business expense. On the part of A, must he treat his pension as income?

A: No, because they are amounts received by A from his employer as a consequence of his termination
from service for a cause beyond his control. The pension is excluded from gross income.

120. Born of poor family on February 14, 1965, Mario worked his way through college. After
working for more than 12 years in X Corp., Mario decided to retire and avail of the benefits under
the very reasonable retirement plan maintained by his employer. On the day of his retirement on
April 30, 2008, he received P400,000.00 as retirement benefit. Is the P400,000.00 retirement
benefit subject to income tax?

A: Yes, because he was only 48 years old at the time of his retirement. For the retirement to be excluded
from the gross income, hence not subject to tax, the retiree must be above 50 years old.

121. Pedro Reyes, an official of X Corporation, asked for an earlier retirement because he was
emigrating to Australia. He was paid P2 M as separation pay in recognition of his valuable
services to the corporation.

Juan Cruz, another official of the same company, was separated for occupying a redundant
position. He was given P1 M as separation pay.

Jose Bautista was separated due to his failing eyesight. He was given P500,000.00 as separation
pay.

Rule whether each of the separation pay is subject to tax.

A: PR Yes. The voluntary action on the part of Reyes is not considered as a cause beyond his control
58 hence, the separation pay is not excluded from the gross income. It is included for tax purposes. He does
not qualify for tax-free retirement because there is no showing in the facts that he is 50 years or over,
that he has rendered at least 10 years of service with X Corp., ans that he has not previously availed of
the tax-free retirement.

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JC No, because Cruz was separated for a reason beyond his control as a result of redundancy.

JB No, because Bautista was separated due to a failing eyesight, a cause beyond his control.

122. Jacobo worked for a manufacturing firm. Due to business reverses the firm offered a
voluntary redundancy program in order to reduce overheard expenses. Under the program, an
employee who offered to resign would be given a separation pay equivalent to his three months
basic salary for every year of service. 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 overheard still
excessive. Hence, it adopted another redundancy program. Various unprofitable departments
were closed. Kintanar was separated from the service. He also received P400,000.00 as
separation pay.

Did they derive income when they received their separation pay?

A: J Yes, Jacobo voluntarily resigned hence the separation pay he received, not being a cause beyond
his control, is not excluded from gross income. Furthermore, the separation pay is not also considered as
tax-free retirement because there is no showing that he is 50 years or oever, that he has rendered at
least 10 years service with his employer, and he has not previously availed of the retirement benefit.

K No, because Kintanar was separated for reason beyond his control which is redundancy. The amount
he received is excluded from gross income hence, not taxable.

123. X, an employee of ABC Corporation, died. ABC Corp. gave Xs widow an amount equivalent
to Xs salary for one year. Is the amount considered taxable income to the widow? Why?

A: No, because it is among the exclusions from gross income.

The amount received by the heirs of an employee as a consequence of separation of such employee
from the service of the employer because of death is excluded from gross income. The money given
to Xs heir, his widow because Xs death the amount is not income.

124. Company A decides to close its operation due to continuing losses and to
terminate the services of its employees. Under the Labor Code, employees who are separated
from the service for such cause are entitled to a minimum of one-half month pay for every
year of service and the cash equivalent of unused vacation and sick leaves as separation
benefits. Are such benefits taxable?

A: No. The benefits are not taxable. The separation, due to the economic situation, is one which is
beyond the control the employees, hence excluded from gross income and not subject to income
taxation.

59 125. Maribel Santos, a retired public school teacher, relies on her pension from the
GSIS and the interest income form a time deposit of P500,000.00 with ABC Bank. Is Miss
Santos liable to pay any tax on her income?

A: Her pension is not subject to tax as it is an exclusion from income.

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126. 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?

A: Yes. Javier does not have any income which is required to be reported in the income tax return.
His pension is not subject to tax as it is an exclusion from income.

127. Z is a Filipino immigrant living in the IS 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 there for about a month. He regularly receives pension from his former employer in the
US, amounting to US $1,000.00 a month. While in the Philippines, with his pension pay from
his former employer, he purchased 3 condo units for P15,000.00 a month each. Does the US
$1,000.00 pension became taxable because he is now residing in the Philippines.

A: No, the provisions of any existing law to the contrary notwithstanding, social security benefits,
retirement gratuities, pensions and other similar benefits received by a resident citizens of the
Philippines, such as Z, from a foreign private institutions, is excluded from income taxation.

128. Evelyn is a graduate student of UP. In January 2012, she won the Planca Award for
an outstanding short story wrote. The award was P25,000.00 in cash. In February 2012, she
was also named MVP of Varsity volleyball and she was given a trophy plus P10,000.00.
Finally, in March 2012, she received a Fellowship Award from the University of California to
pursue a masters degree in American literature. The fellowship is for $10,000.00 plus free
board and lodging for 2 semesters. Should Evelyn include these awards and fellowship in her
gross income?

A: No, all of the awards and monetary value of her fellowship are excluded from her gross income.

The awards were made primarily in recognition of her educational and literarily achievements.
There is no showing in the problem that Evelyn was selected due to any action on her part to join
the contest, and that she is required to render substantial future services as a condition to receiving
the prize or award.

129. Jose Miranda, a young artist and designer, receive a prize of P100,000.00 for
winning in the on-the-spot peace poster contest sponsored by a local Lions Club. Shall the
award be included in the gross income of the recipient for tax purposes?

A: Yes, it is apparent from the nature of an on-the-spot peace poster contest that there was action on
participants part to enter the contest hence, the prize is not excluded from income taxation.

130. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup
Boxing Council, a sport association duly accredited by the Philippine Boxing Association.
Onyoc received the amount of P500,000.00 as his prize which was donated by Ayala Land
60 Corporation. The BIR tried to collect income tax on the amount received by Onyoc who
refuses to pay. Decide.

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A: The P500,000.00 prize is subject to tax. The prize was granted to Onyoc, an athlete, in a local or
international sport tournament, but there is no showing in the problem that the PBA, is the national
sports associations for boxing, duly accredited by the Philippine Olympic Committee.

61

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Volume II-B
Income Taxation
1. Which of the followings is not a characteristic of a deduction?

a. It is a reduction of wealth that helped earn the income subject to tax.


b. An immunity or privilege, a freedom from a charge or burden to which others are
subjected.
c. It is not a receipt.
d. It is a subtraction to arrive at an income subject to tax.

A: B. B is a characteristic of an exemption

2. Which of the following is true?

I. Deductions are reductions of wealth which helped earn the income subject to tax.
II. Deductions are generally receipts.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

A: Deductions are not receipts, but are generally expenditures which are permitted to be subtracted
from income in order to determine the amount subject to tax.

3. The concept of deductions from gross income does not include one of the following:

a. They are subtractions from gross income.


b. They are reductions of wealth which helped earn the income subject to tax.
c. They are generally receipts which are excluded from income.
d. They are allowed by law to be deducted from gross income.

A: C. Items a, b and d are all descriptive of the concept of deductions. Item c is descriptive of exclusions
from gross income because deductions are not receipts but are generally expenditures which are
permitted by law to be subtracted from gross income to determine the amount subject to tax.

4. A deduction from gross income is

a. An immunity or privilege, a freedom from a charge or burden to which others are


subjected;
b. A reduction to of wealth of the taxpayer, other than personal expenses and capital
expenditures, used in earning the income;
c. A subtraction;
62 d. Interpreted strictly against the taxpayer.

A: Item A refers to a tax exemption rather than a deduction which is a subtraction from gross income.

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5. Which of the following deductions are allowed from the compensation income of resident
citizens derived from sources within and without the Philippines.

I. Personal and additional exemptions


II. Premiums for health and hospitalization insurance
III. Optional standard deductions
IV. Depreciation on the family car

a. I, II, III and IV


b. I, II and III
c. I, II and IV
d. I and II

A: The only deductions allowed from compensation income are personal and additional exemptions and
the premiums for health and hospitalization insurance.

6. Who among the following taxpayers are not allowed any deductions whatsoever?

a. Resident citizen employed by a regional or area headquarters of a multinational


corporation in the Philippines receiving compensation from such corporation
b. Resident alien on his income from Philippine sources.
c. Nonresident alien engaged in trade or business in the Philippines on his income from within
d. Nonresident citizen on his rental income derived from Philippine sources

A: A. The resident citizen is subject to a tax equal to 15% of the gross income derived from his salary as
an employee of a regional or area headquarter of a multinational corporation in the Philippines.

7. 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:

a. Is deductible from the gross income of the corporation, despite non-withholding of income
tax by the corporation
b. Is deductible from gross income of the corporation, provided that 5% expanded withholding tax
is paid by the corporation during the audit
c. Is not deducted 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.

A: B.

8. Consider the following statements in relation to the deductibility of ordinary and


necessary expenses from a taxpayers income derived solely from trade or business:

I. There must be a specific provision of law allowing the deductions, since deductions do
63 not exist by implication.
II. The deductions must not have been waived.
III. The withholding and payment of the tax on the expenditure need not be shown.

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a. I, II and III are all correct
b. Only I is not correct
c. Only II is correct
d. Only I and II are correct

A: A. The required withholding and payment of the tax on the expenditure must be shown.

9. To be allowed as deductible from gross income the expense must comply with the
following requirements:
a. It must be paid or incurred within the taxable year.
b. The expense must be ordinary and necessary.
c. It must meet the business test rule and be paid or incurred in carrying on a trade or business
d. The substantiation rule need not be complied with.

Which of the above statements is not correct?

A: D. For an expense to be deductible, the substantiation rule must be complied through substantially
proving by evidence or records the deductions claimed under the law. Otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does
not justify its deduction.

10. Marcos is an independent travelling salesman, deriving his income solely from
commissions, and personally bearing all expenses without reimbursement of any kind. During
the taxable year 2012 arcos incurred the following expenses pertaining directly to his activities
as an independent travelling salesman:

Travelling expenses P 650, 000


Secretarial expenses 250, 000
Long-distance telephone bills 150, 000
Freight expenses for products sold 300, 000
Insurance for products transported 50, 000
Life Insurance premiums 5, 000
Doctors fees he incurred while he
Was on one of his sales trips 15, 000

What amount could Marcos deduct from his gross income?

a. P1, 440, 000


b. P20, 000
c. P1, 150, 000
d. P1, 400, 000

A: D. The expenditures for travelling expenses, secretarial expenses, long-distance telephone bills,
freight expenses for products sold, and insurance for products sold amounting to a total of P1, 400, 000
are ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which
are directly attributable to the development, management, operation and/or conduct of Marcos trade,
64 or business as an independent travelling salesman. They are thus, allowed as deductions from gross
income.

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The payment for life insurance premiums, and doctors fees amounting to a total of P20, 000 are non-
deductible personal expenses.

11. X is the Advertising Manager of Mang Douglas Hamburger, Inc. X had dinner wth Y, owner
of a chain of restaurants, to convince the latter to carry Mang Douglas hamburger. After Y
agreed, both W 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 am. 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. as an ordinary and necessary expense.

A: No. Mang Donald Hamburger, Inc. cannot claim the amount of P50, 000. 00 as ordinary and necessary
expense. The amount is a personal liability of X, and incurring the same as a result of the accident is not
directly related to the active conduct of Mang Douglas Hamburger, Inc.s trade or business.

12. Eddie is the Advertising Manager of Garcie, Inc. Eddie had dinner with Mike, owner of a
chain of restaurants, to convince the latter to carry Garcie, Incs meat products. After Mike
agreed, both Eddie and Mike went their separate ways. Eddie celebrated by going to a singles
bar. He picked up a partner and consumed a bottle of beer. He drove home at 3:00 AM. On his
way, he sideswiped a pedestrian who died as a result of the accident. Eddie settled the case
extrajudicially by paying the heirs of the pedestrian P50, 000.00

The money, however, came from Garcie, Inc.

Given the above situation, comment on the following statements:


I. Garcie, Inc. may deduct the P50, 000.00 as part of its ordinary and necessary expenses.
II. Eddie, being the Advertising Manager, may deduct the P50,000.00 in his income tax
return because the same was incurred as a result of his employment with Garcie, Inc.
a. Only I is correct
b. Only II is correct
c. Both I and II are correct
d. Neither I nor II is correct

A: D. I is not correct. Garcie, Inc. cannot claim the amount of P50, 000.00 as ordinary and necessary
expense. The amount is a personal liability of Eddie, and incurring the same as a result of the accident is
not directly related to the active conduct of Garcie, Inc.s trade or business.

II is not also correct. Eddie, being the Advertising Manager of Garcie, Inc. an employee, who earns
compensation income arising from personal services rendered under an employer-employee
relationship is not allowed deductions, other than the personal and additional exemptions and
premiums on health and hospitalization insurance of an individual taxpayer, in computing taxable
income subject to income tax

13. Corporation X sold one of its parcels of land and realized a profit therefrom. A portion
of this profit was given as bonuses or allowances to the corporate officers as authorized by its by-
laws. Are the said bonuses or allowances deductible expenses from the gross income of the
65 corporation?

A: Yes. Up to the extent that they are not excessive and are not considered as dividends.

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14. X was the President of a highly profitable corporation which was engaged in the
marketing of Mercedes Benz. When Xs daughter got married to the son of a Congressman, the
corporation gave the newly-wedded couple a brand-new Mercedes Benz Sedan worth P8, 000,
000.00 and entered the wedding gift in its books as an advertising expense.

Is the value of the Mercedes Benz taxable income to the couple? For income tax purposes, will
you allow the deduction by the corporation of the supposed advertising expense? If not, how will
you treat the corporate expense, and what would be the tax liability of the corporation? Explain
each answer briefly.

A: No. The value of the Mercedes Benz could not be treated as income because it did not result from
services, use of capital or other property, or disposition of capital assets. It is property treated as a
donation and excluded from the couples gross income.

No. I will treat the same as a donation subject to donors tax. The value could not be deducted as an
expense because the giving is not related to the actual conduct of the corporations trade or business. It
arose out of pure liberality. Consequently, it is subject to donors tax.

15. Despite various financial setbacks and heavy losses, Manila Financing Corporation
granted Christmas bonuses of P100, 000.00 each to its employees with an annual salary of more
than P180, 000. 00 and P150, 000.00 to those receiving less than P180, 000 per annum. Said
bonuses amounted to P8, 600, 000.00 which it listed as deduction from its income for the tax
year of 2012. Rule on the legality of said deduction.

A: The bonuses amounting to P8, 600, 000.00 are not deductible from corporations income because the
bonuses when added to the salaries are not reasonable when measured by the amount of the services
performed by the employees specially considering the financial problems of the corporation.

Note part of answer: In commenting on the practice of granting substantial bonuses to officers who are
paid low salaries, the Supreme Court said, While we are not prepared to hold such policy unreasonable,
still we believe that its application should not result in producing a net loss by the employer at the end
of the year; for if that were to be the case, the scheme may be utilized to freely achieve some other
purpose evade payment of taxes.

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

A: I would resolve the issue in favor of the government and disallow the P75 Million bonus. The bonus is
66
not reasonable considering that the corporation despite suffering from a net operating loss still declared
the 14th month bonus. It is clear that the purpose of declaring the P75 Million bonus was to evade the
corporate taxes from Gold and Silver Corporation.

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17. Corporation X sold some of its shares of stock, from which it realized a profit
therefrom. A reasonable portion of this profit was given as bonuses or allowances to the
corporate officers as authorized by its by-laws. The bonuses were given because it was through
the efforts of the corporate officers that induced investors and prominent businessmen to
venture in Corporation Xs business which is experimental in nature and required million of
pesos.

I. The bonuses and allowance are deductible from gross income as ordinary and necessary
expenses
II. The bonuses and allowances are disguised dividends which are not allowed to be
deductible from gross income.

a. Only I is correct
b. Only II is correct
c. Both I and II are correct
d. Neither I nor II us correct

A: A. In Commissioner of Internal Revenue v. Algue, Inc. et al., 158 SCRA 9, at 15, 16, the payment was
considered as compensation and deductible because the payment of the fees to the
stockholders/directors was necessary and reasonable in the light of the efforts they exerted in inducing
investors and prominent businessmen to venture in an experimental enterprise and involve themselves
in a new business requiring millions of pesos. This was no mean feat for which they should be
sufficiently compensated.

18. Corporation X sold one of its parcels of land, from which it realized a profit therefrom.
A portion of this profit was given as bonuses or allowances to the corporate officers as
authorized by its by-laws.

I. The bonuses and allowances are deductible from gross income as ordinary and necessary
expenses.
II. The bonuses and allowanced are disguised dividends which are not allowed to be
deductible from gross income.

a. Only I is correct
b. Only II is correct
c. Both I and II are correct
d. Neither I nor II is correct

A: B. The bonuses and allowances are disguised dividends which are not deductible from gross income.
In Aguinaldo Industries Corporation, Fishing Nets Division v. Commissioner of Internal Revenue, et. al., L-
29790, February 25, 1982. In Aguinaldo, the portion of the profits from the sale of a parcel of land, given
as bonuses or allowances to corporate officers, as authorized under the by-laws, were disallowed as
deductible expense. This is so, because there was no evidence of any service actually rendered by the
corporate officers which could be the basis of a grant to them of a bonus. The amounts distributed are
but profits derived from the aforesaid parcel of land.
67
19. Despite various financial setbacks and heavy losses, Manila Financing Corporation
granted Christmas bonuses of P100,000.00 each to its employees with a annual salary of more
than P180, 000.00 and P150, 000.00 to those receiving less than P180, 000.00 per annum. Said

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bonuses amounted to P8, 600, 000.00 which it listed as deduction from its income for the taxable
year of 2005.

I. The bonuses are allowed to be deducted as ordinary and necessary expenses.


II. The bonuses are not deductible from the gross income of the corporation.
III. The bonuses are allowed to be deductible only if the proper withholding taxes were made
at the time they were paid to the employees.

a. Only I is correct
b. Only II is correct
c. Only I and III are correct
d. Only III is correct

A: B. The bonuses amounting to P8, 600,000.00 are not deductible from the corporations income
because the bonuses when added to the salaries are not reasonable when measured by the amount of
the services performed by the employees especially considering the financial problems of the
corporation.

In commenting on the practice of granting substantial bonuses to officers who are paid low salaries, the
Supreme Court said, While we are not prepared to hold such policy unreasonable, still we believe that
its application should not result in producing a net loss by the employer at the end of the year for if that
were to be the case, the scheme may be utilized to freely achieve some other purpose evade payment
of taxes.

20. Ping was the President of a highly profitable corporation which engaged in the
marketing of Mercedes Benz. When Pings daughter got married to the son of a Congressman, the
corporation gave the newly-wedded couple a brand-new Mercedes Benz Sedan worth P500, 000,
000. 00 and entered the wedding gift in its books as an advertising expense.

I. The value of the Mercedes Benz Sedan is taxable income to the spouses.
II. For income tax purposes, the corporation is not allowed to deduct the value of the
Mercedes Benz Sedan as advertising expense.

a. Only I is correct
b. Only II is correct
c. Both I and II are correct
d. Neither I nor II is correct

A: B. Only II is correct. Advertising expenses stimulate the current sale of merchandise or use of services
and therefore deductible as ordinary and necessary expenses. The value of the Mercedes Benz Sedan is
not used to stimulate sales of the recedes Benz Sedans but an act of pure liberality to the newly weds.
Thus, not deductible as advertising expenses.

68 I is not correct. The value of the Mercedes Benz could not be treated as income because it did not result
from services, use of capital or other property, or disposition of capital assets. It is property treated as a
donation and excluded from the couples gross income.

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21. A doctor has the following items of expenditure for the taxable year:

a) House rent
b) Office rent
c) Medical supplies
d) Telephone in the office
e) Assistant nurse in the office
f) Yearly dues of the Philippine Medical Association
g) Subscriptions to medical journal
h) New typewriter for the office
i) Gasoline and minor repair expense for his car which he uses more for his profession than
for personal use.
j) Tuition fees for the studies of his children
k) Donation to the Philippine National Red Cross
l) Traveling expenses incurred by him and his wife during a trip to the United States where
he attended a medical convention as a Philippine representative. His wife accompanied him and
took advantage of the occasion to visit her relatives.

State which of the above items are fully or partially deductible and explain your answers.

A: The following expenses are not deductible: House rent, tuition fees for the studies of his children, and
traveling expenses incurred by his wife during a trip to the United States as these are all part of his
personal, living or family expenses.

The following expenses are fully deductible: Yearly dues to the Philippine Medical Association,
subscriptions to the medical journal, gasoline and minor expenses for his car, the donation to the
Philippine National Red Cross, office rental, medical supplies, telephone expenses, and salary of the
assistant nurse in the office are part of the items which are recognized as deductible being directly
attributable to the exercise of the doctors profession.

Finally, the expense for the purchase of the new typewriter for the office could only be partially
deductible through depreciation expenses because the total cost of the typewriter would help in earning
income for the doctor not only for the taxable year but for the succeeding taxable years as well.

22. Maximus is in the business of managing movie stars. One of his clients is Claudia, a movie
actress who recently signed for a prospective blockbuster movie. On this contract, Claudia will
earn P600, 000.00 of which amount Maximus will be entitled to P150, 000.00 pursuant to the
management contract between him and Claudia. The shooting of the film will start three months
from the signing of the contract. To celebrate her new movie contract, Claudia went on a buying
spree, purchasing personal items for herself and her friends. Claudia managed to accumulate
debts in the amount of P120, 000.00 during this period and her creditors are threatening to sue
her. If sued, Claudia may not be allowed to continue with the movie because of the bad publicity.
Maximus, therefore, decided to pay the creditors out of his own pocket.

During the three-month period prior to the start of the shooting of the film, Maximus also hired a
69 car and driver for the use of Claudia and her friends. Maximus decided to hire the car and driver
to keep Claudia safe from harm during her outings with friends, thus preventing any incident
which might result in her not being able to star in the movie. The cost of Maximus of this car and
driver is P5,000.00 a month for three months.

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What are the tax consequences to Maximus and to Claudia of these events during the taxable
year?

A: The tax consequences of the outlays of Claudia and Maximus are the following:

The P20, 000.00 paid by Maximus to Claudias creditors for the purchase of personal items are not
deductible as expenses by Maximus because the expenses are considered as part of Claudias personal
and living expenses. Claudia could not also deduct the same from her gross income for the same reason.

Maximus could deduct the cost of the car and driver as these are considered as ordinary and necessary
expenses which are directly attributable to the conduct of the business of Maximus.

23. Atty. Romeo Acuna, a law practitioner in one of the prestigious law firms in Makati,
incurred the following expenses in 2012. Decide with reasons whether or not the following
expenses can be claimed as deductions from his income.

a) Club dues and expenses amounting to P20, 000.00 at the Ritz, an exclusive business club,
where he normally entertains his clients.
b) A 2012 Mitsubishi Galant dubbed as Car of the Year, recently purchased for P1, 800,
000.00 which he uses exclusively in his work as a lawyer. He has another car, a Mercedes Benz
for his personal and family use.
c) Expenses for attending the Asean Lawyers conference in Hong Kong amounting to P35,
000.00 for plane fare and hotel expenses.

A: a) Atty. Acuna could claim as deduction entertainment, amusement and recreation expense only in
the amount of the club dues and expenses which does not exceed one percent (1%) of his net revenues
derived from the exercise of his profession.

b) The value of the 2012 Mitsubishi Galant, although used exclusively for Atty. Acunas work as a lawyer
could not be deducted as ordinary and necessary expenses because the expense is considered as a
capital expenditure. The value of the car could be subjected to deductions for depreciation. The value of
the Mercedes Benz is not deductible whether it is an ordinary and necessary expense nor be subject to
depreciation because it is for personal and family use.

c) The convention expenses including the plane fare and hotel expenses are allowed as deductions
being ordinary and necessary expenses in the furtherance of the practice of the profession.

24. TP, a practicing physician, owns a car which he uses exclusively in his medical practice.
He also spends for the drivers salary, gasoline, oil and maintenance. In the taxable year in
question, he had the upholstery done and the body repainted which would last for 3 years. While
responding to a medical call, his medical kit, with some cash were stolen from his car. His bad
luck continued when his wallet was stolen while he was unwinding in a disco joint. He deducted
all these expenses, supported by receipts, in his annual income tax return.
70
Enumerate which of these expenses are allowable as deductions and which are not. Explain.

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A: Dr. TP is allowed to deduct all of the expenses except the cost of the upholstery and the body repaint
maybe included in the cost of his car to be depreciated. This is not to be allowed in full because it is a
capital expenditure which prolongs the life of a asset.
25. PL, a medical doctor with a clinic in Makati, MM, expects to derive the following revenues
in 2012. (1) P50, 000.00 cash dividends from San Miguel Corporation; (2) P20, 000.00 from Rex
Publishing Corporation as royalty for a medical textbook that PL authored; (3) P400, 000.00
doctors fees for professional services; (4) P100, 000.00 gift from his mother; and (5) P50,000.00
winnings from the casino. On the other hand, PL anticipates the following disbursements, among
others, in 2012 (1) P50, 000.00 donation to the University of the Philippines to fund a
professional chair in the College of Medicine; (2) P10, 000.00 paid to a police officer who asked
for representation expenses in order to investigate a robbery committed in the clinic of PL; (3)
P150, 000.00 in rent, salaries and other legitimate operating expenses incurred in running the
clinic; and (4) P75, 000.00 losses in horse-racing.
a) Are the foregoing revenues of PL to be included in his 2012 gross income for income tax
purposes?
b) Are the foregoing disbursements deductible from PLs 2012 gross income? Explain.
A: Only item no. 3, the P400, 000.00 doctors feed for professional services should form part of Dr. PLs
2012 gross income as it was derived from the practice of his profession.

The following items do not form part of his gross income: Item no. 1, the P50, 000.00 cash dividends,
item no. 2, the P20, 000.00 royalty, and the P50, 000.00 casino winnings should not be included as part
of Dr. PLs gross income because they were not derived from the exercise of Dr. PLs profession. These
are subject to final taxes. Item no. 4, the P1, 000, 000.00 gift from his mother is not income hence
excluded in accordance with par. 1, Sec. 3, Rev. Regs. No. 2-93 in relation to Sec. 32 (B) {3}, NIRC of 1997
which excludes gifts from gross income.

The following disbursements are allowed to be deducted from Dr. PLs 2012 gross income:

b) Item no. 1, the P50, 000.00 donation to the University of the Philippines. A professional is allowed to
deduct contributions made to the Government. {NIRC of 1997, Sec. 34 (H) (@) (a)} The term
Government, includes state colleges and universities.

Item no. 3, the P150, 000.00 rent, salaries and other legitimate expenses in running the clinic are
properly deductible as ordinary and necessary expenses directly attributable to the exercise of the
profession.

The non-deductible expenses are the representation expenses and ambling losses. The representation
expenses may be considered as bribes which are not deductible. On the other hand, gambling losses are
not included as among the expenses deductible under the NIRC. Since deductions are considered as tax
exemptions, they must be construed strictly against the taxpayer who must point to a specific provision
allowing him to deduct the expense.

26. 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.
71
A: Only the premium paid for malpractice insurance. This is an expense which is directly attributable to
law practice. The Supreme Court fees and the review fees were paid before engaging in the practice of
law, and not during the practice of law hence, not deductible. They may however be considered as

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capital expenditures subject to amortization. Under the circumstances, the entertainment fee is illegal,
hence, not deductible.

27. Which of the following is a deductible expense for income tax purposes?

a.) Interest paid on delinquent business taxes


b.) Provision for doubtful accounts
c.) Ordinary repair for personal car
d.) Salaries of domestic servants

A: A.

28. GrandPhil Corporation issued some preferred shares with the following condition: The
corporation shall have the option to redeem these preferred shares in whole or in part at any
time. Pursuant to the terms of the preferred shares, GrandPhil in 2012 paid to the holders of the
preferred shares interest on their shares totaling P100, 000.00. In turn, in its income tax return
for the same year, GrandPhil deducted the said P100, 000.00. Is this deduction proper?

29. A Co., a Philippine corporation, issued preferred shares of stock with the following
features:

a. Non-voting
b. 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
c. 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.
d. 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.

A: The dividends are not interests considered as deductible expense.

30. GrandPhil Corporation issued some preferred shared with the following condition: The
corporation shall have the option to redeem these preferred shares in whole or in part at any
time. Pursuant to the terms of the preferred shares, GrandPhil in 2008 paid to the holders of the
preferred shares interest on their shares totaling P100, 000.00. In turn, in its income tax return
for the same year, GrandPhil deducted the said P100, 000.00.

I. The interest is deductible but reduced up to the extent of 38% of interest income.
II. The interest is not deductible
72 III. The interest is deductible in full

a. Only I is correct

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b. Only II is correct
c. Both I and III are wrong
d. Only III is correct.

A: B

31. A Co., a Philippine corporation, issued preferred shares of stock with the following
features:

I. Non-voting
II. 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
III. 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
IV. 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.

a. The BIR is correct


b. A Co., is correct
c. Both are wrong
d. Both are correct
A: A

32. In 2012, Sam Corporation incurred interest expense amounting to P500, 000 on
indebtedness used to acquire capital equipment or machinery. Assuming that for the same
period Sam Corporation did not have any interest income, the interest may be

I. Allowed as deducted from gross income


II. Treated as a capital expenditure
III. Only I is correct
IV. Only II is correct
V. Both I and II are correct
VI. Neither I nor II is correct

A: C.

Explanation not part of the answer: Both I and II are correct. At the option of the taxpayer, the interest
incurred to acquire property used in trade, business or exercise of a profession may be allowed as a
deduction or treated as a capital expenditure.

33. The interest expense of a domestic corporation on a bank loan in connection with the
73
purchase of a production equipment:

a) Is not deductible from gross income of the borrower corporation

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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 the date of purchase
d) Is deductible only if the taxpayer uses the cash method of accounting

A: B.

34. Ernie owns two residences. The second residence, which is being rented out for
P1.5million a year is the sole source of income for Ernie. The tenant pays for the rental in
advance, which Ernie deposits. In 2012, he earned P175, 000.00 interest from 2012 advance
rentals which he placed in the money market. Among the items of expenditure which Ernie
incurred in 2012 are the following:

Interests on the mortgage of the rental property P250, 000


Annual life insurance premiums on the rental property 50, 000
Repairs and maintenance 75, 000
Value of a painting he placed on a temporary basis
on the rented property 625, 000

The amount that Ernie could deduct from his income tax return is

a. P1, 000, 000


b. P375, 000
c. P316, 750
d. P933, 500

A: C

Interest expense: P250, 000

Less: 33% of interest income

(P175,000 x 33%) 58,250 P191, 750

Insurance premium 50, 000

Repairs and maintenance 75, 000

Total deductible P316, 750

The allowable deduction have been reduced, effective January 1, 2009, by an amount equal to 33% of the
interest income subject to final tax. (NIRC of 1997, Sec. 34 (B) (1), as amended by Rep. 6337}

The value of the painting is not a deductible expense because it is a purchase of a capital asset. The only
74 deductions allowed, aside from the adjusted interest expense, are the insurance premium and repairs
and maintenance because they are considered as ordinary and necessary expenses.

35. Pursuant to the National Internal Revenue Code interest to be deductible, it must comply
with certain requirements. Which of the following is not one of the requirements?

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a. The interest expense paid or incurred upon an indebtedness of the taxpayer connected with
this taxpayers trade, business or exercise of profession.
b. The interest expense must have been paid or incurred during the taxable year.
c. The interest must have been stipulated in writing and must be legally due.
d. There is no limitation on the deduction provided it is substantiated.

A: D. The interest expense must be within the allowable limitation. The allowable deduction have been
reduced, effective January 1, 2009, by an amount equal to 33% of the interest income subject to final tax.
{NIRC of 1997, Sec. 34 (B) (1), as amended by Rep. 6337]

36. In 2012, Bulusan Corporation was assessed deficiency income taxes with penalties on its
2010 income which it immediately paid. It was likewise assessed deficiency VAT, excise and
other business taxes also for the same year for its 2005 operations. The deficiency payments are
as follows:

Interest for deficiency income tax 30, 000. 00

Interest on deficiency VAT

Excise and other taxes 50, 000.00

Bulusan Corporations interest income, subjected to final tax in 2010 amounted to P100, 000.00.
Assuming that the above interest payments were the only interests paid or accrued by the
corporation, how much interest is it allowed to deduct from its 2010 income

a. P80, 000.00
b. 38, 000.00
c. P50, 000.00
d. P12, 000.00

A: C. The interest incurred or paid by the taxpayer on all unpaid business related expense shall be fully
deductible from gross income and shall not be subject to the limitation of 33% of the interest income
subject to final tax. [NIRC of 1997, Sec. 34 (B) (1), as amended by Rep. Act No. 9337)

37. In 2012, Delgado, a practicing CPA, paid the following taxes:

Real property taxes on his residence P15, 000

Special assessment for the paving of the

Road fronting his office 6, 000

Road tax on his personal car 5, 000

75 CPA privilege tax 300

What amount can Delgado deduct as taxes in calculating his 2008 income subject to tax?

a. P5, 300

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b. P26, 300
c. P6, 300
d. P300
A: D. Choices a, b and c include taxes that are not allowed to be deducted from gross income.

38. In 2012, Letty sold a parcel of land to Gil. Letty originally intended to construct her
residential house on the parcel of land but she migrated to the United States. Letty has not paid
her real property taxed since 2009. At the time of the sale, delinquency amounted to P35, 000.00
Letty paid these taxed before the sale. She also paid presumed capital gains tax on the sale
amounting to P250, 000.00 Letty may deduct from her 2012 gross income, taxes amounting to

a. P285, 000
b. P0
c. P35, 000
d. P35, 000

A: B. The property is a capital asset subject to final tax which is the presumed capital gains tax, hence
real property taxes are not allowed to be deducted. The final tax is an income tax which is not allowed to
be deducted from the gross income in order to arrive at the income subject to tax.

39. The following taxes are deductible as itemized deductions by a self-employed resident
citizen taxpayer except:

a. Customs duties and VAT on imported articles.


b. Real property taxes on property used in trade or business.
c. Documentary stamp taxes.
d. Transfer tax on the sale of shared of stock through the local stock exchange.
A: D.

40. Shirley who derives income solely from her employment with the Professional Regulation
Commission, a government agency, paid to the City of Manila, P15, 00000 real property taxes on a
two-story residential house on which she and her family resided. Of this amount, P8, 000.00
represented 2011 back taxes and P7, 000.00 represented 2012 current taxes.

I. Shirley may deduct from her 2012 gross income the total of P15, 000.00 as taxes.
II. Shirley may deduct only the portion appertaining to 2012 which is P7, 000.00.
III. Shirley is not allowed to deduct the P15, 000.00.

a. Only I is correct.
b. Only II is correct.
c. Only III is correct.
d. Neither II nor III is correct

A: C. The only deductions allowed from compensation income are personal and additional exemptions
76 and the premiums for health and hospitalization insurance. [NIRC of 1997, Sec. 34, 34 (m) and Sec. 35]

41. Mr. Pascual, a gravel and sand dealer, bought the following items in 2012, for his
business.

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1. Mitsubishi dump truck
(directly imported) P1, 500, 000-landed cost
800, 000-VAT

P1, 680, 000

2. 1 locally assembled Nissan


pick-up P350, 000 Unit price

42, 000 VAT

P392, 000

In determining his taxable net income for 2012, Mr. Pascual deducted from his gross income the
amount of P222, 000 representing the taxes indicated above.

Was the deduction proper under the National Internal Revenue Code? Explain.

A: Yes. The taxes were incurred in connection with trade and business of Mr. Pascual. This is so,
provided he does not include the taxes as part of the value of the motor vehicle subject to depreciation.

He may, however, include the taxes as part of the cost of the vehicles, which total cost could be subject to
depreciation. Consequently, he could then deduct depreciation expenses. In this case, he could not
deduct taxes.

42. Mr. Pascual, a gravel and sand dealer, bought the following items in 2012, for his
business.

3. Mitsubishi dump truck


(directly imported) P1, 500, 000-landed cost
800, 000-VAT

P1, 680, 000

4. 1 locally assembled Nissan


pick-up P350, 000 Unit price

42, 000 VAT

P392, 000

77 I. In determining his taxable net income for 2012, Mr. Pascual may deduct from his gross
income the amount of P222, 000 representing the taxes indicated above.
II. In determining his taxable net income for 2012, Mr. Pascual may include the taxes as part
of the value of the vehicles and deduct depreciation.

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a. Only I may be availed of by Mr. Pascual
b. Mr. Pascual could avail of only II
c. Both I and II are not appropriate tax treatments for the taxes paid.
d. Mr. Pascual may avail of I or II in the alternative

A: D. The taxes were incurred in connection with the trade and business of MR. Pascual. This is so,
provided he does not include the taxes as part of the value of the motor vehicles subject to depreciation.

He may, however, include the taxes as part of the cost of the vehicles, which total cost could be subject to
depreciation. Consequently, he could then deduct depreciation expenses. In this case, he could not
deduct the taxes.

43. In 2012 Paolo, a self-employed resident citizen, paid the following taxes:

Professional tax P 300


Philippine income taxes for 2012 1, 000, 000
Gavel and sand tax 20, 000
USA income taxes for 2012 500, 000
Real property tax on his house 3, 000
Road users tax on his delivery vans 50, 000
Local annual fixed tax for his delivery vans 10, 000

If Paolo has signified in his return to avail of tax credit of foreign income tax, how much
deduction for taxes may he claim on his 2012 income?

a. P1, 583, 300.00


b. P80, 300.00
c. P580, 300.00
d. P583, 300.00

A: B. Choice B is correct because it includes taxes paid during the year in connection with Paolos trade
and business such as professional tax, gavel and sand tax, road users tax for his delivery vans and the
local annual fixed tax for his delivery vans.

Choices a, c, and d are not correct because they include non-deductible taxes such as Philippine income
tax and the USA income tax, and the real property tax on his house which is not used in trade or
business. Furthermore, foreign income taxes are allowed as a tax credit and not a deduction.

44. The spouses Crisostomo operate a car repair shop as a single proprietorship and derive
their income solely from such business. Which of the following are not allowed to be deducted
from their gross income?

78
a. Municipal business taxes
b. Philippine income taxes
c. Community tax
d. Special levy by the city on their land which was benefited by a public works expenditure

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A: D. Choice D is not allowed to be deducted as these are taxes assessed against local benefits of a kind
tending to increase the value of the property assessed. Choices a, b, and c are allowed deductions
because they are taxes paid or incurred within the taxable year in connection with the Crisostomos
trade or business.

45. Which among the following taxes is allowed the be deductible fro gross income derived
from exercise of a profession, trade or business?

a. Philippine income taxes


b. Estate of donors taxes
c. Taxes on sale of shares of stock traded through the local stock exchange
d. Import duties

A: D. Choice D is allowed to be deductible considering that it is a tax in connection with the taxpayers
profession, trade, or business. Choices a and b are not allowed to be deducted. Choice c is not also
allowed to be deducted.

46. In 2012, Pocholo paid the VAT on the importation of his merchandise inventory. In 2012,
Pocholo was able to sell all the imported merchandise and he correspondingly paid the
appropriate VAT on the sale deducting the import Vat as his input tax. Which of the following
statements is applicable to the above facts?

a. The tax benefit rule applies.


b. In the determination of taxable income Pocholo may deduct the import VAT he paid.
c. The import VAT may be claimed as a tax credit on his income tax payable
d. The import Vat may not be deducted from Pocholos gross income.

A: D. The fact that Pocholo utilized the import VAT as his input VAT amounts to a recovery of the tax he
paid during the same taxable year. Thus, he is not allowed Choice b, because there is no tax paid that
could be deducted. Choice a is not also correct because the tax benefit rule finds application only where
the tax was deducted from a prior years income and after there was a refund or credit in subsequent
years of such deducted tax. In the problem, the recovery was within the same taxable year, and there
was no occasion to deduct the import VAT from the gross income in the year it was incurred. Choice c is
not correct because the use of the import VAT as an input VAT resulted to no VAT taxes being paid by
Pocholo. This is so because he has shifted the burden of the tax to his customers.

47. A Filipino citizen receives dividend income from the US on his capital investments in that
foreign country. The dividend being remitted to him is taxed in the US and at the same time is
also being taxed in the Philippines. Is this what is called double taxation? Has our Tax Code
provided any remedy for such taxpayer? Explain.

A: No, because there are two taxing authorities

Yes, the amount of income taxes paid the foreign country could be utilized as a credit against Philippine
79
income taxes.

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48. A Filipino citizen receives dividend income from the US on his capital investments in that
foreign country. The dividend being remitted to him is taxed in the US and at the same time is
also being taxed in the Philippines.

I. The above is double taxation the impact of the tax which is constitutionally
anathematized.
II. The taxpayer has to absorb the impact of the tax which is imposed twice on the same
income.

a. Only I is correct.
b. Only II is not correct.
c. Neither I nor II is correct.
d. Both I and II are correct.

A: C. I is not correct. There is no double taxation that is prohibited by the constitution which
violated the due process clause because there are two taxing authorities. II is not also correct
because the amount of income taxes paid in the foreign country could be utilized as a credit against
Philippine income taxes.

49. Who is not entitled to a tax credit for income tax paid to a foreign country?

a. Foreign Corporation
b. Domestic Corporation
c. Citizens of the Philippines
d. Domestic estates

A: Foreign corporations are not included in the taxpayers allowed to avail of tax credits for income tax
paid to a foreign country. Allowed to avail of tax credits are citizens and domestic corporations,
members of general professional partnerships and estates. An alien individual and a foreign corporation
shall not be allowed the credits against the tax for the taxes of foreign countries.

50. Foreign income taxes paid by a foreign corporation

a. May be claimed either as a deduction or as a credit, at the option of the corporation


b. May be claimed only as deduction
c. May be claimed only as a tax credit
d. Do not qualify either as a deduction or as a tax credit
51. A is engaged in the export of copra. Y, a supplier, offered to supply all the copra
requirements of A. A agreed provided Y executed a performance bond in favor of A. Accordingly,
Y as principal and ABC Insurance and Surety Company executed a performance bond in favor of
A. For the protection fo the insurance company, Y in turn, executed a chattel mortgage over his
machineries to indemnify ABC against loss or damage arising from the execution of the
performance bond. Y failed to deliver the copra.

80 In an action instituted by A in 2012, the court rendered judgment against the ABC Insurance and
Surety Co. in the amount of P100, 000.00. Is the amount paid by the insurance company
deductible as a loss? Explain your answer.

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A: Yes, up to the extent that the insurance company was not compensated for the loss on account of its
recovery from reinsurance contract or other form of indemnity such as recovery from the chattel
mortgage.

Alternative answer: The amount paid should not be deductible as a loss, but as part of the ordinary and
necessary expenses incurred by the insurance company in the operation of its business. The business of
an insurance company is to compensate insured parties for the losses they incurred. Hence, it is not the
insurance company that suffers the loss. It is usual for insurance companies to incur these payments.

Whatever recoveries the insurance company may have from the chattel mortgage should be considered
as part of its gross income.

Note Not Part of the Answer: From the revenue collection viewpoint, it does not matter whether the
payment is deducted as a loss or as part of ordinary and necessary expenses.

52. A owns a building on Otrigas Avenue with a book value of P2, 000, 000.00 which he
insured with XYZ Insurance Co. In 2009, the building was totally destroyed by fire. Accordingly, A
filed a claim for P2, 000, 000.00 but the insurance company refused to pay the whole amount and
offered instead the sum of P1, 000, 000.00 only. In February 2010, a case was brought to court. In
January 2012, the parties settled for P1, 500, 000.00 which sum XYZ paid that same month. May
the P500, 000.00 difference be considered as loss deductible for tax purposes? If so, as of what
year? Explain your answers briefly.

A: Yes, the loss may be deducted for the year 2012 not 2009. The reason is that i was only in 2012 that
the loss was actually sustained because it is not possible anymore for A to recover the P500, 000.00
from the insurer.

53. Dr. Francisco Gonzales estimated that by tee end of 2012, he shall have earned from the
practice of his profession a net income of P2,200,000.00 However, his bakery business has been
losing during the past 10 months, and he estimated that by the end of 2012, said business shall
have suffered a loss of P50, 000.00. He requested your advise on whether he can reduce his
taxable net income by deducting from, or offsetting against the income earned from the practice
of his profession the losses suffered by his bakery business. What advice can you give Dr.
Gonzales? State the basis of your advice.

A: Yes. Dr. Gonzales could deduct from the income he earned from the practice of his profession the
losses suffered by his bakery business. The losses were not compensated for by insurance and they were
incurred in the trade or business of Dr. Gonzales.

54. W, a Philippine corporation, has two divisions which are engaged in two lines of
business: a) the transmission manufacturing division which manufactures light commercial
vehicle transmission and b) the engine division which reconditions old diesel engines for trucks.
The transmission division has been consistently losing, while the engine division is breaking
even despite poor business condition because its machineries, although still in working
81 condition, are already fully depreciated in the books.

In June 2012, with a projected loss of more that P2, 000, 000.00 in the transmission division, W
decided to sell the fully depreciated machineries of the engine division to Z who was willing to

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buy them for P2, 000, 000. It was thought that although W would realize a gain of P2, 000, 000
from the sale, it would not pay any income tax thereon from because the gain would be offset by
the more than P2,000,000 expected loss in the transmission division.

The sale of the machineries was consummated on June 30, 2012. W subsequently filed an income
tax return reflecting the loss for the fiscal year 2012.

Was the tax scheme adopted by W legal? Explain.

A: Yes, because there is no showing that the loss was compensated for by insurance of other indemnity.
Furthermore, it is clear that it was incurred in connection with Ws trade or business.

55. X is a traveling 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 Xscar. 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.

A: No. If X earns from gross compensation only, he is not allowed to deduct losses because his only
allowable deductions are personal and additional exemptions, and the reasonable premiums for health
and hospitalization insurance.

However, since X is engaged in trade or business as a traveling salesman, he could deduct the value of
the car as there is no showing that it was compensated for by insurance. It is clear that the loss was
incurred in the business or trade of X because he is a traveling salesman who needs the car in order to
earn income.

56. A is a traveling 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
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 for you tax advice.

A: His claim for casualty loss should be denied. A earns from gross compensation only. He is not allowed
to deduct losses because his only allowable deductions are personal and additional exemptions, and the
reasonable premiums for health and hospitalization insurance.

57. Which among the following losses is a deductible loss for income tax purposes?

a. Loss resulting from the sale of an equipment that became redundant as a result of a merger
82 b. Loss suffered by a corporation when it sold a painting it owned for less than the acquisition
value.
c. Damage to the imported raw materials of a manufacturing company resulting from a risk
excluded by the corporations marine cover.

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d. Loss suffered by the company president when his uninsured residential house was razed to
the ground.

A: C.

Choice c is an actually sustained loss, not compensated for by insurance. The loss which arose from a
casualty, resulted from a risk not covered by the marine insurance policy. The raw materials are
property connected with the trade or business of the manufacturing company.

Choice a is not a deductible loss. In Real Estate Land Title and Trust Co. v. US., 309 US 12, the US Supreme
Court held, that the uselessness must arise from an external cause which renders the asset functionally
inadequate. A mere desire to eliminate it for business reasons because it is needless duplication is
insufficient to support the deduction. Thus, the deduction for obsolescence of a plant that became
redundant as a result of a merger was disallowed. Choice b, is a capital loss which is not allowed to be
deducted from ordinary income. Choice d, is not only a capital loss but also a personal loss, which is not
connected with te companys trade or business.

58. In 2012, Horatios residence was totally destroyed by fire. The property had an adjusted
basis and a fair market value of P130, 000 before the fire. During 2012, Horatio received
insurance reimbursement of P120, 000 for the destruction of his house. Horatios 2012 gross
income was P1, 700, 000. He had no casualty gains during the year. What amount of the fire loss
was Horatio entitled to claim as an itemized deduction on his 2012 income tax return?

a. P0
b. P8, 500
c. P8, 600
d. P10, 000

A: A. The loss is a capital loss because it s not used in trade or business. Thus, it could not be deducted
from gross income.

59. Cora is engaged in the export of copra. Yogie, a supplier, offered to suppl all the copra
requirements of Cora. Cora agreed, provided Yogie executes a performance bond in favor of Cora.
Accordingly, Yogie as principal and ABC Insurance and Surety Company executed a performance
bond in favor of Cora. For the protection of the insurance company, Yogie in turn, executed a
chattel mortgage over her machineries to indemnify ABC against loss or damage arising from the
execution of the performance bond. Yogie failed to deliver the copra.

In an action instituted by Cora in 2012, the court rendered judgment against the ABC Insurance
ad Surety Co. In the amount of P100, 000.00

I. The P100, 000 is deductible from ABCs gross income as part of its losses.
II. The P100, 000 is an ordinary and necessary expense deductible as such by ABC.
83
a. Only I is true
b. Only II is true
c. Both I and II are true

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d. Neither I nor II is true

A: C. No. I is true up to the extent that the insurance company was not compensated for the loss on
account of its recovery from the chattel mortgage. No II is also true. The amount paid may be deductible
as part of the ordinary and necessary expenses insured by the insurance company in the operation of its
business. The business of an insurance company is to compensate insured partied for the losses they
incurred. Hence, it is not the insurance company that suffers the loss. It is usual for insurance companies
to incur these payments.

Whatever recoveries the insurance company may have from the chattel mortgage should be considered
as part of its gross income. From the revenue collection viewpoint, it does no matter whatever the
payment is deducted as a loss or as part of ordinary and necessary expenses.

60. Avelino owns a building on Ortigas Avenue with a book value of P2, 000, 000.00 which he
insured with XYZ Insurance Co. In 2008, the building was totally destroyed by fire. Accordingly,
Avelino filed a claim for P2, 000, 000.00 but the insurance company refused to pay the whole
amount and offered instead the sum of P1,000,000.00 only. In February 2009, a case was brought
ot court. In January 2012, the parties settled for P1, 500, 000.00 which sum XYZ paid the same
moth. The P500, 000.00 difference may be considered as loss deductible for tax purposed for the
taxable year.

a. 2008
b. 2009
c. 2011
d. 2012

A: D. The loss may be deducted for the year 2012 not 2008. The reason is that it was only in 2012 when
the loss was actually sustained because it is not possible anymore for A to recover the P500, 000.00
from the insurer.

61. Dr. Francisco Gonzals estimated that by the end of 2012, he shall have earned from the
practice of his profession a net income of P2, 200, 000.00. However, his bakery business has been
losing during the past 10 months, and he estimated that by the end of 2012, said business shall
have suffered a loss of P50, 000. 00

I. Dr. Gonzales can reduce his taxable net income by deducting from, or offsetting against the
income earned from the practice of his profession the losses suffered by his bakery business.

II. Dr. Gonzales cannot deduct from his earnings as a professional the losses suffered by his
bakery business because the income is professional income while the loss is from trade or
business.

a. Only I is correct
84 b. Only II is correct
c. Both I and II are correct
d. Neither I nor II is correct

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A: A. Dr. Gonzales could deduct from the income he earned from the practice of his profession the losses
suffered by his bakery business. The losses were not compensated for by insurance and they were
incurred in the trade or business of Dr. Gonzales. Furthermore, the totality of Dr. Gonzales income from
his profession and his bakery business are considered as his gross income from where the allowed
deductions could be made.

62. Winner, a Philippine corporation, has two divisions which are engaged in two lines of
business: a) the transmission manufacturing division which manufactures light commercial
vehicle transmission and b) the engine division which reconditions old diesel engines for trucks.
The transmission division has been consistently losing, while the engine division is breaking een
despite poor business conditions because its machineries, although still in working condition,
are already fully depreciated in the books.

In June 2012, with a projected loss of more than P2, 000, 000.00 in the transmission division,
Winner decided to sell the fully depreciated machineries of the engine division to Zygote
Corporation who was willing to buy them for P2, 000, 000.00 expected loss in the transmission
division. The sale of the machineries was consummated on June 30, 2012.

I. Winner is not allowed to deduct the P2, 000, 000 expected loss because the machine was
already fully depreciated.

II. Winner is not allowed to deduct the P2, 000, 000 expected loss because the sale resulted to a
gain which should be taxed separately.

a. Only I is correct
b. Only II is correct
c. Both I and II are correct
d. Neither I nor II is correct

A: D. Both of the statements are not correct because there is no showing that the loss was compensated
for by the insurance or other indemnity. Furthermore, it is clear that it was incurred in connection with
Winners trade or business.

63. Eugel is a salaried salesman in Isabela, Basilan. In the course of his travel, a band of Abu
Sayaff seized his car by force and used it to kidnap a foreign missionary. The next day, Eugel
learned that the military ad the Abu Sayaff band had a chance encounter. Using heavy weapons,
the military fired at the Abu Sayaff band that tried to escape with the use of Eugels car. All the
members of the band died and Eugels car was a total wreck. Eugels is covered by a third party
liability insurance, for damage he may cause or caused to his car as a result of vehicular
accidents.

a. Eugel may deduct the value of his car from his gross income
b. Eugel is not allowed to deduct the value of the car from his gross icome because it is due to his fault
that car was not insured against carnapping.
85 c. Eugel being entitled to compenstion income is not allowed deduction for loss
d. Eugel could not deduct the value of the car because there is no showing in the problem that it was
registered in his name.

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A: C. Since Eugel earns solely from gross compensation only, he is not allowed to deduct losses because
his only allowable deductions are personal and additional exemptions, and the reasonable premiums for
health and hospitalization insurance.

64. Anktryd, Inc., bought a parcel of land in 2009 for P7 million as part of its inventory of real
properties. In 2010, it sold the land for P12 million which was its zonal valuation. In the same
year, it incurred a loss of P6 million for selling another parcel of land in its inventory. These were
the only transactions it had in its real estate business. Which of the following is the applicable tax
treatment?

a. Anktryd shall be subject to a tax of 6% of P12 million.


b. Anktryd could deduct its P6 million loss from its P5 million gain.
c. Anktryds gain of P5 million shall be subject to the holding period.
d. Anktryds P6 million loss could not be deducted from its P5 million gain.

A: B.

65. Explain if the following item is deductible from gross income for income tax purposes.
Disregard who is the person claiming the deduction. Worthless securities

A: If the securities are capital assets then not deductible from gross income because such losses are
considered as capital losses deductible only from capital gains.

66. Section 38 of the National Internal Revenue Code deals with and provides for what is
known as wash sale. Explain and discuss the objective and philosophy behind the said
provision.

A: To prevent taxpayers from claiming loses when actually there are non.

67. The excess of allowable deductions over gross income of the business in a taxable year is
known as

a. Net operating loss


b. Ordinary loss
c. Net deductible loss
d. NOLCO
A: A.

68. Explain if the following item is deductible from gross income for income tax pusposes.
Disregard who is the person claiming the deduction. Reserves for bad debts.

A: No. The reserves are mere provisions, not actually determined to be worthles or uncollectible

69. Why is there a need for a depreciation allowance?


86
A: There is a need for depreciation i order to determine the true taxable income of the taxpayer, allowing
for a deduction of the portion of the value of an asset used in earning the income.

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70. Which of the following assets is subject to depreciation for income tax purposes?

a. Inventories or stock in trade


b. Goodwill
c. Equipment used in business
d. Residential house

A: C. Choice a is not subject to depreciation because they are deductible as expenses because they
benefit only a taxable period. Choice d is not depreciable because it is not used in trade or business.
Choice b, may or may not be depreciable depending on whether it is purchased goodwill or internally
generated. If internally generated, it is not subject to depreciation but if it is acquired then depreciable
(the better term would be subject t amortization).

71. Z, purchased fully depreciated machineries from W and entered the machineries in his
books at P12,000,000. Based on the independent appraisal and engineering report, Z assigned to
the machineries an economic life of 5 years. Adopting the straight-line method of depreciation, Z
claimed a depreciation deduction of P400, 000 in his income tax return.

Is the deduction proper, considering that in the hands of the original owner, W, the said
machineries were already fully depreciated?

A: Yes. The starting point for the computation of the deductions for depreciation is the reasonable cost
of acquiring the asset and its economic life. The fact that the machineries were already depreciated by its
original owner does not matter because Z is now the taxpayer. Z is allowed a depreciation allowance for
the exhaustion, war and tear (including reasonable allowance for obsolescence) of the machineries
which he is using in his trade or business.

72. Which allowable deduction can be claimed in arriving at an individuals income subject
to tax?

a. Support payments
b. Charitable contributions
c. Personal casualty loss
d. Not reimbursed business expense of an outside salesperson

A: B. Assuming that the taxpayer in the problem is engaged in trade, business or exercise of a profession,
qualified charitable contributions may be deducted. All the others are non- deductible personal, living or
family expenses.

73. Are the following expenses deductible form gross income:

A) Employers contribution to the Christmas fund of his employees

87 If the taxpayer is an individual who is not a compensation earner, and is a citizen or resident alien, or
domestic corporation or a resident foreign corporation, the employers contribution to the employees
Christmas fund is deductible as expense under no. 2.7 RAMO No. 1-87 subject to the condition that the

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contribution does not exceed 1/2 months basic salary of all the employees. It is part of the necessary
and ordinary expenses.

B) Contribution to the construction of a chapel of a university that declares dividends to


its stockholders

Contribution to the construction of a chapel of a university that declares dividends to its stockholders is
not deductible because part of the net income of the university inures to the benefit of its private
stockholders.

C) Premiums paid by the employer for the life insurance of his employees

Premiums paid by the employer for the life insurance of its employees are not deductible if the
beneficiary is the corporation.

D) Contribution to a newspaper fund for needy when such newspaper organizes a group
of civic spirited citizens solely for charitable purposes

Contributions to a newspaper fund for needy families are not deductible for the same reasons as that
advanced in letter b above, with respect to the donation to the university.

E) Interest on taxes.

Interests on business taxes are deductible as they are considered indebtedness and not as taxes.

74. X, a taxpayer, has a net income of P130, 000.00. He reported as deduction from the
gross income his contribution of P100.00 to a religious chapel owned and maintained by a
private university. Is the contribution of P100.00 an allowable deduction? Reasons.

A: No. If X derived his income from compensation, the only deductions from gross income that he could
claim are personal and additional exemptions, and the allowance premium payments on health and/or
hospitalization insurance. He is not allowed other deductions like charitable contributions.
Yes, if X derived his income from trade, business or exercise of a profession. This is so, because the
contribution to the religious chapel is operated exclusively for religious purposes.

Note not part of the answer: An alternative answer may explain non-deductibility because the
contribution was to the private university. The contribution was not made to an association or
organization operated exclusively for religious purposes.

75. 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, 000.00 to the PNRC
fo which he was issued a promissory note. Before its maturity, X cancelled and returned the note
to PNRC. An advertising man, X als undertook the promotions of the Austria Boys Choir. Part of
88 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 blood he donated. Give your legal advice/

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A: X cannot claim the deductions, if he derives purely compensation income. The only deductions he is
allowed are personal and additional exemptions and reasonable premiums for health and
hospitalization and insurance.

On the other hand, if X derives income from self-employment as an advertising man, then he may deduct
the P100, 000.00 donation (effected through the cancellation of the promissory note) subject to the
limitation that the deduction shall not exceed 10% of his taxable income computed without benefit of
the deductions for charitable contributions.

He could not deduct his blood donation because there is no monetary value attached to it. This is so,
because it is prohibited by law to sell blood.

76. 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 exclude both the P100,000.00 and the P5,000.00 from his gross income.
Discuss.

A: If X was earning from gross compensation income, he could not deduct either the P100, 000.00 and
the P5, 000.00. If he is earning from trade or business, he could deduct the P100, 000.00 if the hospital is
accredited as a donee institution. If not, then no deduction is allowed.

However, he could not deduct the P5, 000.00 because to qualify for exemption, the charitable
contribution must be given to accredited organizations or associations.

77. Which of he following amounts is deductible as charitable contribution from the gross
income of a corporate taxpayer?

a. Contribution to the Christmas fund of his employees


b. Contribution to the construction of a chapel of a university that declares dividends to its
stock-holders
c. Premiums paid for the life insurance of its president where it is the beneficiary
d. Contribution to a non-government organization (NGO) registered as a donee institution with
the BIR.

A: D. It is only the donation to non-government organizations that is considered as a deductible


charitable donation.

Choice a, the employers contribution to the employees Christmas fund is deductible as expense under
no. 2.7 RAMO No. 1-87 subject to the condition that the contribution does not exceed 1/2 months basic
salary of all the employees. It is part of the necessary and ordinary expenses.

Choice b, the contribution for the construction of a chapel of a university that declares dividends to its
89 stockholders is not deductible because part of the net income of the its university inures to the benefit of
its private stockholders.

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Choice c, premiums paid by the employer for the life insurance of its employees are not deductible if the
beneficiary is the corporation.

78. 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 P500,000.00 as his prize which was donated by Ayala Land Corporation.
Could Ayala Land Corporation deduct the P500, 000.00 from its gross income? Decide.

A: No. There is no showing that the competition was sanctioned by the Philippine Olympic Committee.

79. X, a bachelor, works in a private firm and lives in a rented house. His father, a retired
government employee with no income except fis monthly pension of P2, 500.00 and his mother,
with no income at all live with him. X pays the rent, spends for their food. He does not give any
money to his parents, although his mother does the cooking and attends to the housekeeping.
Can he claim the basic personal exemption? State your reasons.

A: Yes. The basic personal exemption of P50, 000.00 may be availed of by individual taxpayers without
any condition at all.

80. Taxpayer Caroline is single. She maintains an apartment in Makati which is the principal
place of adobe for herself and her orphaned niece, aged ten, who is chiefly dependent on her for
support. Taxpayer Caroline also principally supports her widowed mother who maintains her
own household in Batangas.

Can Caroline qualify for the basic personal exemption? Explain.

State the circumstances under which Caroline may qualify for the basic personal exemption, if
she does not qualify as such under the above set of facts.

A: Yes. The basic personal exemption of P50, 000.00 may be availed of by individual taxpayers,
regardless of status and without any condition at all.

81. Maria Clara, a Filipino citizen, married Ha Wa, a Hongkong national in 2008 in Hongkong.
In 2009, the two separated and Maria returned to the Philippines. The two lost contact with each
other. In 2013, Maria filed her income tax return and claimed a personal exemption of P50,
000.00 under Sec. 35 (A) of the Tax Code. Decide.

A: Maria may avail of the basic personal exemption of P50, 000.00 because the same is her entitlement
regardless of her marital status.

82. RAM got married to LISA last January 2005. On November 30, 2012, LISA gave birth to
twins. Unfortunately, however, LISA died in the course of her delivery. Due to complications, one
of the twins also died on December 15, 2012.
In preparing his Income Tax Return (ITR) for the year 2012, what should RAM indicate in the ITR
90 as his civil status: (a) single; (b) married; (c) head of the family; (d) widower; (e) none of the
above? Why? Reason.

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A: It does not matter whether RAM indicates single or widower in his ITR. This is so because his marital
status does not have any effect on his entitlement to the basic personal exemption of P50, 000.00. This
may be availed of regardless of status.

83. A basic personal exemption amy be claimed by:

I. A married individual
II. An unmarried or legally separated individual
III. A benefactor of a senior citizen who may or may not be related to the benefactor
IV. A benefactor of a senior citizen who should be related to the benefactor.

a. Both I and III


b. Both I and IV
c. All of I, II, III and IV
d. Both II and IV

A: C. All of I, II, III and IV.

Explanation not part of the answer: The basic personal exemption of P50, 000.00 may be availed of by
any individual taxpayer regardless of status without any additional requirements whatsoever.

84. Nicolas, a 35-year old bachelor, blind, deaf-mute and a cripple lives in Nueva Ecija. His
full support amounting to P8, 000.00 are provided, in the following proportion, by the following
resident citizens who are all living in Manila:

Amount of Support

Gloria, Nicolas sister P 4,500.00


Andres, Nicolas father 2, 000.00
Rosario, Nicolass sister 1, 500.00

Who may claim a basic personal exemption status for Nicolas?

a. Gloria, being the sister of Nicolas


b. Andres, because he is the father of Nicolas
c. Rosario, because she is a sister of Nicolas
d. Nobody.

A: There is no need to utilize support for Nicolas in order to enjoy the basic personal exemption, which
is granted to an individual taxpayer without need of any requirement.

85. Atty. Santos, single, a resident citizen, is a law practitioner. He is the chief source of
support of his 80-year old grandfather, an unmarried brother 23 years old but mentally
defective, and an orphaned nephew 10 years old. Not one of these dependents is gainfully
91 employed. Whom could Santos claim to qualify him for the basic personal exemption?

A. His 80-year old grandfather


B. His brother

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C. His orphaned niece
D. Nobody

A: D. Nobody. There is no need to utilize support for anybody in order to enjoy the basic personal
exemption, which is granted to an individual taxpayer without need of any requirement.

86. Which of the following individuals is allowed to deduct basic personal and additional
exemptions from his gross compensation income derived from Philippine sources?

a. Filipino resident citizen employed as a manager in an offshore banking unit established in


the Philippines
b. Resident alien employed as a manager in an offshore banking unit established in the
Philippines
c. Resident alien working as a coach of a professional basketball team playing as a PBA
member
d. Filipino resident citizen employed as a manager by a regional operating headquarters
established in the Philippines as a multinational company.

A: C. Choices a, b, and d, are all subject to gross income taxation without any deductions allowed,
whether the basic personal and additional exemptions, or otherwise.

87. Danielle, a non-resident French citizen earns income from engaging in her profession in
the Philippines occasionally. She is a divorce but is the provider and source of sole support of her
only daughter, an invalid who live with her. France allows exemptions to non-resident Filipino
citizens earning from business exercised in France. Which among the following exemptions may
Danielle claim when she filed her income tax return in the Philippines for income earned from
within the Philippines?

a. Basic personal exemption only


b. Basic personal exemption with an additional dependent
c. Additional dependent without the basic personal exemption
d. Nothing

A: B. The concept of reciprocity finds application because France the home country of Danielle who is
non-resident alien engaged in the practice of her profession the privilege of exemptions. Thus, Danielle
is entitled to the basic personal exemption which is granted regardless of marital status. She is entitled
to an additional exemption because she has living with her and and chiefly dependent her child who
even if of major age is an invalid, single and not gainfully employed.

88. Which of the following individual taxpayers could not avail of the basic personal and
additional exemptions?
a. Resident citizens deriving income from sources within and without the
Philippines
b. Non-resident aliens engaged in trade or business or is in the exercise of a
92 profession the Philippines
c. Resident aliens deriving income from within the Philippines

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d. Non-resident aliens not engaged in trade or business nor in the exercise of a
profession in the Philippines but deriving income from sources within the
Philippines

A: D. Non-resident aliens not engaged in trade or business not in the exercise of a profession in the
Philippines but deriving income from sources within the Philippines.

Explanation not part of the answer: Non-resident alien individuals not engaged in trade or business or
professions in the Philippines are not allowed any deductions, whether the basic personal and
additional exemptions or other deductions, because they are to be taxed on the gross basis.

89. A, single individual, had a brother, B, and a sister V, both minors, who were completely
dependent upon him for support. As father is living. In his income tax return for the year 2012, A
claimed a basic personal exemption of P50,000.00 pursuant to Section 35 of the NIRC, and
additional exemptions for B and V. The CIR refused to consider the additional tax exemption s
and allowed him only the personal based on the ground that As father is still living and
continues to exercise parental authority over B and V. A appealed from the ruling of the CIR. If
you were a member of the CTA, how would you decide this case?

A: I would rule against A. Qualified dependents for purposes of additional tax exemptions are limited
only to children and does not include brothers and sisters.

90. X, a married person legally separated from his wife, is the chief support of his illegitimate
son who is 18 years old, not gainfully employed , and of a sister who is 24 years old and
unmarried but incapable of self-support because of mental defect. How much personal
exemption is X entitled to?

A: X is entitled to the personal exemption of P50,000.00 which may be availed of regardless of status and
an additional exemption of P25,000.00 for the illegitimate son who should be living with him.

91. A, single, maintains B, common-law wife. B is legally married to C. A and B have four
children and they are living dependent upon A for their chief support, and the children are
minors, unmarried and not gainfully employed.

a) For income tax purposes, could A claim a basic personal exemption?


b) Is the basic personal exemption of P50,000.00 claimed by A and deducted from his 2012
gross compensation income valid and allowable?
c) Is A entitled to deduct from his 2012 gross compensation income the additional
exemption of P25,000.00 for each of his illegitimate children?

A: a. Yes. A is an individual tax payer who is entitled to claim the P50,000.00 BPE which is granted
regardless of status and without an additional conditions.

b. Yes. Yes. A is an individual tax payer who is entitled to claim BPE which is granted regardless of status
93 and without an additional conditions.

c. Yes. Illegitimate children could now be claimed as additional exemption.

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92. John and Marsha were legally separated by court order. John was awarded the custody of
their minor son Rolly, and Marsha, the custody of their minor daughter, Shirley. To preserve
somehow the ties between parent and child living separately, the court ordered John to shoulder
the 60% of the financial support for Shirley, and Marsha, to shoulder the 60% of the financial
support for Rolly. John and Marsha complied with the court order.

In their respective ITRs for 2012, how much BPE and additional exemptions would John and
Marsha be separately entitled to, assuming each of them earned more than P600,000.00 in 2012?

A: John and Marsha shall be entitled only to P50,000.00 each BPE, granted to individual taxpayers
regardless of the marital status.

Neither John and Marsha is entitled to any additional exemption because neither Rolly nor Shirley are
qualified dependent children. Rolly while living with John is not dependent upon John for his chief
support because it is Marsha who shoulders 60% of his financial support. The same holds true for
Marsha with respect to Shirley.

93. Assume that a married individual has the following unmarried children whose ages are
indicated below who are living with him and wholly dependent upon him for support:

Child Ages as of Dec. 31, 2012


A 25
B 24
C 16
D 10
E 8
F 7
G 5
H 3

For purposes of the ITR to be filed in 2013, how much additional exemptions would the above
taxpayer be entitled to and for whom?

A: P100,000.00. The taxpayer could claim an additional tax exemption for each qualified dependent not
exceeding four in the amount of P25,000.00 each. Where there are six qualified dependents, as in the
case, C, D, E, F, G and H, who are below 21 years old, the limitation of 4 applies. Any four of the above
children who are below 21 could be claimed as an additional exemption. Thus, P25,000.00 x 4 =
P100,000.00.

94. Heraclitus, a widower, 54 years old, maintains a home in Cebu City for his three children.
During the taxable year 2012, Ursula, 20 years old, his eldest child, was away most of the time at
the UP Diliman in Quezon City. The other two children, Cephas and Carpus, ages 14 and 12, were
away in the US on vacation with their grandparents for 8 months during the taxable year.
Heraclitus is the sole supporter of his children who do not have any income of their own. What
94 are total exemptions for taxable year 2012 which can be availed by Heraclitus?

A: Heraclitus could claim the BPE of an individual regardless of the status and additional exemptions for
qualified dependents, Ursula, Cephas and Carpus.

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Ursula is considered living with him even if she is away at school and the other two are in the US. Living
with the person giving support does not necessarily mean actual and physical dwelling together at all
times and under all circumstances. Thus, additional exemption applies even if the child is away at school
or on a visit. Furthermore, the fact that the two children were with their grandparents for 8 months in
2012 does not detract from the fact that Heraclitus is still the chief source of support for his two
children.

95. A, single, maintains B, a common-law wife who is not legally separated from her husband
C. A and B have two children who are unmarried minors and are living with and wholly
dependent from A for support. May A claim additional exemption for his two children with B?

A: Yes, because although the children were born out of wedlock, they are his recognized natural children
living with him and wholly dependent for support.

96. Cruz, single, resident in and citizen of the Philippines is a law practitioner. He supports
wholly his grandfather, mother, an unmarried brother 23 years old but mentally defective, and
an orphaned nephew of 10 years old. Not one of these dependent is gainfully employed. Discuss
briefly the BPE and additional exemption available to him.

A: Cruz is entitled only to the BPE of P50,000.00. He does not have additional exemptions because he
does not have any qualified dependent child who is living with him and chiefly dependent for support.
There is no showing that Cruz grandfather and mother are qualified senior citizens which could entitle
Cruz to additional exemptions.

97. Demetrio, a Filipino widower living in Davao City, is the sole source of support of his
mother Barbara; and his minor son Dencio. Barbara maintains her own household in Tagum City.
Dencio and his wife are living in a dormitory in Manila near the university where both are
studying. How much BPE and additional exemptions may Demetrio claim?

A: Demetrio, being an individual taxpayer is entitled to P50,000.00 BPE regardless of the status. He is
not entitled to any additional exemption because his minor son Dencio is already married. Neither may
he claim his mother for additional exemption because there is no showing that she is a qualified senior
citizen.

98. Jose, the 70-year old widowed father of Rolando is earning P15,000.00/month. As his
income is barely enough just for medicines alone, Jose lives with and is dependent for his chief
support upon Rolando who is single. How much BPE and additional exemptions could Rolando
claim when he files his ITR?

A: P50,000.00. Rolando is entitled to claim the P50,000.00 BPE which is granted regardless of status, and
without any further qualification. While it is true that Jose is living with Rolando and dependent upon
the latter for his chief support, this does not qualify Rolando to claim an additional exemption for his
father because Jose is gainfully employed and there is no showing of compliance with other
95 requirements to make Jose a qualified senior citizen dependent.

99. Spouses Andres and Linda, both resident Filipinos, provided the chief support for their
two unmarried, minor children, Lindas 3-year old niece whom the couple considered as their

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adopted child, and Andres 80-year old mother who received a P10,000.00 annuity from
insurance company. The two children have been employed for the past two years with a fast food
chain. All of the above live with Andres and Linda. How many additional exemptions may Andres
and Linda claim when they file their joint ITR?

A: NONE. The two children could not be claimed as additional exemptions because both are gainfully
employed. So also with Lindas 3-year old niece because she is not a child of Andres and Linda. Neither
could Andres 80-year old mother be claimed as additional exemption because there is no showing of
compliance with the requirements to make her a qualified senior citizen dependent.

100. Spouses Albert and Maple, Filipino residents, earning solely from compensation income,
filed separate ITRs for their 2012 income. They had seven minor children, who are all living with
them and dependent upon the couple for their chief support. The children are all married and
not gainfully employed. Albert claimed as his additional exemption, four of the children. What
should Maple claim as additional exemptions in her separate ITR?

A: NONE. The husband shall be the proper claimant of the additional exemption for qualified dependent
children unless he explicitly waives his right in favor of the wife in the Application Registration or in the
Certificate od Update of Exemption and of Employers and Employees Information, whichever is
applicable. There is no showing in the problem of such waiver.

101. Mar and Joy got married in January 2012. A week before the marriage, Joy received by
way of donation, a condo unit worth P750,000.00 from her parents. After marriage, some
renovations were made at a cost of P150,000.00. The spouses were both employed after their
marriage in 2012 by the same company. On December 30, 2012, their child was born. Also in
2012, they sold the condo 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?

A: Their marriage had no effect on their entitlement to the BPE of P50,000.00 which may be enjoyer
regardless of status. The birth of their child entitled one of them (Mar, the husband) to avail an
additional exemption of P25,000.00.

102. Bambang, an unmarried resident Indonesian citizen who is engaged in trade and
business in the Philippines provided 1/3 of the support of his father and mother who are both
living with him. Supposing Indonesian law allows unmarried Filipino citizens the privilege of
deducting from their gross income earned in Indonesia a BPE, and for each parent the amount of
P100,000.00. How much BPE and additional exemptions should Bambang be entitled relative to
his 2012 income derived from within?

A; P50,000.00. Bambang, being a resident alien is entitled to the same BPE and additional exemptions as
a resident citizen. However, he could qualify only for the basic personal exemption of P50,000.00 and
not for the additional exemptions for his parents. This is so because of reciprocity which is limited by the
requirement that the exemptions granted to the resident alien should not exceed that granted to
Filipinos. Filipinos could not claim as qualified dependent their parents for purposes of additional
96 exemption.

103. Helga, married and a non-resident Swede while a tourist in Boracay, sold her SAAB car in
the Philippines to Roberto for P3.5 M. She previously bought the car of P2.5 M. Aside from the

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sales proceed she did not derive any other income from the Philippines. She has three minor
children, single and not gainfully employed, all of whom are living with her and dependent upon
her for chief support. How much BPE and additional exemptions is Helga entitled to on the sales
proceeds of her car if Sweden allows non-resident Filipinos who ear income in Sweden, a BPE of
P100,000.00 for each married individual, and P75,000.00 for each minor independent child, and
Helga, is willing to file a true and accurate return of the P3.5 M sales proceeds?

A: NONE. Helga is a non-resident alien individual not engaged in trade or business within the
Philippines, because the transaction which is the sale of the car is merely an isolated transaction.
Consequently, she is to be taxed on her gross income without any allowable deductions including BPE
and additional exemptions.

104. CIR assessed against a manufacturing corporation the amount of P1,000,000.00 as


deficiency income tax. The deficiency was brought about by the disallowance of items claimed by
the corporation as deductible business expenses for the taxable year. These were: a) expenses
paid to an advertising firm in order to create a favorable image for the corporation; and b)
litigation expenses incurred in defense of a title to a corporate property.

The corporation argued that they were ordinary and necessary business expenses incurred
during the taxable year in carrying out its business and were, therefore, deductible. The CIR
contended otherwise.

A: The expenses paid to an advertising firm in order to create a favorable image for the corporation are
considered as ordinary and necessary expenses incurred during the taxable year and the taxpayer
could deduct the same if the following conditions are met:

a) The rules on substantiation were followed;


b) All payments were properly receipted; and
c) The payments were subject to withholding taxes

The litigation expenses incurred in defense of a title to corporate property are not properly deductible
as ordinary and necessary expenses because they constitute part of the cost of the property.

105. A corporation paid compensation to public relations firm for services rendered in
carrying on the campaign to sell the corporations additional capital stock. Is the payment
deductible as an ordinary and necessary business expense?

A: No. The expenses are considered capital expenditures included as part of organization expenses and
should be capitalized. They are not ordinary and necessary business expenses because they are not
common to incur in pursuit of the income or profit.
97 106. Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard.
To entice him to accept the offer for employment, the was offered the arrangement that part of
its compensation would be an insurance policy with a face value of P20 M. The parents of Noel
are made beneficiaries of the insurance policy. Can the company deduct from its gross income
the amount of the premium?

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A: Yes, it is deductible being legitimate business expense and Hewlett Packard, the employer is not the
beneficiary under the policy. It is a deductible legitimate business expense because the taking of the
insurance policy is part of Noel Santos compensation package.

107. PRC Corpr. Took two keymen insurance on the life of its President, P. In one policy, the
beneficiary is the corporation to compensate it for its expected loss in case the death of its
president. The other policy designates Ps wife as its irrevocable beneficiary. Are the insurance
premiums paid by PRC Corp. in both policies deductible? Will the insurance proceeds be treated
as income subject to tax by the corporation and by the wife?

A: No to both questions.

On the first question, premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on by the taxpayer,
individual or corporate are not deductible when the taxpayer is directly or indirectly a beneficiary under
such policy.

On the second question, proceeds of life insurance policies paid to the beneficiaries upon the death of
the insured, whether in a single sum or otherwise, shall not be included in the gross income and shall be
exempt from income taxation.

108. X found it necessary to give gifts to the government officials with whom he had official
dealings. He deducted the costs of these gifts as representation expenses in his income tax
return. Are the deductions valid?

A: No. The gifts are considered as bribes which are not allowed deduction as expenses.

109. X is the proprietor of Vanguard, which is a security and detective agency. X was able to get
the contract to provide the security cervices of a government agency. He signed the Security
Agreement with the director of the government agency calling for the development of 100
security guards on a 24 hour basis. The contract was recoverable at the will of the director. To
please the director, X gives him at the end of the month P100.00 per guard hired. May X deduct
from his income the money he paid to the director?

A: No. The payments are considered as bribes which are not allowed deduction as expenses.

110. Geris, who worked as an export clerk for STC Export Inc., lent STC P150,000.00 in 2010.
Geris did not own any stock in STC Export, Inc., and the loan was not a precondition of Geris
maintaining his employment with STC Export, Inc. In 2012, STC Export, Inc. declared bankruptcy
and Geris notes receivable from STC became worthless. What loss can Geris claim on his 2008
ITR?

A: 0. Geris, being an employee, who earns compensation income arising from personal services rendered
98 under an employee-employer relationship is not allowed deductions, other than the personal and
additional exemptions and premiums on health and hospitalization insurance of an individual taxpayer,
in computing taxable income subject to income tax.

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111. 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, or his terminal leave pay, be subject to income
tax?

A: No. The commutation is not subject to tax. The monetized value of leave credits paid to the
government officials and employees shall not be subject to income tax and consequently to withholding
tax.

112. A, an employee of the CA, 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 the said amount subject to tax?

A: No. The accumulated leave credits in the amount of P500,000.00 is not subject to tax. The monetized
value of leave credits paid to the government officials and employees shall not be subject to income tax
and consequently to withholding tax.

113. MBC was incorporated in 1961 and engaged in commercial banking operations since
1987. On May 22, 1987, it ceased operations due to insolvency and its assets and liabilities were
placed under the charge of a government-appointed receiver. On June 23, 1999, BSP authorized
MBC to operate as a thrift bank.

In 2000, it filed its ITR for the year 1999 paying P33 million computed in accordance with the
Minimum Corporate Income Tax (MCIT). It sought BIR ruling on whether it is entitled to the 4-
year grace period for paying on the basis of MCIT reckoned from 1999. BIR ruled that cessation
of business activities as a result of being placed under involuntary receivership may be an
economic reason for suspending the imposition of MCIT.

As a result of the ruling, MBC filed an application for the refund of P33 million. Due to BIRs
inaction, MBC filed a petition for review with the CTA.

The CTA denied the petition on the ground that MBC is not a newly organized corp. In a volte
facie the BIR now maintains that MBC should pay the MCIT beginning Jan. 1, 1998 as it did not
close its business operations in 1987 but merely suspended the same. Even if placed under
receivership, the corporate existence was never affected. Thus, it falls under the category of an
existing corp. recommencing its banking operations.

Q: Should the refund be granted?

A: Yes. MCIT shall be imposed beginning the fourth taxable year immediately following the year in which
the corporation commenced its business operations.
99
The date of commencement of operations of a thrift bank is the date it was registered with the SEC or
the date when the Certificate of Authority to Operate was issued to it by the Monetary Board, whichever
comes later.

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MBC is entitled to the grace period of 4 years from June 23, 1999 when it was authorized by BSP to
operate as a thrift bank before the MCIT should be applied to it.

114. Airways, Inc., a foreign corp. not licensed to engage in air transportation business in the
Phils., sold its passage tickets here through appointed agents. The ticket holders were lifted by
Airways planes only in segments of the flight outside the Phils.

Q: Discuss whether or not it was subject to the payment of Phil. Income tax on the gross receipts
from the sales of tickets. *

A: Yes, upon the basis of gross receipts and not on gross Philippine Billings.

While Airways, Inc. is not licensed to engage in transportation business in the Phils., it is engaged in
trade or business in the Phils. because of the regularity of business functions performed through
appointed agents.

Hence, its income tax is computed upon the basis of its gross revenue. It has no flights that originate
from or land in the Phils.

115. Q: What is the Immediacy Test? Explain.

A: The term reasonable needs of the business is hereby construed to mean the immediate needs of the
business, including reasonably anticipated needs. In either case, the corp. should prove an immediate
need for the accumulation of the earnings and profits, or the direct correlation of anticipated needs to
such accumulation of profits. Otherwise, such accumulation would be deemed to be not for the
reasonable needs of the business, and the penalty tax shall apply.

116. Q: Under the new Constitution, may the government tax income of non-profit educational
institution operated by religious orders? What policy considerations are to be taken into
account?

A: No, the revenue of non-stock, non-profit educational institutions which are actually, directly and
exclusively used for educational purposes, irrespective of whether or not they are operated by religious
orders under the 1987 Constitution are exempt from taxation.

The policy consideration is to encourage the establishment of educational institutions which are not
profit motivated. The tax exemption would translate to lower tuition providing access to education for
all.

117. Q: Is the idea of exempting Pioneer Enterprises from taxation a sound one? Why?

A: Yes. Exempting pioneer enterprises from taxation would encourage their proliferation resulting in
more employment, more goods to be sold and ultimately the collection of more taxes which would
100
redound to the countrys benefit.

118. Q: Enumerate at least 4 specific tax exemptions granted by the statutes.

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A: 1) Income of cooperatives duly registered with the Cooperative Development Administration
2) Income of companies in pioneer industries registered with the Board of Investments under the
Omnibus Investment Code

3) Income derived by companies located in the Special Economic Zone

4) Fish and aquatics product caught or gathered by Philippine registered vessels, which are not
improved in value are exempt from customs duties when brought into the Philippines

5) Retirement pay is, under certain conditions provided for in NIRC, exempt from taxation

119. Q: Distinguish between the income tax liability of X, a general professional partnership
(GPP) engaged in the practice of law, and Y, a general partnership (aka business partnership or
BP) engaged in the operation of a logging concession.

A: a. GPP is 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 WHILE a BP is formed by persons for
the sole purpose of engaging in any trade or business

b. GPP is NOT a taxable entity hence its income is not taxable as such while BP is considered as a
corporation hence a taxable entity and its income is taxable as such

c. Distributive shares of partners of GPP in the net income is reportable and taxable as part of the
partners gross income subject to schedular rates while the share of an individual in the distributable net
income after tax of a BP is subject to a final tax

d. GPP not being a taxable entity does not need to file an ITR but an INFORMATION RETURN while a BP
being a taxable entity should file an ITR

e. Partners in GPP are not subject to double taxation being taxed only once while BP is taxed once on its
income and when the share in the profits of the partners are received, they are taxed again as dividends

119. A partner in a general law partnership incurs expenses that are not passed on to the
partnership, such as: he buys his own law books; he entertains clients without passing the bills to
the partnership; he pays his own dues to professional organization; and he buys a car for use in
law practice. The partnership does not advance the purchase price or take title to the car.
Q: May he deduct the above-mentioned expenses from his distributive share in the net profits of
said partnership? Why?

A: No, because these are incurred in the exercise of the profession which are properly deductible by the
GPP in order to arrive at the net distributive shares of the individual partners.

120. Atty. MA and Atty. PL were classmates in law school. After passing the bar in 2007, they
joined separate law firms in Makati. In 2008, they resigned from their respective law firms and
formed a law partnership under the firm name of A & L. In 2010, the 2 married each other. After
the marriage, they continued to practice law together, this time under the firm name L & A-L.
101 This year 2012, being particularly good year, the partnership anticipates a net income of P2
million.

Q: a) Is the said law partnership a taxable entity for income tax purposes? Explain.

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A: No, because it is a GPP organized for the conduct of a profession.

Q: b) If the 2 partners decide to re-invest P1.50 million into the partnership to buy an office
condominium unit and distribute as dividends only P0.50 million, how much of the partnerships
2008 net income will be subject to income tax? Explain.

A: None, because the net income of a GPP is not subject to income taxation.

121. Q: Explain the concept of taxation at source. What is the rationale behind it?

A: The practice of withholding taxes which is also known as taxation at source, refers to the
requirement that taxes imposed or prescribed by NIRC are to be deducted and withheld by the payor-
corporations and/or persons from payments made to payees-corporations and/or persons for the
former to pay the same directly to the BIR. Thus, the taxes are collected practically at the time the
transaction is made or when the taxable act occurs.
Rationale:

a) to provide the taxpayer a convenient manner to meet his probable income tax liability

b) to ensure the collection of the income tax which could otherwise be lost or substantially reduced
through failure to file the corresponding returns

c) to improve the governments cash flow

d) to minimize tax evasion, thus resulting in a more efficient tax collection system

102

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