Allowable Deductions

1. Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file) of Sta. Portia Realty Corporation (SPRC). He
invited the Regional Director of the Housing and Land Use Regulatory Board (HLURB) to lunch at the Sulo Hotel in
Quezon City to discuss the approval of SPRC's application for a development permit in connection with its subdivision
development project in Pasig City. At breakfast the following day, Calvin met a prospective client interested to enter
into a joint venture with SPRC for the construction of a residential condominium unit in Cainta, Rizal.
Calvin incurred expenses for the lunch and breakfast meetings he had with the Regional Director of HLURB and the
prospective client, respectively. The expenses were duly supported by official receipts issued in his name. At month's
end, he requested the reimbursement of his expenses, and SPRC granted his request.
(a) Can SPRC claim an allowable deduction for the expenses incurred by Calvin? Explain your answer. (2.5%)
(b) Is the reimbursement received by Calvin from SPRC subject to tax? Explain your answer. (2.5%)
Answers:
a. Under the Tax Code, business expenses are allowed as a deduction provided that they are ordinary and
necessary expenditures, directly connected with or pertaining to the taxpayer’s trade or business and that
such expenses are substantiated by adequate proof like official receipts. Applying the requisites in the case
at bar, Calvin’s incurred expenses with respect to the HLURB Director cannot be considered as ordinary and
necessary because the application and approval of a subdivision development permit need not be discussed
outside the place of work of the HLURB Regional Director. Although these are directly connected with the
taxpayer’s business and substantiated with official receipts, it fell short of the first requirement. With respect
to the expenses incurred in meeting a prospective client, those expenses are considered ordinary and
necessary because those are helpful in the development of the taxpayer’s business. Therefore, only the
expenses incurred with respect to the prospective client can be claimed as a deduction by SPRC.
b. No. As a general rule, allowances received by a public officer or employee of a private entity in addition to
his regular compensation is a compensation subject to withholding tax. However, any amount paid, either as
advances or reimbursements, are not considered as compensation subject to withholding tax if they were
incurred as ordinary and necessary or they are reasonably incurred by the employee in the performance of his
duties.

Double Taxation; Interest Income; Withholding Tax

2. Upon his retirement, Alfredo transferred his savings derived from his salary as a marketing assistant to a time deposit
with AAB Bank. The bank regularly deducted 20% final withholding tax on the interest income from the time deposit.
Alfredo contends that the 20% final tax on the interest income constituted double taxation because his salary had been
already subjected to withholding tax.
Is Alfredo's contention correct? Explain your answer. (3%)
Answer: No. Based on jurisprudence, there is double taxation when the same property has been taxed twice
when it should have been taxed once. Both taxes must be imposed on the same property or subject matter for
the same purpose. It must be imposed by the same taxing authority. It must be taxed within the same
jurisdiction during the same taxing period and lastly it must be of the same kind and character. In this case,
while taxes were imposed twice on the same subject matter by the same taxing authority, the character and
purpose for which they were taxed are entirely distinct from one another and that the taxes were not imposed
during the same tax period.
Exclusions Gross Income
3.. The Board of Directors of Sumo Corporation, a company primarily engaged in the business of marketing and
distributing pest control products, approved the partial cessation of its commercial operations, resulting in the
separation of 32 regular employees. Only half of the affected employees were notified of the board resolution.
Rule on the taxability of the separation pay and indemnity that will be received by the affected employees as the result
of their separation from service. Explain your answer. (3%)
Answer: Under the Tax Code, any amount received by an official or employee or by his heirs from the employer
as consequence from the service of the employer because of death, sickness or other physical disability or
for any cause beyond the control of the said official or employee shall be exempt from taxation on gross
income. In this case, the separation of the affected employees was due to cessation of commercial operations
by the employer, a cause beyond the control of the employees. That being the case, whatever amount that
may be received by the employee shall be exempt from tax on gross income.
Real Property Tax; Income Tax
4.San Juan University is a non-stock, non-profit educational institution. It owns a piece of land in Caloocan City on
which its three 2-storey school buildings stood. Two of the buildings are devoted to classrooms, laboratories, a canteen,
a bookstore and administrative offices. The third building is reserved as dormitory for student athletes who are granted
scholarships for a given academic year.
In 2017, San Juan University earned income from tuition fees and from leasing a portion of its premises to various
concessionaires of food, books, and school supplies.
(a) Can the City Treasurer of Caloocan City collect real property taxes on the land and building of San Juan University?
Explain your answer. (5%)
Generally no. Under the Constitution, lands, buildings, and improvements actually, directly and exclusively
used for educational purposes are exempt from property tax whether the educational institution is
proprietary or non-profit.

(b) Is the income earned by San Juan University for the year 2017 subject to income tax? Explain your answer. (5%)
Yes. Revenue or income from trade, business or other activity, the conduct of which is not related to the
exercise or performance of religious, educational and charitable purposes or functions shall be subject to
internal revenue taxes when the same is not actually, directly or exclusively used for the intended purposes.