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TAXATION LAW BAR EXAM QUESTIONS AND SUGGESTED

ANSWERS

2008

Tax Avoidance; Exchange of Real Property and Shares of Stock (2008)


V. Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of P1 million.
Said property has been leased to MAS Corporation, a domestic corporation engaged in
manufacturing paper products, owned 99% by Maria Suerte. In October 2007, EIP Corporation,
a real estate developer, expressed its desire to buy the Makati property at its fair market value
of P300 million, payable as follows: (a) P60 million down payment; and (b) balance, payable
equally in twenty four (24) monthly consecutive instalments. Upon the advice of a tax lawyer,
Maria Suerte exchanged her Makati property for shares of stocks of MAS Corporation. A BIR
ruling, confirming the tax-free exchange of property for shares of stock, was secured from the
BIR National Office and a Certificate Authorizing Registration was issued by the Revenue District
Officer (RDO) where the property was located. Subsequently, she sold her entire stockholdings
in MAS Corporation to EIP Corporation for P300 million. In view of the tax advice, Maria Suerte
paid only the capital gains tax of P29,895,000 (P100,000 x 5% plus P298,900,000 x 10%), instead
of the corporate income tax of P104,650,000 (35% on P299 million gain from sale of real
property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria
Suerte, stating that she committed tax evasion.Is the contention of the RDO tenable? Or was it
tax avoidance that Maria Suerte had resorted to? Explain. (6%)
SUGGESTED ANSWER:
No. The exchange of the real state property for the shares of stocks is considered as a
legitimate tax avoidance scheme (Sec. 40 [C2 b] NIRC). The sale of the shares of stocks of
domestic corporation, which is a capital asset, is subject to a final tax of 5% on the first
P100,000 and 10% on the amount in excess of P100,000 (Sec. 24[C] NIRC).
ALTERNATIVE ANSWER:
Yes. the RDO’s contention, that Maria Suerte committed tax evasion and not tax avoidance, is
tenable. Suerte’s sale of her property to MAS Corporation was an intermediary transaction
aimed more at reducing Suerte’s tax liabilities than for MAS Corporation’s legitimate business
purposes (CIR v. Norton Harrison Co.,120 Phil. 684, 691 [1964]). Said sale was merely a tax ploy,
a sham and without business purpose and economic substance (CIR v. Toda’s Estate, G.R. No.
147188, 14 September 2004).

Corporate Income Tax: Sale of Real Property by a Real Estate Broker (2008)
I. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for
P100,000. This property has a current fair market value of P10 million in view ofthe
construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his
agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a
fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged
in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for
P9 million.
(C) Is Alpha Corporation subject to income tax on the exchange property? If so, what is the tax
base and rate? Explain (3%)
SUGGESTED ANSWER:
Yes. Alpha must pay corporate income tax at the rate of 35% of the residential property’s fair
market value of P10 million (Sec. 27[A] NIRC).

Personal Income Tax: Passive Income; (Rental Income); Situs of Taxation (2008)
(C) Will Z, a non-resident citizen, be liable to pay income tax on the P45,000 monthly rental
income? Reason briefly.
SUGGESTED ANSWER:
Yes. The rental income from property located in the Philippines is considered as income derived
from within. Z, a non-resident citizen is taxable on income derived from sources within the
Philippines. (Section 42 in relation to Section 23, NIRC).

Deductions: Vanishing Deductions (2008)


VI. While driving his car to Baguio last month, Pedro Asuncion, together with his wife Assunta,
and only son, Jaime, met an accident that caused that instantaneous death of Jaime. The
following day, Assunta also died in the hospital. The spouses and their son had the following
assets and liabilities at the time of death:
Properties Assunta Jaime
Exclusive Conjugal Exclusive
Cash P 10M P 1.2M
Cars P 2M P 500K
Land P 5M P 2M
Residential
House P 4M
Mortgage
Payable P 2.5M
Funeral
Expenses P 300K

(B) Is vanishing deduction applicable to the Estate of Assunta Asuncion? Explain (4%)
SUGGESTED ANSWER:
No. In order to claim a vanishing deduction, Sec. 86(A2) NIRC requires that the estate tax of the
property from Jaime to Assunta has already been paid. However, in this case, it is unlikely that
the estate tax has been paid because of the difference of only one day between the respective
times of death.
ALTERNATIVE ANSWER:
Yes. Provided that the estate tax of the property of Jaime was paid before Assunta died, as
provided for in Sec. 86(A2) NIRC. Vanishing deduction equal to 100% is applicable to Assunta’s
estate as regards ½ of the cash she inherited from her son Jaime. Assunta died within one (1)
year after receiving her share of Jaime’s estate.

Exemptions: Gifts, Bequests and Devises (2008)


XIV. Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a
residential house and lot in Quezon City. After the recent wedding of their son, Mario, to
Maria, the spouses donated said real property to them. At the time of donation, the real
property has a fair market value of P2 million.
(A) Are Mario and Maria subject to income tax for the value of the real property donated to
them? Explain. (4%)
SUGGESTED ANSWER:
No. The law classifies the donated property as an exclusion from income tax, and therefore
exempt from income tax (Sec. 32[B3] NIRC).
Exchange of Real Property by an Individual and Domestic Corporation (2008)
I. In January 1970, Juan Gonzales bought one hectare of agricultural land in Lagunafor
P100,000. This property has a current fair market value of P10 million in view of the
construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his
agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a
fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged
in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for
P9 million.
(B) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax
base and rate? Explain (3%)
SUGGESTED ANSWER:
Yes. Juan must pay final income tax of 6% of the gross selling price or the fair market value,
whichever is higher (Sec. 24[D1], NIRC; and RR No. 13-99).

Nature of Real Properties; Capital or Ordinary Asset (2008)


I. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for
P100,000.This property has a current fair market value of P10 million in view of the
construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his
agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a
fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged
in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for
P9 million.
(A) What is the nature of the real properties exchanged for tax purposes - capital asset or
ordinary asset? Explain. (3%)
SUGGESTED ANSWER:
With regard to the Laguna property, it is a capital asset because it is agricultural land. The
Batangas property, in contrast, is an ordinary asset because it is either(1) held for sale to
customers in the ordinary course of business or (2) real property used in the trade of business
of a realtor like Alpha Corp (Secs. 24[D1], 39[A1]2 NIRC; and RR No. 7-2003).

Sale of Shares of Stock Not Traded in the Local Stock Exchange (2008)
X. John McDonald, a U.S. citizen residing in Makati City, bought shares of stock of a domestic
corporation whose shares are listed and traded in the Philippine Stock Exchange at the price of
P2 million. Yesterday, he sold the shares of stock through his favorite Makati stockbroker at a
gain of P200,000.
(B) If John McDonald directly sold the shares to his best friend, who is another U.S. citizen
residing in Makati, at a gain of P200,000, is he liable for Philippine income tax? If so, what is the
tax base and rate? (3%)
SUGGESTED ANSWER:
Yes, He is liable for a final income tax of 5% on first P100,000 net capital gain, and 10% for any
amount in excess of P100,000 net capital gain (Sec.24[C] NIRC).

Sale of Shares of Stock Traded through the Local Stock Exchange (2008)
X. John McDonald, a U.S. citizen residing in Makati City, bought shares of stock of a domestic
corporation whose shares are listed and traded in the Philippine Stock Exchange at the price of
P2 million. Yesterday, he sold the shares of stock through his favorite Makati stockbroker at a
gain of P200,000.
(A) Is John McDonald subject to Philippine income tax on the sale of his shares through his
stockbroker? Is he liable for any other tax? (3%)
SUGGESTED ANSWER:
No. R.A. 7717, now incorporated in Sec. 127 of the NIRC, provides that the sale of shares of
stock traded in the local stock exchange is subject to a percentage tax on the sales of shares, in
lieu of any kind of income tax.

Donor’s Tax: Donation to Relatives (2008)


XIV. Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a
residential house and lot in Quezon City. After the recent wedding of their son, Mario, to
Maria, the spouses donated said real property to them. At the time of donation, the real
property has a fair market value of P2 million.
(B) Are Jose and Clara subject to donor‟s tax? If so, how much is the taxable gift of each spouse
and what rate shall be applied to the gift? Explain. (4%)
SUGGESTED ANSWER:
Yes, because the value of the gift exceeds P10,000 (Sec. 101 [A1] NIRC). However, they are each
entitled to a deduction of P100,000 for the net valueof the gift (Sec.99[B] NIRC). Each spouse
shall be liable for a taxable gift worth P890,000 each at the progressive rate of 2-15%, since the
donee is a relative.
Estate Tax: Basis of Computation (2008)
II. Jose Cernan, Filipino citizen, married to Maria Cernan, died in a vehicular accident in NLEX
on July 10, 2007. The spouses owned, among others, a 100-hectare agricultural land in Sta.
Rosa, Laguna with current fair market value of P20 million, which was the subject matter of a
Joint Venture Agreement about to be implemented with Star Land Corporation (SLC), a well-
known real estate development company. He bought the said real property for P2 million fifty
years ago. On January 5, 2008, the administrator of the estate and SLC jointly announced their
big plans to start conversion and development of the agricultural lands in Sta. Rosa, Laguna,
into first-class residential and commercial centers. As a result, the prices of real properties in
the locality have doubled.The Administrator of the Estate of Jose Cernan filed the estate tax
return on January 9, 2008, by including in the gross estate the real property at P2 million. After
9 months, the BIR issued deficiency estate tax assessment, by valuing the real property at P40
million. 43(A) Is the BIR correct in valuing the real property at P40 million? Explain (3%)
SUGGESTED ANSWER:
No. The BIR is not correct. The property valuation should be fixed at P20 million, which was the
value at the time of the death of Jose Cernan (Sec. 88[A] NIRC).
(B) If you disagree, what is the correct value to use for estate tax purposes? Explain (3%)
SUGGESTED ANSWER:
For purposes of computing the estate tax, the value should have been P20 million because that
was the value of the property at the time of death (Sec. 88[A] NIRC).

Estate Tax: Composition of Gross Estate(2008)


XV(a) What are the properties and interests that should be included in the computation of the
gross estate of the decedent? Explain. (2.5%)
SUGGESTED ANSWER:
All the properties and interests enumerated in the problem should be included in the gross
estate if the decedent. The composition of a grossestate of a decedent who is a citizen of the
Philippines includes all properties, tangible or intangible, wherever situated and to the extent of
the interest that he has thereon at the time of his death (Sec 85, NIRC).

Estate Tax: Deductions Allowed to Estate of a Resident or Citizen (2008)


(XV) Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died
intestate on November 15, 2009. He left the following properties and interests:
House and lot (family home) in Pasig P 800,000
Vacation house and lot in Florida, USA 1,500,000
Agricultural land in Naic, Cavite which he inherited from his father P2,000,000
Car which is being used by his brother in Cavite 500,000
Proceeds of life insurance where he named his estate as irrevocable beneficiary 1,000,000
Household furniture and appliances 1,000,000
Claims against a cousin who has assets of P10,000 and
liabilities of P100,000 - 100,000
Shares of stock in ABC Corp, a domestic enterprise 100,000
The expenses and charges on the estate are as follows:
Funeral Expenses P 250,000
Legal fees for the settlement of the estate 500,000
Medical expenses of last illness 600,000
Claims against the estate 300,000
The compulsory heirs of Don Sebastian approach you and seek your assistance in the
settlement of his estate for which they have agreed to the above-stated professional fees.
Specifically, they request you to explain and discuss with them the following questions. You
oblige:
(B) What is the net taxable estate of the decedent? Explain. (2.5%)
SUGGESTED ANSWER:
The net taxable extent of the decedent is P3,700,000.00. From the gross estate of P7 million the
following deductions are allowed: (1) funeral expenses of P 200,000 which is the maximum
allowed by law; (2) legal fees amounting to P500,000; (3) medical expenses not to exceed
P500,000; (4) Claims against the estate of P300,000; (5) family home equivalent to its fair
market value (not to exceed P1 million) of P800,000; and (6) standard deduction of P1 million,
or a total allowable deduction of P3,300,000.00 (Sec 86, NIRC).
The claim against the cousin amounting to P100, 000, although included in the gross estate,
cannot be claimed as a deduction because the debtor is not yet declared insolvent. Likewise,
the inherited property cannot give rise to a vanishing deduction for want of sufficient factual
basis (Sec 86, NIRC)
Estate Tax: Deductions Allowed to Estate of a Resident or Citizen (2008)
VI. While driving his car to Baguio last month, Pedro Asuncion, together with his wife Assunta,
and only son, Jaime, met an accident that caused that instantaneous death of Jaime. The
following day, Assunta also died in the hospital. The spouses and their son had the following
assets and liabilities at the time of death:
Properties Assunta Jaime
Exclusive Conjugal Exclusive
Cash P 10M P 1.2M
Cars P 2M P 500K
Land P 5M P 2M
Residential
House P 4M
Mortgage
Payable P 2.5M
Funeral
Expenses P 300K

(A) Is the Estate of Jaime Asuncion liable for estate tax? Explain. (4%)
SUGGESTED ANSWER:
No. By availing of the standard deduction of P1 million (Sec. 86 [A5] NIRC); funeral expenses not
exceeding P200,000 and in no case, to exceed 5% of the gross estate (Sec. 86[A1a] NIRC); and
medical expenses not more than P500,000 (Sec. 86[A6] NIRC), the result is a negative net
estate. Therefore, there is no estate tax liability.

VAT: Exempted Transactions; Importation and Use within SBMA (2008)


IV. JKL Corporation is a domestic corporation engaged in the importation and sale of motor
vehicles in the Philippines and is duly registered with the Subic Bay Metropolitan Authority
(SBMA). In December 2007, it imported several second-hand motor vehicles from Japan and
Korea, which it stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to
persons residing in the customs territory.
(A) Are the importations of motor vehicles from abroad subject to customs duties and value
added taxes? Explain. (4%)
SUGGESTED ANSWER:
No. because domestic corporations importing used vehicles that are “stored, used or traded”
within the Subic Naval Base Area enjoy an exemption from customs duties and VAT, provided
they are registered with the SBMA (R.A. 7096; Executive Secretary v. Southwing Heavy
Industries, G.R. No. 164171, 20 February 2006).
(B) If they are taxable, when must the duties and taxes be paid? What are the bases for and
purposes of computing customs duties and VAT? To whom must the duties and VAT be paid?
Explain. (3%)
SUGGESTED ANSWER:
Duties and taxes must be paid upon release of the vehicle from Customs’ custody. Custom
duties for motor vehicles are based on the value being used by the Bureau for assessing
customs duties. VAT is also based on the value being used by the Bureau for motor vehicles
(Sec. 107[A] NIRC). Duties must be paid to the Bureau of Customs. VAT must be paid to the
Bureau of Internal Revenue.

VAT: Liable for VAT (2008)


XII. Greenhills Condominium Corporation incorporated in 2001 is a non-stock, non-profit
association of unit owners in Greenhills Tower, San Juan City. To be able to reduce the
association dues being collected from the unit owners, the Board of Directors of the
corporation agreed to lease part of the ground floor of the condominium building to DEF
Savings Bank for P120,000 a month or P1.44 million for the year, starting January 2007.
(A) Is the non-stock, non-profit association liable for value added tax in 2007? If your answer is
in the negative, is it liable for another kind of business tax? (4%)
SUGGESTED ANSWER:
No. Under RR No. 16-2005, liability for VAT arises only if the annual gross receipts exceed P1.5
million. Secondly, under Sec. 106(A1a) NIRC, the lease must be pursuant to the ordinary course
of trade or business of the taxpayer. The lease of the ground floor to the bank is a casual
transaction.The Association is liable for the business tax of 3% of the gross receipt if the gross
receipts of the taxpayer do not exceed P1.5 million per annum (Sec. 116 NIRC).
(B) Will the association be liable for value added tax in 2008 if it increases the rental to
P150,000 a month beginning January 2008? Explain. (3%)
SUGGESTED ANSWER:
Yes, because the gross receipts will exceed P1.5 million (RR No. 16-2005).
ALTERNATIVE ANSWER:
No. Although the gross receipts will exceed P1.5 million, the lease of the ground floor is not part
of the ordinary course of trade or business of the association (RR No. 16-2005).

BIR: Assessment; Requisites (2008)


VII. After examining the books and records of EDS Corporation, the 2004 final assessment
notice, showing basic tax of P1,000,000, deficiency interest of P400,000, and due date for
payment of April 30, 2007, but without the demand letter, was mailed and released by the BIR
on April 15, 2007.The registered letter, containing the tax assessment, was received by the EDS
Corporation on April 25, 2007.
(A) What is an assessment notice? What are the requisites of a valid assessment? Explain. (3%)
SUGGESTED ANSWER:
An assessment notice is a computation prepared by the BIR of the alleged unpaid taxes, plus
interests, penalties or surcharges, if any. However, an assessment notice must be accompanied
by a demand letter from the BIR in order to result in valid assessment (RR No. 12-99).
(B) As tax lawyer of EDS Corporation, what legal defense(s) would you raise against the
assessment? Explain. (3%)
SUGGESTED ANSWER:
I would raise the defense that there is no valid assessment because EDS Corporation did not
receive a demand letter from the BIR.

BIR: Assessment; Sale of Real Properties (2008)


XI. Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and lot in San
Francisco, California, U.S.A. which he acquired in 2000 for P15 million. On January 10, 2006, he
sold said real property to Juan Mayaman, another Filipino citizen residing in Quezon City, for
P20 million. On February 9, 2006, Manalo filed the capital gains tax return and paid P1.2 million
representing 6% capital gains tax. Since Manalo did not derive any ordinary income, no income
tax return was filed by him for 2006. After the tax audit conducted in 2007, the BIR officer
assessed Manalo for deficiency income tax computed as follows: P5 million (P20 million less
P15 million) x 35% = P1.75 million, without the capital gains tax paid being allowed as tax credit.
Manalo consulted a real estate broker who said that the P1.2 million capital gains tax should be
credited from the P1.75 million deficiency income tax.
(A) Is the BIR officer‟s tax assessment correct? Explain. (3%)
SUGGESTED ANSWER:
The BIR officer correctly disallowed the credit of the final tax of P1.2 million against the net
income tax, which is subject to deductions. However, the assessment of 35% is incorrectly
imposed. The correct rate is based on the 5-32% tax scale which is applicable to individuals
(Sec.24[D1] and Sec. 42[A5] NIRC).
(B) If you were hired by Manalo as his tax consultant, what advice would you give him to
protect his interest? Explain. (3%)
SUGGESTED ANSWER:
I would advise him to demand the application of the 5-32% tax scale instead of the fixed rate of
35% which applies only to domestic corporations (Sec. 24[D1] NIRC).

Taxpayer: Claim for Tax Credit; Prescription (2008)


III. DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Starting
December 15, 2004, DEF Corporation paid annual royalties to DEF, Inc., for the use the latter‟s
software, for which the former, as withholding agent of the government, withheld and remitted
to the BIR the 15% final tax based on the gross royalty payments. The withholding tax return
was filed and the tax remitted to the BIR on January 10 of the following year, On April 10, 2007,
DEF Corporation filed a written claim for tax credit with the BIR, arising from erroneously paid
income taxes covering the years 2004 and 2005. The following day, DEF Corporation filed a
petition for review with the Court of Tax Appeals involving the tax credit claim for 2004 and
2005.
(A) As a BIR lawyer handling the case, would you raise the defense of prescription in your
answer to the claim for tax credit? Explain. (4%)
SUGGESTED ANSWER:
Yes. The defense of prescription is available as against the 2004 tax credit. Under Sec. 229
NIRC, the prescriptive period is 2 years reckoned from the filing of the annual return (CIR v.
TMX Sales, G.R. No. 83736, 15 January 1992; CIR v. PhilAm Life, G.R. No. 105208, 29 May 1995;
CIR v. CTA, G.R. No. 117254, 21 January 1999). However, the 2005 claim has not yet prescribed
since its prescriptive period ends on January 11, 2008 while the claim was filed on April 10,
2007. The filing of the Petition for Review with the Tax Appeals on the 2005 Claim is premature
(Sec. 57[A] NIRC).
(B) Can the BIR lawyer raise the defense that DEF Corporation is not the proper party to file
such claim for tax credit? Explain. (3%)
SUGGESTED ANSWER:
No. the BIR cannot raise the defense that DEF Corporation is not the proper party. In CIR v.
Procter & Gamble, G.R. No. 66838, 02 December 1991, the Courtruled that a final withholding
agent is a proper party “with sufficient legal interest” because it will be liable in the event that
the final income tax cannot be paid by the taxpayer (See also Philippine Guaranty Co. v. CIR and
CTA, No. L-22074, 30 April 1965)

Local Taxation: Business Tax: Taxable Period, Payment in Instalment (2008)


XIII. MNO Corporation was organized on July 1, 2006, to engage in trading of school supplies,
with principal place of business in Cubao, Quezon City. Its books of accounts and income
statement showing gross sales as follows:
July 1, 2006 to December 31, 2006 P5,000,000.
January 1, 2007 to June 30, 2007 P10,000,000.
July 1, 2007 to December 31, 2007 15,000,000.
Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for income tax
purposes, it paid its 2% business tax for fiscal year ending June 30, 2007 based on gross sales of
P15 million. However, the Quezon City Treasurer assessed the corporation for deficiency
business tax for 2007 based on gross sales of P25 million alleging that local business taxes shall
be computed based on calendar year.
(A) Is the position of the city treasurer tenable? Explain. (3%)
SUGGESTED ANSWER:
Yes. Under Sec. 165 of the Local Government Code, the taxable period for the payment of
business taxes is the calendar year.
(B) May the deficiency business tax be paid in installments without surcharge and interest?
Explain. (3%)
SUGGESTED ANSWER:
Yes, provided there is a valid tax ordinance enacted for that purpose that does not impose such
surcharge and/orinterest on any taxes not paid (Sec. 192, Local Government Code).
ALTERNATIVE ANSWER:
No, There is no ordinance authorizing the instalment payment of business taxes without
interest and surcharges (See Sec. 192, Local Government Code).
Local Taxation: Legality/ Constitutionality; Tax Rate (2008)
VIII. The City of Manila enacted an ordinance, imposing a 5% tax on gross receipts on rentals of
space in privately-owned public markets. BAT Corporation questioned the validity of the
ordinance, stating that the tax is an income tax, which cannot be imposed by the city
government. Do you agree with the position of BAT Corporation? Explain (5%)
SUGGESTED ANSWER:
BAT Corporation is correct in questioning the ordinance, but not because it is income tax. The
tax imposed is authorized by Sec. 143 (H) of the Local Government Code. However, the
maximum rate that can be imposed by the city is only 3% (Sec. 151, Local Government Code).
Therefore, tax imposed by Manila is invalid for exceeding the amount allowed by law.

Customs: Exempted Transactions; Importation and Use within SBMA (2008)


IV. JKL Corporation is a domestic corporation engaged in the importation and sale of motor
vehicles in the Philippines and is duly registered with the Subic Bay Metropolitan Authority
(SBMA). In December 2007, it imported several second-hand motor vehicles from Japan and
Korea, which it stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to
persons residing in the customs territory.
(A) Are the importations of motor vehicles from abroad subject to customs duties and value
added taxes? Explain. (4%)
SUGGESTED ANSWER:
No. because domestic corporations importing used vehicles that are “stored, used or traded”
within the Subic Naval Base Area enjoy an exemption from customs duties and VAT, provided
they are registered with the SBMA (R.A. 7096; Executive Secretary v. Southwing Heavy
Industries, G.R. No. 164171, 20 February 2006).
(B) If they are taxable, when must the duties and taxes is paid? What are the bases for and
purposes of computing customs duties and VAT? To whom must the duties and VAT be paid?
Explain. (3%)
SUGGESTED ANSWER:
Duties and taxes must be paid upon release of the vehicle from Customs’ custody. Custom
duties for motor vehicles are based on the value being used by the Bureau for assessing
customs duties. VAT is also based on the value being used by the Bureau for motor vehicles
(Sec. 107[A] NIRC). Duties must be paid to the Bureau of Customs. VAT must be paid to the
Bureau of Internal Revenue.
Customs: Forfeiture Proceeding, Nature (2008)
IX. William Antonio imported into the Philippines a luxury car worth US$100,000. This car was,
however, declared only for US$20,000 and corresponding customs duties and taxes were paid
thereon. Subsequently, the Collector of Customs discovered the underdeclaration and he
initiated forfeiture proceedings of the imported car.
(A) May the Collector of Customs declare the imported car forfeited in favor of the
government? Explain. (3%)
SUGGESTED ANSWER:
Yes, Under-declaration of value is a ground for forfeiture (See Sec. 1206, Tariff and Customs
Code; See also Feeder International v. CA, G.R. No. 94262, 31 May 1991).
(B) Are forfeiture proceedings of goods illegally imported criminal in nature? Explain. (3%)
SUGGESTED ANSWER:
No, a forfeiture proceeding under tariff and customs laws in not penal in nature, the main
purpose of which is to enforce the administrative fines or forfeiture incident to unlawful
importation of goods or their deliberate possession. The penalty in seizure cases is distinct and
separate from the criminal liability that might be imposed against the indicted importer or
possessor and both kinds of penalties may be imposed (Peo. v. CFI of Rizal, et al., No. L-41686,
17 November 1980).

2015

2015 TAXATION LAW BAR Q and A by Bumbo S. Cruz


I. Explain the principles of a sound tax system. (3%)
ANSWER: The following are the principles of a sound tax system: (FAT)
1. Fiscal Adequacy - The sources of tax revenue should coincide with, and approximate
theneeds of, government expenditures.
2. Administrative Feasibility - Tax laws should be capable of convenient, just and effective
administration.
3. Theoretical Justice - The tax burden should be in proportion to the taxpayer’s ability to pay.
II. Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a professional
boxing match held in 2013, he won prize money in United States (US) dollars equivalent to
P300,000,000.
a) Is the prize money paid to and received by Mr. A in the US taxable in the P hilippines? Why?
(2%)
ANSWER: Yes, the prize money is taxable under the NIRC with a final tax rate of 20%. As a
resident citizen of the Philippines Mr. A is taxable for gross income earned within and without
the Philippines. This includes gross income derived from prizes and winnings as such payment
constitutes gain derived from labor. (Sec. 32(A))
b) May Mr. A's prize money qualify as an exclusion from his gross income? Why? (2%)
ANSWER: No, the prize money may not be excluded from Mr. A’s gross income.Under the
NIRC, to be exempt from income tax, prizes and awards granted to athletes inlocal and
international sports competitions and tournaments held in the Philippines and abroad must be
sanctioned by their national associations duly accredited by the Philippine Olympic committee.
(Sec. 32(B)(7)(d), R.A. 7549 sec. 2)There being no indication that the boxing match was
sanctioned by the requirednational sports association, the winnings derived from the match
may not be excluded.
c) The US already imposed and withheld income taxes from Mr. A's prize money. How may Mr.
A use or apply the income taxes he paid on his prize money to the US when he computes his
income tax liability in the Philippines for 2013? (4%)
ANSWER: Under the NIRC, Mr. A may apply the income taxes he paid to the US as a deduction
from his gross income within the taxable year of 2013, unless he signifies in his return the
desire to claim a tax credit for such foreign income taxes. (Sec. 34 (C)(1)(b) and (C)(3)(a))
III. Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a nonresident citizen.
a) If the goods were produced from Ms. B's factory in the Philippines, is Ms. B's income from
the sale to Ms. C taxable in the Philippines? Explain. (2%)
ANSWER: Yes. As a nonresident citizen, Ms. B is taxable for income from sources within the
Philippines under the NIRC. With the factory of the goods being here in the Philippines, the
income derived from their sale is deemed as taxable income from sources within. (Sec. 42)
b) If Ms. B is an alien individual and the goods were produced in her factory in China, is Ms. B's
income from the sale of the goods to Ms. C taxable in the Philippines? Explain. (2%)
ANSWER: No. An alien whether a resident or nonresident, is taxable only on income derived
from sources within the Philippines (Sec. 22). Since the goods were produced in China, and
there being no indication that Ms. B is doing business in the Philippines, the income derived
from the sale is considered from a source without the Philippines, hence is not taxable here.
IV. Mr. E and Ms. F are both employees of AAA Corp. They got married on February 14, 2011.
On December 29, 2011, the couple gave birth to triplets. On June 25, 2013, they had twins.
What were the personal exemptions/deductions which Mr. E and Ms. F could claim in the
following taxable years:
a) For 2010 (2%)
ANSWER: Under the law (R.A. 9504), Mr. E and Ms. F as income earning individuals are each
entitled to the basic personal exemption of Fifty thousand pesos (P50,000), regardless of their
status.
b) For 2011 (3%)
ANSWER: Mr. E and Mrs. F are each entitled to the basic personal exemption of Fifty thousand
pesos (P50,000).An additional exemption of Twenty-five thousand pesos (P25,000) for each of
the triplets who are all Qualified Dependent Children may also be claimed by the husband.
Under the law(R.A. 9504), where the husband and wife are both compensation income earners
the husband is the proper claimant of the additional exemptions EXCEPT if there is an express
waiver by the husband in favor of his wife, as embodied in the application for registration (BIR
Form No. 1902) or in the Certificate of Update of Exemption and of Employer’s and Employee’s
Information (BIR Form No. 2305), whichever is applicable.
c) For 2013 (2%)
ANSWER: For the taxable year of 2013, Mr. E and Mrs. F are entitled to the following personal
exemptions/deductions under the law (R.A. 9504):
1. Basic Personal Exemption of Fifty thousand pesos (P50,000) for each spouse.
2. Additional personal exemption of Twenty-five thousand pesos (P25,000) for each of their
Qualified Dependent Children which shall not exceed 4 dependents, to be claimed by Mr. E,
except if he makes an express waiver in favor of his wife.
V. BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014. In June
2015, its Board of Directors approved the distribution of cash dividends to its stockholders.
BBB, Inc. has individual and corporate stockholders. What is the tax treatment of the cash
dividends received from BBB, Inc. by the following stockholders:
a) A resident citizen (1%)
ANSWER: The cash dividends shall be taxed with a Final Withholding Tax Rate of 10%.
b) Non-resident alien engaged in trade or business (1%)
ANSWER: The cash dividends shall be taxed with a Final Withholding Tax Rate of 20%.
c) Non-resident alien not engaged in trade or business (1%)
ANSWER: The cash dividends shall be taxed with a Final Withholding Tax Rate of 25%.
d) Domestic corporation (1%)
ANSWER: Dividends received by domestic corporations from other domestic corporations are
exempt from tax.
e) Non-resident foreign corporation (1%)
ANSWER: The cash dividends shall be taxed with a Final Withholding Tax Rate of 30%.
(NOTE: The FWT shall be 15% if the country in which the nonresident foreign corporation is
domiciled allows a tax credit for taxes “deemed paid” in the Philippines equivalent to at least
15%)
VI. Differentiate between double taxation in the strict sense and in a broad sense and give an
example of each. (4%)
ANSWER: There is double taxation in the strict sense or direct duplicate taxation when the
following elements concur:
1. the same property must be taxed twice;
2. for the same purpose;
3. by the same taxing authority;
4. within the same jurisdiction;
5. during the same taxing period; and
6. with the same character of tax.
While there is double taxation in the broad sense or indirect duplicate taxation if any of the
elements for direct duplicate taxation is absent. An example of double taxation in the strict
sense include the collection of the City of Manila of the same local business tax twice based on
two different sections of the Revenue Code of Manila, which the Supreme Court has deemed
obnoxious. (Nursery Care Corp. vs. Acevedo, G.R. No. 180651, July 30, 2014) As for double
taxation in the broad sense, an example would be a tax upon the same property imposed by
two different states.
VII. On May 15, 2013, CCC, Inc. received the Final Decision on Disputed Assessment issued by
the Commissioner of Internal Revenue (CIR) dismissing the protest of CCC, Inc. and affirming
the assessment against said corporation. On June 10, 2013, CCC, Inc. filed a Petition for Review
with the Court of Tax Appeals (CTA) in division. On July 31, 2015, CCC, Inc. received a copy of
the Decision dated July 22, 2015 of the CTA division dismissing its Petition. CCC, Inc.
immediately filed a Petition for Review with the CTA en banc on August 6, 2015. ls the
immediate appeal by CCC, Inc. to the CTA en banc of the adverse Decision of the CTA division
the proper remedy? (3%)
ANSWER: No. The proper remedy under the law is to first file a motion for reconsideration of
the decision before the same Division of the CTA within fifteen (15) days from notice thereof.
(Sec. 11, RA 1125 as amended by RA 9282 [2004])
VIII. In June 2013, DDD Corp., a domestic corporation engaged in the business of leasing real
properties in the Philippines, entered into a lease agreement of a residential house and lot with
EEE, Inc., a non-resident foreign corporation. The residential hou se and lot will be used by
officials of EEE, Inc. during their visit to the Philippines. The lease agreement was signed by
representatives from DDD Corp. and EEE, Inc. in Singapore. DDD Corp. did not subject the said
lease to VAT believing that it was not a domestic service contract. Was DDD Corp. correct?
Explain. (3%)
ANSWER: DDD Corp. is incorrect since the leased property is in the Philippines.Under the NIRC,
the lease of properties shall be subject to the 12% Value Added Taximposed irrespective of the
place where the contract of lease was executed if the property is leased or used in the
Philippines. (Sec. 108 (A) as amended by R.A. 9337)
IX. For calendar year 2011, FFF, Inc., a VAT -registered corporation, reported unutilized excess
input VAT in the amount of P 1,000,000.00 attributable to its zero-rated sales. Hoping to
impress his boss, Mr. G, the accountant of FFF, Inc., filed with the Bureau of Internal Revenue
(BIR) on January 31, 2013 a claim for tax refund/credit of the P 1,000,000.00 unutilized excess
input VAT of FFF, Inc. for 2011. Not having received any communication from the BIR, Mr. G
filed a Petition for Review with the CTA on March 15, 2013, praying for the tax refund/credit of
the P 1,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011.
a) Did the CTA acquire jurisdiction over the Petition of FFF, Inc.? (2%)
ANSWER: No, since 120 days have not yet lapsed from January 31, 2013. The CTA did not
acquire jurisdiction since the taxpayer may only resort to a Judicial claim in case of inaction of
the BIR within 30 days after the expiration of 120 days from the date of submission of complete
documents in support of the application for tax refund/credit, which periods are mandatory
under the law. (R.A. 8424)
b) Discuss the proper procedure and applicable time periods for administrative and judicial
claims for refund/credit of unutilized excess input VAT. (4%)
ANSWER: The proper procedure for claiming a tax credit or refund of unutilized excess input
VAT are as follows:
First, the taxpayer must file an Administrative claim with an application for the issuance of a tax
credit certificate or refund of creditable input tax be filed with the Commissioner of Internal
Revenue (CIR) within 2 years after the close of the taxable quarter when the sale was made.
The CIR shall then grant the tax credit/refund within 120 days from the date of submission of
complete documents in support of the application.
Next, in case of denial of the application or the expiry of the 120-day period, whichever comes
first, the taxpayer may resort to a Judicial Claim by filing an appeal to the CTA within 30 days
from the receipt of the denial or inaction.
X. Indicate whether each of the following individuals is required or not required to file an
income taxreturn:
a) Filipino citizen residing outside the Philippines on his income from sou rces outside the
Philippines. (1 %)
ANSWER: No, since a non-resident citizen is NOT taxable on his income without the Philippines.
b) Resident alien on income derived from sources within the Philippines. (1%)
ANSWER: Yes, since a resident alien is taxable on income within the Philippines.
c) Resident citizen earning purely compensation income from two employers within the
Philippines, whose income taxes have been correctly withheld. (1 %)
ANSWER: Yes, since only an individual earning purely compensation income with one employer
is exempted from the filing of an income tax return.
d) Resident citizen who falls under the classification of minimum wage earners. (1%)
ANSWER: No, since Minimum Wage Earners who have no other returnable income are NOT
taxable under the NIRC.
e) An individual whose sole income has been subjected to final withholding tax. (1%)
ANSWER: No, since substituted tax filing applies to an individual whose sole income has been
subjected to final withholding tax.
XI. What are de minimis benefits and how are these taxed? Give three (3) exa mples of de
minimis benefits. (4%)
ANSWER: De minimis benefits are privileges of relatively small value given by the employer to
his employees and are exempt from income tax as well as withholding tax on compensation
income of both managerial and rank and file employees. Examples of de minimis benefits
include:
1. Monetized unused vacation leave credits of private employees not exceeding ten (10) days
during the year
2. Laundry allowance not exceeding P300 per month
3. Uniform and Clothing allowance not exceeding P5,000 per annum (RR 8-2012)
XII. Mr. H decided to sell the house and lot wherein he and his family have lived for th e past 10
years, hoping to buy and move to a new house and lot closer to his children's school.
Concerned about the capital gains tax that will be due on the sale of their house, Mr. H
approaches you as a friend for advice if it is possible for the sale of their house to be exempted
from capital gains tax and the conditions they must comply with to avail themselves of said
exemption. How will you respond? (4%)
ANSWER: I would advise Mr. H that it is possible to sell the house and have it exempted from
capital gains tax provided he complies with the following conditions:
1. The sale is of the old principal residence;
2. The sale is done by natural persons who are residents taxable under Sec. 24 of the NIRC;
3. The proceeds of which is fully utilized in (a)acquiring or (b) constructing a new principal
residence within eighteen (18) months from date of sale or disposition;
4. The Commissioner is notified within thirty (30) days from the date of sale or disposition
through a prescribed return of his intention to avail the tax exemption;
5. The exemption may only be availed of only once every ten years; and
6. The historical cost or adjusted basis of his old principal residence is be carried over to the
cost basis of his new principal residence. (Sec. 24 (D)(2) NIRC)
XIII. GGG, Inc. offered to sell through competitive bidding its shares in HHH Corp., equivalent to
40% of the total outstanding capital stock of the latter. JJJ, Inc. acquired the said shares in HHH
Corp. as the highest bidder. Before it could secure a certificat e authorizing registration/tax
clearance for the transfer of the shares of stock to JJJ, Inc., GGG, Inc. had to request a ruling
from the BIR confirming that its sale of the said shares was at fair market value and was thus
not subject to donor's tax. In B IR Ruling No. 012-14, the CIR held that the selling price for the
shares of stock of HHH Corp. was lower than their book value, so the difference between the
selling price and the book value of said shares was a taxable donation. GGG, Inc. requested the
Secretary of Finance to review BIR Ruling No. 012-14, but the Secretary affirmed said ruling.
GGG, Inc. filed with the Court of Appeals a Petition for Review under Rule 43 of the Revised
Rules of Court. The Court of Appeals, however, dismissed the Petition f or lack of jurisdiction
declaring that it is the CT A which has jurisdiction over the issues raised. Before which Court
should GGG, Inc. seek recourse from the adverse ruling of the Secretary of Finance in the
exercise of the latter's power of review? (3%)
ANSWER: In a similar case, the Supreme Court held that t he CTA through its power of
certiorari, has the power to rule on the validity of a particular administrative rule or regulation
so long as it is within its appellate jurisdiction. Hence, it can now rule not only on the propriety
of an assessment or tax treatment of a certain transaction, but also on the validity of the
revenue regulation or revenue memorandum circular on which the said assessment is based.
(PhilAm LIFE vs. Secretary of Finance, G.R. No. 210987, November 24, 2014)
XIV. KKK Corp. secured its Certificate of Incorporation from the Securities and Exchange
Commission on June 3, 2013. It commenced business operations on August 12, 2013. In April
2014, Ms. J, an employee of KKK Corp. in charge of preparing the annual income tax return of
the corporation for 2013, got confused on whether she should prepare payment for the regular
corporate income tax or the minimum corporate income tax.
a) As Ms. J's supervisor, what will be your advice? (2%)
ANSWER: My advice to Ms. J would be for her to prepare payment for the regular corporate
income tax since only one taxable year has elapsed since August 12, 2013. The minimum
corporate income tax (MCIT) can only apply on the fourth taxable year from when the
corporation commenced its business operations and when the corporation has zero or negative
income or when MCIT is greater than the regular tax rate, as provided under the NIRC.
(Sec.27(E)(1))
b) What are the distinctions between regular corporate income tax and minimum corporate
income tax? (3%)
ANSWER: The distinctions between Regular Corporate Income Tax (RCIT) and Minimum
Corporate Income Tax (MCIT) are as follows:
Tax Base: The tax base for RCIT is Taxable Income, which is Gross Income less Allowable
Deductions, while the tax base for MCIT is Gross Income, which is Gross Sales less Cost of Goods
Sold.
Tax Rate: RCIT is computed at 30% of Taxable Income, while MCIT is computed at 2% of Gross
Income.
When to apply: RCIT is applied from the first taxable year of the corporation onwards, while
MCIT is applied alternatively to RCIT on the fourth taxable year onwards when the corporation
has zero or negative taxable income or when MCIT is greater than RCIT. (Sec. 27(E) NIRC)
XV. In 2012, Dr. K decided to return to his hometown to start his own practice. At the end of
2012, Dr. K found that he earned gross professional income in the amount of P 1,000,000.00;
while he incurred expenses amounting to P560,000.00 constituting mostly of his office space
rent, utilities, and miscellaneous expenses related to his medical practice. However, to Dr. K's
dismay, only P320,000.00 of his expenses were duly covered by receipts. What are the options
available for Dr. K so he could maximize the deductions from his gross income? (3%)
ANSWER: Dr. K may avail of the following options to maximize the deductions from his gross
income:Optional Standard Deduction (OSD): In lieu of itemized deductions, he may elect a
standard deduction in an amount not exceeding 40% of his gross professional income by
signifying in his return his intention to elect the OSD, as provided under the NIRC. (Sec. 34(L))
The Cohan Rule: This relief will apply if he can show that the expenses are usual and it is
necessary in his trade to incur similar kinds of expenditures, though not itemized. In such a
situation, thededuction of the expenses incurred might be allowed even if there are no receipts
or vouchers, as long as he can prove through credible evidence, such as check payments or
bank withdrawals, the amount of disbursements. (Gancayco v. Collector, G.R. No. L-13325, April
20, 1961)
XVI. LLL is a government instrumentality created by Executive Order to be primarily responsible
for integrating and directing all reclamation projects for the National Government. It was not
organized as a stock or a non-stock corporation, nor was it intended to operate commercially
and compete in the private market. By virtue of its mandate, LLL reclaimed several portions of
the foreshore and offshore areas of the Manila Bay, some of which were within the territorial
jurisdiction of Q City. Certificates of title to the reclaimed properties in Q City were issued in the
name of LLL in 2008. In 2014, Q City issued Warrants of Levy on said reclaimed properties of
LLL based on the assessment for delinquent property taxes for the years 2010 to 2013.
a. Are the reclaimed properties registered in the name of LLL subject to real property tax? (4%)
ANSWER: The reclaimed properties are not subject to real property tax.Under the Local
Government Code, real property owned by the Republic of the Philippines or any of its political
subdivisions are exempted from payment of the real property tax. Further, this exemption
should be read in relation to another provision under the same code whichprohibits local
governments from imposing taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities. (Sections 234(a) and 133(o))Here, the subject reclaimed public
lands form part of the public domain. The fact that alienable lands of the public domain were
transferred to LLL which is a government instrumentality did not automatically make such lands
private. The real properties remain owned by the National Government and continue to be
exempt from real estate tax. (Republic vs. Paranaque, G.R. No 191109, July 18, 2012)
b. Will your answer be the same in (a) if from 2010 to the present time, LLL is leasing portions
of the reclaimed properties for the establishment and use of popular fastfood restaurants J
Burgers, G Pizza, and K Chicken? (2%)
ANSWER: No, my answer will not be the same since under the Local Government Code, real
property owned by the Republic of the Philippines or any of its political subdivisions are
exempted from the payment of real property tax, EXCEPT when the beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person. (Sec. 234)By leasing portions
of the reclaimed properties to several commercial establishments, LLL thereby granted
beneficial use of the same to private taxable entities which make the real propertiestaxable.
XVII. Mr. L owned several parcels of land and he donated a parcel each to his two children. Mr.
L acquired both parcels of land in 1975 for P 200,000.00. At the time of donation, the fair
market value of the two parcels of land, as determined by the CIR, was P 2,300,000.00; while
the fair market value of the same properties as shown in the schedule of values prepared by
the City Assessors was P2,500,000.00. What is the proper valuation of Mr. L's gifts to his
children for purposes of computing donor's tax? (3%)
ANSWER: The proper valuation for the donated real properties is the higher value of
P2,500,000.00, based on the schedule of values prepared by the City Assessors.Under the NIRC,
the valuation of gifts made in real property shall be appraised at the
fair market value as determined by the Commissioner, or the schedule of values prepared by
the Provincial and City Assessors, whichever is higher. (Sec. 102, 88(B))
XVIII. Under the Tariff and Customs Code, as amended:
a. When does importation begin and when is it deemed terminated? (2%)
ANSWER: As provided under the Tariff and Customs Code, the importation of goods BEGIN
when the carrying vessel/aircraft enters the Philippine jurisdiction with an intention to unload
its cargoes. It ENDS when there is already payment of duties/taxes/other charges and issuance
of the permit to withdraw. (Sec. 1202)
b. In what case/s is the decision of the Collector automatically reviewed by the Commissioner of
Customs? In what instance/s is the decision of the Commissioner automatically appealed to the
Secretary of Finance? (4%)
ANSWER: Under the Tariff and Customs Code, where a decision of the Collector of Customs
inseizure and protest cases is adverse to the government it shall automatically be reviewed by
the Commissioner of Customs which, if affirmed, shall automatically be elevated for final review
by the Secretary of Finance. (Sec. 2315)
XIX. In 2014, M City approved an ordinance levying customs duties and fees on goods coming
into the territorial jurisdiction of the city. Said city ordinance was duly published on February
15, 2014 witheffectivity date on March 1, 2014.
a. Is there a ground for opposing said ordinance? (2%)
ANSWER: Yes, since the ordinance goes beyond the common limitations on the taxing powers
of local government units.Under the Local Government Code, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays shall not extend to the levy of customs duties.
(Sec. 133(d))
b. What is the proper procedural remedy and applicable time periods f or challenging the
ordinance? (4%)
ANSWER: Any question on the constitutionality or legality of a tax ordinance may be raised on
appeal within 30 days from effectivity to the Secretary of Justice who shall render a decision
within 60 days from the date of receipt of the appeal.Within 30 days after receipt of the
decision or the lapse of the sixty-day period without the Secretary of Justice acting upon the
appeal, the aggrieved party may file appropriate proceedings with a court of competent
jurisdiction. (Sec. 187, LGC)
XX. After filing an Information for violation of Section 254 of the National Internal Revenue
Code (Attempt to Evade or Defeat Tax) with the CTA, the Public Prosecutor manifested that the
People is reserving the right to file the corresponding civil action for the recovery of the civil
liability for taxes. As counsel for the accused, comment on the People's manifestation. (3%)
ANSWER: The manifestation reserving the right to file the corresponding civil action separately
is improper. Under the expanded jurisdiction of the CTA, the criminal action and the
corresponding civil action for the recovery of civil liability for taxes and penalties shall at all
times be simultaneously instituted with, and jointly determined in the same proceeding by the
CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the
civil action, and no right to reserve the filling of such civil action separately from the criminal
action will be recognized. (R.A. 9282 Sec. 7)
XXI. MMM, Inc., a domestic telecommunications company, handles incoming
telecommunications services for non-resident foreign companies by relaying international calls
within the Philippines. To broaden the coverage of its telecommunications services throughout
the country, MMM, Inc. entered into various interconnection agreements with local carriers.
The non -resident foreign corporations pay MMM, Inc. in US dollars inwardly remitted through
Philippine banks, in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas. MMM, Inc. filed its Quarterly VAT Returns for 2000. Subsequently, MMM, Inc. timely
filed with the BIR an administrative claim for the refund of the amount of P6,321,486.50,
representing excess input VAT attributable to its effectively zero -rated sales in 2000. The BIR
ruled to deny the claim for refund of MMM, Inc. because the VAT official receipts submitted by
MMM, Inc. to substantiate said claim did not bear the words "zero -rated" as required under
Section 4.108-1 of Revenue Regulations (RR) No. 7-95. On appeal, the CTA division and the CTA
en banc affirmed the BIR ruling. MMM, Inc. appealed to the Supreme Court arguing that the
NIRC itself did not provide for such a requirement. RR No. 7-95 should not prevail over a
taxpayer's substantive right to claim tax refund or credit.
a. Rule on the appeal of MMM, Inc. (3%)
ANSWER: The petition MMM, Inc. is bereft of merit.In a similar case, the Supreme Court held
that the NIRC explicitly grants the Secretary of Finance the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the tax code.
Such rules and regulations deserve to be given weight and respect by the courts in view of the
rulemaking authority given to those who formulate them and their specific expertise in their
respective fields.Consequently, the invoicing requirements under Revenue Regulations No. 7-95
must be observed by all VAT-registered taxpayers and the failure of MMM Inc. to print the
word “zero-rated” on its invoices or receipts is fatal to its claim for tax refund or tax credit of
input VAT on zero-rated sales.(Eastern Telecommunications vs. CIR, G.R. No. 168856, August
29, 2012)
b. Will your answer in (a) be any different if MMM, Inc. was claiming refund of excess input
VAT attributable to its effectively zero-rated sales in 2012? (2%)
ANSWER: My disposition of the case will remain the same particularly since the provisions of
Revenue Regulation No. 7-95 are already integrated in the NIRC (Sec. 113) enumerating the
invoicing requirements of VAT-registered persons when the tax code was amended.
XXII. State the conditions for allowing the following as deductions from the gross estate of a
citizen or resident alien for the purpose of imposing estate tax:
a. Claims against the estate (2%)
ANSWER: For claims against the Estate to be deductible the following conditions must concur :
(a) The liability represents a personal obligation of the deceased existing at the time of his
death
(b) The liability was contracted in good faith and for adequate and full consideration in money
or money’s worth;
(c) The claim must be a debt or claim which is valid i n law and enforceable in court;
(d) The indebtedness must not have been condoned by the creditor or the action to collect
from the decedent must not have prescribed. (Sec 6(A)(3) of RR 2-2003)
b. Medical expenses (2%)
ANSWER: For medical expenses to be deductible the following conditions must concur:
(a) They must have been incurred within one year prior to the death
(b) They are duly substantiated by receipts
(c) They must not exceed P500,000 (Sec (86) (A)(6) NIRC)