Taxation Law: Answers To Bar Examination Questions

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics
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ANSWERS TO BAR EXAMINATION QUESTIONS
IN
TAXATION LAW
* ARRANGED
BY TOPIC *
(1994 2006)
E !"# $% A&&$%'# ()*
ROMUALDO L. SEERIS II
Silliman University - College of Law
From the ANSWERS TO BAR EXAMINATION QUESTIONS by the UP LAW COMPLEX & P ILIPPINE ASSOCIATION OF LAW SC OOLS
June 3, 2007
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FOREWARD
This work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may be freely o!ied and distrib"ted# ne$ertheless# %ERMISSION TO CO%& from the editors is A'(ISA)LE to !rote t the interest of the ORI*INAL SO+RCES,REFERENCES of this material-. dee!er It is !rimarily intended for all those who desire to ha$e a ommonly to" hed by the %hili!!ine )ar
"nderstandin. of the iss"es
E/aminations and its trend on s!e ifi ally on Ta/ation Laws. It is s!e ifi ally intended for law st"dents from the !ro$in es who# $ery often# are re i!ients of deliberately
distorted notes from other "ns r"!"lo"s law s hools and st"dents.
I wo"ld like to seek the ind"l.en e of the reader for some )ar 0"estions whi h are im!ro!erly lassified "nder a to!i and for some to!i s whi h are im!ro!erly
or i.norantly !hrased# for the arran.er is 1"st a )ar Re$iewee who has !re!ared this work while re$iewin. for the 2
nd
time for the )ar E/ams 2334 "nder time
onstraints and within his limited knowled.e of the law. I wo"ld like to seek the reader5s ind"l.en e also for a n"mber of ty!o.ra!hi al errors in this work.
The Arranger
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Detailed Table of Contents
GENERAL PRINCIPLES...................................................................................................................8 Basic Features: Present Income Tax System (1996)....................................................................................... 8 Basic Stages or Aspects of Taxation (2 6).............................................................................................. 8 !o""ection of Taxes: Aut#ority$ %r&inary !ourts (2 1)................................................................................8 !o""ection of Taxes: Prescription (2 1)..................................................................................................... 8 'irect Tax (s) In&irect Tax (199*)............................................................................................................8 'irect Tax (s) In&irect Tax (2 )............................................................................................................8 'irect Tax (s) In&irect Tax (2 1)............................................................................................................8 'irect Tax (s) In&irect Tax (2 6)............................................................................................................9 'ou+"e Taxation (199,)..........................................................................................................................9 'ou+"e Taxation: -#at !onstitutes 'T. (1996)..........................................................................................9 'ou+"e Taxation$ In&irect 'up"icate Taxation (199,)....................................................................................9 'ou+"e Taxation$ /icense Fee (s) /oca" Tax (2 *)..................................................................................... 9 'ou+"e Taxation$ 0et#o&s of A(oi&ing 'T (199,) .......................................................................................... 9 Imprescripti+i"ity of Tax /a1s (199,)......................................................................................................... 9 Po1er of Taxation: 23ua" Protection of t#e /a1 (2 )................................................................................. 10 Po1er of Taxation: In#erent in a So(ereign State (2 4).............................................................................10 Po1er of Taxation: /ega"ity$ /oca" 5o(6t Taxation (2 4)............................................................................... 10 Po1er of Taxation: /egis"ati(e in 7ature (199*)...........................................................................................10 Po1er of Taxation: /imitations of t#e !ongress (2 1)..................................................................................10 Po1er of Taxation: /imitations: Passing of 8e(enue Bi""s (199,)...................................................................... 11 Po1er of Taxation: /imitations$ Po1er to 'estroy (2 )................................................................................11 Po1er of Taxation: 8e(ocation of 2xempting Statutes (199,)...................................................................... 11 Po1er of Taxation$ In#erent in a So(ereign State (2 9).............................................................................11 Po1er of Taxation$ /egis"ati(e in 7ature (1996)...........................................................................................12 Purpose of Taxation$ Interpretation (2 *).............................................................................................. 12 Purpose of Taxation$ /egis"ati(e in 7ature (2 *)........................................................................................ 12 8u"e on Set:%ff or !ompensation of Taxes (1996)........................................................................................12 8u"e on Set:%ff or !ompensation of Taxes (2 1)........................................................................................12 8u"e on Set:%ff or !ompensation of Taxes (2 9)........................................................................................13 8u"e on Set:%ff or !ompensation on Taxes (2 9)....................................................................................... 13 Tax A(oi&ance (s) Tax 2(asion (1996)................................................................................................... 13 Tax A(oi&ance (s) Tax 2(asion (2 )................................................................................................... 13 Tax 2xemptions: 7ature ; !o(erage$ Proper Party (2 *).............................................................................. 13 Tax /a1s$ BI8 8u"ing$ 7on:8etroacti(ity of 8u"ings (2 *)............................................................................. 14 Tax Pyrami&ing$ 'efinition ; /ega"ity (2 6).............................................................................................. 14 Taxpayer Suit$ -#en A""o1e& (1996)........................................................................................................14 <niformity in t#e !o""ection of Taxes (199=)............................................................................................ 14 INCOME TAXATION....................................................................................................................... 14 Basic: A""o1a+"e 'e&uctions (s) Persona" 2xemptions (2 1)......................................................................... 14 Basic: 0eaning of Taxa+"e Income (2 )..................................................................................................15 Basic: Princip"e of Mobilia Sequuntur Personam (199*)................................................................................. 15 Basic: Proper A""o1ance of 'epreciation (199=).......................................................................................... 15 Basic: Sources of Income: Taxa+"e Income (199=)....................................................................................... 15 Basic: Tax Benefit 8u"e (2 4)............................................................................................................... 15 Basic$ Basis of Income Tax (1996)...........................................................................................................16 Basic$ 5ross Income: 'efine (1999).......................................................................................................16 Basic$ Income (s) !apita" (1999).............................................................................................................16 Basic$ Sc#e&u"ar Treatment (s) 5"o+a" Treatment (199*)...............................................................................16 !ompensation$ Income Tax: 'ue to Profita+"e Business 'ea" (1999)..................................................................16 !orporate: Income: 'onor6s tax$ Tax /ia+i"ity (1996) .....................................................................................17 !orporate$ Income Tax$ 8easona+"eness of t#e Bonus (2 6) ......................................................................... 17 !orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (199*)................................................................................. 17 !orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (2 9)................................................................................. 17
'i(i&en&s: 'isguise& &i(i&en&s (199*).....................................................................................................18 'i(i&en&s$ Income Tax$ 'e&ucti+"e 5ross Income (1999)............................................................................... 18
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2ffect$ !on&onation of /oan in Taxation (1999)........................................................................................... 18 Fringe Benefit Tax: !o(ere& 2mp"oyees (2 1)........................................................................................... 18 Fringe Benefit Tax: 2mp"oyer re3uire& to Pay (2 4).....................................................................................19
Interest: 'eficiency Interest: &efine (1999 Bar).........................................................................................19 Interest: 'e"in3uency Interest: &efine (1999)...............................................................................................19 IT8: Persona" Income$ 2xempte& to Fi"e IT8 (199,)...................................................................................... 19 IT8$ 'omestic !orporate Taxation (199,)................................................................................................19 IT8$ 'omestic !orporate Taxation (2 1)................................................................................................20 IT8$ Persona" Income: T1o 2mp"oyment (2 1)........................................................................................20 IT8$ Persona" Income$ 5SIS Pension (2 )............................................................................................ 20 IT8$ Persona" Income$ 0arrie& In&i(i&ua" (2 *)..........................................................................................20 IT8$ Taxpayer$ /ia+i"ities$ Fa"sifie& Tax 8eturn (2 9)................................................................................... 20 Partners#ip: Income Tax (1999)............................................................................................................ 21 Persona"$ Income Tax: 7on:8esi&ent A"ien (2 )........................................................................................ 21 Persona"$ Income Tax: 7on:8esi&ent !iti?en (1999)......................................................................................21 Persona"$ Income Tax: Tax:Free 2xc#ange (199,)........................................................................................ 22 Persona"$ Income Tax$ !ontract of /ease (1999)..........................................................................................22 Persona"$ Income Tax$ 0arrie& In&i(i&ua" (199,)..........................................................................................22 Persona"$ Income Tax$ 8etiring A"ien 2mp"oyee (2 9).................................................................................. 23 Persona"$ Income Taxation: 7on:8esi&ent !iti?en (199,)................................................................................23 Taxa+"e Income: I""ega" Income (1999 Bar).............................................................................................. 23 Taxa+"e or 7on:Taxa+"e$ Income an& 5ains (2 9).......................................................................................23 -it##o"&ing Tax: 7on:8esi&ent A"ien (2 1)...............................................................................................24 -it##o"&ing Tax: 8etirement Benefit (2 ).............................................................................................24 -it##o"&ing Tax: 8etirement Benefit (2 ).............................................................................................24 -it##o"&ing Tax: 8oya"ty (2 2)............................................................................................................. 24 -it##o"&ing Tax$ !o(erage (2 *)...........................................................................................................25 -it##o"&ing Tax$ 'omestic !orporation$ !as# 'i(i&en&s (2 1) ...................................................................... 25 -it##o"&ing Tax$ Income su+@ect t#ereto (2 1).......................................................................................25 -it##o"&ing Tax$ 7on:8esi&ent A"ien (199*)...............................................................................................25 -it##o"&ing Tax$ 7on:8esi&ent !orporation (199*)...................................................................................... 26 -it##o"&ing Tax$ 8ea&erAs 'igest A1ar& (199=).......................................................................................... 26 -it##o"&ing Tax$ Time 'eposit Interest$ 5SIS Pension (199*)......................................................................... 26
DEDUCTIONS, EXEMPTIONS, EXCLUSIONS - INCLUSIONS..................................................... 2 'e&uction: Faci"itation Fees or >BicB+acB> (199=).....................................................................................26 'e&uctions: %r&inary Business 2xpenses (2 *)........................................................................................26 'e&uctions: Amount for Bri+e (2 1)....................................................................................................... 27 'e&uctions: !apita" /osses$ Pro#i+itions (2 4)......................................................................................... 27 'e&uctions: 'e&ucti+"e Items from 5ross Income (1999)............................................................................27 'e&uctions: Income Tax: 'onation: 8ea" Property (2 2).............................................................................. 27 'e&uctions: 7on:'e&ucti+"e Items$ 5ross Income (1999)........................................................................... 28 'e&uctions: 8e3uisites$ 'e&uci+i"ity of a /oss (199=)...................................................................................28 'e&uctions$ Income Tax: A""o1a+"e 'e&uctions (2 1)..................................................................................28 'e&uctions$ Canis#ing 'e&uction$ Purpose (2 6).......................................................................................28 2xc"usion ; Inc"usion$ 5ross 8eceipts (2 6).............................................................................................28 2xc"usion (s) 'e&uction from 5ross Income (2 1) ......................................................................................28 2xc"usions ; Inc"usions: Benefits on Account of In@ury (1999).....................................................................29 2xc"usions ; Inc"usions: 2xecuti(e Benefits (1999)......................................................................................29 2xc"usions ; Inc"usions$ Assets$ 8esi&ent A"ien (2 9).................................................................................29 2xc"usions ; Inc"usions$ Benefits on Account of 'eat# (1996) ........................................................................ 30 2xc"usions ; Inc"usions$ Benefits on Account of In@ury (2 9).....................................................................30 2xc"usions ; Inc"usions$ !ompensation for persona" in@uries or sicBness (2 4) .................................................. 30 2xc"usions ; Inc"usions$ Faci"ities or Pri(i"eges$ 0i"itary !amp (1999) .......................................................... 30 2xc"usions ; Inc"usions$ 5ifts o(er an& a+o(e t#e 8etirement Pay (1999) ...........................................................31 2xc"usions ; Inc"usions$ IT8$ 14t# mont# pay an& &e minimis +enefits (2 9) ......................................................31 2xc"usions ; Inc"usions$ IT8$ 'i(i&en&s recei(e& +y a &omestic corporation (2 9) .............................................. 31 2xc"usions ; Inc"usions$ IT8$ Income rea"i?e& from sa"e (2 9) ....................................................................... 31 2xc"usions ; Inc"usions$ IT8$ Interest on &eposits (2 9)...........................................................................31 2xc"usions ; Inc"usions$ IT8$ Procee&s of "ife insurance (2 9) ...................................................................32
2xc"usions ; Inc"usions$ /ife Insurance Po"icy (2 4)...................................................................................32
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2xemptions: !#arita+"e Institutions (2 ).................................................................................................32 2xemptions: !#arita+"e Institutions$ !#urc#es (1996)................................................................................... 32 2xemptions: 2&ucationa" institution (2 *)................................................................................................32
2xemptions: 5ifts ; 'onations (199*)....................................................................................................32 2xemptions: Dea& of t#e Fami"y: (199=)................................................................................................... 33 2xemptions: 7on:Profit 2&ucationa" Institutions (2 )................................................................................. 33 2xemptions: 7on:Profit 2ntity$ Anci""ary Acti(ity ; Inci&enta" %perations (199*) ...................................................33 2xemptions: 7on:StocBE 7on:Profit Association (2 2)................................................................................. 34 2xemptions: Pri?e of Peace Poster !ontest (2 ).................................................................................... 34 2xemptions: Pri?es ; A1ar&s$ At#"etes (1996)............................................................................................34 2xemptions: 8etirement Benefits: -orB Separation (1999)............................................................................. 34 2xemptions: Separation Pay (199*)....................................................................................................... 35 2xemptions: Separation Pay (1999)....................................................................................................... 35 2xemptions: Separation Pay (2 9)....................................................................................................... 36 2xemptions: StocB 'i(i&en&s (2 4)........................................................................................................36 2xemptions: Strict"y !onstrue& (1996)...................................................................................................36 2xemptions: Termina" /ea(e Pay (1996)....................................................................................................36 2xemptions$ !#arita+"e Institutions (2 6).................................................................................................36 2xemptions$ 2&ucationa" institution (2 *)................................................................................................36 2xemptions$ 2xemptions are <ni"atera" in 7ature (2 *)................................................................................ 37 2xemptions$ 5o(6t BonusF 5iftsF ; A""o1ances (199*)...................................................................................37 2xemptions$ Persona" ; A&&itiona" 2xemption (2 6)................................................................................... 37 2xemptions$ 8oman !at#o"ic !#urc#$ /imitations (2 9)........................................................................... 38
CAPITAL GAIN TAX....................................................................................................................... 38 !apita" Asset (s) %r&inary Asset (2 4)..................................................................................................38 !apita" 5ain Tax$ 7ature (2 1).............................................................................................................. 38 %r&inary Sa"e of a !apita" Asset (199*).....................................................................................................38 Sa"es of S#are of StocBs: !apita" 5ains Tax 8eturn (1999)..............................................................................39 Tax Basis: !apita" 5ains: 0erger of !orporations (199*) ................................................................................39 Tax Basis: !apita" 5ains: Tax:Free 2xc#ange of Property (199*)...................................................................... 39 CORPORATION - PARTNERS/IP................................................................................................ 3! Ba& 'e+ts$ Factors$ 2"ements t#ereof (2 *)........................................................................................... 39 !on&ominium !orp)$ Sa"e of !ommon Areas (199*).................................................................................. 40 !orporation$ Sa"e$ !re&ita+"e -it##o"&ing Tax (199*) ................................................................................... 40 'i(i&en&s: -it##o"&ing Tax (1999).......................................................................................................... 40 2ffect: 'isso"ution$ !orporate 2xistence (2 *)...........................................................................................41 0inimum !orporate Income Tax (2 1).....................................................................................................41 0inimum !orporate Income Tax$ 2xemption (2 1)......................................................................................41 ESTATE - DONOR0S TAXES.........................................................................................................41 'onor6s Tax: 2"ection !ontri+utions (199=)................................................................................................41 'onor6s Tax$ Basis for 'etermining 5ain (1999).......................................................................................... 41 'onor6s Tax$ 'acion en Pago$ 2ffect: Taxation (199,)................................................................................42 'onor6s Tax$ 'onation to a Si+"ing (2 1)..................................................................................................42 'onor6s Tax$ 'onation to 7on:StocBF 7on:Profit Pri(ate 2&ucationa" Institutions (2 ) .................................... 42 'onor6s Tax$ 'onation to Po"itica" !an&i&ate (2 4).................................................................................. 43 'onor6s Tax$ 'onee or Beneficiary$ Stranger (2 )..................................................................................... 43 'onor6s Tax$ Sa"e of s#ares of StocB ; Sa"e of 8ea" Property (1999)............................................................. 43 2state Tax: !ompre#ensi(e Agrarian 8eform /a1 (199*)............................................................................43 2state Tax: 'onation 0ortis !ausa (2 1)................................................................................................. 43 2state Tax: 'onation 0ortis !ausa (s) Inter Ci(os (199*) ............................................................................... 44 2state Tax: 5ross 2state: A""o1a+"e 'e&uction (2 1)...................................................................................44 2state Tax: 5ross 2state: 'e&uctions (2 )..............................................................................................44 2state Tax: Inc"usion: 8esi&ent A"ien (199*)...............................................................................................44 2state Tax: Payment (s) Pro+ate Procee&ings (2 *)....................................................................................45 2state Tax: Situs of Taxation: 7on:8esi&ent 'ece&ent (2 )...................................................................... 45 2state Tax: Canis#ing 'e&uctions (199*).................................................................................................. 45 2state Tax$ Payment (s) Pro+ate Procee&ings (2 9)....................................................................................45
BUSINESS TAXES """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" 4#
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CAT: Basis of CAT (1996)..................................................................................................................... 45 CAT: !#aracteristics of CAT (1996)..........................................................................................................45 CAT: 2xempte& Transactions (1996)........................................................................................................ 45 CAT: /ia+"e for Payment (1996).............................................................................................................. 46 CAT: Transactions >'eeme& Sa"esG (199,)................................................................................................ 46
CAT$ !o(ere& Transactions (199=)........................................................................................................ 46 CAT$ 2xemption: !onstitutiona"ity (2 *).................................................................................................. 46 CAT$ 7on:CAT taxpayer$ !"aim for 8efun& (2 6)..................................................................................... 47
REMEDIES IN INTERNAL RE1ENUE TAXES................................................................................ 47 BI8: Assessment: <nregistere& Partners#ip (199,)...................................................................................... 47 BI8: !o""ection of Tax 'eficiency (1999)....................................................................................................47 BI8: !ompromise$ !on&itions (2 )....................................................................................................... 48 BI8: !ompromise$ 2xtent of Aut#ority (1996)............................................................................................. 48 BI8: !ompromise$ -it##o"&ing Agent (199=)..............................................................................................48 BI8: !orporation: 'istraint ; /e(y (2 2).................................................................................................. 48 BI8: !ourt of Tax Appea"s: !o""ection of Taxes$ 5roun&s for !ompromise (1996) ..................................................49 BI8: !rimina" Prosecution: Tax 2(asion (199=)........................................................................................ 49 BI8: 2xtinction$ !rimina" /ia+i"ity of t#e Taxpayer (2 2)............................................................................49 BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (199=)................................................................................50 BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (2 2)................................................................................50 BI8: 5arnis#ment: BanB Account of a Taxpayer (199=) ..................................................................................50 BI8: Pre:Assessment 7otice not 7ecessary (2 2).......................................................................................51 BI8: Prescripti(e Perio&: !i(i" Action (2 2)...............................................................................................51 BI8: Prescripti(e Perio&$ Assessment ; !o""ection (1999) ..............................................................................51 BI8: Prescripti(e Perio&$ !rimina" Action (2 2)..........................................................................................51 BI8: Secrecy of BanB 'eposits /a1 (199=).................................................................................................52 BI8: Summary 8eme&y: 2state Tax 'eficiencies (199=)................................................................................. 52 BI8: <npai& Taxes (s) !"aims for <npai& -ages (1999)................................................................................. 53 BI8$ Assessment$ !rimina" !omp"aint (2 9)...........................................................................................53 BI8$ Aut#ority$ 8efun& or !re&it of Taxes (2 9)......................................................................................... 53 BI8$ !ompromise (2 *)...................................................................................................................... 53 BI8$ !ompromise (2 9)...................................................................................................................... 54 BI8$ 'eficiency Tax Assessment (s) Tax 8efun& E Tax !re&it (2 9)..............................................................54 BI8$ 'istraint$ Prescription of t#e Action (2 2)....................................................................................... 54 BI8$ Fa"se (s) Frau&u"ent 8eturn (1996)....................................................................................................55 BI8$ Huris&iction$ 8e(ie1 8u"ings of t#e !ommissioner (2 6)........................................................................ 55 BI8$ Prescripti(e Perio&$ Assessment$ Frau&u"ent 8eturn (2 2)......................................................................55 BI8$ Prescripti(e Perio&$ !rimina" Action (2 6)..........................................................................................55 BI8$ Taxpayer: !i(i" Action ; !rimina" Action (2 2).................................................................................... 55 !ustom: Cio"ation of Tax ; !ustom 'uties (2 2)........................................................................................56 !ustoms$ Basis$ Automatic 8e(ie1 (2 2).............................................................................................. 56 'e"in3uent Tax 8eturn (199=).................................................................................................................57 Huris&iction: !ustoms (s) !TA (2 )................................................................................................... 57 /5<: !o""ection of TaxesF Fees ; !#arges (199,)........................................................................................ 57 Tax Amnesty (s) Tax 2xemption (2 1).....................................................................................................57 Taxpayer: A&ministrati(e ; Hu&icia" 8eme&ies (2 )................................................................................... 57 Taxpayer: Assessment: Protest: !"aims for refun& (2 ).............................................................................. 58 Taxpayer: Assessment$ In@unction (2 *)............................................................................................... 58 Taxpayer: BI8 Au&it or In(estigation (1999).............................................................................................58 Taxpayer: !ity Boar& of Assessment 'ecision$ -#ere to appea" (1999)..............................................................59 Taxpayer: !"aim for 8efun&$ Proce&ure (2 2).........................................................................................59 Taxpayer: 'eficiency Income Tax (1999)................................................................................................... 59 Taxpayer: 2x#austion of A&ministrati(e 8eme&ies (199,)...........................................................................60 Taxpayer: Fai"ure to -it##e"& ; 8emit Tax (2 )..................................................................................... 60 Taxpayer: 7I8! (s) T!! 8eme&ies (1996)..................................................................................................60 Taxpayer: %(er1it#o"&ing !"aim for 8efun& (1999).......................................................................................61 Taxpayer: Prescripti(e Perio&: Suspen&e& (2 )........................................................................................ 61 Taxpayer: Prescripti(e Perio&$ !"aim for 8efun& (199,)................................................................................. 61 Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (199*)................................................................................61
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (2 *)................................................................................62
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Taxpayer: Protest against Assessment (199=).............................................................................................62 Taxpayer: Protest against Assessment (1999).............................................................................................62 Taxpayer: Protest against Assessment (1999).............................................................................................62 Taxpayer: Protest$ !"aim of 8efun& (1996).................................................................................................63
Taxpayer$ Appea" to t#e !ourt of Tax Appea"s (2 9).................................................................................63 Taxpayer$ !"aim for Tax !re&its (2 6)..................................................................................................... 63 Taxpayer$ !ompromise after !rimina" Action (199=)..................................................................................... 63 Taxpayer$ Protest against Assessment$ 'onor6s Tax (1999)............................................................................64 Taxpayer$ -it##o"&ing Agent$ !"aim of Tax 8efun& (2 9)..............................................................................64
LOCAL - REAL PROPERTY TAXES............................................................................................. 4 /oca" Taxation: Actua" <se of Property (2 2).............................................................................................64 /oca" Taxation: !o(erage (2 2).............................................................................................................64 /oca" Taxation: 2xemption$ 8ea" Property Taxes (2 2).................................................................................65 /oca" Taxation: Imposition of A& Ca"orem Tax (2 ) ....................................................................................65 /oca" Taxation: /ega"ityE !onstitutiona"ity$ Tax %r&inance (2 4).................................................................65 /oca" Taxation: /ega"ity$ Imposition of 8ea" Property Tax 8ate (2 2)................................................................65 /oca" Taxation: Po1er to Impose (2 4)....................................................................................................65 /oca" Taxation: 8emissionE!on&onation of Taxes (2 *)............................................................................... 66 /oca" Taxation: 8u"e of <niformity an& 23ua"ity (2 4).............................................................................. 66 /oca" Taxation$ Situs of Professiona" Taxes (2 9) .......................................................................................66 /oca" Taxation$ Specia" /e(y on I&"e /an&s (2 9)....................................................................................... 66 8ea" Property Tax: <n&ergroun& 5aso"ine TanBs (2 4).............................................................................67 8ea" Property Tax$ 8e3uirements$ Auction Sa"es of Property for Tax 'e"in3uency (2 6) ........................................ 67 8ea" Property Taxation: !apita" Asset (s) %r&inary Asset (1999)...................................................................... 67 8ea" Property Taxation: !apita" 5ains (s) %r&inary 5ains (199=)......................................................................67 8ea" Property Taxation: !o(erage of %r&inary Income (199=).......................................................................... 67 8ea" Property Taxation: 2xc#ange of /ot$ !apita" 5ain Tax (199,).................................................................... 68 8ea" Property Taxation: 2xemptionE'e&uctions$ 'onor6s Tax (199=)............................................................. 68 8ea" Property Taxation: 2xemption: Ac3uiring 7e1 Principa" 8esi&ence (2 ) .................................................... 68 8ea" Property Taxation: Fun&amenta" Princip"es (199,)................................................................................. 69 8ea" Property Taxation: Princip"es ; /imitations: /5< (2 ) ..........................................................................69 8ea" Property Taxation: Property So"& is an %r&inary Asset (199=)................................................................... 69 8ea" Property Taxation: <n&ergroun& 5aso"ine TanBs (2 1)..........................................................................69 8ea" Property Taxation$ 2xempte& Properties (2 6).................................................................................... 69 TARI33 AND CUSTOMS DUTIES...................................................................................................70 !ustoms: IF"exi+"e Tariff !"auseG (2 1)...................................................................................................70 !ustoms: A&ministrati(e (s) Hu&icia" 8eme&ies (199,)................................................................................. 70 !ustoms: Importation (1999)................................................................................................................. 70 !ustoms: Huris&iction$ Sei?ure ; Forfeiture Procee&ings (1996)......................................................................70 !ustoms: Jin&s of !ustom 'uties (1999).................................................................................................. 70 !ustoms: Jin&s of !ustom 'uties (199,).................................................................................................. 71 !ustoms: 8eme&ies of an Importer (1996)................................................................................................. 71 !ustoms: 8eturning 8esi&ents: TouristETra(e"ers (2 4)................................................................................71 !ustoms: Sei?ure ; Forfeiture: 2ffects (199*).............................................................................................71 !ustoms: Steps in(o"(ing Protest !ases (199*)....................................................................................... 72 !ustoms$ Basis of 'utia+"e Ca"ue$ Importe& Artic"e (2 9)..........................................................................72 !ustoms$ !ounter(ai"ing 'uty (s) 'umping 'uty (2 9)................................................................................ 72 !ustoms$ Taxa+i"ity$ Persona" 2ffects (2 9)..............................................................................................72 OT/ER RELATED MATTERS.........................................................................................................73 BI8: BanB 'eposits Secrecy Cio"ation (2 )........................................................................................... 73 BI8: Secrecy of BanB 'eposit /a1 (2 4)............................................................................................... 73
nonresidents) are not sub0ect to income tax! Basic Stages or Aspects of Taxation (2 6) 1numerate the ) stages or aspects of taxation! 1xplain each! (*+)
SUGGESTED ANSWER*
GENERAL PRINCIPLES
Basic Features: Present Income Tax System (1996) What are the basic features of the present income tax system"?
SUGGESTED ANSWER*
Our present income tax system can be said to have the following basic features: (a) It has adopted a COMPREHENSIVE TAX SITUS by using the nationality residence and source rules! "his ma#es citi$ens and resident aliens taxable on their income derived from all sources while non%resident aliens are taxed only on their income derived from within the &hilippines! 'omestic corporations are also taxed on universal income while foreign corporations are taxed only on income from within!
(b) "he individual is mainly income tax system
"he aspects of taxation are: (2) 3145I6, 7 the act of the legislature in choosing the persons properties rights or privileges to be sub0ected to taxation! (8) 9--1--:16" and (O331("IO6 7 "his is the act of executing the law through the administrative agencies of government! ()) &95:16" 7 the act of the taxpayer in settling his tax obligations!
PROGRESSIVE IN NATURE in that it provides a graduated rates of income tax! (orporations in general are taxed at a flat rate of thirty five percent ()*+) of net income!
(c) It has retained MORE SCHEDULAR THAN GLOBAL FEATURES with respect to individual taxpayers but has maintained a more global
treatment on corporations! Note: The following might also be cited by the bar candidates as features of the income tax system:
a!
Individual compensation income earners are taxed on modified ,ross Income (,ross compensation income less personal exemptions)! -elf%employed and professionals are taxed on net income with deductions limited to seven items or in lieu thereof the forty percent (./+) maximum deduction plus the personal exemptions! (orporations are generally taxed on net income except for non%resident foreign corporations which are taxed on gross income! "he income tax is generally imposed via the self% assessment system or pay%as%you%file concept of imposing the tax although certain incomes! Including income of non%residents are taxed on the pay%as% you%earn concept or the so called withholding tax!
b!
c!
"he corporate income tax is a one% layer tax in that distribution of profits to stoc#holders (except to
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!o""ection of Taxes: Aut#ority$ %r&inary !ourts (2 1) :ay the courts en0oin the collection of revenue taxes? 1xplain your answer! (8+)
SUGGESTED ANSWER*
very person who as intended should pay the tax which he cannot shift to anotherA while an I6'I<1(" "9> is demanded in the first instance from one person with the expectation that he can shift the burden to someone else not as a tax but as a part of the purchase price! 'irect Tax (s) In&irect Tax (2 1) 'istinguish direct taxes from indirect taxes and give an example for each one! (8+)
SUGGESTED ANSWER*
9s a general rule the courts have no authority to en0oin the collection of revenue taxes! (-ec! 82; 6I<()! =owever the (ourt of "ax 9ppeals is empowered to en0oin the collection of taxes through administrative remedies when collection could 0eopardi$e the interest of the government or taxpayer! (-ection 22 <9 228*)!
'I<1(" "9>1- are taxes wherein both the incidence (or liability for the payment of the tax) as well as the impact or burden of the tax falls on the same person! 9n
!o""ection of Taxes: Prescription (2 1) :ay the collection of taxes be barred by prescription? 1xplain your answer! ()+)
SUGGESTED ANSWER*
5es! "he collection of taxes may be barred by prescription! "he prescriptive periods for collection of taxes are governed by the tax law imposing the tax! =owever if the tax law does not provide for prescription the right of the government to collect taxes becomes imprescriptible! 'irect Tax (s) In&irect Tax (199*) 'istinguish a direct from an indirect tax!
SUGGESTED ANSWER*
9 'I<1(" "9> is one in which the taxpayer who pays the tax is directly liable therefor that is the burden of paying the tax falls directly on the person paying the tax! 9n I6'I<1(" "9> is one paid by a person who is not directly liable therefor and who may therefore shift or pass on the tax to another person or entity which ultimately assumes the tax burden! (Maceda v.
Macaraig
!"# SCRA ##!$
'irect Tax (s) In&irect Tax (2 ) 9mong the taxes imposed by the ?ureau of Internal <evenue are income tax estate and donor@s tax value% added tax excise tax other percentage taxes and documentary stamp tax! (lassify these taxes into direct and indirect taxes and differentiate direct from Indirect taxes! (*+)
SUGGESTED ANSWER*
Income tax estate and donor@s tax are considered as direct taxes! On the other hand value%added tax excise tax other percentage taxes and documentary stamp tax are indirect taxes! 'I<1(" "9>1- are demanded from the
expectation and intention that he shall indemnify himself at the expense of another and the burden finally resting on the ultimate purchaser or consumer! 1xample: value added tax! 'irect Tax (s) In&irect Tax (2 6) 'istinguish "direct taxes" from "indirect taxes!" ,ive examples! (*+)
SUGGESTED ANSWER*
'I<1(" "9>1- are demanded from the very person who should pay the tax and which he can not shift to another! 9n I6'I<1(" "9> is demanded from one person with the expectation that he can shift the burden to someone else not as a tax but as part of the purchase price! 1xamples of direct taxes are the income tax the estate tax and the donor@s tax! 1xamples of indirect taxes are the value% added tax the percentage tax and the excise tax on exciseable articles! 'ou+"e Taxation (199,) Is double taxation a valid defense against the legality of a tax measure?
SUGGESTED ANSWER*
6o double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the legality of a tax measure
Ta%a&a% (')$.
'" SCRA
(Pe*+i v.
C,-a
=owever if double taxation amounts to a direct duplicate taxation 2! in that the same sub0ect is taxed twice when it should be taxed but once 8! in a fashion that both taxes are imposed for the same purpose )! by the same taxing authority within the same 0urisdiction or taxing district .! for the same taxable period and *! for the same #ind or character of a tax then it becomes ob0ectionable for being and ineBuitable! legally oppressive
example of this tax is income tax where the person sub0ect to tax cannot shift the burden of the tax to another person! I6'I<1(" "9>1on the other hand are taxes wherein the incidence of or the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person! 1xample of this tax is the value%added tax!
ALTERNATI1E ANSWER*
'ou+"e Taxation: -#at !onstitutes 'T. (1996) > a lessor of a property pays real estate tax on the premises a real estate dealer@s tax based on rental receipts and income tax on the rentals! > claims that this is double taxation? 'ecide!
SUGGESTED ANSWER*
9 direct tax is a tax which is demanded from the person who also shoulders the burden of the tax! 1xample: corporate and individual income tax! 9n indirect tax demanded from is a tax which is one person in the
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"her e
doubl taxatio is no e n! 'OC?31 "9>9"IO6 means taxing for the same tax period the same thing or activity twice when it should be taxed but once by the same taxing authority for the same purpose and with the same #ind or character of tax! "he <193 1-"9"1 "9> is a tax on propertyA the <193 1-"9"1 '1931<@- "9> is a tax on the privilege to engage in businessA while the I6(O:1 "9> is a tax on the privilege to earn an income! "hese taxes are imposed by different taxing authorities and are essentially of different #ind and character
(Vi--a%.eva v+. Ci/0 ,1 I-,i-, 2' SCRA
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occurrence of double taxation?

SUGGESTED ANSWER*
"he usual methods of avoiding the occurrence of double taxation are: 2! 9llowing reciprocal exemption either by law or by treatyA 8! 9llowance of tax credit for foreign taxes paidA )! 9llowance of deduction for foreign taxes paidA and .! <eduction of the &hilippine tax rate!
Note: Any three of the methods shall be given full credit.
3#4$.
'ou+"e Taxation$ In&irect 'up"icate Taxation (199,) When an item of income is taxed in the &hilippines and the same income is taxed in another country is there a case of double taxation?
SUGGESTED ANSWER*
Imprescripti+i"ity of Tax /a1s (199,) "axes were generally imprescriptibleA statutes however may provide otherwise! -tate the rules that have been adopted on this score by %
5es but it is only a case of indirect duplicate taxation which is not legally prohibited because the taxes are imposed by different taxing authorities! 'ou+"e Taxation$ /icense Fee (s) /oca" Tax (2 *) 9 municipality ?? has an ordinance which reBuires that all stores restaurants and other establishments selling liBuor should pay a fixed annual fee of &8/!///! -ubseBuently the municipal board proposed an ordinance imposing a sales tax eBuivalent to *+ of the amount paid for the purchase or consumption of liBuor in stores restaurants and other establishments! "he municipal mayor (( refused to sign the ordinance on the ground that it would constitute double taxation! Is the refusal of the mayor 0ustified? <eason briefly! (*+)
SUGGESTED ANSWER*
6o! "he refusal of the mayor is not 0ustified! "he impositions are of different nature and character! "he fixed annual fee is in the nature of a license fee imposed through the exercise of police power while the *+ tax on purchase or consumption is a local tax imposed through the exercise of taxing powers! ?oth a license fee and a tax may be imposed on the same business or occupation or for selling the same article and this is not in violation of the rule against double taxation DCa5*a%ia Ge%era- de
Ta6ac,+ de Fi-i*i%,+ v. Ci/0 ,1 Ma%i-a 4 SCRA 7'# 8!"'79)! 'ou+"e Taxation$ 0et#o&s of A(oi&ing 'T (199,) What are the usual methods of avoiding the
(a) "he 6ational Internal <evenue (odeA (b) "he "ariff and (ustoms (odeA and (c) "he 3ocal ,overnment (ode 9nswer:
SUGGESTED ANSWERS*
Po1er of Taxation: 23ua" Protection of t#e /a1 (2
"he rules that have been adopted on prescription are as follows: (a) National Internal Revenue Code % "he statute of limitation for assessment of tax if a return is filed is within three ()) years from the last day prescribed by law for the filing of the return or if filed after the last day within three years from date of actual filing! If no return is filed or the return filed is false or fraudulent the period to assess is within "16 519<- from discovery of the omission fraud or falsity! "he period to collect the tax is within "=<11 519<- from date of assessment! In the case however of omission to file or if the return filed is false or fraudulent the period to collect is within "16 519<- from discovery without need of an assessment!
(b) Tariff and Customs Code % It does not express any general statute of limitationA it provided however that "when articles have entered and passed free of duty or final ad0ustment of duties made with subseBuent delivery such entry and passage free of duty or settlement of duties will after the expiration of O61 (2) 519< from the date of the final payment of duties in the absence of fraud or protest be final and conclusive upon all parties unless the liBuidation of Import entry was merely tentative" (-ec 2E/) "(()!
9n 1xecutive Order was issued pursuant to law granting tax and duty incentives only to businesses and residents within the "secured area" of the -ubic 1conomic -pecial Hone and denying said incentives to those who live within the Hone but outside such "secured area"! Is the constitutional right to eBual protection of the law violated by the 1xecutive Order? 1xplain! ()+)
SUGGESTED ANSWER*
6o! 1Bual protection of the law clause is sub0ect to reasonable classification! (lassification to be valid must (2) rest on substantial distinctions (8) be germane to the purpose of the law ()) not be limited to existing conditions only (.) apply eBually to all members of the same class!
(c) Code %
3ocal taxes fees or charges shall be assessed within FI41 (*) 519<-
Local Government
from the date they became due! In case of fraud or intent to evade the payment of taxes fees or charges the same maybe assessed within "16 519<- from
discovery of the fraud or intent to evade payment! "hey shall also be collected either by administrative
or 0udicial action within FI41 (*) 519<from date

of assessment (-ec! 2G. 3,()!
"here are substantial
differenc betwe en big es investors being enticed to the "secured area" and the business operators outside that are in accord with the eBual protection clause that does not reBuire territorial uniformity of laws! "he classification applies eBually to all the resident individuals and businesses within the "secured area"! "he residents being in li#e circumstances to contributing directly to the achievement of the end purpose of the law are not categori$ed further! Instead they are similarly treated both in privileges granted and obligations reBuired! (Tiu et al v. !ourt of "npeals et al #.$. No. %&'"%( )anuary &( %***)
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<evenue <egulation valid?

SUGGESTED ANSWER*
"he regulation establishing gross income as the tax base for corporations doing business in the &hilippines (domestic as well as resident foreign) is not valid! "his is no longer implementation of the law but actually it constitutes legislation because among the powers that are exclusively within the legislative authority to tax is the power to determine %the amount of the tax! (,ee % !ooley %'.%/"). (ertainly if the tax is limited to gross income without deductions of these corporations this is changing the amount of the tax as said amount ultimately depends on the taxable base! Po1er of Taxation: /imitations of t#e !ongress (2 1)
(ongress after much public hearing and consultations with various sectors of society came to the conclusion that it will be good for the country to have only one
Po1er of Taxation: In#erent in a So(ereign State (2 4) Why is the power to tax considered inherent in a sovereign -tate? (.+)
SUGGESTED ANSWER*
It is considered inherent in a sovereign -tate because it is a necessary attribute of sovereignty! +ithout this power no sovereign ,tate can exist or endure ! The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty belonging as a matter of right to every independent state or government. 6o sovereign state can continue to exist without the means to pay its expensesA and that for those means it has the right to compel all citi$ens and property within its limits to contribute hence the emergence of the power to tax! (-% Am. )ur. Taxation "(). Po1er of Taxation: /ega"ity$ /oca" 5o(6t Taxation (2 4) :ay (ongress under the 2G;I (onstitution abolish the power to tax of local governments? (.+)
SUGGESTED ANSWER*
6o! (ongress cannot abolish what is expressly granted by the fundamental law! "he only authority conferred to (ongress is to provide the guidelines and limitations on the local government@s exercise of the power to tax (-ec! * 9rt! > 2G;I (onstitution)! Po1er of Taxation: /egis"ati(e in 7ature (199*) "he -ecretary of Finance upon recommendation of the (ommissioner of Internal <evenue issued a <evenue <egulation using gross income as the tax base for corporations doing business in the &hilippines! Is the
system of taxation by centrali$ing the imposition and collection of all taxes in the national government! 9ccordingly it is thin#ing of passing a law that would abolish the taxing power of all local government units! In your opinion would such a law be valid under the present (onstitution? 1xplain your answer! (*+)
SUGGESTED ANSWER*
amendments! "his follows from the co% eBuality of the two chambers of (ongress (T,-e%/i%, v. Secre/ar0 ,1 Fi%a%ce GR N,. !!3(33 Oc/. 7) !""3)!
6o! "he law centrali$ing the imposition and collection of all taxes in the national government would contravene the (onstitution which mandates that: ! ! ! "1ach local government unit shall have the power to create their own sources of revenue and to levy taxes fees and charges sub0ect to such guidelines and limitations as (ongress may provide consistent with the basic policy of local autonomy!" It is clear that (ongress can only give the guidelines and limitations on the exercise by the local governments of the power to tax but what was granted by the fundamental law cannot be withdrawn by (ongress!
Po1er of Taxation: /imitations$ Po1er to 'estroy (2 ) Justice =olmes once said: The power to tax is not the power to destroy while this !ourt (the ,upreme !ourt) sits.0 'escribe the power to tax and its limitations! (*+)
SUGGESTED ANSWER*
"he power to tax is an inherent power of the sovereign which is exercised through the legislature to impose burdens upon sub0ects and ob0ects within its Jurisdiction for the purpose of raising revenues to carry out the legitimate ob0ects of government! "he underlying basis for its exercise is governmental necessity for without it no government can exist nor endure! 9ccordingly it has the
Po1er of Taxation: /imitations: Passing of 8e(enue Bi""s (199,) "he =ouse of <epresentatives introduced =? I/// which envisioned to levy a tax on various transactions! 9fter the bill was approved by the =ouse the bill was sent to the -enate as so reBuired by the (onstitution! In the upper house instead of a deliberation on the =ouse ?ill the -enate introduced -? ;/// which was its own version of the same tax! "he -enate deliberated on this -enate ?ill and approved the same! "he =ouse ?ill and the -enate ?ill were then consolidated in the ?icameral (ommittee! 1ventually the consolidated bill was approved and sent to the &resident who signed the same! "he private sectors affected by the new law Buestioned the validity of the enactment on the ground that the constitutional provision reBuiring that all revenue bills should originate from the =ouse of <epresentatives had been violated! <esolve the issue!
SUGGESTED ANSWER*
"here is no violation of the constitutional reBuirement that all revenue bills should originate from the =ouse of <epresentatives! What is prohibited is for the -enate to enact revenue measures on its own without a bill originating from the =ouse! ?ut once the revenue bill was passed by the =ouse and sent to the -enate the latter can pass its own version on the same sub0ect matter consonant with the latter@s power to propose or concur with
broadest scope of all the powers of government because in the absence of limitations it is considered as unlimited plenary comprehensive and supreme! "he two limitations on the power of taxation are the inherent and constitutional limitations which are intended to prevent abuse on the exercise of the otherwise plenary and unlimited power! It is the (ourt@s role to see to it that the exercise of the power does not transgress these limitations! Po1er of Taxation: 8e(ocation of 2xempting Statutes (199,)
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taxation is an essential and inherent of sovereignty belonging as a matter to every independent government being expressly granted by the
(Pe*+i;C,-a B,//-i%g
attribute of right without people!
C,5*a%0 ,1 /:e P:i-i**i%e+ I%c. v. M.%ici*a-i/0 ,1 Ta%a.a% Le0/e G.R. N,. L;7!!3' Fe6r.ar0 2# !"#'$
"axation is the inherent power of a -tate to collect enforced proportional contribution to support the expenses of government! "axation is the power vested in the legislature to impose burdens or charges upon persons and property in order to raise revenue for public purposes! "he power to tax is so unlimited in force and so searching in extent that courts scarcely venture to declare it is
">" (orporation was the recipient in 2GG/ of two tax exemptions both from (ongress one law exempting the company@s bond issues from taxes and the other exempting the company from taxes in the operation of its public utilities! "he two laws extending the tax exemptions were revo#ed by (ongress before their expiry dates! Were the revocations constitutional?
SUGGESTED ANSWER*
5es! "he exempting statutes are both granted unilaterally by (ongress in the exercise of taxing powers! -ince taxation is the rule and tax exemption the exception any tax exemption unilaterally granted can be withdrawn at the pleasure of the taxing authority without violating the (onstitution (Mac/a% Ce6. I%/er%a/i,%a- Air*,r/ A./:,ri/0 v Marc,+ G.R N,. !2))42 Se*/e56er !! !""')! 6either of these were issued by the taxing authority in a contract lawfully entered by it so that their revocation would not constitute an impairment of the obligations of contracts!
ALTERNATI1E ANSWER*
6o! "he withdrawal of the tax exemption amounts to a deprivation of property without due process of law hence unconstitutional! Po1er of Taxation$ In#erent in a So(ereign State (2 9) 'escribe the power of taxation! :ay a legislative body enact laws to raise revenues in the absence of a constitutional provision granting said body the power to tax? 1xplain!
SUGGESTED ANSWER*
5es the legislative body may enact laws even in the absence of a constitutional provision because the power to tax is inherent in the government and not merely a constitutional grant! "he power of
granting them general and broad tax powers

sub0ect to any restrictions whatever except such as rest in the discretion of the authority which exercises it! (Ti, v.
Vide,gra5 Reg.-a/,r0 B,ard G.R. N,. L; #3'"# <.%e !4 !"4#$ -o potent is the power
(Ma%i-a E-ec/ric C,5*a%0 v. Pr,vi%ce ,1 Lag.%a e/. a-. 7)' SCRA #3) 8!"""9$! (onsidering that
to tax that it was once opined power to tax involves the destroy!"
that "the power to
(C.<. Mar+:a-- i% McC.--,c: v. Mar0-a%d ( =:ea/ 7!' ( L. Ed. 3#" ')#$
inasmuch as the power to tax may be exercised by local legislative bodies no longer by valid congressional delegation but by direct authority conferred by the (onstitution in interpreting statutory provisions on municipal fiscal powers doubts will therefore have to be resolved in favor of municipal corporations (Ci/0 G,ver%5e%/ ,1
Sa% Pa6-, Lag.%a v. Re0e+ 7)3 SCRA 737 8!"""9$. "his means that the court must
Po1er of Taxation$ /egis"ati(e in 7ature (1996) What is the nature of the power of taxation?
SUGGESTED ANSWER*
"he &OW1< "O "9> is an attribute of sovereignty and is inherent in the -tate! It is a power emanating from necessity because it imposes a necessary burden to preserve the -tate@s sovereignty (P:iG.ara%/ee C,. v+. C,55i++i,%er L;22)#( A*ri- 7) !"'3$ ! It is inherently legislative in nature and character in that the power of taxation can only be exercised through the enactment of law!
ALTERNATI1E ANSWER*
adopt a liberal construction of a law granting a municipal corporation the power to tax!
Note: If the examinee chose proposition no. 4 as his answer it should be given full credit considering that the present ("9 9ct (<!9! 6o! G8;8) has made the ("9 a coeBual 0udicial body of the (ourt of 9ppeals! "he Buestion "Which of the following propositions
"he nature of the power of taxation refers to its own limitations such as the reBuirement that it should be for a public purpose that it be legislative that it is territorial and that it should be sub0ect to international comity!
Purpose of Taxation$ Interpretation (2 *) Which of the following propositions may now be untenable: 2) "he court should construe a law granting tax exemption strictly against the taxpayer! 8) "he court should construe a law granting a municipal corporation the power to tax most strictly! )) "he (ourt of "ax 9ppeals has 0urisdiction over decisions of the (ustoms (ommissioner in cases involving liability for customs duties! .) "he (ourt of 9ppeals has 0urisdiction to review decisions of the (ourt of "ax 9ppeals! *) "he -upreme (ourt has 0urisdiction to review decisions of the (ourt of 9ppeals! Justify your answer or choice briefly! (*+)
SUGGESTED ANSWER*
2! The court should construe a law granting a municipal corporation the power to tax most strictly.
"his proposition is now untenable! "he basic rationale for the grant of tax power to local government units is to safeguard their viability and self%sufficiency by directly
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of
may now be untenable" may 73 lead the examinee to choose a
proposition which is untenable on the basis of the new law despite the cut% off date adopted by the ?ar 1xamination (ommittee! <!9! 6o! G8;8 was passed on :arch )/ 8//.!
Purpose of Taxation$ /egis"ati(e in 7ature (2 *) "axes are assessed for the purpose of generating revenue to be used for public needs! "axation itself is the power by which the -tate raises revenue to defray the expenses of government! 9 0urist said that a tax is what we pay for civili$ation!In our 0urisdiction which of the following statements may be erroneous: 2) "axes are pecuniary in nature! 8) "axes are enforced charges and contributions! )) "axes are imposed on persons and property within the territorial 0urisdiction of a -tate! .) "axes are levied by the executive branch of the government! *) "axes are assessed according to a reasonable rule of apportionment! Justify your answer or choice briefly! (*+) SUGGESTED NS!ER: . 4. Taxes are levied by the executive branch of government! "his statement is erroneous because levy refers to the act of imposition by the legislature which is done through the enactment of a tax law! 3evy is an exercise of the power to tax which is exclusively legislative in nature and character! (learly taxes are not levied by the executive branch of government! (<VPC v. A-6a0 !4' SCRA !"4 8!"")9$. 8u"e on Set:%ff or !ompensation of Taxes (1996)
> is the owner of a residential lot situated at Kuirino 9venue &asay (ity! "he lot has an area of )// sBuare meters! On June 2 2GG. 2// sBuare meters of said lot owned by > was expropriated by the government to be used in the widening of Kuirino 9venue for &)//!///!// representing the estimated assessed value of said portion! From 2GG2 to 2GG* > who is a businessman has not been paying his income taxes! > is now being assessed for the unpaid income taxes in the total amount of &2*/ ///!//! > claims his income tax liability has already been compensated by the amount of &)//!///!// which the government owes him for the expropriation of his property! 'ecide!
SUGGESTED ANSWER*
for his property expropriated taxes are of distinct #ind essence and nature than ordinary obligations! "axes and debts cannot be the sub0ect of compensation because the ,overnment and > are not mutually creditors and debtors of each other and a claim for taxes is not a debt demand contract or Judgment as is allowable to be set off! (Fra%cia v+. IAC. G.R #'#(" <.%e
24. !"44$
8u"e on Set:%ff or !ompensation of Taxes (2 1) :ay a taxpayer who has pending claims for 49" input credit or refund set%off said claims against his other tax liabilities? 1xplain your answer! (*+)
SUGGESTED ANSWER*
"he income tax liability of > can not be compensated with the amount owed by the ,overnment as compensation
(ivil (ode!
(D,5i%g, v. Gar-i/,+ G.R. N,. L;!4""( <.%e 2" !"'7$
6o! -et%off is available only if both obligations are liBuidated and demandable! 3iBuidated debts are those where the exact amounts have already been determined! In the instant case the claim of the taxpayer for 49" refund is still pending and the amount has still to be determined! 9 fortiori the liBuidated obligation of the taxpayer to the government can not therefore be set%off against the unliBuidated claim which the taxpayer conceived to exist in his favor! (P:i-e> Mi%i%g C,r*. v. CIR GR N,. !23#)( A.g.+/ 2" !""4)!
ALTERNATI1E ANSWER*
8u"e on Set:%ff or !ompensation on Taxes (2 9) (an an assessment for a local tax be the sub0ect of set%off or compensation against a final 0udgment for a sum of money obtained by the taxpayer against the local government that made the assessment? 1xplain!
SUGGESTED ANSWER*
6o
taxes cannot be the sub0ect of set%off

D,5i%g, v. Gar-i/,+ G.R. N,. L;!4""(
6o! "axes and claims for refund cannot be the sub0ect of set%off for the simple reason that the government and the taxpayer are not creditors and debtors of each other! "here is a material distinction between a tax and a claim for refund! (laims for refunds 0ust li#e debts are due from the government in its corporate capacity while taxes are due to the government in its sovereign capacity! (P:i-e> Mi%i%g C,r*. v. CIR GR N,. !23#)( A.g.+/ 2" !""4)! 8u"e on Set:%ff or !ompensation of Taxes (2 9) :ay taxes be the sub0ect of set%off or compensation? 1xplain!
SUGGESTED ANSWER5
<.%e 2" !"'7
even when there is a final 0udgment for a sum of money against the local government ma#ing the assessment! "he government and the taxpayer are not the "mutual creditors and debtors" of each other who can avail of the remedy of compensation which 9rt! 28I; ((ivil (ode) is
6o taxes cannot be the sub0ect of set%off or compensation for the following reasons: 2) "he lifeblood theory reBuires that there should be no unnecessary impediments to the collection of taxes to ma#e available to the government the wherewithal to meet its legitimate ob0ectivesA and
8)
"he payment of taxes is not a contractual obligation but arises out of a duty to pay and in respect of the positive acts of government regarding the ma#ing and enforcing of taxes the personal consent of the individual taxpayer is not reBuired! (Re*.6-ic
v. Ma56.-a, L.56er C,. G.R.
N,. L;!##23 Fe6r.ar0 24 !"'2? Ca-/e> v. C,55i++i,% ,% A.di/ G.R. N,. "2343 Ma0 4 !""2? a%d P:i-e> v. C,55i++i,%er ,1 I%/er%aReve%.e G.R. N,. !23#)( A.g.+/ 24 !""4$
=owever there is a possibility that set%off may arise if the claims against the government have been recogni$ed and an amount has already been appropriated for that purpose! Where both claims have already become overdue and demandable as well as fully liBuidated! (ompensation ta#es place by operation of law under 9rt! 28// in relation to 9rticles 28IG and 28G/ of the 6ew
referrin Re*.6-i /: g to c ,1 e
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Ma56.-a, L.56er C,. G.R. N,. L; !##23 Fe6r.ar0 24 !"'2? a%d Fra%cia v. I%/er5edia/e A**e--a/e C,.r/ G.R. N,. L;'#'(" <.%e 24 !""4.
P:i-i**i% e+ v.
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from the donor@s tax! "he donation is the legal means employed to transfer the incidence of income tax on the rental income! Tax 2xemptions: 7ature ; !o(erage$ Proper Party (2 *)
9s an incentive for investors a law was passed giving newly established companies in certain economic $one exemption from all taxes duties fees imposts and other charges for a period of three years! 9?( (orp! was organi$ed and was granted such incentive! In the course of business 9?( (orp! purchased mechanical eBuipment from >5H Inc! 6ormally the sale is sub0ect to a sales tax!
"here is however legal basis to state that an assessment for a local tax may be the sub0ect of set%off or compensation against a final 0udgment for a sum of money obtained by the taxpayer against the local government by operation of law where the local government and the taxpayer are in their own right reciprocally debtors and creditors of each other and that the debts are both due and demandable! "his is consistent
with the ruling in relying upon 9rts! 28I; and 28IG of the (ivil (ode where these provisions were applied in relation to the national tax and should therefore be applicable to a local tax! Tax A(oi&ance (s) Tax 2(asion (1996) 'istinguish tax evasion from tax avoidance!
SUGGESTED ANSWER*
>5H Inc! claims however that since it sold the eBuipment to 9?( (orp! which is tax exempt >5H
"ax evasion is a scheme used outside of those lawful means to escape tax liability and when availed of it usually sub0ects the taxpayer to further or additional civil or criminal liabilities! "ax avoidance on the other hand is a tax saving device within the means sanctioned by law hence legal! Tax A(oi&ance (s) Tax 2(asion (2 )
:r! &ascual@s income from leasing his property reaches the maximum rate of tax under the law! =e donated one% half of his said property to a non%stoc# non%profit educational institution whose income and assets are actually directly and exclusively used for educational purposes and therefore Bualified for tax exemption under 9rticle >I4 -ection . ()) of the (onstitution and -ection )/ (h) of the "ax (ode! =aving thus transferred a portion of his said asset :r! &ascual succeeded in paying a lesser tax on the rental income derived from his property! Is there tax avoidance or tax evasion? 1xplain! (8+)
SUGGESTED ANSWER*
"here is tax avoidance! :r! &ascual has exploited a fully permissive alternative method to reduce his income tax by transferring part of his rental income to a tax exempt entity through a donation of one%half of the income producing property! "he donation is li#ewise exempt
should not be liable to pay the sales tax! Is this claim tenable? (*+)
SUGGESTED ANSWER*
for bac# taxes because it would be violative of the principle of non%retroactivity of rulings and doing so would result in grave in0ustice to the taxpayer who relied on the first ruling in good faith (Sec/i,% 2(' NIRC? CIR v.
B.rr,.g:+ I%c. !(2 SCRA 72(8!"4'9$.
9! 6o! 1xemption from taxes is personal in nature and covers only taxes for which the taxpayer%grantee is directly liable! "he sales tax is a tax on the seller who is not exempt from taxes! -ince >5H Inc! is directly liable for the sales tax and no tax exemption privilege is ever given to him therefore its claim that the sale is tax exempt is not tenable! 9 tax exemption is construed in strictissimi 1uris and it can not be permitted to exist upon vague implications (A+ia/ic Pe/r,-e.5 C,. L/d. V.
L-a%e+ (" P:i-
Tax Pyrami&ing$ 'efinition ; /ega"ity (2 6) What is tax pyramiding? What is its basis in law? (*+)
SUGGESTED ANSWER*
"ax &yramiding is the imposition of a tax upon another tax! It has no basis in fact or in law (Pe,*-e v. Sa%diga%6a0a% G.R. N,. !32372 A.g.+/ !' 2))3$. "here is also tax pyramiding when sales taxes are incorrectly applied to goods several times from production to final
('' 8!"2'9$.
9ssume arguendo that >5H had to and did pay the sales tax! 9?( (orp! later found out however that >5H merely shifted or passed on to 9?( the amount of the sales tax by increasing the purchase price! 9?( (orp! now claims for a refund from the ?ureau of Internal <evenue in an amount corresponding to the tax passed on to it since it is tax exempt! Is the claim of 9?( (orp! meritorious? (*+)
SUGGESTED ANSWER6
(C:.rc:i-- @ Tai- v.
?! 6o! "he claim of 9?( (orp! is not meritorious! 9lthough the tax was shifted to 9?( (orp! by the seller what is paid by it is not a tax but part of the cost it has assumed! =ence since 9?( (orp! is not a taxpayer it has no capacity to file a claim for refund! "he taxpayer who can file a claim for refund is the person statutorily liable for the payment of the tax! Tax /a1s$ BI8 8u"ing$ 7on:8etroacti(ity of 8u"ings (2 *) 'ue to an uncertainty whether or not a new tax law is applicable to printing companies '1F &rinters submitted a legal Buery to the ?ureau of Internal <evenue on that issue! "he ?I< issued a ruling that printing companies are not covered by the new law! <elying on this ruling '1F &rinters did not pay said tax! -ubseBuently however the ?I< reversed the ruling and issued a new one stating that the tax covers printing companies! (ould the ?I< now assess '1F &rinters for bac# taxes corresponding to the years before the new ruling? <eason briefly! (*+)
SUGGESTED ANSWER*
(P:i-. Tr.+/ @ C,. v.
6o! <eversal of a ruling shall not be given a retroactive application if said reversal will be pre0udicial to the taxpayer! "herefore the ?I< can not assess '1F printers
of sale thus shifting the tax burden to the 73 ultimate consumer!

(NOTABENE: This concept pertains to the 2AT law which is excluded from the bar coverage #uidelines for &((. 3ar 4xaminations )une %- &((.)
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14
INCOME TAXATION
Basic: A""o1a+"e 'e&uctions (s) Persona" 2xemptions (2 1)
'istinguish 9llowable 'eductions from &ersonal 1xemptions! ,ive an example of an allowable deduction and another example for personal exemption! (*+)
SUGGESTED ANSWER*
Taxpayer Suit$ -#en A""o1e& (1996) When may a taxpayer@s suit be allowed? SUGGESTED NS!ER: 9 taxpayer@s suit may only be allowed when an act complained of which may include a legislative enactment directly involves the illegal disbursement of public funds derived from taxation ( Pa+c.av+. Secre/ar0 ,1 P.6-ic =,rA+ !!) P:i-. 77!)! <niformity in t#e !o""ection of Taxes (199=) 1xplain the reBuirement of uniformity as a limitation in the imposition andLor collection of taxes! (*+M
SUGGESTED ANSWER*
"he distinction between allowable deductions and personal exemptions are as follows:
a! A+ /, a5,.%/ 7 9llowable deductions generally refer to actual expenses incurred in the pursuit of trade business or practice of profession while
Cniformity in the imposition andLor collection of taxes means that all taxable articles or #inds of property of the same class shall be taxed at the same rate! "he reBuirement of uniformity is complied with when the tax operates with the same force and effect in every place
where the sub0ect of it is found

7( P:i-. "'"$ ! It does not mean that lands chattels securities income occupations franchises privileges necessities and luxuries shall be assessed at the same rate! 'ifferent articles maybe taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times! 9ccordingly singling out one particular class for taxation purposes does not infringe the reBuirement of uniformity! C,%ce*/i,%
"IRST LTERN TI#E NS!ER: "he criteria is met when the tax laws operate eBually and uniformly on all persons under similar circumstances! 9ll persons are treated in the same manner the conditions not being different both in privileges conferred and liabilities imposed! Cniformity in taxation also refers to geographical uniformity! Favoritism and preference is not allowed! SEC$ND LTERN TI#E NS!ER: 9 tax is deemed to have satisfied the uniformity rule when it operates with the same force and effect in every place where the sub0ect maybe found!
Ba/c, '" P:i-. (2)$.
personal exemptions are arbitrary amounts allowed by law! b! A+ /, %a/.re 7 9llowable deductions constitute business expenses while personal exemptions pertain to personal expenses!
c! A+ /, *.r*,+e 7 'eductions are allowed to enable the taxpayer to recoup his cost of doing business while personal exemptions are allowed to cover personal family and living expenses!
(d) any other method which may be prescribed by the -ecretary of Finance upon recommendation of the (ommissioner of Internal <evenue (-ec! ).(F)! 6I<()! 8! "he annual depreciation of the depreciable fixed asset may be computed on the straight%line method which will allow the taxpayer to deduct an annual depre% ciation of &hp. *// arrived at by dividing the depreciable value (&hp l//!///%&hpl/!///) of &hpG/ /// by the estimated useful life (8/ years)!
N$TE: "he bar candidate may give a different figure depending on the method he used in computing the annual depreciation!
d! A+ /, c-ai5a%/+ 7 9llowable deductions can be claimed by all taxpayers corporate or otherwise while personal exemptions can be claimed only by individual taxpayers! Basic: 0eaning of Taxa+"e Income (2 ) What is meant by taxable income? (8+)
SUGGESTED ANSWER*
"9>9?31 I6(O:1 means the pertinent items of gross income specified in the "ax (ode less the deductions andLor personal and additional exemptions if any authori$ed for such types of income by the "ax (ode or other special laws! (,ec. 5% N6$! of %**')
Basic: Princip"e of Mobilia Sequuntur Personam (199*) What is the principle of mobilia se7uuntur personam in income taxation?
SUGGESTED ANSWER*
&rinciple of 8obilia ,e7uuntur 9ersonam in income taxation refers to the principle that taxation follows the property or person who shall be sub0ect to the tax! Basic: Proper A""o1ance of 'epreciation (199=) 8! What is the proper allowance for depreciation of any property used in trade or business? N)+) )! What is the annual depreciation of a depreciable fixed asset with a cost of &2// /// and an estimated useful life of 8/ years and salvage value of & 2/ /// after its useful life?
SUGGESTED ANSWER*
2! "he *r,*er a--,&a%ce ,1 de*recia/i,% of any property used in trade or business refers to the reason% able allowance for the exhaustion wear and tear (including reasonable allowance for obsolescence) of said property! "he reasonable allowance shall include but not limited to an allowance computed under any of the following methods: (a) straight%line methodA (b) declining%balance methodA (c) sum%of%years%digit methodA and
"he facts given in proble ar sufficie t the m e nt o compute the annual depreciation either under the declining% balance method or sum%of% years%digit method! 9ny answer arrived at by using any of the recogni$ed methods should be given full credit! It is suggested that no Buestion reBuiring computation should be given in future bar examinations!
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1. of 73
or credited! "he taxpayer is also reBuired to report as taxable income the subseBuent tax refund or tax credit granted to the extent of the tax benefit the taxpayer en0oyed when such taxes were previously claimed as deduction from income! (b) ,ive an illustration of the application of the tax benefit rule!
Basic: Sources of Income: Taxa+"e Income (199=) From what sources of income are the following personsLcorporations taxable by the &hilippine government? 8) (iti$en of the &hilippines residing thereinA N2+O )) 6on%resident citi$enA N2+2 .) 9n individual citi$en of the &hilippines who is wor#ing and deriving income from abroad as an overseas contract wor#erA N2+O *) 9n alien individual whether a resident or not of the &hilippinesA N2+O E) 9 domestic corporationA N2+O SUGGESTED ANSWER* (-ection 8) 6I<( of 2GGI) 2) 9 citi$en of the &hilippines residing therein is taxable on all income derived from sources within and without the &hilippines! 8) 9 nonresident citi$en is taxable only on income derived from sources within the &hilippines! )) 9n individual citi$en of the &hilippines who is wor#ing and deriving income from abroad as an overseas contract wor#er is taxable only on income from sources within the &hilippines! .) 9n alien individual whether a resident or not of the &hilippines is taxable only on income derived from sources within the &hilippines! *) 9 domestic corporation is taxable on all income derived from sources within and without the &hilippines! Basic: Tax Benefit 8u"e (2 4) (a) What is meant by the "tax benefit rule"?
SUGGESTED ANSWER*
SUGGESTED ANSWER*
(b) > (ompany has a business connected receivable amounting to &2// ///!// from 5 who was declared ban#rupt by a competent court! 'espite earnest efforts to collect the same 5 was not able to pay prompting > (ompany to write%off the entire liability! 'uring the year of write%off the entire amount was claimed as a deduction for income tax purposes reducing the taxable net income of > (ompany to only &2 /// ///!//! "hree years later 5
(a) "9> ?161FI" <C31 states that the taxpayer is obliged to declare as taxable income subseBuent recovery of bad debts in the year they were collected to the extent of the tax benefit en0oyed by the taxpayer when the bad debts were written%off and claimed as a deduction from income! It also applies to taxes previously deducted from gross income but which were subseBuently refunded
voluntarily paid his obligation previously written%off to > (ompany! In the year of recovery the entire amount constitutes part of gross income of > (ompany because it was able to get full tax benefit three years earlier! Basic$ Basis of Income Tax (1996) > is employed as a driver of a corporate lawyer and receives a monthly salary of &* ///!// with free board and lodging with an eBuivalent value of &2 *//!//! 2! What will be the basis of >@s income tax? Why
8! Will your answer in Buestion (a) be the same if >@s
interestA rentsA royaltiesA dividendsA annuitiesA pri$es and winningsA pensionsA and partner@s distributive share of the gross income of general professional partnership (-ec! 8; 6I<()!
ALTERNATI1E ANSWER*
a) ,ross income means all wealth which flows into the taxpayer other than as a mere return of capital! It includes the forms of income specifically described as gains and profits including gains derived from the sale or other disposition of capital!
b) ,ross income means income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by law (-ec! )E <ev! <eg! 6o! 8)! ,ross income from business means total sales less cost of goods sold plus any income from investments
employer is an obstetrician? Why?

SUGGESTED ANSWERS*
2) "he basis of >Ps income tax would depend on whether his employer is an employee or a practicing corporate lawyer! If his employer is an employee the basis of >@s income tax is &E *//!// eBuivalent to the total of the basic salary and the value of the board and lodging! "his is so because the employerLcorporate lawyer has no place of business where the free board and lodging may be given! On the other hand if the corporate lawyer is a "practicing lawyer (self% employed) > should be taxed only on &* ///!// provided that the free board and lodging is given in the business premises of the lawyer and for his convenience and that the free lodging was given to > as a condition for employment!
8) If the employer is an obstetrician who is self%em% ployed the basis of >@s income will only be &* ///!// if it is proven that the free board and lodging is given within the business premises of said employer for his convenience and that the free lodging is reBuired to be accepted by > as condition for employment! Otherwise > would be taxed on &E *//!//!
Basic$ 5ross Income: 'efine (1999) What is "gross Income" for purposes of the Income tax?
SUGGESTED ANSWER*
,<O-- I6(O:1 means all income from whatever source derived including (but not limited to) compensation for services including fees commissions and similar itemsA gross income from businessA gains derived from dealings in propertyA
16 of and from incidental or outside 73 operations or sources (-ec! .) <ev! <eg!

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6o! 8)!
Basic$ Income (s) !apita" (1999) =ow does "Income" differ from "capital"? 1xplain!
SUGGESTED ANSWER*
obligation on the part of &ere$ or his company to give such an expensive gift! ?ut &ere$ insisted that Osorio #eep the car! "he company of &ere$ deducted the cost of the car as a business expense! "he (ommissioner of Internal <evenue included the fair mar#et value of the car as Income of Osorio who protested that the car was a gift and therefore excluded from income! Who is correct the (ommissioner or Osorio? 1xplain!
SUGGESTED ANSWER*
Income differs from capital in that I6(O:1 is any wealth which flows into the taxpayer other than a return of capital while capital constitutes the investment which is the source of income! "herefore capital is fund while income is the flow! (apital is wealth while income is the service of wealth! (apital is the tree while income is the fruit (Vice%/e Madriga- e/ a- v. <a5e+
RC11er/0 74 P:i-. (!()!
Basic$ Sc#e&u"ar Treatment (s) 5"o+a" Treatment (199*) 'istinguish "schedular treatment" from "global treatment" as used in income taxation!
SUGGESTED ANSWER*
"he (ommissioner is correct! "he car having been given to :r! Osorio in consideration of having introduced :r! &ere$ to a foreign Importer which resulted to a profitable business deal is considered to be a compensation for
Cnder a -(=1'C31< -5-"1: the various typesLitems of income (compensation: business;professional income) are classified accordingly and are accorded different tax treatments in accordance with schedules characteri$ed by graduated tax rates! -ince these types of income are treated separately the allowable deductions shall li#ewise vary for each type of income!
Cnder the ,3O?93 -5-"1: all income received by the taxpayer are grouped together without any distinction as to the type or nature of the income and after deducting therefrom expenses and other allowable deductions are sub0ected to tax at a fixed rate! !ompensation$ Income Tax: 'ue to Profita+"e Business 'ea" (1999) :r! Osorio a ban# executive while playing golf with :r! &ere$ a manufacturing firm executive mentioned to the latter that his (Osorio) ban# had 0ust opened a business relationship with a big foreign importer of goods which &ere$@ company manufactures! &ere$ reBuested Osorio to introduce him to this foreign importer and put in a good word for him (&ere$) which Osorio did! 9s a result &ere$ was able to ma#e a profitable business deal with the foreign Importer! In gratitude &ere$ in behalf of his manufacturing firm sent Osorio an expensive car as a gift! Osorio called &ere$ and told him that there was really no
services rendered! "he transfer is not a gift because it is not made out of a detached or disinterested generosity but for a benefit accruing to :r! &ere$! "he fact that the company of :r! &ere$ ta#es a business deduction for the payment indicates that it was considered as a pay rather than a gift! =ence the fair mar#et value of the car is includable in the gross income pursuant to -ection 8;(a)(l) of the "ax (ode (,ee %*'" <ederal Tax =andboo> p. %"-). 9 payment though voluntary if it is in return for services rendered or proceeds from the constraining force of any moral or legal duty or a benefit to the payer is anticipated is a taxable income to the payee even if characteri$ed as a @gift@ by the payor
(C,55i++i,%er v+. D.6er+/ei% 7'7 U.S.
located in the &hilippines or the shares donated have acBuired business situs in the &hilippines the donation may be taxed in the &hilippines sub0ect to the rule of reciprocity!
8) If the shares of stoc#s were given to :r! 5 in consideration of his services to the corporation the same shall constitute taxable compensation income to the recipient because it is a compensation for services rendered under an employer%employee relationship hence sub0ect to income tax!
"he par value or stated value of the shares issued also constitutes deductible expense to the corporation provided it is sub0ected to withholding tax on wages!
2#4$.
ALTERNATI1E ANSWER*
:r! Osorio is correct! "he car was not payment for services rendered! "here was no prior agreement or negotiations between :r! Osorio and :r! &ere$ that the former will be compensated for his services! :r! &ere$ in behalf of his company gave the car to :r! Osorio out of gratitude! "he transfer having been made gratuitously should be treated as a gift sub0ect to donor@s tax and should be excluded from the gross income of the recipient :r! Osorio! "he (ommissioner should cancel the assessment of deficiency income tax to :r! Osorio and instead assess deficiency donor@s tax on :r &ere$@ company! (-ec! 8;(b)()) 6I<(A Pir,va%, v+. C,55i++i,%er)
!orporate: Income: 'onor6s tax$ Tax /ia+i"ity (1996) > a multinational corporation doing business in the &hilippines donated 2// shares of stoc# of said corporation to :r! 5 its resident manager in the &hilippines! 2) What is the tax liability if any of > corporation?
8) 9ssuming the shares of stoc#s were given to :r! 5 in consideration of his services to the corporation
what are the tax implications? 1xplain!

SUGGESTED ANSWERS*
2) Foreign corporations effecting a donation are sub0ect to donor@s tax only if the property donated is located in the &hilippines! 9ccordingly donation of a foreign corporation of its own shares of stoc#s in favor of resident employee is not sub0ect to donor@s tax (?I< <uling 6o! /2;% ;I January 8E 2G;I)! =owever if ;*+ of the business of the foreign corporation is
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!orporate$ Income Tax$ 8easona+"eness of t#e
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flight information services!
reservation and tic#eting
Bonus (2 6)
,old and -ilver (orporation gave extra 2.th month bonus to all its officials and employees in the total amount of &I* :illion! 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 ?I< the following year it disallowed as item of deduction the &I* :illion bonus the corporation gave its officials and employees on the ground of unreasonableness! "he corporation claimed that the bonus is an ordinary and necessary expense that should be allowed! If you were the ?I< (ommissioner how will you resolve the issue? (*+)
SUGGESTED ANSWER*
9re the revenues of (aledonia 9ircargo from tic#ets reserved by its &hilippine office sub0ect to tax?
SUGGESTED ANSWER*
"he revenues in the &hilippines of (aledonia 9ircargo as an "off%line" airline from tic#et reservation services are taxable income from "whatever source" under -ec! 8;(a) of the "ax (ode! "his case is analogous to C,55i++i,%er
v. BOAC G.R N,. N,. '3##7;#( A*ri- 7) !"4#
where the -upreme (ourt ruled that the income received in the &hilippines from the sale of tic#ets by an "off%line" airline is taxable as income from whatever source!
I will disallow the expense! 9 bonus is ordinary and necessary where said expenditure is (2) appropriate and helpful in the development of the taxpayers business
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (2 9) 9n international airline with no landing rights in the &hilippines sold tic#ets in the &hilippines for air transportation! Is income derived from such sales of tic#ets considered taxable income of the said international
(8artens ?aw of <ederal 6ncome Taxation 2olume 62 p. 5%-) and (8) is normal in relation to the business of the taxpayer and the surrounding circumstances (p. 5%. 6bid).
"o determine the reasonableness of the bonus it must be commensurate with services performed by the officials and employees! Other factors to consider are whether the payment was made in good faithA the character of the taxpayer@s businessA the volume and amount of its net earningsA its localityA the type and extent of the services renderedA the salary policy of the corporationA the si$e of the particular businessA the employees@ Bualification and contributions to the business ventureA and general economic conditions (A/-a+ Mi%i%g v. CIR G.R. N,. L; 2'"!! <a%.ar0 2# !"4!$ ! =owever since the business suffers from a net operating loss I will rule that the bonus is an unreasonable expense!
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (199*)

(aledonia 9ircargo is an off%line international carrier without any flight operations in the &hilippines! It has however a liaison office in the &hilippines which is duly licensed with the -ecurities and 1xchange (ommission established for the purpose of providing passenger and
air carrier from &hilippine sources under the "ax (ode? 1xplain! (*+)
ALTERNATI1E ANSWER*
5es! "he income derived from the sales of tic#ets in the &hilippines is considered taxable income of the international air carrier from &hilippine sources! "he source of income is the property activity or service that produced the income! "he sale of tic#ets in the &hilippines is the activity that produces the income! "he absence of landing rights in the &hilippines cannot alter the fact that revenues were derived from tic#et sales within the &hilippines! (C,55i++i,%er ,1
I%/er%a- Reve%.e v. <a*a% Air Li%e+ G.R. N,. ')#!( Oc/,6er ( !""! rei/era/i%g Bri/i+: Over+ea+ Air&a0+ C,r*. Air I%dia a%d A5erica% Air-i%e+ I%c.$
ALTERNATI1E ANSWER*
which is a subsidiary of a non% resident foreign corporation to the latter ostensibly for services rendered by the latter to the former but which payments are disproportionately larger than the actual value of the services rendered! In such case the amount over and above the true value of the service rendered shall be treated as a dividend and shall be sub0ected to the corresponding tax of )*+ on &hilippine sourced gross income or such other preferential rate as may be provided under a corresponding "ax "reaty!
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E>a5*-eD <oyalty payments under a corresponding licensing agreement! 'i(i&en&s$ Income Tax$ 'e&ucti+"e 5ross Income (1999) 9 (o! a &hilippine corporation issued preferred shares of stoc# with the following features:
6o under ,ec. 5 of $.$. No. %--&((& an off%line airline having a branch office or a sales agent in the &hilippines which sells passage documents for compensation or commission to cover off%line flights of its principal or head office or for other airlines covering flights originating from &hilippine ports or off%line flights is not considered engaged in business as an international air carrier in the &hilippines and is therefore not sub0ect to ,ross &hilippine ?illings "ax nor to the )+ common carrier@s tax!
?ased on the foregoing the international airline company is not considered as engaged in business in the &hilippines and is therefore a non%resident foreign corporation! 9 non%resident foreign corporation is sub0ect to the gross income tax on its income derived from sources within the &hilippines! "he income from sale of tic#ets shall not form part of taxable income because the term "taxable income" as defined under -ec! )2 of the 6I<( refers only to income of those taxpayers who pay by way of the net income tax! "axable income means the pertinent items of gross income specified in the 6I<( less the deductions andLor personal and additional exemptions if any authori$ed for such types of income by the 6I<( or other special laws! 'i(i&en&s: 'isguise& &i(i&en&s (199*) 'isguised dividends in income taxation? ,ive an example!
SUGGESTED ANSWER*
'isguised dividends are those income payments made by a domestic corporation
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2)
8)
6on%votingA
&referred and cumulative dividends at the rate of 2/+ per annum whether or not in any period the amount is covered by earnings or pro0ectsA
))
.)
In the event of dissolution of the issuer holders of preferred stoc# shall be paid in full or ratably as the assets of the issuer may permit before any distribution shall be made to common stoc#holdersA and "he issuer has the option to redeem the preferred stoc#!
fishponds with a salary of &hp 2/ ///!//! "o enable him to perform his duties well he was also provided a small hut which he could use as his residence in the middle of the fishponds! Is the fair mar#et value of the use of the small hut by > a "fringe benefit" that is sub0ect to the )8+ tax imposed by -ection )) of the 6ational Internal <evenue (ode? 1xplain your answer! (*+)
SUGGESTED ANSWER*
9 (o! declared dividends on the preferred stoc# and claimed the dividends as interests deductible from its gross Income for income tax purposes! "he ?I< disallowed the deduction! 9 (o! maintains that the preferred shares with their features are really debt and therefore the dividends are realty interests! 'ecide! (2/+)
SUGGESTED ANSWER*
6o! > is neither a managerial nor a supervisory employee! Only managerial or supervisory employees are entitled to a fringe benefit sub0ect to the fringe benefits tax! 1ven assuming that he is a managerial or supervisory employee the small hut is provided for the convenience of the
"he dividends are not deductible from gross income! &referred shares shall be considered capital regardless of the conditions under which such shares are issued and therefore dividends paid thereon are not considered @interest@ which are allowed to be deducted from the gross income of the corporation! ($evenue 8emorandum !ircular No. %''% )uly %& %*'%). 2ffect$ !on&onation of /oan in Taxation (1999)
:r! Francisco borrowed &2/ ///!// from his friend :r! ,utierre$ payable in one year without interest! When the loan became due :r! Francisco told :r! ,utierre$ that he (:r! Francisco) was unable to pay because of business reverses! :r! ,utierre$ too# pity on :r! Francisco and condoned the loan! :r! Francisco was solvent at the time he borrowed the & 2/ ///!// and at the time the loan was condoned! 'id :r! Francisco derive any income from the cancellation or condonation of his indebtedness? 1xplain!
SUGGESTED ANSWER*
6o :r! Francisco did not derive any income from the cancellation or condonation of his indebtedness! -ince it is obvious that the creditor merely desired to benefit the debtor in view of the absence of consideration for the cancellation the amount of the debt is considered as a gift from the creditor to the debtor and need not be included in the latter@s gross income!
Fringe Benefit Tax: !o(ere& 2mp"oyees (2 1) > was hired by 5 to watch over 4Ps
employer hence does not constitute a taxable fringe benefit! (,ection 55 N4$!). Fringe Benefit Tax: 2mp"oyer re3uire& to Pay (2 4) 9 "fringe benefit" is defined as being any good service or other benefit furnished or granted in cash or in #ind by an employer to an individual employee! Would it be the employer or the employee who is legally reBuired to pay an income tax on it? 1xplain! (.+)
SUGGESTED ANSWER*
reBuired to be filedA or (b) the amount of the tax due for which return is reBuiredA or
(c) the deficiency tax or any surcharge or interest thereon on the due date appearing in the notice and demand of the (ommissioner of Internal <evenue! If in the above illustration the assessment notice was released on 'ecember )2 2GG. and the amount of deficiency tax inclusive of surcharge and deficiency interest were computed up to January )/ 2GG* which is the due date for payment per assessment notice failure to
It is the employer who is legally reBuired to pay an income tax on the fringe benefit! "he fringe benefit tax is imposed as a FI693 WI"==O3'I6, "9> placing the legal obligation to remit the tax on the employer such that if the tax is not paid the legal recourse of the ?I< is to go after the employer! 9ny amount or value received by the employee as a fringe benefit is considered tax paid hence net of the income tax due thereon! "he person who is legally reBuired to pay (same as statutory incidence as distinguished from economic incidence) is that person who in case of non%payment can be legally demanded to pay the tax! Interest: 'eficiency Interest: &efine (1999 Bar) What is a "deficiency interest" for purposes of the income tax? Illustrate!
SUGGESTED ANSWER*
'1FI(I16(5 I6"1<1-" for purposes of the income tax is the interest due on any amount of tax due or installment thereof which is not paid on or before the date prescribed for its payment computed at the rate of 8/+ per annum or the :anila <eference <ate whichever is higher from the date prescribed for its payment until it is fully paid!
If for example after the audit of the boo#s of >5H (orp! for taxable year 2GG) there was found to be due a deficiency income tax of &28* ///!// inclusive of the 8*+ surcharge imposed under -ection 8.; of the "ax (ode the interest will be computed on the &28*!///!// from 9pril 2* 2GG. up to its date of payment!
Interest: 'e"in3uency Interest: &efine (1999) What is a "delinBuency interest" for purposes of the income tax? Illustrate!
SUGGESTED ANSWER*
'elinBuency interest is the interest of 8/+ or the :anila <eference <ate whichever is higher reBuired to be paid in case of failure to pay: (a) the amount of the tax due on any return
rend pay on this latter ta the x date will er
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delinBuent and will reBuire the payment of delinBuency interest! IT8: Persona" Income$ 2xempte& to Fi"e IT8 (199,)
9 bachelor was employed by (orporation 9 on the first wor#ing day of January 2GGE on a part%time basis with a salary of &) *//!// a month! =e then received the 2)th month pay! In -eptember 2GGE he accepted another part% time Job from (orporation ? from which he received a total compensation of &2. *//!// for the year 2GGE! "he correct total taxes were withheld from both earnings! With the withholding taxes already paid would he still be reBuired to file an income tax return for his 2GGE income?
SUGGESTED ANSWER*
"he dividends from domestic corporation are exempt from income taxA and gains from stoc# transactions with the &hilippine -toc# 1xchange are sub0ect to transaction tax which is in lieu of the income tax! "he proceeds under an insurance policy on the loss of goods is not an item of income but merely a return of capital hence not taxable!
ALTERNATI1E ANSWER*
"he gross receipts from trading business is includible as an item of income in the corporate income tax return! 3i#ewise the gain or loss reali$ed as a conseBuence of the receipt of proceeds under an insurance policy on the loss of goods will be included in the corporate income tax
5es because what is exempt from filing are those individuals who have total compensation income not exceeding &E/!/// with the taxes correctly withheld only by one employer! In this case even if his aggregate compensation income from both his employers does not exceed &E/!/// and that total withholding taxes were correctly withheld by his employers the fact that he derives compensation income concurrently from two employers at anytime during the taxable year does not exempt him from filing his income tax return ($A '"*' as implemented by $$ No. "-*5).
IT8$ 'omestic !orporate Taxation (199,)

'uring the year a domestic corporation derived the following items of revenue: (a) gross receipts from a trading businessA (b) interests from money placements in the ban#sA (c) dividends from its stoc# investments in domestic corporationsA (d) gains from stoc# transactions through the &hilippine -toc# 1xchangeA (e) proceeds under an insurance policy on the loss of goods! In preparing the corporate income tax return what should be the tax treatment on each of the above items?
SUGGESTED ANSWER*
"he gr,++ recei*/+ 1r,5 /radi%g 6.+i%e++ is includible as an item of income in the corporate income tax return and sub0ect to corporate income tax rate based on net income! "he other items of revenue will not be included in the corporate income tax return! "he interest from money mar#et placements is sub0ect to a final withholding tax of 8/+A
return either as a taxable gain or a deductible loss! "he gain or loss is arrived at by deducting from the proceeds of insurance (amount reali$ed) the basis of the good lost (-ec! ).(a) 6I<()! "he net income of the corporation shall be sub0ect to corporate income tax rate of )*+! "he other items of revenue will not be included in the corporate income tax return! "he interest from money mar#et placements is sub0ect to a final withholding tax of 8/+A dividends from domestic corporations are exempt from income taxA and gains from stoc# transactions with the &hilippine -toc# 1xchange are sub0ect to transaction tax which is in lieu of the income tax!
her neighborhood! "he total income of > for the year from the two employers does not exceed her total personal and additional exemptions for the year 8///! Was she reBuired to file an income tax return last 9pril? 1xplain your answer! (*+)
SUGGESTED ANSWER*
5es! 9n individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return (-ec! *2(9)(8) (b) 6I<(!)
ALTERNATI1E ANSWER*
It depends! 9n individual with pure compensation income is not reBuired to file an income tax returns when she meets the following conditionsA (2) the total gross compensation income does not exceed &hpE/ ///!// and (8) the income tax has been correctly withheld meaning
IT8$ 'omestic !orporate Taxation (2 1)

a) =ow often does a domestic corporation file income tax return for income earned during a single taxable
year? 1xplain the process! ()+)

SUGGESTED ANSWER*
a) 9 domestic corporation is reBuired to file income tax returns four (.) times for income earned during a single taxable year! Kuarterly returns are reBuired to be filed for the first three Buarters where the corporation shall declare its Buarterly summary of gross income and deductions on a cumulative basis! (,ection 'N6$!) ! "hen a final ad0ustment return is reBuired to be filed covering the total taxable income for the entire year calendar or fiscal!
(,ection '. N6$!)! b) What is the reason for such procedure? (8+)
SUGGESTED ANSWER*
b) "he reason for this procedure is to ensure the timeliness of collection to meet the budgetary needs of the government! 3i#ewise it is designed to ease the burden on the taxpayer by providing it with an installment payment scheme rather than reBuiring the payment of the tax on a lump% sum basis after the end of the year!
ALTERNATI1E ANSWER*
b) "he reason for the Buarterly filing of tax returns is to allow partial collection of the tax before the end of the taxable year and also to improve the liBuidity of government IT8$ Persona" Income: T1o 2mp"oyment (2 1) In the year 8/// > wor#ed part time as a waitress in a restaurant in :ega :all from ;:// a!m! to .:// p!m! and then as a cashier in a 8.%hour convenience store in
the tax withheld is eBual to the tax due! (,ection l(A@(&)(b) N6$!).
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taxable year the taxpayer may still claim the same exemptions (that of being married) as if the spouse died at the close of such year
"here is no mention in the problem of the amount of personal and additional personal exemption to Buantify how much is that compensation income that did not exceed the personal and additional personal exemptions! "here is no mention either of whether or not the employers withheld taxes and that the amount withheld is eBual to the tax due! Whether or not she will be reBuired to file an income tax return last 9pril 2* on the 8/// income will depend on her compliance with the reBuirements of the law! IT8$ Persona" Income$ 5SIS Pension (2 ) :r! Javier is a non%resident senior citi$en! =e receives a monthly pension from the ,-I- which he deposits with the &6?%:a#ati ?ranch! Is he exempt from income tax and therefore not reBuired to file an income tax return? (*+)
SUGGESTED ANSWER*
(,ection 5-;!1 N6$!). IT8$ Taxpayer$ /ia+i"ities$ Fa"sifie& Tax 8eturn (2 9) 'anilo who is engaged in the trading business entrusted to his accountant the preparation of his income tax return and the payment of the tax due! "he accountant filed a falsified tax return by underdeclaring the sales and overstating the expense deductions by 'anilo! Is 'anilo liable for the deficiency tax and the penalties thereon? What is the liability if any of the accountant? 'iscuss! (*+)
SUGGESTED ANSWER*
'anilo is liable for the deficiency tax as well as for the deficiency interest! =e should not be held liable for the
:r! Javier is exempt from income tax on his monthly ,-I- pension (,ec. 5&(3)(.)(f) N6$! of %**') but not on the interest income that might accrue on the pensions deposited with &6? which are sub0ect to final withholding tax! (onseBuently since :r! Javier@s sole taxable income would have been sub0ected to a final withholding tax he is not reBuired anymore to file an income tax return! (,ec. -% (A) (&) (c). 6bid@.
IT8$ Persona" Income$ 0arrie& In&i(i&ua" (2 *) <9: got married to 3I-9 last January 8//)! On 6ovember )/ 8//) 3I-9 gave birth to twins! Cnfortunately however 3I-9 died in the course of her delivery! 'ue to complications one of the twins also died on 'ecember 2* 8//)!
In preparing his Income "ax <eturn (I"<) for the year 8//) what should <9: indicate in the I"< as his civil status: (a) singleA (b) marriedA (c) =ead of the familyA (d) widowerA (e) none of the above? Why? <eason! (*+)
SUGGESTED ANSWER*
<9: should indicate "(b) married" as his civil status in preparing his Income "ax <eturn for the year 8//)! "he death of his wife during the year will not change his status because should the spouse die during the
fraud penalty because the accountant acted beyond the limits of his authority! "here is no showing in the problem that 'anilo signed the falsified return or that it was prepared under his direction!
DOn the other hand the accountant may be held criminally liable for violation of the "ax (ode when he falsified the tax return by underdeclaring the sale and overstating the expense deductions! If 'anny@s accountant is a (ertified &ublic 9ccountant his certificate as a (&9 shall automatically be revo#ed or cancelled upon conviction!
Partners#ip: Income Tax (1999)

Five years ago :arBue$ &eneyra Jayme &osadas and :anguiat all lawyers formed a partnership which they named :arBue$ and &eneyra 3aw Offices! "he (ommis% sioner of Internal <evenue thereafter issued $evenue $egulation No. &-*5 implementing $A. '"*. #nown as the -implified 6et Income "axation -cheme (-6I"-)! <evenue <egulation 6o! 8%G) provides in part: Sec. '. Ge%eraPr,1e++i,%aPar/%er+:i*! 7 "he general professional partnership and the partners are covered by <!9! I.GE! "hus in determining profit of the partnership only the direct costs mentioned in said law are to be deducted from partnership income! 9lso the expenses paid or Incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct costs are not deductible from his gross income! 2) :arBue$ and &eneyra 3aw Offices filed a taxpayer@s suit alleging that <evenue <egulation 6o! 8%G) violates the principle of uniformity in taxation because general professional partnerships are now sub0ect to payment of income tax and that there is a difference in the tax treatment between individuals engaged in the practice of their respective profes% sions and partners in general professional
income of the general professional partnership during the taxable year whether distributed or not! "he -6I"treat professionals as one class of taxpayer so that they shall be treated ali#e irrespective of whether they practice their profession alone or in association with other professionals under a general professional partnership! What are taxed differently are individuals and corporations! 9ll individuals similarly situated are taxed ali#e under the regulations therefore the principle of uniformity in taxation is not violated! On the contrary all the reBuirements of a valid classification have been complied with (T,% v+. DeR,+ari, e/ a- G.R N,. !)"24" !""($. Oc/,6er+
8)
Is <evenue <egulation 6o! 8%G) now considered as having adopted a gross income method instead of retaining the net income taxation scheme? 1xplain!
SUGGESTED ANSWER*
partnerships! Is this contention correct? 1xplain!

SUGGESTED ANSWER*
2) "he contention is not correct! ,eneral

professional partnerships remain to be a non%taxable entity! What is taxable are the partners comprising the same and they are obligated to report as income their share in the
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6o! 8%G) implementing <9 6o! I.GE have indeed significantly reduced the items of deduction by limiting it to direct costs and expenses or the ./+ of gross receipts maximum deduction in cases where the direct costs are difficult to determine! "he allowance of limited deductions however is still in consonance with the net income taxation scheme rather than the gross income method! While it is true that not all the expenses of earning the income might be allowed this can well be 0ustified by the fact that deductions are not matters of right but are matters of legislative grace! Persona"$ Income Tax: 7on:8esi&ent A"ien (2 ) :r! (orte$ is a non%resident alien based in =ong Qong! 'uring the calendar year 2GGG he came to the &hilippines several times and stayed in the country for an aggregated period of more than 2;/ days! =ow will :r! (orte$ be taxed on his income derived from sources within the &hilippines and from abroad? (*+)
SUGGESTED ANSWER*
<egulatio <evenue n 6o!
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residence in the &hilippines! "he salary of & will be shouldered */+ by 9 (o! while the other */+ plus housing cost of living and educational allowances of &@s dependents will be shouldered by =Q (o! 9 (o! will credit the */+ of &@s salary to &@s &hilippine ban# account! & will sign the contract of employment in the &hilippines! & will also be receiving rental income for the lease of his &hilippine residence! 9re these salaries allowances and rentals sub0ect to the &hilippine income tax? (*+)
SUGGESTED ANSWER*
"he salaries and allowances received by & are not sub0ect to &hilippine income tax! & Bualifies as a nonresident citi$en because he leaves the &hilippines for employment reBuiring him to be physically present abroad most of the time during the taxable year! (,ection &&(4) N6$!). 9 non% resident citi$en is taxable only on income derived from &hilippine sources! (,ection &5 N6$!). "he salaries and
:r! (orte$ being a non%resident alien individual who has stayed for an aggregated period of more than 2;/ days during the calendar year 2GGG shall for that taxable year be deemed to be a non%resident alien doing business in the &hilippines! (onsidering the above :r! (orte$ shall be sub0ect to an income tax in the same manner as an individual citi$en and a resident alien individual on taxable income received from all sources within the &hilippines! A,ec. &- (A) (%) N6$! of %**'@ "hus he is allowed to avail of the itemi$ed deductions including the personal and additional exemptions but sub0ect to the rule on reciprocity on the personal exemptions! (,ec. 5" (A) to ()) and (8) in relation to ,ec. &- (A) (%) 6bid ,ec. 5- (B) 6bid.@
NCT4: 6t is suggested that full credit should be given if the examineeDs answer only cover the first two paragraphs.
Persona"$ Income Tax: 7on:8esi&ent !iti?en (1999)

9 (o! a &hilippine corporation has an executive (&) who is a Filipino citi$en! 9 (o! has a subsidiary in =ong Qong (=Q (o!) and will assign & for an indefinite period to wor# full time for =Q (o! & will bring his family to reside in =Q and will lease out his
allowances received from being employed abroad are incomes from without because these are compensation for services rendered outside of the &hilippines! (,ection "& N6$!). =owever & is taxable on rental income for the lease of his &hilippine residence because this is an income derived from within the leased property being located in the &hilippines! (,ection "& N6$!). Persona"$ Income Tax: Tax:Free 2xc#ange (199,) "hree brothers inherited in 2GG8 a parcel of land valued for real estate tax purposes at &)!/ million which they held in co% ownership! In 2GG* they transferred the property to a newly organi$ed corporation as their eBuity which was placed at the $onal value of &E!/ million! In exchange for the property the three brothers thus each received shares of stoc# of the corporation with a total par value of &8!/ million or altogether a total of &E!/ million! 6o business was done by the (orporation and the property remained idle! In the early part of 2GGI one of the brothers who was in dire need of funds sold his shares to the two brothers for &8!/ million! Is the transaction sub0ect to any internal revenue tax (other than the documentary stamp tax)?
SUGGESTED ANSWER*
taxable if a gain results therefrom! In the instant case the sale will not be sub0ect to any internal revenue tax other than the documentary stamp tax because the seller did not reali$e any gain from the sale! "he gain is measured by the difference between the amount reali$ed (selling price) and the basis of the property! Incidentally the basis to him is his share in the value of the property received at the time of exchange which is &8 :illion an amount 0ust eBual to the amount reali$ed from the sale!
Persona"$ Income Tax$ !ontract of /ease (1999)

:r! 'omingo owns a vacant parcel of land! =e leases the land to :r! 1nriBue$ for ten years at a rental of &28 ///!// per year! "he condition is that :r! 1nriBue$
5es! "he exchange in 2GG* is a tax%free exchange so that the subseBuent sale of one of the brothers of his shares to the other two (8) brothers in 2GGI will be sub0ect to income tax! "his is so because the tax%free exchange merely deferred the recognition of income on the exchange transaction! "he gain sub0ect to income tax in the sale is measured by the difference between the selling price of the shares (&8 :illion) and the basis of the real property in the hands of the transferor at the time of exchange which is the fair mar#et value of his share in the real property at the time of inheritance (-ection ).(b)(8) 6I<()! "he net gain from the sale of shares of stoc# is sub0ect to the schedular capital gains tax of 2/+ for the first &2//!/// and 8/+ for the excess thereof (-ection 8l(d) 6I<()!
ALTERNATI1E ANSWER*
"he exchange effected in 2GG* did not Bualify as a tax%free exchange because there is no showing that the three brothers gained control of the corporation by acBuiring at least *2+ of the voting rights! -ince the entire gain on the exchange was previously sub0ected to income tax then the sale will also be
will erect a th lan whic wil building on e d h l become the property of :r! 'omingo at the end of the lease without compensation or reimbursement whatsoever for the value of the building! :r! 1nriBue$ erects the building! Cpon completion the building had a fair mar#et value of &2 :illion! 9t the end of the lease the building is worth only &G//!///!// due to depreciation! Will :r! 'omingo have income when the lease expires and becomes the owner of the building with a fair mar#et value of &G//!///!//? =ow much income must he report on the building? 1xplain!
SUGGESTED ANSWER*
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"he income to be reali$ed by :r! 'omingo at the time of the expiration will consist of the value of the building which is &G//!///!// and any rental income that has accrued as of said date! Persona"$ Income Tax$ 0arrie& In&i(i&ua" (199,)
:ar and Joy got married in 2GG/! 9 wee# before their marriage! Joy received by way of donation a condominium unit worth &I*/!///!// from her parents! 9fter marriage some renovations were made at a cost of &2*/!///!//! "he spouses were both employed in 2GG2 by the same company! On )/ 'ecember 2GG8 their first child was born and a second child was born on /I 6ovember 2GG)! In 2GG. they sold the condominium unit and bought a new unit! Cnder the foregoing facts what
When a building is erected by a lessee in the leased premises in pursuance of an agreement with the lessor that the building becomes the property of the lessor at the end of the lease the lessor has the option to report income as follows: 2) "he lessor may report as income the mar#et value of the building at the time when such building is completedA or 8) "he lessor may spread over the life of the lease the estimated depreciated value of such building at the termination of the lease and report as income for each year of the lease an aliBuot part thereof (-ec! .G << 6o! 8)!
Cnder the first option the lessor will have no income when the lease expires and becomes the owner of the building! "he second option will give rise to an income during the year of lease expiration of &G/!///!// or 2L2/ of the depreciated value of the building!
"he availment of the first option will reBuire :r! 'omingo to report an income of &2!/// ///!// during the year when the building was completed! 9 total of &G//!///!// income will be reported under the second option but will be spread over the life of the lease or &G/!///!// per year!
ALTERNATI1E ANSWER*
:r! 'omingo will reali$e an income when the lease expires and becomes the owner of the building with a fair mar#et value of &G//!///!// because the condition for the lease is the transfer of the building at the expiration of the lease!
were the events in the life of the spouses that had income tax incidences?
SUGGESTED ANSWER*
"he events in the life of spouses! :ar and Joy which have income tax incidences are the following: 2) "heir marriage in 2GG/ Bualifies them to claim personal exemption for married individualsA 8) "heir employment in 2GG2 by the same company will ma#e them liable to the income tax imposed on gross compensation incomeA )) ?irth of their first child in 'ecember 2GG8 would give rise to an additional exemption of &* /// for taxable year 2GG8A
.) ?irth of their second child in 6ovember 2GG) would li#ewise entitle them to claim additional exemption of &* /// raising their additional personal exemptions to & 2/ /// for taxable year 2GG)A and
from his employment in the Cnited -tates on which the C- income tax is paid! On which of the above income is the taxable if at all in the &hilippines and how in general terms would such income or incomes be taxed?
SUGGESTED ANSWER*
Juan shall be taxed on both his income from the &hilippines and on his Income from the Cnited -tates be% cause his being a citi$en ma#es him taxable on all Income wherever derived! For the income he derives from his property in the &hilippines Juan shall be taxed on his net income under the Si5*-i1ied Ne/ I%c,5e Ta>a/i,% Sc:e5e (-6I"-) whereby he shall be considered as a self%employed individual! =is Income as employee in the Cnited -tates on the other hand shall be taxed in
*)
-ale of their condominium unit in 2GG. shall ma#e the spouses liable to the *+ capital gains tax on the gain presumed to have been reali$ed from the sale!
Persona"$ Income Tax$ 8etiring A"ien 2mp"oyee (2 9) 9n alien employee of the 9sian 'evelopment ?an# (9'?) who is retiring soon has offered to sell his car to you which he imported tax%free for his personal use! "he privilege of exemption from tax is granted to Bualified personal use under the 9'? (harter which is recogni$ed by the tax authorities! If you decide to purchase the car is the sale sub0ect to tax? 1xplain! (*+)
SUGGESTED ANSWER*
"he sales transaction is sub0ect to value added tax (49") under -ec! 2/I(?) of the 6I<( although this provision is expressly excluded from the coverage of the 8//* bar exam! "he proceeds from the sale are sub0ect to income tax! "he car is considered a capital asset of the retiring alien employee because he is not engaged in the business of buying and selling cars! =e therefore derived income which should be reported in his income tax return! (-ees! )8 and )G 6I<() Persona"$ Income Taxation: 7on:8esi&ent !iti?en (199,) Juan a Filipino citi$en has immigrated to the Cnited -tates where he is now a permanent resident! =e owns certain income%earning property in the &hilippines from which he continues to derive substantial income! =e also receives income
accordance with the schedular graduated rates of 2+ 8+ and )+! based on the ad0usted gross income derived by non% resident citi$ens from all sources without the &hilippines during each taxable year! Taxa+"e Income: I""ega" Income (1999 Bar)
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as taxable income would perpetuate in0ustice by relieving embe$$lers of the duty of paying income taxes on the money they enrich themselves with through embe$$lement while honest people pay their taxes on every conceivable type of income! ()ames vs. E.,.)
)) "he deficiency income tax assessment is a direct tax imposed on the owner which is an excise on the privilege to earn an income! It will not necessarily be paid out of the same income that were sub0ected to the tax! :r! 3a0o0o@s liability to pay the tax is based on his having reali$ed a taxable income from his swindling activities and will not affect his obligation to ma#e restitution! &ayment of the tax is a civil obligation imposed by law while restitution is a civil liability arising from a crime!
:r! 3a0o0o is a big%time swindler! In one year he was able to earn &2 :illion from his swindling activities! When the (ommissioner of Internal <evenue discovered his income from swindling the (ommissioner assessed him a deficiency income tax for such income! "he lawyer of :r! 3a0o0o protested the assessment on the following grounds:
2)
8)
"he income tax applies only to legal income not to illegal incomeA
))
:r! 3a0o0o@s receipts from his swindling did not constitute income because he was under obligation to return the amount he had swindled hence his receipt from swindling was similar to a loan which is not income because for every peso borrowed he has a corresponding liability to pay one pesoA and If he has to pay the deficiency income tax assess%
Taxa+"e or 7on:Taxa+"e$ Income an& 5ains (2 9)
ment there will be hardly anything left to return to the victims of the swindling! =ow will you rule on each of the three grounds for the protest? 1xplain!
SUGGESTED ANSWERS*
2) "he contention that the income tax applies to legal income and not to illegal income is not correct! -ection 8;(a) of the "ax (ode includes within the purview of gross income all Income from whatever source derived! =ence the illegality of the income will not preclude the imposition of the income tax thereon!
8) "he contention that the receipts from

his swindling did not constitute income because of his obligation to return the amount swindled is li#ewise not correct! When a taxpayer acBuires earnings lawfully or unlawfully without the consensual recognition express or implied of an obligation to repay and without restriction as to their disposition he has received taxable income even though it may still be claimed that he is not entitled to retain the money and even though he may still be ad0udged to restore its eBuivalent (<a5e+ v+. U.S. 7'' U.S. 2!7 !"'!$. "o treat the embe$$led funds not
1xplain briefly whether the following items are taxable or non%taxable: (*+) a) Income from <UETENGA
SUGGESTED ANSWER*
hence the gain is considered income! (,ec. 5&AA@A5@ and ,ec. 5*AA@A%@ N6$!) -it##o"&ing Tax: 7on:8esi&ent A"ien (2 1) Is a non%resident alien who is not engaged in trade or business or in the exercise of profession in the &hilippines but who derived rental income from the &hilippines reBuired to file an income tax return on 9pril of the year following his receipt of said income? If not why not? 1xplain your answer! (*+)
SUGGESTED ANSWER*
"axable! ,ross income includes "all income derived from whatever source" (,ec. 5&AA@ N6$!) which was interpreted as 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! "hus the income may proceed from a legal or illegal source such as from 0ueteng! Cnlawful gains gambling winnings etc! are sub0ect to income tax! "he tax code stands as an indifferent neutral party on the matter of where the income comes from!
(C,55i++i,%er ,1 I%/er%a- Reve%.e v. Ma%%i%g G.R. N,. L;247"4 A.g.+/ ' !"#3$
6o! "he income tax on all income derived from &hilippine sources by a non% resident alien who is not engaged in trade or business in the &hilippines is withheld by the lessee as a Final Withholding "ax! (,ection -'(A) N6$!). "he government can not reBuire persons outside
b) ,ain arising from EXPROPRIATION OF PROPERTBA

SUGGESTED ANSWER*
"axable! -ale exchange or other disposition of property to the government of real property is taxable! It includes ta#ing by the government through condemnation proceedings! (G,%Ea-e+ v. C,.r/ ,1 Ta>
A**ea-+ G.R. N,.
L;!(372 Ma0 2' !"'3$
c) TAXES paid and subseBuently refundedA

SUGGESTED ANSWER*
"axable only if the taxes were paid and claimed as deduction and which are subseBuently refunded or credited! It shall be included as part of gross income in the year of the receipt to the extent of the income tax benefit of said deduction! (,ec. 5"A!@A%@ N6$!) 6ot taxable if the taxes refunded were not originally claimed as deductions!
d) <ecovery of BAD DEBTS previously charged offA

SUGGESTED ANSWER*
"axable under the T % &ENE"IT RULE! <ecovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction! (,ec. 5"A4@A%@ N6$!) "his is sometimes referred as the REC 'TURE RULES! e) ,ain on the sale of a car used for personal purposes!
SUGGESTED ANSWER*
"axable! -ince the car is used for personal purposes it is considered as a capital asset
fil retur fo to e a nA r this reason the income tax on income derived from within must be collected through the withholding tax system and thus relieve the recipient of the income the duty to file income tax returns! (,ection -% N6$!).
o its territorial f 0urisdiction
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c! that the benefit is availed of only once! )! Cnder <epublic 9ct 6o! IE.2 (those received from employers without any retirement plan): a! "hose received under existing collective bargaining agreement and other agreements are exemptA and b! In the absence of retirement plan or agreement providing for retirement benefits the benefits are excluded from gross income and exempt from income tax if: i! retiring employee must have served at least five(*) yearsA and ii! that he is not less than sixty (E/) years of age but not more than sixty five (E*)! -it##o"&ing Tax: 8oya"ty (2 2)
-it##o"&ing Tax: 8etirement Benefit (2 ) "o start a business of his own :r! :ario de ,u$man opted for an early retirement from a private company after ten (2/) years of service! &ursuant to the company@s Bualified and approved private retirement benefit plan he was paid his retirement benefit which was sub0ected to withholding tax! Is the employer correct in withholding the tax? 1xplain! (8+)
SUGGESTED ANSWER*
(a) It depends! 9n employee retiring under a company@s Bualified and private retirement plan can only be exempt from income tax on his retirement benefits if the following reBuisites are met: (2) that the retiring employee must have been in service of the same employer for at least ten (2/) yearsA (8) that he is not less than */ years of age at the time of retirementA and ()) the benefit is availed of only once! In the instant case there is no mention whether the employee has li#ewise complied with reBuisites number (8) and ())! -it##o"&ing Tax: 8etirement Benefit (2 ) Cnder what conditions are retirement benefits received by officials and employees of private firms excluded from gross income and exempt from taxation? ()+)
SUGGESTED ANSWER*
"he conditions to be met in order that retirement benefits received by officials and employees of private firms are excluded from gross income and exempt from taxation are as follows: 8! Cnder <epublic 9ct 6o! .G2I (those received under areasonable private benefit plan): a! the retiring official or employee must have been in service of the same employer for at least ten (2/) yearsA b! that he is not less than fifty (*/) years of age at the time of retirementA and
"he :Q?%&hils! is a ?OI%registered domestic corporation licensed by the :Q? of the Cnited Qingdom to distribute support and use in the &hilippines its computer software systems including basic and related materials for ban#s! "he :Q?%&hils! provides consultancy and technical services incidental thereto by entering into licensing agreements with ban#s! Cnder such agreements the :Q?% &hils! will not acBuire any proprietary rights in the licensed systems! "he :Q?%&hils! pays royalty to the :Q?%CQ net of 2*+ withholding tax prescribed by the <&%CQ "ax "reaty! Is the income of the :Q?%&hils! under the licensing agreement with ban#s considered royalty sub0ect to 8/+ final withholding tax? Why? If not what #ind of tax will its income be sub0ect to? 1xplain! (*+)
SUGGESTED ANSWER*
=ence the deduction of withholding taxes being a manner of collecting the income tax on their salary is not a diminution contemplated by the fundamental law! (Ni/a1a% e/. a-. v. CIR !32 SCRA 24( 8!"4#O)! -it##o"&ing Tax$ 'omestic !orporation$ !as# 'i(i&en&s (2 1) What do you thin# is the reason why cash dividends when received by a resident citi$en or alien from a domestic corporation are taxed only at the final tax of 2/+ and not at the progressive tax rate schedule under -ection 8.(9) of the "ax (ode? 1xplain your answer! (*+)
SUGGESTED ANSWER*
"he reason for imposing final withholding tax rather than the progressive tax schedule on cash dividends received by
5es! "he income of :Q?%&hils! under the licensing agreement with ban#s shall be considered as royalty sub0ect to the 8/+ final withholding tax! "he term royalty is broad enough to include technical advice assistance or services rendered in connection with technical management or administration of any scientific industrial or commercial underta#ing venture pro0ect or scheme! (-ec! .8(.)(f) 6I<()! 9ccordingly the consultancy and technical services rendered by :Q?%&hils which are incidental to the distribution support and use of the computer systems of :Q?%CQ are taxable as royalty!
-it##o"&ing Tax$ !o(erage (2 *)

(iting -ection 2/ 9rticle 4III of the 2G;I (onstitution which provides that salaries of 0udges shall be fixed by law and that during their continuance in office their salary shall not be decreased a 0udge of :: <egional "rial (ourt Buestioned the deduction of withholding taxes from his salary since it results into a net deduction of his pay! Is the contention of the 0udge correct? <eason briefly! (*+)
SUGGESTED ANSWER*
6o! "he contention is incorrect! "he salaries of 0udges are not tax%exempt and their taxability is not contrary to the provisions of -ection 2/ 9rticle 4III of the (onstitution on the non%diminution of the salaries of members of the 0udiciary during their continuance in office! "he clear intent of the (onstitutional (ommission that framed the (onstitution is to sub0ect their salaries to tax as in the case of all taxpayers!
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domes resident citi$en alie fro n m a or a tic corporation is to ensure the collection of income tax on said income! If we sub0ect the dividend to the progressive tax rate which can only be done through the filing of income tax returns there is no assurance that the taxpayer will declare the income especially when there are other items of gross income earned during the year! It would be extremely difficult for the ?I< to monitor compliance considering the huge number of stoc#holders! ?y shifting the responsibility to remit the tax to the corporation it is very easy to chec# compliance because there are fewer withholding agents compared to the number of income recipients!
3i#ewise the imposition of a final withholding tax will ma#e the tax available to the government at an earlier time! Finally the final withholding tax will be a sure revenue to the government unli#e when the dividend is treated as a returnable income where the recipient thereof who is in a tax loss position is given the chance to offset such loss against dividend income thereby depriving the government of the tax on said dividend income! NNote: 6t is recommended that any of the foregoing answers can be given full credit because the 7uestion involves a policy issue which can only be found in the deliberations of !ongress!O
ALTERNATI1E ANSWER*
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returns! 1xamples of income sub0ect to final tax are dividend income interest from ban# deposits royalties etc!
-it##o"&ing Tax$ 7on:8esi&ent A"ien (199*) Four (atholic parishes hired the services of Fran# ?inatra a foreign non%resident entertainer to perform for four (.) nights at the Fol# 9rts "heater! ?inatra was paid &8//!///!// a night! "he parishes earned &2 /// ///!// which they used for the support of the orphans in the city! Who are liable to pay taxes?
SUGGESTED ANSWER*
"he following are liable to pay income taxes:

(a) "he four catholic parishes because the income received by them not being income earned "as such" in the performance of their religious functions and duties is taxable income under the last paragraph of -ec! 8E in relation to -ec! 8E(e) of the "ax (ode! In
"he reason why cash dividends received by a resident citi$en or alien from a domestic corporation are sub0ected to the final withholding tax of 2/+ and not at the progressive rate tax schedule is to lessen the impact of a second layer of tax on the same income! -it##o"&ing Tax$ Income su+@ect t#ereto (2 1) What is meant by income sub0ect to "final tax"? ,ive at least two examples of income of resident individuals that is sub0ect to the final tax! ()+)
SUGGESTED ANSWER*
Income sub0ect to final tax refers to an income wherein the tax due is fully collected through the withholding tax system! Cnder this procedure the payor of the income withholds the tax and remits it to the government as a final settlement of the income tax due on said income! "he recipient is no longer reBuired to include the item of income sub0ected to "final tax" as part of his gross income in his income tax
promoting and operating the ?inatra -how they engaged in an activity conducted for profit! (Ibid!)
(b) "he income of Fran# ?inatra a non% resident alien under our law is taxable at the rate of )/+ final withholding tax based on the gross income from the show! :r! ?inatra is not engaged in any trade or business in the &hilippines!
addition to the other penalties provided under the (ode be liable upon conviction to a penalty eBual to the total amount of tax not withheld (-ec! 8*2 6I<()! In case of failure to withhold the tax or in the case of under withholding the deficiency tax shall be collected from the payorLwithholding agent (2st par!! -ec! 8!*IN9O <!<! 6o! 8% G;)! 9ny person reBuired under the "ax (ode or by rules and regulations to withhold taxes at the time or times reBuired by law or rules and regulations shall in addition to other penalties provided by law upon conviction be punished by a fine of not less than "en thousand pesos (&hp 2/!/OO) and suffer imprisonment of not less than one (2)
-it##o"&ing Tax$ 7on:8esi&ent !orporation (199*)

?ates 9dvertising (ompany is a non%resident corporation duly organi$ed and existing under the laws of -ingapore! It is not doing business and has no office in the &hilippines! &ilipinas ,arment Incorporated a domestic corporation retained the services of ?ates to do all the advertising of its products abroad! For said services ?ates@ fees are paid through outward remittances! 9re the fees received by ?ates sub0ect to any withholding tax?
SUGGESTED
"he fees paid to ?ates 9dvertising (o! a non%resident foreign corporation are not sub0ect to withholding tax since they are not sub0ect to &hilippine tax! "hey are exempt because they do not constitute income from &hilippine sources the same being compensation for labor or personal services performed outside the &hilippines (-ec! )EDc) ()) and -ec! 8*(b)(l) "ax (ode)!
NS!ER:
-it##o"&ing Tax$ 8ea&erAs 'igest A1ar& (199=) Is the pri$e of one million pesos awarded by the <eader@s 'igest sub0ect to withholding of final tax? Who is responsible for withholding the tax? What are the liabilities for failure to withhold such tax? N*+O
SUGGESTED ANSWER*
2)
It depends! If the pri$e is considered as winnings derived from sources within the &hilippines it is sub0ect to withholding of final tax (-ec! 8.N?O in relation to -ec! *IN9O 6I<()! If derived from sources without the &hilippines it is not sub0ect to withholding of final tax because the &hilippine tax law and regulations could not reach out to foreign 0urisdictions!
8)
"he tax shall be withheld by the <eader@s 'igest or local agent who has control over the payment of the pri$e!
9ny person reBuired to withhold or who willfully fails to withhold shall in
))
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year but not more than ten (2/) 73 years (2st par! -ec! 8** 6I<()!
26
of
C$((ENT: It is suggested that any of the following answers to the Buestion "What are the liabilities for failure to withhold such a tax?" be given full credit: 2) "he payor shall be liable for the payment of the tax which was not withheld! 8) "he payerLwithholding agent shall be liable to both civil and criminal penalties imposed by the "ax (ode!
government 9'' proposed to obtain a policy of insurance on his life! On ethical grounds O>5 ob0ected to the insurance purchase but 9'' purchased the policy anyway! Its annual premium amounted to &2// ///! Is said premium deductible by 9'' (omputers Inc!? <eason! (*+)
SUGGESTED ANSWER*
6o! "he premium is not deductible because it is not an ordinary business expense! "he term "ordinary" is used in the income tax law in its common significance and it has the connotation of being normal usual or customary
7)4 US (44 8!"()9$! &aying premiums for the insurance of a person not connected to the company is not normal usual or customary! (De*./0 v. D. P,%/
-it##o"&ing Tax$ Time 'eposit Interest$ 5SIS Pension (199*) :aribel -antos a retired public school teacher relies on her pension from the ,-I- and the Interest Income from a time deposit of &*//!///!// with 9?( ?an#! Is :iss -antos liable to pay any tax on her Income?
SUGGESTED ANSWER*
:aribel -antos is exempt from tax on the pension from the ,-I- (,ec. &/(b((') (<) Tax !ode). =owever as regards her time deposit the interest she receives thereon is sub0ect to 8/+ final withholding tax! (,ec. &%(a)(c) Tax !ode).
DEDUCTIONS, EXEMPTIONS, EXCLUSIONS - INCLUSIONS

'e&uction: Faci"itation Fees or >BicB+acB> (199=) :( ,arcia a contractor who won the bid for the construction of a public highway claims as expenses facilitation fees which according to him is standard operating procedure in transactions with the government! 9re these expenses allowable as deduction from gross income? N*+O
SUGGESTED ANSWER*
6o! "he alleged facilitation fees which he claims as standard operating procedure in transactions with the government comes in the form of bribes or "#ic#bac#" which are not allowed as deductions from gross income
(,ection 5"(A)(l)(c) N6$!)! 'e&uctions: %r&inary Business 2xpenses (2 *) O>5 is the president and chief executive officer of 9'' (omputers Inc! When O>5 was as#ed to 0oin the government service as director of a bureau under the 'epartment of "rade and Industry he too# a leave of absence from 9''! ?elieving that its business outloo# goodwill and opportunities improved with O>5 in the
9nother reason for its non%deductibility is the fact that it can be considered as an illegal compensation made to a government employee! "his is so because if the insured his estate or heirs were made as the beneficiary (because of the re7uirement of insurable interest) the payment of premium will constitute bribes which are not allowed as deduction from gross income (,ection 5"AA@Al@Ac@ N6$!). On the other hand if the company was made the beneficiary whether directly or indirectly the premium is not allowed as a deduction from gross income (,ection 5.AAF%"@ N6$!). 'e&uctions: Amount for Bri+e (2 1) In order to facilitate the processing of its application for a license from a government office (orporation 9 found it necessary to pay the amount of &hp 2// /// as a bribe to the approving official! Is the &hp 2// /// deductible from the gross income of (orporation 9? On the other hand is the &hp 2// /// taxable income of the approving official? 1xplain your answers! (*+)
SUGGESTED ANSWER*
personal living and family expenses are not allowed as deduction from gross income (,ection 5.(A)(%) of the %**' Tax !ode). "he prohibition of deduction of capital losses from ordinary gains is designed to forestall the shifting of deductions from an area sub0ect to lower taxes to an area sub0ect to higher taxes thereby unnecessarily resulting in lea#age of tax revenues! (apital gains are generally taxed at a lower rate to prevent among others the bunching of income in one taxable year which is a liberality in the law begotten from motives of public policy ($ule on =olding 9eriod)! It stands to reason therefore that if the transaction results in loss the same should be allowed only from and to the extent of capital gains and not to be deducted from
-ince the amount of &hpl//!/// constitutes a bribe it is not allowed as a deduction from gross income of (orporation 9 (,ection 5"(A)(l)(c) N6$!)! =owever to the recipient government official the same constitutes a taxable income! 9ll income from legal or illegal sources are taxable absent any clear provision of law exempting the same! "his is the reason why gross income had been defined to include income from whatever source derived! (,ection 5&(A) N6$!). Illegally acBuired income constitutes reali$ed income under the claim of right doctrine (R./Ai% v. US 7(7 US !7)$.
'e&uctions: !apita" /osses$ Pro#i+itions (2 4) What is the rationale for the rule prohibiting the deduction of capital losses from ordinary gains? 1xplain!
SUGGESTED ANSWER*
It is to insure that only costs or expenses incurred in earning the income shall be deductible for income tax purposes consonant with the reBuirement of the law that only necessary expenses are allowed as deductions from gross income! "he term "N4!4,,A$G 4H94N,4," presupposes that in order to be allowed as deduction the expense must be business connected which is not the case insofar as capital losses are concerned! "his is also the reason why all non%business connected expenses li#e
ordinary gains which are sub0ect to a higher rate of income tax! (!hirelstein <ederal 6ncome Taxation %*'' 4d.)
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donated lot eBuivalent mar#et valueL$onal value of the donation?
to its fair at the time
1xplain your answer! (8+)

SUGGESTED ANSWER*
'e&uctions: 'e&ucti+"e Items from 5ross Income (1999) 1xplain if the following items are deductible from gross income for income tax purposes! 'isregard who is the person claiming the expense! (*+) 2) Interest on loans used to acBuire capital eBuipment or machinery! 8) 'epreciation of goodwill!
SUGGESTED ANSWER*
9! 6o! 'onations andLor contributions made to Bualified donee institutions consisting of property other than money shall be based on the acBuisition cost of the property! "he donor is not entitled to claim as full deduction the fair mar#et valueL$onal value of the lot donated! (-ec! ).(=) 6I<()! ?! In order that donations to non%stoc# non%profit educational institution may be exempt from the donor@s gift tax what conditions must be met by the
2) I%/ere+/ ,% -,a%+ .+ed /, acC.ire ca*i/a- eC.i*; 5e%/ ,r 5ac:i%er0 is a deductible item from gross income! "he law gives the taxpayer the option to claim as a deduction or treat as capital expenditure interest in% curred to acBuire property used in trade business or exercise of a profession! (,ection 5"(3) (5) N6$!).
8) De*recia/i,% 1,r g,,d&i-- is not allowed as de% duction from gross income! While intangibles maybe allowed to be depreciated or amorti$ed it is only allowed to those intangibles whose use in the business or trade is definitely limited in duration! (Ba+i-a% E+/a/e+ I%c. v CIR 2! SCRA !#)! -uch is not the case with goodwill!
ALTERNATI1E ANSWER*
donee? ()+)
SUGGESTED ANSWER*
'epreciation of goodwill is allowed as a deduction from gross income if the goodwill is acBuired through capital outlay and is #nown from experience to be of value to the business for only a limited period! (,ection %(' $evenue $egulations No. &)! In such case the goodwill is allowed to be amorti$ed over its useful life to allow the deduction of the current portion of the expense from gross income thereby paving the way for a proper matching of costs against revenues which is an essential feature of the income tax system! 'e&uctions: Income Tax: 'onation: 8ea" Property (2 2) On 'ecember /E 8//2 346 (orporation donated a piece of vacant lot situated in :andaluyong (ity to an accredited and duly registered non% stoc# non%profit educational institution to be used by the latter in building a sports complex for students!
9! :ay the donor claim in full as deduction from its gross income for the taxable year 8//2 the amount of the
?! In order that donations to non%stoc# non%profit educational institution may be exempt from the donor@s gift tax it is reBuired that not more than )/+ of the said gifts shall be used by the donee% institution for administration purposes! (-ec! 2/2(9)()) 6I<()!
).N'O())A capital losses (-ec! ).N'O(.)A 3osses from wash sales of stoc#s or securities (-ec! ).N'O (*) in relation to -ec! );)A wagering losses (-ec! ).N'O(E)A and abandonment losses (-ec! ).('O(I)! 3osses are also deductible from the gross estate (-ec! ;EN9O(l)(e) 6I<()! (onsidering the time allotted for a five (*) point Buestion is only nine (G) minutes the candidates would not be able to write down a complete answer! It is suggested that any answer which states the reBuisites for the deducibility of any of the above losses be given full credit!
'e&uctions: 7on:'e&ucti+"e Items$ 5ross Income (1999) 1xplain if the following items are deductible from gross income for income tax purposes! 'isregard who is the person claiming the deduction! (*+) 2! <eserves for bad debts! 8! Worthless securities
SUGGESTED ANSWER*
2! RESER#E "$R & D DE&TS are not allowed as deduction from gross income! ?ad debts must be charged off during the taxable year to be allowed as deduction from gross income! "he mere setting up of reserves will not give rise to any deduction! (-ection ).(1)! 6"<()!
8! !$RT)LESS SECURITIES which are ordinary assets are not allowed as deduction from gross income because the loss is not reali$ed! =owever if these worthless securities are capital assets the owner is considered to have incurred a capital loss as of the last day of the taxable year and therefore deductible to the extent of capital gains! (,ection 5"(B) (") N6$!). "his deduction however is not allowed to a ban# or trust company! (,ection 5"(4)(&) N6$!).
'e&uctions$ Income Tax: A""o1a+"e 'e&uctions (2 1) "axpayers whose only income consists of salaries and wages from their employers have long been complaining
'e&uctions: 8e3uisites$ 'e&uci+i"ity of a /oss (199=) ,ive the reBuisites for deducibility of a loss! (*+2
SUGGESTED ANSWER*
"he reBuisites for deducibility of a loss are 2) loss belongs to the taxpayerA 8) actually sustained and charged off during the taxable yearA )) evidenced by a closed and completed transactionA .) not compensated by Insurance or other forms of indemnityA *) not claimed as a deduction for estate tax purposes in case of individual taxpayersA and E) if it is a casualty loss it is evidenced by a declaration of loss filed within .* days with the ?I<!
COMMENT*
"he Buestion is vague! "here are different #inds of losses recogni$ed as deductible under the "ax (ode! "hese are losses in general (-ec! ).N'O(2)A net operating loss carryover (-ec!
that they are not dedu an allowed to ct y item from their gross income for purposes of computing their net taxable income! With the passage of the (omprehensive "ax <eform 9ct of 2GGI is this complaint still valid? 1xplain your answer! (*+)
SUGGESTED ANSWER*
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amount does not alter the fact that it is remitted in satisfaction of its tax obligations! -ince the income withheld is an income owned by 1xpress "ransport the same forms part of its gross receipts
(CIR v. !(4!"! S,-id6a%A C,r*. G.R. N,.
N,ve56er 23 2))7$.
ALTERNATI1E ANSWER*
6o more! ,ross compensation income earners are now allowed at least an item of deduction in the form of premium payments on health andLor hospitali$ation insurance in an amount not exceeding &8 .// per annum N-ection ).(:)O! "his deduction is allowed if the aggregate family income do not exceed &8*/!/// and by the spouse in case of married individual who claims additional personal exemption for dependents!
6o! "he term "gross receipts " as applied to the business of a common carrier consists of revenues from carriage of goods cargoes and passengers! It does not comprehend or include interest income which is properly described as "Other Income!"
(NOTA BENE: This 7uestion pertains to a percentage tax on #ross $eceipts which is excluded from the 3ar coverage)
2xc"usion (s) 'e&uction from 5ross Income (2 1)
'e&uctions$ Canis#ing 'e&uction$ Purpose (2 6) 4anishing deduction is availed of by taxpayers to: a! (orrect his accounting records to reflect the actual deductions made b! <educe his gross income c! <educe his output value%added tax liability d! <educe his gross estate (hoose the correct answer! 1xplain! (*+)
SUGGESTED ANSWER*
(') reduce his gross estate! 4anishing deduction or prop% erty previously taxed is one of the items of deduction allowed in computing the net estate of a decedent (,ection /.AA@A&@ and /.A3@A&@ N6$!). 2xc"usion ; Inc"usion$ 5ross 8eceipts (2 6)
(ongress enacts a law imposing a *+ tax on gross receipts of common carriers! "he law does not define the term "gross receipts!" 1xpress "ransport Inc! a bus company plying the :anila%?aguio route has time deposits with 9?( ?an#! In 8//* 1xpress "ransport earned &2 :illion interest after deducting the 8/+ final withholding tax from its time deposits with the ban#! "he ?I< wants to collect a *+ gross receipts tax on the interest income of 1xpress "ransport without deducting the 8/+ final withholding tax! Is the ?I< correct? 1xplain! (*+)
ALTERNATI1E ANSWER*
5es! "he term ",ross <eceipts" is broad enough to include income constructively received by the taxpayer! "he amount withheld is paid to the government on its behalf in satisfaction of withholding taxes! "he fact that it did not actually receive the
'istinguish "1xclusion from ,ross Income" from "'eductions From ,ross Income"! ,ive an example of each! (8+)
SUGGESTED ANSWER*
EXCLUSIONS 1r,5 gr,++ i%c,5e refer to a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayerPs taxable income due to the following reasons: (2) It is exempted by the fundamental lawA (8) It is exempted by statuteA and ()) It does not come within the definition of income! (-ection E2 << 6o! 8)! DEDUCTIONS 1r,5 gr,++ i%c,5e on the other hand are the amounts which the law allows to be deducted from gross income in order to arrive at net income!
to receive are @amounts of any damages received whether by suit or agreement on account of such in0uries!@ -ection 8;(b)(*) of the "ax (ode specifically exclude these amounts from the gross income of the individual in0ured! (-ection 8;(b) 6I<( and -ec! E) <ev! <eg! 6o! 8)
ALTERNATI1E ANSWER*
"he income reali$ed from the 0udgment is only the recovery for lost salaries! "his constitutes taxable income because were it not for the in0ury he could have received it from his employer as compensation income! 9ll the other amounts received are either compensation for in0uries or damages received on account of such in0uries@
1xclusions pertain to the computation of gross income while deductions pertain to the computation of net income! 1xclusions are something received or earned by the taxpayer which do not form part of gross income while deductions are something spent or paid in earning gross income! 1xample of an exclusion from gross income is proceeds of life insurance received by the beneficiary upon the death of the insured which is not an income or 2)th month pay of an employee not exceeding &)/!/// which is an income not recogni$ed for tax purposes! 1xample of a deduction is business rental! 2xc"usions ; Inc"usions: Benefits on Account of In@ury (1999)
:r! Infante was hit by a wayward bus while on his way to wor#! =e survived but had to pay &.//!///!// for his hospitali$ation! =e was unable to wor# for six months which meant that he did not receive his usual salary of & 2/ ///!// a month or a total of &E/!///!//! =e sued the bus company and was able to obtain a final 0udgment awarding him &.//!///!// as reimbursement for his hospitali$ation &E/!/// for the salaries he failed to receive while hospitali$ed &8// ///!// as moral damages for his pain and suffering and & 2// ///!// as exemplary damages! =e was able to collect in full from the 0udgment! =ow much income did he reali$e when he collected on the 0udgment? 1xplain!
SUGGESTED ANSWER*
6one! "he &8//!/// moral and exemplary damages are compensation for in0uries sustained by :r! Infante! "he &.//!///!// reimbursement for hospitali$ation expenses and the &E/!///!// for salaries he failed
29 of which are exclusions from gross 73 income pursuant to -ection 8;(b)(*) of the
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"his is to enable :r! 9drian to company guests (C,--ec/,r v+.

He%der+,%$.
entertain
"ax (ode!
2xc"usions ; Inc"usions$ Assets$ 8esi&ent A"ien (2 9)

<alph 'onald an 9merican citi$en was a top executive of a C!-! company in the &hilippines until he retired in 2GGG! =e came to li#e the &hilippines so much that following his retirement he decided to spend the rest of his life in the country! =e applied for and was granted a permanent resident status the following year! In the spring of 8//. while vacationing in Orlando Florida C-9 he suffered a heart attac# and died! 9t the time of his death he left the following properties: (a) ban# deposits with (itiban# :a#ati and (itiban# Orlando FloridaA (b) a resthouse in Orlando FloridaA (c) a condominium unit in
2xc"usions ; Inc"usions: 2xecuti(e Benefits (1999)

:r! 9drian is an executive of a big business corporation! 9side from his salary his employer provides him with the following benefits: free use of a residential house in an exclusive subdivision free use of a limousine and membership in a country club where he can entertain customers of the corporation! Which of these benefits if any must :r! 9drian report as income? 1xplain!
SUGGESTED ANSWER*
:r! 9drian must report the imputed rental value of the house and limousine as income! If the rental value exceeds the personal needs of :r! 9drian because he is expected to provide accommodation in said house for company guests or the car is used partly for business purpose then :r! 9drian is entitled only to a ratable rental value of the house and limousine as exclusion from gross income and only a reasonable amount should be reported as income! "his is because the free housing and use of the limousine are given partly for the convenience and benefit of the employer (C,--ec/,r v+. He%der+,%$.
ALTERNATI1E ANSWER*
<emuneration for services although not given in the form of cash constitutes compensation income! 9ccordingly the value for the use of the residential house is part of his compensation income which he must report for income tax purposes! =owever if the residential house given to :r! 9drian for his free use as an executive is also used for the benefit of the corporationLemployer such as for entertaining customers of the corporation only */+ of the rental value or depreciation (if the house is owned by the corporation) shall form part of compensation income (<9:O 2%;I)!
"he free use of a limousine and the membership in a country club is not part of :r! 9drian@s compensation income because they were given for the benefit of the employer and are considered to be necessary incidents for the proper performance of his duties as an executive of the corporation!
"he membership fee in the country club needs to be reported as income! It appears that the membership of :r! 9drian to the country club is primarily for the benefit and convenience of the employer!
:a#atiA (d) shares of stoc# in the &hilippine subsidiary of the C!-! (ompany where he wor#edA (e) shares of stoc# in -an :iguel (orp! and &3O"A (f) shares of stoc# in 'isney World in FloridaA (g) C!-! treasury bondsA and (g) proceeds from a life insurance policy issued by a C!-! corporation! Which of the foregoing assets shall be included in the taxable gross estate in the &hilippines? 1xplain! (*+)
SUGGESTED ANSWER*
I)
9ll of the properties enumerated except (g) the proceeds from life insurance are included in the taxable gross estate in the &hilippines! <alph 'onald is considered a resident alien for tax purposes since he is an 9merican (iti$en and was a permanent resident of the &hilippines at the time of his death! "he value of the gross estate of a resident alien decedent shall be determined by including the value at the time of his death of all property real or personal tangible or intangible wherever situated! (-ec! ;* 6I<()
"he other item (g) proceeds from a life insurance policy may also be included on the assumption that it was <alph 'onald who too# out the insurance upon his own life payable upon his death to his estate! (-ec! ;*N1O 6I<()
the gift was made to the widow rather than the estate: ;) there was no obligation for the corporation to ma#e further payments to the deceasedA G) the widow had never wor#ed for the corporationA 2/) the corporation received no economic benefitA and 22) the deceased had been fully compensated for his services (E+/a/e ,1 S0d%e0 Car/er v+. C,55i++i,%er (37 F. 2d '! (2dCir. !"#!)! 2xc"usions ; Inc"usions$ Benefits on Account of In@ury (2 9) J< was a passenger of an airline that crashed! =e survived the accident but sustained serious physical in0uries which reBuired hospitali$ation for ) months! Following negotiations with the airline and its insurer an agreement
2xc"usions ; Inc"usions$ Benefits on Account of 'eat# (1996) > an employee of 9?( (orporation died! 9?( (orporation gave >Ps widow an amount eBuivalent to >Ps salary for one year! Is the amount considered taxable income to the widow? Why?
SUGGESTED ANSWER*
6o! "he amount received by the widow from the decedent@s employer may either be a gift or a separation benefit on account of death! ?oth are exclusions from gross income pursuant to provisions of -ection 8;(b) of the "ax (ode!
ALTERNATI1E ANSWER*
6o! -ince the amount was given to the widow and not to the estate it becomes obvious that the amount is more of a gift! In one C!-! tax case (E+/a/e ,1
He--+/r,5 v+. C,55i++i,%er 2( T.C. "!')
it was held that payments to the widow of the president of a corporation of the amount the president would have received in salary if he lived out the year constituted a gift and not an income! "he controlling facts which would lead to the conclusion that the amount received by the widow is not an income are as follows:
was reached under the terms of which J< was paid the following amounts: &*// ///!// for his hospitali$ationA &8*/ ///!// as moral damagesA and &)// ///!// for loss of income during the period of his treatment and recuperation! In addition J< received from his employer the amount of &8// ///!// representing the cash eBuivalent of his earned vacation and sic# leaves!
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in0uries sustainedA all shall be excluded from his gross income! Obviously these damages are considered by law as mere return of capital! (-ection )8(?)(.) 2GGI "ax (ode) 2xc"usions ; Inc"usions$ Faci"ities or Pri(i"eges$ 0i"itary !amp (1999) (apt! (anuto is a member of the 9rmed Forces of the &hilippines! 9side from his pay as captain the government gives him free uniforms free living Buarters in whatever military camp he is assigned and free meals inside the camp! 9re these benefits income to (apt! (anuto? 1xplain!
SUGGESTED ANSWER*
Which if any of the amounts he received are sub0ect to income tax? 1xplain! (*+)
SUGGESTED ANSWER*
9ll amounts received from the airline company are excluded from gross income! Cnder -ec! )8(?)(.) of the 6I<( amounts of damages received whether by suit or agreement on account of personal in0uries or sic#ness are excluded from gross income! -ince the amounts received from the airline company were received as damages by agreement on account of personal in0uries all shall be excluded from J<@s gross income! "he amount of &8// ///!// less the eBuivalent of not more than 2/ days of vacation leave received by J< from his employer is sub0ect to income tax under -ec! 8!I;!2 (a) (I) of <!<! 6o! 8%G;! 2xc"usions ; Inc"usions$ !ompensation for persona" in@uries or sicBness (2 4) > while driving home from his office was seriously in0ured when his automobile was bumped from behind by a bus driven by a rec#less driver! 9s a result he had to pay &8// ///!// to his doctor and &2// ///!// to the hospital where he was confined for treatment! =e filed a suit against the bus driver and the bus company and was awarded and paid actual damages of &)// ///!// (for his doctor and hospitaliIation bills) &2// ///!// by way of moral damages and &*/ ///!// 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 > and which are not? 1xplain! (;+)
SUGGESTED ANSWER*
6o and not are
the free uniforms free living Buarters the free meals inside the camp are income to (apt! (anute because these facilities or privileges furnished by the
6othing is taxable! Cnder the "ax (ode any amount received as compensation for personal in0uries or sic#ness plus the amounts for any damages received whether by suit or agreement on account of such in0uries or sic#ness shall be excluded from gross income! -ince the entire amount of &.*/ ///!// received are award of damages on account of the
employer for the employer@s convenience which are necessary incidents to proper performance of the military personnel@s duties! 2xc"usions ; Inc"usions$ 5ifts o(er an& a+o(e t#e 8etirement Pay (1999)
:r! Kuiro$ wor#ed as chief accountant of a hospital for forty%five years! When he retired at E* he received retirement pay eBuivalent to two months@ salary for every year of service as provided in the hospital ?I< approved retirement plan! "he ?oard of 'irectors of the hospital felt that the hospital should give Kuiro$ more than what was provided for in the hospital@s retirement plan in view of his loyalty and invaluable services for forty%five yearsA hence it resolved to pay him a gratuity of &2 :illion over and above his retirement pay!
nothing but @good will esteem and #indness@ which motivated the employer to give the gratuity!
(S/,%/,% v+. U.S. !4' F. S.**. 7"7$. -uch is
not the case in the herein problem!

ALTERNATI1E ANSWER*
5es! "he 2 million is not compensation income sub0ect to income tax but a gift from his employer! "here was no evidence presented to show that he was not fully compen% sated for his .* years of service! If his services contributed in a large measure to the success of the hospital it did not give rise to a recoverable debt! "he &2 million is purely a gratuity from the company! It is a taxable gift to the transferor! Cnder the "ax (ode gifts are excluded from gross income therefore exempt from income tax! (-ec! 8;Db)()) 6I<(A Pir,va%, v+. C,55i++i,%er)
"he (ommissioner of Internal <evenue taxed the &2 :il% lion as part of the gross compensation income of Kuiro$ who protested that it was excluded from income because (a) it was a retirement pay and (b) it was a gift! 2) Is :r! Kuiro$ correct in claiming that the additional &2 :illion was retirement pay and therefore excluded from income? 1xplain! 8) Is :r! Kuiro$ correct in claiming that the additional &2 :illion was gift and therefore excluded from income? 1xplain!
SUGGESTED ANSWERS*
2) 6o! "he additional &2 million is not a retirement pay but a part of the gross compensation income of :r! Kuiro$! "his is not a retirement benefit received in accordance with a reasonable private benefit plan maintained by the employer as it was not paid out of the retirement plan! 9ccordingly the amount received in excess of the retirement benefits that he is entitled to receive under the ?I<%approved retirement plan would not Bualify as an exclusion from gross income! 8) 6o! "he amount received was in consideration of his loyalty and invaluable services to the company which is clearly a compensation income received on account of employment! Cnder the employer@s @motivation test @ emphasis should be placed on the value of :r! Kuiro$ services to the company as the compelling reason for giving him the gratuity hence it should constitute a taxable income! "he payment would only Bualify as a gift if there is
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2xc"usions ; Inc"usions$ IT8$ 14t# mont# pay
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6I<()A (ii)Income reali$ed from sale of ordinary assets is part of ,ross Income included in the Income "ax <eturn! (-ec! )8N9ON)O 6I<() 2xc"usions ; Inc"usions$ IT8$ Interest on &eposits (2 9) -tate with reasons the tax treatment of the following in the preparation of annual income tax returns: Interest on deposits with: (i) ?&I Family ?an#A and (ii) a local offshore ban#ing unit of a foreign ban#A
SUGGESTED ANSWER*
an& &e minimis +enefits (2 9) -tate with reasons the tax treatment of the following in the preparation of annual income tax returns: 2)th month pay and de minimis benefitsA
SUGGESTED ANSWER*
"he !7/: 5,%/: *a0 not exceeding &)/ ///!// shall not be reported in the income tax return because it is excluded from gross income (,ec. 5&A3@A'@ Ae@ N6$!) "he amount of the 2)th month pay in excess of &)/ ///!// shall be reported in the annual income tax return! De 5i%i5i+ 6e%e1i/+ which do not exceed the ceilings are excluded from gross income and not to be considered for determining the &)/ ///!// ceiling hence not reportable in the annual income tax return! (,ec. &.'/.%AA@A5@ $.$. &-*/ as amended by ,ec. &.55 A!@ and further amended by $.$. No. /-&((() 2xc"usions ; Inc"usions$ IT8$ 'i(i&en&s recei(e& +y a &omestic corporation (2 9)
-tate with reasons the tax treatment of the following in the preparation of annual income tax returns: 'ividends received by a domestic corporation from (i) another domestic corporationA and (ii) a foreign corporationA
SUGGESTED ANSWER*
?oth items are excluded from the income tax return: (i) Interest income from any currency ban# deposit is considered passive income from sources within the &hilippines and sub0ect to final tax! -ince it is sub0ect to
(i) 'ividends received by a domestic corporation from a domestic corporation shall not be sub0ect to tax (-ec! 8IN'O N.O 6I<() hence excluded from the income tax return! (ii)'ividends received by a domestic corporation from a foreign corporation form part of the gross income and are accordingly sub0ect to net income tax hence included in the annual I"< (-ec! .8N9ON8ONbO 6I<() hence must be included in the income tax return! 2xc"usions ; Inc"usions$ IT8$ Income rea"i?e& from sa"e (2 9) -tate with reasons the tax treatment of the following in the preparation of annual income tax returns: Income reali$ed from sale of: (i) capital assetsA and (ii) ordinary assets!
SUGGESTED ANSWER*
(i)Income reali$ed from sale of capital assets is sub0ect to the final withholding tax at source and therefore excluded from the Income "ax <eturn (-ec! 8.N(O and N'O
final tax it is not to be included in the annual I"<! (-ec! 8.N?ON2O 6I<() (u) -ame as 6o! (0)! 2xc"usions ; Inc"usions$ IT8$ Procee&s of "ife insurance (2 9) -tate with reasons the tax treatment of the following in the preparation of annual income tax returns: &roceeds of life insurance received by a child as irrevocable beneficiaryA
SUGGESTED ANSWER*
beneficiary is irrevocable! 9s stated in the problem only the designation of 5 is irrevocable while the insuredLdecedent reserved the right to substitute H as beneficiary for another person! 9ccordingly the proceeds received by 5 shall be excluded while the proceeds received by H shall be included in the gross estate of >! (,ect;on /-(4) %**' Tax !ode)
2xemptions: !#arita+"e Institutions (2
6ot to be reported in the annual income tax returns because the proceeds of the life insurance are excluded from gross income! &roceeds of 3ife insurance policies paid to the heirs or beneficiaries upon the death of the insured is an exclusion from gross income! (,ec.5&A3@Al@ N6$!) 2xc"usions ; Inc"usions$ /ife Insurance Po"icy (2 4) On )/ June 8/// > too# out a life insurance policy on his own life in the amount of &8 /// ///!//! =e designated his wife 5 as irrevocable beneficiary to &2 /// ///!// and his son H to the balance of &2 /// ///!// but in the latter designation reserving his right to substitute him for another! On /2 -eptember 8//) > died and his wife and son went to the insurer to collect the proceeds of >@s life insurance policy! (;+) (a) 9re the proceeds of the insurance sub0ect to income tax on the part of 5 and H for their respective shares? 1xplain! (b) 9re the proceeds of the insurance to form part of the gross estate of >? 1xplain!
SUGGESTED ANSWERS*
9rticle 4I -ection 8; ()) of the 2G;I &hilippine (onstitution provides that charitable institutions churches and personages or covenants appurtenant thereto mosBues non%profit cemeteries and all lands buildings and improvements actually directly and
(a) 6o! "he law explicitly provides that proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are excluded from gross income and is exempt from taxation! "he proceeds of life insurance received upon the death of the insured constitute a compensation for the loss of life hence a return of capital which is beyond the scope of income taxation! (,ection 5&(3)(%) %**' Tax !ode)
(b)Only the proceeds of &2 /// ///!// given to the son H shall form part of the ,ross 1state of >! Cnder the "ax (ode proceeds of life insurance shall form part of the gross estate of the decedent to the extent of the amount receivable by the beneficiary designated in the policy of the insurance except when it is expressly stipulated that the designation of the
exempt from taxation! a) "o what #ind of tax does this exemption apply? (8+) SUGGESTED NS!ER:
"his exemption applies only to taxes! What is exempted is institution itself but the lands and improvements actually and exclusively used for charitable and educational property not the buildings directly religious purposes!
+2 of exclusively used for religious 73 charitable or educational purposes shall be

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institution all of its income from school related and non%school related activities will be sub0ect to the income tax based on its aggregate net income derived from both activities (-ection 8I(?) 6:()! 9ccordingly all of the income enumerated in the problem will be taxable! "he donation of lot and building will li#ewise be sub0ect to the donor@s tax because a donation to an educational institution is exempt only if the school is incorporated as a non%stoc# entity paying no dividends!
-ince the donee is a proprietary educational institution the donation is taxable (-ection 2/2(9>)) 6J<()!
(C,55i++i,%er ,1 I%/er%a- Reve%.e v. C,.r/ ,1
A**ea-+ e/ a- G.R. N,. !2()(7 Oc/,6er !( !""4$.
b)
Is proof of actual use necessary for tax exemption
2xemptions: 5ifts ; 'onations (199*)

In 2GG2 Imelda gave her parents a (hristmas gift of & 2// ///!// and a donation of &*/ ///!// to her parish
purposes under the (onstitution? ()+)

SUGGESTED ANSWER*
5es because tax exemptions are strictly construed against the taxpayer! "here must be evidence to show that the taxpayer has complied with the reBuirements for exemption! Furthermore real property taxation is based on use and not on ownership hence the same rule must also be applied for real property tax exemptions!
2xemptions: !#arita+"e Institutions$ !#urc#es (1996) "he (onstitution exempts from taxation charitable in% stitutions churches parsonages or convents appurtenant thereto mosBues arid non%profit cemeteries and lands buildings and improvements actually directly and exclu% sively used for religious charitable and educational purposes! :ercy =ospital is a 2//%bed hospital organi$ed for charity patients! (an said hospital claim exemption from taxation under the above%Buoted constitutional provision? 1xplain!
SUGGESTED ANSWER*
5es! :ercy =ospital can claim exemption from taxation under the provision of the (onstitution but only with respect to real property taxes provided that such real properties are used actually directly and exclusively for charitable purposes! 2xemptions: 2&ucationa" institution (2 *) -uppose that >5H (olleges is a proprietary educational institution owned by the 9rchbishop@s family rather than the 9rchdiocese which of those above cited income and donation would be exempt from taxation? 1xplain briefly! (*+)
SUGGESTED ANSWER*
If >5H (olleges is a proprietary educational
church! -he also donated a parcel of land for the construction of a building to the &C& 9lumni 9ssociation a non%stoc# non%profit organi$ation! &ortions of the building shall be leased to generate income for the association! 2) Is the (hristmas gift of & 2// ///!// to Imelda@s parents sub0ect to tax? 8) =ow about the donation to the parish church? )) =ow about the donation to the &!C!& 9lumni 9sso% ciation?
SUGGESTED ANSWER*
8)
Is 9rnold entitled to deduct from his gross income an additional exemption for each of his illegitimate child? N8+O
5es! 9n unmarried man who has illegitimate minor children who live with him and depend upon him for their chief support is considered as "head of the family" ($$ No. &-*/ implementing ,ection 5- N6$!). 6o! 9rnold is only entitled to deduct additional personal exemption for four (.) out of the six (E) illegitimate children! "he maximum number of dependents for purposes of the additional personal exemption is four! (-ec! )* 6I<()!
SUGGESTED ANSWER*
2)
8)
2) "he (hristmas gift of &2// ///!// given by Imelda to her parents is taxable up to &*/ ///!// because under
the law (,ec. (a) of the !od net gifts *& e) not Tax exceeding &*/ ///!// are exempt!
2xemptions: 7on:Profit 2&ucationa" Institutions (2
8) "he donation of &*/ ///!// to the
parish church even assuming that it is exclusively for religious purposes is not tax%exempt because the exemption granted under 9rticle 4I -ec! 8;()) of the (onstitution applies only to real estate taxes (L-ad,c
v. C,55i++i,%er !(SCRA2"2$.
)) "he donation to the &!C!&! 9lumni 9ssociation does not also Bualify for exemption both under the (onstitution and the aforecited law because it is not an educational or research organi$ation corporation
institution foundation or trust!

ALTERNATI1E ANSWER*
'onation to the &!C!&! 9lumni 9ssociation is exempt from donor@s tax if it is proven that the association is a nonstoc# non%profit charitable association paying no dividends governed by trustees who receive no compensation and devoting all its income to the accomplishment and promotion of the purposes enumerated in its articles of incorporation! 6ot more than )/+ of the gift should be used for administration purposes by the donee! 2xemptions: Dea& of t#e Fami"y: (199=) 9rnold who is single cohabits with 4ilma who is legally married to Hachary! 9rnold and 4ilma have six minor children who live and depend upon 9rnold for their chief support! "he children are not married and not gainfully employed! 2) For income tax purposes may 9rnold be considered as "head of a family?" N)+O
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Cnder 9rticle >"4 -ection . ()) of the 2G;I
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&hilippine (onstitution all revenues and assets of non% stoc# nonprofit educational institutions used actually directly and exclusively for educational purposes are exempt from taxes and duties! 9re income derived from dormitories canteens and boo#stores as well as interest income on ban# deposits and yields from deposit substitutes automatically exempt from taxation? 1xplain! (*+)
SUGGESTED ANSWER*
2xemptions: 7on:Profit 2ntity$ Anci""ary Acti(ity ; Inci&enta" %perations (199*)

"he Cniversity of ?igaa a non%stoc# non% profit entity operates a canteen for its students and a boo#store inside the campus! It also operates two dormitories for its students one of which is in the campus! Is the Cniversity liable to pay income taxes for the operation of the: 2) canteen? 8) boo#store? )) two dormitories?
SUGGESTED ANSWER*
6o! "he interest income on ban# deposits and yields from deposit substitutes are not automatically exempt from taxation! "here must be a showing that the incomes are included in the school@s annual information return and duly audited financial statements together with:
2) For the operation of the canteen inside the campus the income thereon being incidental to the operations of the Cniversity as a school is exempt (Art. H62 (") (5) !onstitution: B4!, $egulations No. %5'-/' Bec. %. %*/').
2!
8! )!
(ertifications from depository ban#s as to the amount of interest income earned from passive investments not sub0ect to the 8/+ final withholding taxA (ertification of actual direct and exclusive utili$ation of said income for educational purposesA ?oard resolution on proposed pro0ect to be funded out of the money deposited in ban#s or placed in money mar#et placements (<inance Bepartment Crder No. %"*-*- issued November &" %**-) which must be used actually directly and exclusively for educational purposes!
8) For the same reasons the Cniversity of ?igaa is not liable to pay income taxes for the operation of the
"he income derived from dormitories canteens and boo#stores are not also automatically exempt from taxation! "here is still the reBuirement for evidence to show actual direct and exclusive use for educational purposes! It is to be noted that the 2G;I &hilippine (onstitution does not distinguish with respect to the source or origin of the income! "he distinction is with respect to the use which should be actual direct and exclusive for educational purposes! (onseBuently the provisions of -ec! )/ of the 6I<( of 2GGI that a non%stoc# and nonprofit educational institution is exempt from taxation only "in respect to income received by them as such" could not affect the constitutional tax exemption! Where the (onstitution does not distinguish with respect to source or origin the "ax (ode should not ma#e distinctions!
boo#store since this is an ancillary activity the conduct of which is carried out within the school premises! )) "he Cniversity of ?igaa shall not be liable to pay income taxes for the operation of the dormitory located in the campus for same reasons as the foregoing! =owever the latter shall be liable for income taxes on income from operations of the dormitory located outside the school premises! 2xemptions: 7on:StocBE 7on:Profit Association (2 2)
>5H Foundation is a non%stoc# non%profit association duly organi$ed for religious charitable and social welfare purposes! 3ast January ) 8/// it sold a portion of its lot used for religious purposes and utili$ed the entire proceeds for the construction of a building to house its free 'ay and 6ight (are (enter for children of single parents! In order to subsidi$e the expenses of the 'ay and 6ight (are (enter and to support its religious charitable and social welfare pro0ects the Foundation leased the )//% sBuare meter area of the second and third floors of the building for use as a boarding house! "he Foundation also operates a canteen and a gift shop within the premises all the income from which is used actually directly and exclusively for the purposes for which the Foundation was organi$ed! 9! (onsidering the constitutional provision granting tax exemption to non%stoc# corporations such as those formed exclusively for religious charitable or social welfare purposes explain the meaning of the last paragraph of said -ec! )/ of the 2GGI "ax (ode which states that J6ncome of whatever >ind and character of the foregoing organiIations from any of their properties real or personal or from any of their activities conducted for profit regardless of the disposition made of such income shall be
exempt from income tax on their income received by them as such! =owever if these religious charitable or social welfare corporations derive income from their properties or any of their activities conducted for profit the income tax shall be imposed on said items of income irrespective of their disposition! (Sec. 7) NIRC? CIR v BMCA GR N,. !2()(7 !""4)!
?! Is the income derived by >5H Foundation from the sale of a portion of its lot rentals from its boarding house and the operation of its canteen and gift shop sub0ect to tax? 1xplain! (*+)
SUGGESTED ANSWER*
?! 5es! "he income derived from the sale of lot and rentals from its boarding house are considered as income from properties which are sub0ect to tax! 3i#ewise the income from the operation of the canteen and gift shop
sub1ect to tax imposed under this !ode.0 (*+)

SUGGESTED ANSWER*
9! "he exemption contemplated in the (onstitution covers real estate tax on real properties actually directly and exclusively used for religious charitable or social welfare purposes! It does not cover exemption from the imposition of the income tax which is within the context of -ection )/ of the "ax (ode! 9s a rule non%stoc# non% profit corporations organi$ed for religious charitable or social welfare purposes are
are income from activiti conduct fo es its ed r
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from the payment of the donor@s tax!" 2xemptions: 8etirement Benefits: -orB Separation (1999) 9 (o! a &hilippine corporation has two divisions 7 manufacturing and construction! 'ue to the economic situation it had to close its construction division and lay% off the employees in that division! 9 (o! has a retirement plan approved by the ?I< which reBuires a minimum of */ years of age and 2/ years of service in the same employer at the time of retirement! "here are 8 groups of employees to be laid off: 2) 1mployees who are at least */ years of age and has at 2/ years of service at the time of termination of employment! 8) 1mployees who do no meet either the age or length of service 9 (o! plans to give the following:
profit which are sub0ect to tax! "he income tax attaches irrespective of the disposition of these incomes! (Sec. 7) NIRC? CIR v. BMCA GR N,. !2()(7 !""4)! 2xemptions: Pri?e of Peace Poster !ontest (2 ) Jose :iranda a young artist and designer received a pri$e of &2// ///!// for winning in the on%the%spot peace poster contest sponsored by a local 3ions (lub! -hall the reward be included in the gross income of the recipient for tax purposes? 1xplain! ()+)
SUGGESTED ANSWER*
6o! It is not includable in the gross income of the recipient because the same is sub0ect to a final tax of 8/+ the amount thereof being in excess of &2/!/// (,ec. &"(3)K%) N6$! of %**'). "he pri$e constitutes a taxable income because it was made primarily in recognition of artistic achievement which he won due to an action on his part to enter the contest! A,ec. 5& (3) (') (c) N6$! of %**'@
-ince it is an on%the%spot contest it is evident that he must have 0oined the contest in order to earn the pri$e or award! 2xemptions: Pri?es ; A1ar&s$ At#"etes (1996)
Onyoc an amateur boxer won in a boxing competition sponsored by the ,old (up ?oxing (ouncil a sports association duly accredited by the &hilippine ?oxing 9ssociation! Onyoc received the amount of &*// /// as his pri$e which was donated by 9yala 3and (orporation! "he ?I< tried to collect income tax on the amount received by Onyoc and donor@s tax from 9yala 3and (orporation which taxes Onyoc and 9yala 3and (orporation refuse to pay! 'ecide!
SUGGESTED ANSWER*
"he pri$e will not constitute a taxable income to Onyoc hence the ?I< is not correct in imposing the income tax! <!9! 6o! I*.G explicitly provides that @9ll pri$es and awards granted to athletes in local and international sports tournaments and competitions held in the &hilippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax"! 6either is the ?I< correct in collecting the donor@s tax from 9yala 3and (orporation! "he law is clear when it categorically stated ""hat the donor@s of said pri$es and awards shall be exempt
a!For category (9) employees % the benefits under the ?I< approved plan plus an ex gratia payment of one month of every year of
&edro <eyes an official of (orporation > as#ed for an "earlier retirement" because he was emigrating to 9ustralia! =e was paid &8!///!///!// as separation pay in recognition of his valuable services to the corporation! Juan (ru$ another official of the same company was separated for occupying a redundant position! =e was given &2 ///!///!// as separation pay! Jose ?autista was separated due to his failing eyesight! =e was given &*//!///!// as separation pay! 9ll the three ()) were not Bualified to retire under the ?I<%approved pension plan of the corporation! 2) Is the separation pay given to <eyes sub0ect to income tax? 8) =ow about the separation pay received by (ru$? )) =ow about the separation pay received by ?autista?
service! b! For category (?) employees month for every year of service!
For both categories eBuivalent of
% one
the cash
unused vacation and sic# leave credits! 9 (o! see#s your advice as to whether or not it will sub0ect any of these payments to W"! 1xplain your advice! (*+)
SUGGESTED ANSWER*
For category employees all the benefits received on account of their separation are not sub0ect to income tax hence no withholding tax shall be imposed! "he benefits received under the ?I<%approved plan upon meeting the service reBuirement and age reBuirement are explicitly excluded from gross income! "he ex gratia payment also Bualifies as an exclusion from gross income being in the nature of benefit received on account of separation due to causes beyond the employees@ control! (-ection )8(?) 6I<()! "he cash eBuivalent of unused vacation and sic# leave credits Bualifies as part of separation benefits excluded from gross income (CIR v. C,.r/ ,1 A**ea-+ GR N,. "'O!' Oc/,6er !# !""!)!
For category ? employees all the benefits received by them will also be exempt from income tax hence not sub0ect to withholding tax! "hese are benefits received on account of separation due to causes beyond the employees@ control which are specifically excluded from gross income! (,ection 5&(3) N6$!).
ALTERNATI1E ANSWER6
9ll of the payments are not sub0ect to income tax and should not also be sub0ect to withholding tax! "he employees were laid off hence separated for a cause beyond their control! (onseBuently the amounts to be paid by reason of such involuntary separation are excluded from gross income irrespective of whether the employee at the time of separation has rendered less than ten years of service andLor is below fifty years of age!
(,ection 5&(3) N6$!). 2xemptions: Separation Pay (199*)
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SUGGESTED ANSWER*
a conseBuence of separation of such official or employee from the service of the employer for any cause beyond the control of the said official or employee (-ec 8; 6I<()!
ALTERNATI1E ANSWER*
2) "he separation pay given to <eyes is sub0ect to income tax as compensation income because it arises from a service rendered pursuant to an employer% employee rela% tionship! It is not considered an exclusion from gross income because the rule in taxation is tax construed in strictissimi 1uris or the rule on strict Interpretation of tax exemptions! 8) "he separation pay received by (ru$ is not sub0ect to income tax because his separation from the company was involuntary (-ec! 8; b (I) "ax (ode)!
)) "he separation pay received by ?autista is li#ewise not sub0ect to tax! =is separation is due to disability hence involuntary! Cnder the law separation pay received through involuntary causes are exempt from taxation!
6o :r! Jacobo did not derive any taxable income because the separation pay was due to a retrenchment policy adopted by the company so that any employee terminated by virtue thereof is considered to have been separated due to causes beyond the employee@s control! "he voluntary redundancy program reBuiring employees to ma#e an offer to resign is only considered as a tool to expedite the lay%off of excess manpower whose services are no longer needed by the employer but is not the main reason or cause for the termination
SUGGESTED ANSWER*
8) 6o :r! Qintanar did not derive any income when he received his separation pay because his separation from
2xemptions: Separation Pay (1999) :r! Jacobo wor#ed for a manufacturing firm! 'ue to business reverses the firm offered voluntary redundancy program in order to reduce overhead expenses! Cnder the program an employee who offered to resign would be given separation pay eBuivalent to his three month@s basic salary for every year of service! :r! Jacobo accepted the offer and received &.//!///!// as separation pay under the program! 9fter all the employees who accepted the offer were paid the firm found its overhead still excessive! =ence it adopted another redundancy program! 4arious unprofitable departments were closed! 9s a result :r! Qintanar was separated from the service! =e also received &.//!///!// as separation pay! 2) 'id :r! Jacobo derive income when he received his separation pay? 1xplain! 8) 'id :r! Qintanar derive income when he received his separation pay? 1xplain!
SUGGESTED ANSWER*
2) 5es :r! Jacobo derived a taxable income when he received his separation pay because his separation from employment was voluntary on his part in view of his offer to resign! What is excluded from gross income is any amount received by an official or employee as
employment is due to causes beyond his control! "he separation was involuntary as it was a conseBuence of the closure of various unprofitable departments pursuant to the redundancy program! 2xemptions: Separation Pay (2 9)
(ompany 9 decides to close its operations due to continuing losses and to terminate the services of its employees! Cnder the 3abor (ode employees who are separated from service for such cause are entitled to a minimum of one%half month pay for every year of service! (ompany 9 paid the eBuivalent of one month pay for every year of service and the cash eBuivalent of unused vacation and sic# leaves as separation benefits!
2xemptions: Strict"y !onstrue& (1996) Why are tax exemptions strictly construed against the taxpayer?
SUGGESTED ANSWER*
"ax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and may almost be said to be odious to the law (Ma%i-a E-ec/ric C,5*a%0 v+. Vera '# SCRA 73! )! "he exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not loo# with favor on tax exemptions they being contrary to the life% blood theory which is the underlying basis for taxes! 2xemptions: Termina" /ea(e Pay (1996)
9re such benefits taxable and sub0ect to withholding tax under the "ax (ode? 'ecide with reasons! (*+)
SUGGESTED ANSWER*
9ll of the benefits are not taxable hence they are not sub0ect to withholding tax under the "ax (ode! ?enefits received as a conseBuence of separation for any cause beyond the control of the employees such as closure of business are excluded from gross income. (,ec. 5&A3@ A.@Ab@ N6$! in relation to ,ec. &Ab@A&@ $.$. &-*/) 2xemptions: StocB 'i(i&en&s (2 4)
On /) January 2GG; > a Filipino citi$en residing in the &hilippines purchased one hundred (2//) shares in the capital stoc# of 5 (orporation a domestic company! On /) January 8/// 5 (orporation declared out of the profits of the company earned after /2 January 2GG; a hundred percent (2//+) stoc# dividends on all stoc#holders of record as of )2 'ecember 2GGG as a result of which > holding in 5 (orporation became two hundred (8//) shares! 9re the stoc# dividends received by > sub0ect to income tax? 1xplain! (;+)
SUGGESTED ANSWER*
6o! -toc# dividends are not reali$ed income! 9ccordingly the different provisions of the "ax (ode imposing a tax on dividend income only includes within its purview cash and property dividends ma#ing stoc# dividends exempt from income tax! =owever if the distribution of stoc# dividends is the eBuivalent of cash or property as when the distribution results in a change of ownership interest of the shareholders the stoc# dividends will be sub0ect to income tax! (,ection &"(3)(&): ,ection &-(A)L(3): ,ection &/(3)(-)(b) %**' Tax !ode)
9 an employee of the (ourt of 9ppeals retired upon reaching the compulsory age of E* years! Cpon compulsory retirement 9 received the money value of his accumulated leave credits in the amount of &*//!///!//! Is said amount sub0ect to tax? 1xplain!
SUGGESTED ANSWER*
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placements of the tuition fees (e) 'onation of a lot and building by school alumni Which of these above cited income and donation would not be exempt from taxation? 1xplain briefly! (*+)
SUGGESTED ANSWER*
6o! "he commutation of leave credits more commonly #nown as terminal leave pay i!e! the cash eBuivalent of accumulated vacation and sic# leave credits given to an officer or employee who retires or separated from the service through no fault of his own is exempt from income tax! (BIR R.-i%g
274;"! da/ed N,ve56er 4 !""!?
C,55i++i,%er v. CA a%d E1re% Ca+/a%eda GR N,. "')!' Oc/,6er !# !""!)!
9! 9ll of the income derived by the non% stoc# nonprofit educational institution will be exempt from taxation provided they are used actually directly and exclusively for educational purposes! "he (onstitution provides that all revenues and assets of non%stoc# non%profit educational institution which are actually directly and exclusively used for educational purposes are exempt from taxation (,ection " par. 5 Article H62 %*/' !onstitution).
2xemptions$ !#arita+"e Institutions (2 6) "he (onstitution provides "charitable institutions churches personages or convents appurtenant thereto mosBues and non%profit cemeteries and all lands buildings and improvements actually directly and exclusively used for religious charitable or educational purposes shall be exempt from taxation!" "his provision exempts charitable institutions and religious institutions from what #ind of taxes? (hoose the best answer! 1xplain! (*+) a! from all #inds of taxes i!e! income 49" customs duties local taxes and real property tax b! from local tax only c! from value%added tax d! from real property tax only e! from capital gains tax only
SUGGESTED ANSWER*
"he provision exemptions institutions and religious from (d) <193 &<O&1<"5 "he exemption is only for taxes property taxes as distinguished taxes (CIR v.
charitable institutions "9>1- only! assessed as from excise
CA CTA @ BMCA G.R. N,. !2()(7 Oc/,6er !( !""4? L-ad,c v. C,55i++i,%er ,1 I%/er%a- Reve%.e L; !"2)! <.%e !' !"'3$.
2xemptions$ 2&ucationa" institution (2 *) >5H (olleges is a non%stoc# non% profit educational institution run by the 9rchdiocese of ?& (ity! It collected and received the following: (a) "uition fees (b) 'ormitory fees (c) <entals from canteen concessionaires (d) Interest from money%mar#et
"he donation is li#ewise exempt from the donor@s tax if actually directly and exclusively used for educational purposes provided not more than )/+ of the donation is used by the donee for administration purposes! "he donee being a non% stoc# non%profit educational institution is a Bualified entity to receive an exempt donation sub0ect to conditions prescribed by law (,ection " par. " Art. H62 %*/' !onstitution in relation to ,ection %(%(AH5) N)$!).
three years later the law was repealed! With the repeal the exemptions were considered revo#ed by the ?I< which assessed the investing companies for unpaid taxes effective on the date of the repeal of the law! 6&( and Q"< companies Buestioned the assessments on the ground that having made their investments in full reliance with the period of exemption granted by the law its repeal violated their constitutional right against the impairment of the obligations and contracts! Is the contention of the companies tenable or not? <eason briefly! (*+)
SUGGESTED ANSWER*
9ccordingly none of the cited income and donation collected and received by the non%stoc# non%profit educational institution would not be exempt from taxation!
ALTERNATI1E ANSWER*
"he following receipts by the non% stoc# nonprofit educational institution are not exempt from taxation vi$: (c) Re%/a-+ 1r,5 Ca%/ee% C,%ce++i,%aire+! <ental income is considered as unrelated to the school operationsA hence taxable (BC< Crder No. %5'-/' Bec. %. %*/')
"he contention is not tenable! "he exemption granted is in the nature of a unilateral tax exemption! -ince the exemption given is spontaneous on the part of the
(d) I%/ere+/
1r,5 5,%e0;5arAe/ *-ace5e%/+ ,1 /:e /.i/i,% 1ee+. "he interest on the placement is taxable (BC< Crder No. %5'-/'). If however the said interest is used actually directly and exclusively for educational purposes as proven by substantial evidence the same will be exempt from taxation (CIR v. CA 2"4 SCRA
47 !!""49F.
"he other items of income which were all derived from school%related activities will be exempt from taxation in the hands of the recipient if used actually directly and exclusively for educational purposes (-ection . par! ) 9rticle >"4 2G;I (onstitution)!
"he donation to a non%stoc# non% profit educational institution will be exempt from the donor@s tax if used actually directly and exclusively for educational purposes and provided that not more than )/+ of the donation is used for administration purposes (-ection . par! . 9rt! >J4 2G;I (onstitution in relation to -ection 2/2(9:)) 6J<()! 2xemptions$ 2xemptions are <ni"atera" in 7ature (2 *) 9 law was passed granting tax exemption to certain industries and investments for a period of five years! ?ut
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legislature and no service remunerative conditions have been imposed on the taxpayers receiving the exemption it may be revo#ed at will by the legislature (C:ri+/ C:.rc: v. P:i-ade-*:ia 2( H,&. 7)) 8!4')9)! What constitutes an impairment of the obligation of contracts is the revocation of an exemption which is founded on a valuable consideration because it ta#es the form and essence of a contract (Ca+a%,va+ v. H,rd 4 P:i-. !23 8!")#9? Ma%i-a Rai-r,ad C,5*a%0 v.
dut oth or y or er
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perform for its clientele li#e the people of the municipality!
2xemptions$ Persona" ; A&&itiona" 2xemption (2 6) (harlie a widower has two sons by his previous marriage! (harlie lives with Jane who is legally married to :ario! "hey have a child named Jill! "he children are all minors and not gainfully employed! !. H,& 5.c: *er+,%a- e>e5*/i,% ca% C:ar-ie c-ai5G E>*-ai%. (2.3H$
SUGGESTED ANSWER*
I%+.-ar C,--ec/,r ,1 C.+/,5+ !2 P:i-. !(' 8!"!39$ 2xemptions$ 5o(6t BonusF 5iftsF ; A""o1ances (199*)
In 'ecember 2GG) the -angguniang ?ayan authori$ed a (hristmas bonus of &) ///!// a cash gift of &* ///!// and transportation and representation allowance of &E ///!// for each of the municipal employees!
(harlie can claim the personal exemption of a =ead of a Family or &8* ///!// provided that at least one of his minor and not gainfully employed children is unmarried and living with and dependent upon him for chief support
(Tax $eform Act $A /"&" !hapter 266 ,ection 5-AA@: 36$ $evenue $egulation (&*/). 2. H,& 5.c: addi/i,%a- e>e5*/i,% ca% C:ar-ie c-ai5G E>*-ai%. (2.3H$
2) Is the (hristmas bonus sub0ect to any tax? 8) =ow about the cash gift? )) =ow about the transportation and representation allowances?
SUGGESTED ANSWER*
2)
"he (=<I-":9?O6Cgiven by the -angguniang ?ayan to the municipal employees is taxable as additional compensation (-ec! 82 (a)! "ax (ode)! "he cash gift per employee of &*!///!// being substantial may be considered taxable also! "hey parta#e the nature of additional compensation income as it is highly doubtful if municipal governments are authori$ed to ma#e gifts in substantial sums such as this! "hey are not further% more gifts of "small value" which employers might give to their employees on special occasions li#e (hristmas % items which could be exempt under ?I< <evenue 9udit :emo 6o! 2%;I!
"he transportation and representation allowances are actually reimbursements for expenses incurred by the employee for the employer! -aid allowances spent by the employee for the employer are designed to enhance the Buality of the service that the employer is supposed to
8)
))
SUGGESTED ANSWER* Answers to the BAR: Taxation 1994-2006 (Arranged by Topics SUGGESTED ANSWER*
=is children from his previous marriage who are le% gitimate children and his illegitimate child with Jane will all entitle him to additional personal exemption of &; ///!// for each dependent if apart from being minor and not gainfully employed they are unmarried living with and dependent upon (harlie for their chief support (Tax $eform Act $A/"&" !hapter 2= ,ection 5-(A): 36$ $evenue $egulation (&-*/). 2xemptions$ 8oman !at#o"ic !#urc#$ /imitations (2 9)
"he <oman (atholic (hurch owns a 8% hectare lot in a town in "arlac province! "he southern side and middle part are occupied by the (hurch and a convent the eastern side by a school run by the (hurch itself the southeastern side by some commercial establishments while the rest of the property in particular the northwestern side is idle or unoccupied!
(a) "he term "capital asset" regards all properties not specifically excluded in the statutory definition of capital assets the profits or loss on the sale or the exchange of which are treated as capital gains or capital losses! (onversely all those properties specifically excluded are considered as ordinary assets and the profits or losses reali$ed must have to be treated as ordinary gains or ordinary losses! 9ccordingly "Ca*i/aA++e/+" includes property held by the taxpayer whether or not connected with his trade or business but the term does not include any of the following which are conseBuently considered "ordinary assets": (2) stoc# in trade of the taxpayer or other property of a #ind which would properly be included in the
:ay the (hurch claim tax exemption on the entire land? 'ecide with reasons!
SUGGESTED ANSWER*
6o! "he (hurch cannot claim tax exemption on the entire land! Only the southern side and middle part that are occupied by the (hurch and a convent and the eastern side occupied by a school run by the (hurch itself are exempt because such parts of the 8%hectare lot are actually directly and exclusively used for religious and educational purposes! (,ec. &/A5@ Art. 26 %*/' !onstitution: ,ec. &5" ?ocal #overnment !ode) "he southeastern side occupied by some commercial establishment is not tax exempt! If real property is used for one or more commercial purposes it is not exclusively used for the exempted purpose but is sub0ect to taxation! @-olely@ is synonymous with @exclusively!@ (L.%g Ce%/er ,1
/:e P:i-i**i%e+ v. I.eE,% Ci/0 G.R. N,. !((!)( <.%e 2" 2))($ "he property must
be exclusively (solely) used for educational purposes!
religious or
Of course it is apparent that the northwestern side which is idle or unoccupied is not "actually directly and exclusively" used for religious or educational purposes hence not exempt from taxation!
CAPITAL GAIN TAX

!apita" Asset (s) %r&inary Asset (2 4) 'istinguish a "capital asset" from an "ordinary asset"!
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"he ?I< claims that the sale of parcel 9 should be taxed as a sale by an unregistered partnership! Is the ?I< correct?
SUGGESTED ANSWER*
(8) property held by the taxpayer primarily for sale to customers in the ordinary course of trade or businessA ()) property used in the trade or business of a character which is sub0ect to the allowance for depreciation provided in -ection ). (F) of the "ax (odeA or (.) real property used in trade business of the taxpayer! or
"he ?I< is not correct since there is no showing that the acBuisition of the property by 6oel and Jovy 3angit as pro indiviso owners and prior to the formation of the partnership was used intended for use or bears any relation whatsoever to the pursuit or conduct of the partnership business! "he sale of parcel 9 shall therefore not be treated as a sale by an unregistered partnership but an ordinary sale of a capital asset and hence will be sub0ect to the *+ capital gains tax and documentary
"he statutory definition of "capital assets" practically excludes from its scope it will be noted all property held by the taxpayer if used in connection with his trade or business! !apita" 5ain Tax$ 7ature (2 1) 9 a doctor by profession sold in the year 8/// a parcel of land which he bought as a form of investment in 2GG/ for &hp 2 million! "he land was sold to ? his colleague at a time when the real estate prices had gone down and so the land was sold only for &hp ;// /// which was then the fair mar#et value of the land! =e used the proceeds to finance his trip to the Cnited -tates! =e claims that he should not be made to pay the E+ final tax because he did not have any actual gain on the sale! Is his contention correct? Why? (*+)
SUGGESTED ANSWER*
6o! "he E+ capital gains tax on sale of a real property held as capital asset is imposed on the income presumed to have been reali$ed from the sale which is the fair mar#et value or selling price thereof whichever is higher! (-ection 8.(') 6I<()! 9ctual gain is not reBuired for the imposition of the tax but it is the gain by fiction of law which is taxable! %r&inary Sa"e of a !apita" Asset (199*)
6oel 3angit and his brother Jovy bought a parcel of land which they registered in their names as pro%indiviso owners (&arcel 9)! -ubseBuently they formed a partnership duly registered with -ecurities and 1xchange (ommission which bought another parcel of land (&arcel ?)! ?oth parcels of land were sold reali$ing a net profit of &2 /// ///!// for parcel 9 and &*//!///!// for parcel ?!
stamp tax on transfers of real property said taxes to be borne eBually by the co% owners!
ALTERNATI1E ANSWER*
income tax under our 0urisdiction because the income derived there from is considered as a foreign%sourced income!
ALTERNATI1E ANSWER*
"he ?I< is correct in treating the gain from the sale of parcel of land by 6oel and Jovy 3angit at a profit of &2 /// ///!//! In the case of Pa+c.a-
a%d Drag,% v. C,55i++i,%er G.R. N,. #4!77 Oc/,6er !4 !"44 the -upreme
5es but only on the shares of stoc#s of 9 (o! and only on the portion of the purchase price which constitutes capital gains! Cnder the "ax (ode of 2GGI the capital gains tax imposed under -ection 8;(?)(*)(c) is collectible via the withholding of tax at source pursuant to -ection *I of the same (ode!
(6ote: "he bar candidate might have relied on the provision of the "ax (ode of 2GGI which provides that the capital gains tax is imposed as withholding taxes (-ection *I 6I<()! "his procedure is impractical and therefore not followed in practice because the buyerL withholding agent will not be in a position to determine how much income is reali$ed by
(ourt ruled that the sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a 0oint or common right or interest in the property! "he decision in said case cannot be applied here because clearly the parties organi$ed a partnership duly registered with the -ecurities and 1xchange (ommission! "hey pooled their resources together with the purpose of dividing the profit between them! Sa"es of S#are of StocBs: !apita" 5ains Tax 8eturn (1999)
=Q (o! is a =ong Qong corporation not doing business in the &hilippines! It holds ./+ of the shares of 9 (o! a &hilippine company while the E/+ is owned by & (o! a Filipino%owned &hilippine corporation! =Q (o! also owns 2//+ of the shares of ? (o! an Indonesian company which has a duly licensed &hilippine branch! 'ue to worldwide restructuring of the =Q (o! group =Q (o! decided to sell all its shares in 9 and ? (os! "he negotiations for the buy%out and the signing of the 9greement of -ale were all done in the &hilippines! "he 9greement provides that the purchase price will be paid to =Q (o@s ban# account in the C! -! and that little to 9 and ? (os! -hares will pass from =Q (o! to & (o! in =Q where the stoc# certificates will be delivered! & (o! see#s your advice as to whether or not it will sub0ect the payments of purchase price to Withholding "ax! 1xplain your advice! (2/+)
SUGGESTED ANSWER*
& (o! should not sub0ect the payments of the purchase price to withholding tax! While the seller is a non%resident foreign corporation which is not normally reBuired to file returns in the &hilippines therefore ordinarily all its income earned from &hilippine sources is taxed via the withholding tax system this is not the procedure availing with respect to sales of shares of stoc#! "he capital gains tax on the sale of shares of stoc# of a domestic corporation is always reBuired to be paid through a capital gains tax return filed! "he sale of the shares of stoc# of the Indonesian (orporation is not sub0ect to
sirdondee@gmail.com +9 of the seller reason any from the sale! For this 73 of the foregoing suggested answers should be given full credit)!
Tax Basis: !apita" 5ains: 0erger of !orporations (199*) In a Bualified merger under -ection ). (c) (8) of the "ax (ode what is the tax basis for computing the capital gains on: (a) the sale of the assets received by the surviving corporation from the absorbed corporationA and (b) the sale of the shares of stoc# received by the stoc#holders from the surviving corporation?
SUGGESTED ANSWER*
). (c) (8) is: (a) With respect to the asset received by the corporation the same as it would be in the hands of the transferor increased by the amount of the gain recogni$ed to the transferor on the transfer!
(b) With respect to the shares received by the stoc#holders in exchange of the assets % the same as the basis of the property stoc# or securities exchanged decreased by the money received and the fair mar#et value of the other property received and increased by the amount treated as dividend of the shareholder and the amount of any gain that was recogni$ed on the exchange!
In a Bualified merger under -ection ). (c) (8) of the "ax (ode the tax basis for computing the capital gains on:
(a) the sale of the assets received by the surviving corporation from the absorbed corporation shall be the originalLhistorical cost of the assets when still in the hands of the absorbed corporation!
CORPORATION - PARTNERS/IP
Ba& 'e+ts$ Factors$ 2"ements t#ereof (2 *)
(b) the sale of the shares of stoc# received by the stoc#holders from the surviving corporation shall be the acBuisitionLhistorical cost of assets transferred to the surviving corporation! Tax Basis: !apita" 5ains: Tax:Free 2xc#ange of Property (199*) In a Bualified tax%free exchange of property for shares under -ection ). (c) (8) of the "ax (ode what is the tax basis for computing the capital gains on: (a) the sale of the assets received by the (orporationA and (b) the sale of the shares received by the stoc#holders in exchange of the assets?
SUGGESTED ANSWER*
In a Bualified tax free exchange of property for shares under -ection ). (c) (8) of the "ax (ode the tax basis for computing the gain on the: (a) sale of the assets received by the corporation shall be the originalLhistorical cost (purchase price plus expenses of acBuisition) of the propertyL assets given in exchange of the shares of stoc#!
(b) sale of the shares of stoc# received by the stoc#holders in exchange of the assets shall be the originalLhistorical cost of the property given in
exchange of the shares of stoc#!

ALTERNATI1E ANSWER*
"he basis in computing capital gains tax in a Bualified tax% free exchange under -ec!
&K< (orp! claimed as a deduction in its tax returns the amount of &2 /// /// as bad debts! "he corporation was assessed by the (ommissioner of Internal <evenue for deficiency taxes on the ground that the debts cannot be considered as "worthless " hence they do not Bualify as bad debts! "he company as#s for your advice on "What factors will held in determining whether or not the debts are bad debts?" 9nswer and explain briefly! (*+)
SUGGESTED ANSWER*
of the building conveyed the common areas in favor of the >%land (ondominium (orporation! Is the conveyance sub0ect to any tax?
SUGGESTED ANSWER*
"he conveyance is not sub0ect to any tax! "he same is without consideration and not in connection with a sale made to >%land (ondominium (orporation and the purpose of the conveyance to the latter is for the management of the common areas for the common benefit of the unit owners! "he same is not sub0ect to income tax since no income was reali$ed as a result of the conveyance which was made pursuant to the (ondominium 9ct (<!9! 6o! .E8E and the purpose of which was merely to vest title to the common areas in favor of the 3and (ondominium (orporation!
In order that debts be considered as bad debts because they have become worthless the taxpayer should establish that during the year for which the deduction is sought a situation developed as a result of which it became evident in the exercise of sound ob0ective business 0udgment that there remained no practical but only vaguely theoretical prospect that the debt would ever be paid (C,--ec/,r ,1
I%/er%a- Reve%.e v. G,,dric: I%/er%a/i,%aR.66er C,. 2! SCRA !77' 8!"'#9$.
"Worthless" is not determined by an inflexible formula or slide rule calculation but upon the exercise of sound business 0udgment! "he factors to be considered include but are not limited to the following:
2! 8! )! .!
"he debtor has no property nor visible incomeA "he debtor has been ad0udged ban#rupt or insolventA (ollateral shares have become worthlessA and "here are numerous debtors with small amounts of debts and further action on the accounts would entail expenses exceeding the amounts sought to be collected!
ALTERNATI1E ANSWER*
"he following are the factors to be considered in determining whether or not the debts are bad debts: 2! "he debt must be valid and subsistingA 8! "he debt is connected with the taxpayer@s trade or business and is not between related partiesA )! "here is an actual ascertainment that the debt is worthlessA and .! "he debt is charged%off within the taxable year!
(PRC v. CA 23' SCRA ''# 8!""'9? Reve%.e Reg+. N,. 3;""$.
!on&ominium !orp)$ Sa"e of !ommon Areas (199*) >%land (ondominium (orporation was organi$ed by the owners of units in >%land ?uilding in accordance with the :aster 'eed with 'eclaration of <estrictions! "he >% land ?uilding (orporation the developer
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"here being no monetary consideration neither is the conveyance sub0ect to the creditable withholding tax im% posed under <evenue <egulations 2%G/ as amended! "he second conveyance was actually no conveyance at all because when the units were sold to the various buyers the common areas were already part and parcel of the sale of said units pursuant to the (ondominium 9ct! =owever the 'eed of (onveyance is sub0ect to documentary stamp tax!
N.3. Bocumentary stamps tax and !ondominium ?aw are excluded from the coverage of the 3ar 4xaminations.
its stoc#holders! ?efore remitting the dividends to =Q (o! 9 (o! see#s your advice as to whether it will sub0ect the remittance to W"! 6o need to discuss W" rates if applicable! Focus your discussion on what is the issue! (2/+)
SUGGESTED ANSWER*
I will advise 9 (o! to withhold and remit the withholding tax on the dividends! While the general rule is that a foreign corporation is the same 0uridical entity as its branch office in the &hilippines when however the corporation transacts business in the &hilippines directly and independently of its branch the taxpayer would be the foreign corporation itself and sub0ect to the dividend tax similarly imposed on non%resident foreign corporation! "he dividends attributable to the =ome Office would not Bualify as dividends earned by a resident foreign corporation which is exempt from tax! (Mar.6e%i
C,r*,ra/i,% v. C,55i++i,%er GR N,. #'3#7 Se*/e56er !( !"4"$.
!orporation$ Sa"e$ !re&ita+"e -it##o"&ing Tax (199*)

6oel 3angit and his brother Jovy bought a parcel of land which they registered in their names as pro%indiviso owners (&arcel 9)! -ubseBuently they formed a partnership duly registered with -ecurities and 1xchange (ommission which bought another parcel of land (&arcel ?)! ?oth parcels of land were sold reali$ing a net profit of &2 /// ///!// for parcel 9 and &*//!///!// for parcel ?!
"he ?I< also claims that the sale of parcel ? should be taxed as a sale by a corporation! Is the ?I< correct?
SUGGESTED ANSWER*
"he ?I< is correct since a "corporation" as defined under -ection 8/ (a) of the "ax (ode includes partnerships no matter how created or organi$ed except general profes% sional partnerships! "he business partnership in the in% stant case shall therefore be taxed in the same manner as a corporation on the sale of parcel ?! "he sale shall thus be sub0ect to the creditable withholding tax under <evenue <egulations 2%G/ as amended by 28%G. on the sale of parcel ? and the partnership shall report the gain reali$ed from the sale when it files its income tax return!
'i(i&en&s: -it##o"&ing Tax (1999)
=Q (o! is a =ong Qong company which has a duly licensed &hilippine branch engaged in trading activities in the &hilippines! =Q (o! also invested directly in ./+ of the shares of stoc# of 9 (o! a &hilippine corporation! "hese shares are boo#ed in the =ead Office of =Q (o! and are not reflected as assets of the &hilippine branch! In 2GG; 9 (o! declared dividends to
0inimum !orporate Income Tax (2 1) What is the rationale of the law in imposing what is #nown as the :inimum (orporate Income tax on 'omestic (orporations? ()+)
SUGGESTED ANSWER*
(S.%i, v. NLRC !2# SCRA 7")J!"4(9F.
(Ta% Ti,%g Bi, v. CFR ( SCRA
"he imposition of the :inimum (orporate Income "ax (:(I") is designed to forestall the prevailing practice of corporations of over claiming deductions in order to reduce their income tax payments! "he filing of income tax returns showing a tax loss every year goes against the business motive which impelled the stoc#holders to form the corporation! "his is the reason why domestic corporations (and resident foreign corporations) after the recovery period of four years from the time they commence business operations they become liable to the :(I" whenever this tax imposed at 8+ of gross income exceeds the normal corporate income tax imposed on net income! (-ponsorship -peech (hairman of -enate Ways and :eans (ommittee)!
2ffect: 'isso"ution$ !orporate 2xistence (2 *)

For failure to comply with certain corporate reBuirements the stoc#holders of 9?( (orp! were notified by the -ecurities and 1xchange (ommission that the corporation would be sub0ect to involuntary dissolution! "he stoc#holders did not do anything to comply with the reBuirements and the corporation was dissolved! (an the stoc#holders be held personally liable for the unpaid taxes of the dissolved corporation? 1xplain briefly! (*+)
SUGGESTED ANSWER*
0inimum !orporate Income Tax$ 2xemption (2 1)

Is a corporation which is exempted from the minimum corporate income tax automatically exempted from the regular corporate income tax? 1xplain your answer! (8+)
SUGGESTED ANSWER*
6o! 9s a general rule stoc#holders cannot be held personally liable for the unpaid taxes of a dissolved corporation! "he rule prevailing under our 0urisdiction is that a corporation is vested by law with a personality that is separate and distinct from those of the persons
6o! "he minimum corporate income tax is a proxy for the normal corporate income tax not the regular corporate income tax paid by a corporation! For instance a proprietary educational institution may be sub0ect to a regular corporate income tax of 2/+ (depending on its dominant income) but it is exempt from the imposition of :(I" because the latter is not intended to substitute
composing it
6O"1: additional point should be given to the examinee if he answers in the following that: =owever stoc#holders may be held liable for the unpaid taxes of a dissolved corporation if it appears that the corporate assets have passed
into their hands

8!"'29$. 3i#ewise when stoc#holders have unpaid subscriptions to the capital of the corporation they can be made liable for unpaid taxes of the corporation to the extent of their unpaid subscriptions! "4'
special tax rates! -o is with &1H9 enterprises ('9 enterprises etc!
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type of contributionsLdonations governed by the 1lection (ode!
is
'onor6s Tax$ Basis for 'etermining 5ain (1999)

(2) Qenneth 5usoph owns a commercial lot which he bought many years ago for &2 :illion! It is now worth &8/ :illion although the $onal value is only &2* :illion! =e donates one%half pro% indiviso interest in the land to his son 'ino on )2 'ecember 2GG. and the other one%half pro%indiviso interest to
N6ote: If what is meant by regular income tax is the )8+ tax rate imposed on taxable income of corporations the answer would be in the affirmative because domestic corporations and resident foreign corporations are either liable for the 8+ of gross income (:(I") or )8+ of net income (the normal corporate income tax) whichever is higher!O
ALTERNATI1E ANSWER*
6o! 9 corporation which is exempted from the minimum corporate income tax is not automatically exempted from the regular corporate income tax! "he reason for this is that :(I" is imposed only beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations! "hus a corporation may be exempt from :(I" because it is only on its third year of operations following its commencement of business operations!
the same son on 8 January 2GG*! =ow much is the value of the gifts in 2GG. and 2GG* for purposes of computing the gift tax? 1xplain!
SUGGESTED ANSWER*
2) "he value of the gifts for purposes of computing the gift tax shall be &I!*million in 2GG. and &I!*million in
ESTATE - DONOR0S TAXES

'onor6s Tax: 2"ection !ontri+utions (199=) 9re contributions to a candidate in an election sub0ect to donor@s tax? On the part of the contributor is it allowable as a deduction from gross income? N*+J
SUGGESTED ANSWER*
2)
6o provided the recipient candidate had complied with the reBuirement for filing of returns of contri% butions with the (ommission on 1lections as reBuired under the Omnibus 1lection (ode!
"he contributor is not allowed to deduct the contributions because the said expense is not directly attributable to the development management operation andLor conduct of a trade business or profession K,ec. 5"AA)(l)(a) N6$!)! Furthermore if the candidate is an incumbent government official or employee it may even be considered as a bribe or a #ic#bac# (-ec! ).N9J(l)(c)
8)
6I<()!
C$((ENT: It is suggested that full credit should be given for any answer to the first Buestion because the answer reBuires an interpretation of the 1lection (ode! &ursuant to the provisions of -ection GG(() of the 6I<( the taxability of this
2GG*! In valuing a real property for gift tax purposes the property should be appraised at the higher of two values as of the time of donation which are (a) the fair mar#et value as determined by the (ommissioner (which is the $onal value fixed pursuant to -ection 2E(e) of the "ax (ode) or (b) the fair mar#et value as shown in the schedule of values fixed by the &rovincial and (ity 9ssessors! "he fact that the property is worth &8/ million as of the time of donation is immaterial unless it can be shown that this value is one of the two values mentioned as provided under -ection ;2 of the "ax (ode! (8) "he <evenue 'istrict Officer Buestions the splitting of the donations into 2GG. and 2GG*! =e says that since there were only two (8) days separating the two donations they should be treated as one having been
.) If the commercial lot was received by inheritance the gain from the sale for &8/ million is &* million because the basis is the fair mar#et value as of the date of acBuisition! "he stepped%up basis of &2* million which is the value for estate tax purposes is the basis for determining the gain (-ec! ).(b)(8) 6I<()!
ALTERNATI1E ANSWER*
If 'ino held on to the property as a capital asset in that it is neither for sale in the ordinary course of business nor used in 'ino@s business then upon sale thereof there is presumed to be reali$ed an income of &8/ million which is the gross selling price of the property! (-ec! 82(e) 6I<()! "he same would be sub0ect to the *+ capital gains tax! 'onor6s Tax$ 'acion en Pago$ 2ffect: Taxation (199,)
made within one year! Is he correct? 1xplain!

SUGGESTED ANSWER*
8) "he <evenue 'istrict Officer is not correct because the computation of the gift tax is cumulative but only insofar as gifts made within the same calendar year! "herefore there is no legal 0ustification for treating two gifts effected in two separate calendar years as one gift!
()) 'ino subseBuently sold the land to a buyer for & 8/ :illion! =ow much did 'ino gain on the sale? 1xplain!
SUGGESTED ANSWER*
)) 'ino gained an income of 2G million from the sale! 'ino acBuires a carry%over basis which is the basis of the property in the hands of the donor or &2 million! "he gain from the sale or other disposition of property shall be the excess of the amount reali$ed therefrom over the basis or ad0usted basis for determining gain (-ec! ).(a) 6I<()! -ince the property was acBuired by gift the basis for determining gain shall be the same as if it would be in the hands of the donor or the last preceding owner by whom the property was not acBuired by gift! =ence the gain is computed by deducting the basis of &2 million from the amount reali$ed which is &8/ million!
(.) -uppose instead of receiving the lot by way of donation 'ino received it by inheritance! What would be his gain on the sale of the lot for &8/
:illion? 1xplain!
SUGGESTED ANSWER*
9n insolvent ha outstandi company d an ng obligation of & l// ///!// from a creditor! -ince it could not pay the debt the creditor agreed to accept payment through dacion en pago a property which had a mar#et value of &)/!///!//! In the dacion en pago document the balance of the debt was condoned! 9! What is the tax effect on the discharge of the unpaid balance of the obligation on the debtor corporation?
?! Insofar as the how is he creditor is
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necessitating the payment of donor@s tax! On the other hand splitting the donation into two eBual amounts of &hp 2// /// given on two different years will totally relieve the donor from the donorPs tax because the first &hpl//!/// donation in the graduated brac#ets is exempt! (-ection GG 6I<()! While the donorPs tax is computed on the cumulative donations the aggregation of all donations made by a donor is allowed only over one calendar year!
concerned
'onor6s Tax$ 'onation to 7on:StocBF 7on:Profit Pri(ate 2&ucationa" Institutions (2 )

What conditions must occur in order that all grants donations and contributions to non%stoc# non%profit private educational institutions may be exempt from the donor@s tax under -ection 2/2 (a) of the "ax (ode? ()+)
SUGGESTED ANSWER*
effected tax%wise as a conseBuence of the transaction?

SUGGESTED ANSWERS*
(a) "he condonation of the unpaid balance of the obligation has the effect of a donation made on the part of the creditor! It is obvious that the creditor merely desires to benefit the debtor and without any consideration therefore cancels the debt the amount of the debt cancelled is a gift from the creditor to the debtor and need not be included in the latter@s gross income (-ec! */ << 6o! 8)A (b) For the difference of &I/ /// the creditor shall be sub0ect to donor@s tax at the applicable rates provided for under the 6ational Internal <evenue (ode!
ALTERNATI1E ANSWER*
"he following are the conditions:
(a) If the discharge was prompted by the insolvency of the debtor company then it is a clear case of a write%off of a bad debts which has no tax conseBuence to the debtor!
(b)"he write%off of the bad debt will entitle the creditor to claim the same as a deduction from its gross income! 'onor6s Tax$ 'onation to a Si+"ing (2 1) 5our bachelor client a Filipino residing in Kue$on (ity wants to give his sister a gift of &hp 8// ///!//! =e see#s your advice for purposes of reducing if not eliminating the donor@s tax on the gift on whether it is better for him to give all of the &hp 8// ///!// on (hristmas 8//2 or to give &hp 2// ///!// on (hristmas8//2 and the other &hp 2// ///!// on January 2 8//8! &lease explain your advice! (*+)
SUGGESTED ANSWER*
I would advice him to split the donation! ,iving the &hp8// /// as a one%time donation would mean that it will be sub0ect to a higher tax brac#et under the graduated tax structure thereby
2! 8! )! .!
*!
6ot more than thirty percent ()/+) of said gifts shall be used by such donee for administration purposesA "he educational institution is incorporated as a non% stoc# entity paying no dividends governed by trustees who receive no compensation and
devoting all its income whether students@ fees or gifts donations subsidies or other forms of philanthropy to the accomplishment and promotion of the purposes enumerated in its 9rticles of Incorporation! (-ec! 2/2 (9) ()) 6I<( of 2GGIO
Property (1999) 9 an individual sold to ? his brother%in%law his lot with a mar#et value of &2 /// /// for &E//!///! 9@s cost in the lot is &2//!///! ? is financially capable of buying the lot!
9 also owns > (o! which has a fast growing business! 9 sold some of his shares of stoc# in > (o! to his #ey executives in > (o! "hese executives are not related to 9! "he selling price is &) /// /// which is the boo# value of the shares sold but with a mar#et value of &* /// ///! 9@s cost in the shares sold is &2 /// ///! "he purpose of 9 in selling the shares is to enable his #ey executives to acBuire a propriety interest in the business and have a personal
'onor6s Tax$ 'onation to Po"itica" !an&i&ate (2 4) > is a friend of 5 the chairman of &olitical &arty H who wants to run for &resident in the 8//. elections! Qnowing that 5 needs funds for posters and streamers > is thin#ing of donating to 5 &2*/ ///!// for his campaign! =e as#s you whether his intended donation to 5 will be sub0ect to the donor@s tax! What would your answer be? Will your answer be the same if he were to donate to &olitical &arty H instead of to 5 directly? (;+)
SUGGESTED ANSWER*
"he donation to 5 once he becomes a candidate for an elective post is not sub0ect to donor@s tax provided that he complies with the reBuirement of filing returns of contributions with the (ommission on 1lections as reBuired under the Omnibus 1lection (ode! "he answer would be the same if > had donated the amount to &olitical &arty H instead of to 5 directly because the law places in eBual footing any contribution to any candidate political party or coalition of parties for campaign purposes! (,ection **(!) of the %**' Tax !ode).
'onor6s Tax$ 'onee or Beneficiary$ Stranger (2 ) When the donee or beneficiary is a stranger the tax payable by the donor shall be )/+ of the net gifts! For purposes of this tax who is a stranger? (8+)
SUGGESTED ANSWER*
9 -"<96,1< is a person who is not a: 9! ?rother sister (whether by whole or half%blood) spouse ancestor and lineal descendantA or ?! <elative by consanguinity in the collateral line within the fourth degree of relationship!" N-ec! G; (?) 6I<( of 2GGIO 'onor6s Tax$ Sa"e of s#ares of StocB ; Sa"e of 8ea"
busine 1xplai sta# abov in its ss! n if the e e

SUGGESTED ANSWER*
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transactions are sub0ect to donor@s tax! (*+)

"he first transaction where a lot was sold by 9 to his brother%in%law for a price below its fair mar#et value will not be sub0ect to donor@s tax if the lot Bualifies as a capital asset! The transfer for less than ade7uate and full consideration which gives rise to a deemed gift does not apply to a sale of property sub1ect to capital gains tax. (-ection 2// 6I<()! =owever if the lot sold is an ordinary asset the excess of the fair mar#et value over the consideration received shall be considered as a gift sub0ect to the donor@s tax!
incurable cancer on 9ugust 2 8//2 wrote a will and on the same day made several inter%vivos gifts to his children! "en days later he died! In your opinion are the inter% vivos gifts considered transfers in contemplation of death for purposes of determining properties to be included in his gross estate? 1xplain your answer! (*+)
SUGGESTED ANSWER*
"he sale of shares of stoc# below the fair mar#et value thereof is sub0ect to the donor@s tax pursuant to the provisions of -ection 2// of the "ax (ode! "he excess of the fair mar#et value over the selling price is a deemed gift!
ALTERNATI1E ANSWER*
5es! When the donor ma#es his will within a short time of or simultaneously with the ma#ing of gifts the gifts are considered as having been made in contemplation of death! (R,ce+ v. P,+ada+ 34 P:i-. !)4)! Obviously the intention of the donor in ma#ing the inter% vivos gifts is to avoid the imposition of the estate tax and since the donees are li#ewise his forced heirs who are called upon to inherit it will create a presumption 1uris tantum that said donations were made mortis causa hence the properties donated shall be included as part of 9@s gross estate!
"he sale of shares of stoc# below the fair mar#et value will not give rise to the imposition of the donor@s tax! In determining the gain from the transfer the selling price of the shares of stoc#s shall be the fair mar#et value of the shares of stoc#s transferred! (-ection E << 6o! 8%;8)! In which case the reason for the imposition of the donor@s tax on sales for inadeBuate consideration does not exist!
2state Tax: !ompre#ensi(e Agrarian 8eform /a1 (199*)

Jose Orti$ owns 2// hectares of agricultural land planted to coconut trees! =e died on :ay )/ 2GG.! &rior to his death the government by operation of law acBuired under the (omprehensive 9grarian <eform 3aw all his agricultural lands except five (*) hectares! Cpon the death of Orti$ his widow as#ed you how she will consider the 2// hectares of agricultural land in the preparation of the estate tax return! What advice will you give her?
SUGGESTED ANSWER*
"he 2// hectares of land that Jose Orti$ owned but which prior to his death on :ay )/ 2GG. were acBuired by the government under (9<& are no longer part of his taxable gross estate with the exception of the remaining five (*) hectares which under -ec! I;Da) of the "ax (ode still forms part of "decedent@s interest"! 2state Tax: 'onation 0ortis !ausa (2 1) 9 aged G/ years and suffering from
2state Tax: 'onation 0ortis !ausa (s) Inter Ci(os (199*) 9re donations inter vivos and donations mortis causa sub0ect to estate taxes?
SUGGESTED ANSWER*
'onations inter vivos are sub0ect to donor@s gift tax (-ec! G2 (a)! "ax (ode) while donations mortis causa are sub0ect to estate tax (-ec! II "ax (ode)! =owever donations inter vivos actually constituting taxable lifetime li#e trans% fers in contemplation of death or revocable transfers (-ec! I; (b) and (c) "ax (ode) may be taxed for estate tax purposes the theory being that the transferor@s control thereon extends up to the time of his death!
ALTERNATI1E ANSWER*
:r! Felix de la (ru$ a bachelor resident citi$en suffered from a heart attac# while on a business trip to the C-9! =e died intestate on June 2* 8/// in 6ew 5or# (ity leaving behind real properties situated in 6ew 5or#A his family home in 4alle 4erde &asig (ityA an office condominium in :a#ati (ityA shares of stoc#s in -an :iguel (orporationA cash in ban#A and personal belongings! "he decedent is heavily insured with Insular 3ife! =e had no #nown debts at the time of his death! 9s the sole heir and appointed 9dministrator how would you determine the gross estate of the decedent? What deductions may be claimed by the estate and when and where shall the return be filed and estate tax paid? ()+)
SUGGESTED ANSWER*
'onations inter vivos are not sub0ect to estate taxes because the transfer of the property ta#e effect during the lifetime of the donor! "he transfer is therefore sub0ect to the donor@s tax! On the other hand donations mortis causa are sub0ect to estate taxes since the transfer of the properties ta#es effect after the death of the decedent! -uch donated properties real or personal tangible or intangible shall form part of the gross estate! 2state Tax: 5ross 2state: A""o1a+"e 'e&uction (2 1)
On the first anniversary of the death of 5 his heirs hosted a sumptuous dinner for his doctors nurses and others who attended to 5 during his last illness! "he cost of the dinner amounted to &hp */ ///!//! (ompared to his gross estate the &hp */ ///!// did not exceed five percent of the estate! Is the said cost of the dinner to commemorate his one year death anniversary deductible from his gross estate? 1xplain your answer! (*+)
SUGGESTED ANSWER*
6o! "his expense will not fall under any of the allowable deductions from gross estate! Whether viewed in the context of either funeral expenses or medical expenses the same will not Bualify as a deduction! Funeral expenses may include medical expenses of the last illness but not expenses incurred after burial nor expenses incurred to commemorate the death anniversary! (De
G.E5a% V. De G.E5a% 47 SCRA 23'$.
:edical expenses on the other hand are allowed only if incurred by the decedent within one year prior to his death! (-ection ;E(9)(E) 6I<()!
2state Tax: 5ross 2state: 'e&uctions (2
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"he gross estate shall be determined by including the value at the time of his death a-,1 /:e *r,*er/ie+ 5e%/i,%ed to the extent of the interest he had at the time of his death because he is a <ilipino citiIen! N-ec! ;* (9) 6I<( of 2GGIO
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provided that the (ommissioner of Internal <evenue shall have authority to grant in meritorious cases a reasonable extension not exceeding thirty ()/) days for filing the return (-ec! G/ (c) IbidO 1xcept in cases where the (ommissioner of Internal <evenue otherwise permits the estate tax return shall be filed with an authori$ed agent ban# or <evenue 'istrict Officer (ollection Officer or duly authori$ed "reasurer of &asig (ity the (ity in which the decedent :r! de la (ru$ was domiciled at the time of his death! N-ec! G/ (')! 6I<( of 2GGIO 2state Tax: Inc"usion: 8esi&ent A"ien (199*)
(liff <obertson an 9merican citi$en was a permanent resident of the &hilippines! =e died in :iami Florida! =e left 2/ /// shares of :eralco a condominium unit at the
With respect to the -i1e i%+.ra%ce *r,ceed+ the amount includible in the gross estate for &hilippine tax purposes would be to the extent of the amount receivable by the estate of the deceased his executor or administrator under policies ta#en out by decedent upon his own life irrespective of whether or not the insured retained the power of revocation or to the extent of the amount receivable by any beneficiary designated in the policy of insurance except when it is expressly stipulated that the designation of the beneficiary is irrevocable! N-ec! ;* (1) 6I<( of 2GGIO "he DEDUCTIONS that may be claimed by the estate are: 2) "he actual funeral expenses or in an amount eBual to five percent (*+) of the gross estate whichever is lower but in no case to exceed two hundred thousand pesos (&8//!///!//)! N-ec! ;E (9) (2) (a)! 6I<( of 2GGIO 8) "he 0udicial expenses in the testate or intestate proceedings! (-ec! ;E(9)(2)
)) "he value of the decedent@s family home located in 4alle 4erde &asig (ity in an amount not exceeding one million pesos (&2 /// ///!//) and upon presentation of a certification of the barangay captain of the locality that the same have been the decedent@s family home! N-ec! ;E (9) (.) IbidO
.) "he standard deduction of &2 /// ///! (-ec! ;E(9)(*) *) :edical expenses incurred within one year from death in an amount not exceeding &*// ///!(-ec! ;E(9) (E) "he ESTATE TAX RETURN shall be filed within six (E) months from the decedent@s death (-ec! G/ (?) 6I<( of 2GGIO
"win "owers ?uilding at &asig :etro :anila and a house and lot in 3os 9ngeles (alifornia! What assets shall be included in the 1state "ax <eturn to be filed with the ?I<?
SUGGESTED ANSWER*
the interest therein of the decedent at the time of his death N-ec! ;* (9) 6I<( of 2GGI)! "hese properties shall have a situs of taxation in the &hilippines hence sub0ect to &hilippine estate taxes! On the other hand in the case of a non%resident decedent who at the time of his death was not a citi$en of the &hilippines only that part of the entire gross estate which is situated in the 9hilippines to the extent of the interest therein of the decedent at the time of his death shall be included in his taxable estate. &rovided that with respect to intangible personal property we apply the rule of reciprocity! (Ibid)
9ll of :r! <obertson@s assets consisting of 2/ /// shares in the :eralco a condominium unit in &asig and his house and lot in 3os 9ngeles (alifornia are taxable! "he properties of a resident alien decedent li#e :r! <obertson are taxable wherever situated (-ees! II I; and G; "ax (ode)! 2state Tax: Payment (s) Pro+ate Procee&ings (2 *)
4(( is the administrator of the estate of his father 6,( in the estate proceedings pending before the :: <egional "rial (ourt! 3ast year he received from the (ommissioner of Internal <evenue a deficiency tax assessment for the estate in the amount of &2 /// ///! ?ut he ignored the notice! 3ast month the ?I< effected a levy on the real properties of the estate to pay the delinBuent tax! 4(( filed a motion with the probate court to stop the enforcement and collection of the tax on the ground that the ?I< should have secured first the approval of the probate court which had 0urisdiction over the estate before levying on its real properties! Is 4((@s contention correct? (*+)
SUGGGESTED ANSWER*
2state Tax: Canis#ing 'e&uctions (199*) 4anishing deductions in estate%taxation?
6o! 4((@s contention is not correct! "he approval of the probate court is not necessary! &ayment of estate taxes is a condition precedent for the distribution of the properties of the decedent and the collection of estate taxes is executive in nature for which the court is devoid of any 0urisdiction! =ence the approval of the court sitting in probate or as a settlement tribunal is not a mandatory reBuirement in the collection of estate taxes (Marc,+ H v. C,.r/ ,1 A**ea-+ 2#7 SCRA (# 8!""#O)! 2state Tax: Situs of Taxation: 7on:8esi&ent 'ece&ent (2 ) 'iscuss the rule on situs of taxation with respect to the imposition of the estate tax on property left behind by a non%resident decedent! (8+)
SUGGESTED ANSWER*
"he value of the gross estate of a non%resident decedent who is a Filipino citi$en at the time of his death shall be determined by including the value at the time of his death of all property real or personal tangible or intangible wherever situated to the extent of
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SUGGESTED ANSWER*
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4anishing deductions or property previously taxed in estate taxation refers to the diminishing deducibilityL exemption at the rate of 8/+ over a period of five (*) years until it is lost after the fifth year of any property (situated in the &hilippines) forming part of the gross estate acBuired by the decedent from a prior decedent who died within a period of five (*) years from the decedent@s death! 2state Tax$ Payment (s) Pro+ate Procee&ings (2 9) Is the approval of the court sitting as probate or estate settlement court reBuired in the enforcement and collection of estate tax? 1xplain!
SUGGESTED ANSWER*
shifting is always presumed: 8) It is consumption%basedA )) It is imposed on the value%added in each stage of distributionA .) It is a credit%invoice method value%added taxA and *) It is not a cascading tax! CAT: 2xempte& Transactions (1996) ,ive at least three ()) real estate transactions which are not sub0ect to the 4alue%9dded "ax!
SUGGESTED ANSWER*
<eal estate transactions which are exempt from the value% added tax are: (a) -ale of real property not primarily held for sale or lease in the ordinary course of trade or businessA
6o the approval of the court sitting in probate or as a settlement tribunal over the deceased is not a mandatory reBuirement in the collection of estate taxes! "here is nothing in the "ax (ode and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court@s approval of the state@s claim for estate taxes before the same can be enforced and collected!
(Marc,+ v. C,.r/ ,1 A**ea-+ G.R. N,. !2)44) <.%e 3 !""#$
BUSINESS TAXES
CAT: Basis of CAT (1996) =:a/ i+ /:e 6a+i+ ,1 /:e Va-.e;Added Ta> ,% /a>a6-e +a-e+ ,1 rea- *r,*er/0G
SUGGESTED ANSWER*
"he basis of the 4alue%9dded "ax on taxable sale of real property is ",<O--133I6, &<I(1" which is either selling price stated in the sale document or the "Honal 4alue" whichever is higher! In the absence of $onal values the gross selling price shall refer to the mar#et value as shown in the latest tax declaration or the consideration whichever is higher! CAT: !#aracteristics of CAT (1996) =:a/ are /:e c:arac/eri+/ic+ ,1 /:e Va-.e;Added Ta>G
SUGGESTED ANSWER*
"he value%added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer transferee or lessee of the goods properties or services!
ALTERNATI1E ANSWER*
"he value%added tax has the following characteristics: 2) It is an indirect tax where
tax
(b) -ale of real property utili$ed for sociali$ed housing under <9! 6o! I8IGA (c) -ale of real property utili$ed under the low%cost housing under ?& ?ig! 88/! Note: "he other real estate transactions which are exempt from the value%added tax which may be cited by the bar candidates are as follows: (a) "ransfer of real property to a trustee if the property is to be held merely in trust for the trustor! (b) "ransfer of real property to a corporation in exchange for its shares of stoc# under -ection ).(c)(8) and (E)(8) of the "ax (ode! (c) 9dvance payment by the lessee in a lease contract when the same is actually a loan to the lessor from the lessee! (d) -ecurity deposits for lease arrangements to insure the faithful performance of certain obligations of the lessee to the lessor! (e) 3ease of residential units boarding houses dormito% ries rooms and bed spaces offered for rent by their owners at a monthly rental not exceeding &) G*/!// per unit! CAT: /ia+"e for Payment (1996) =:, are -ia6-e 1,r /:e *a05e%/ ,1 Va-.e;Added Ta>G
SUGGESTED ANSWER*
b)
'istribution or transfer to: (2) -hareholders or investors as share in the profits of 49"%registered personsA or (8) (reditors in payment of debtA (onsignment of goods if actual sale is not made within E/ days following the date such goods were consignedA and <etirement from or cessation of business with respect to inventories of taxable goods existing as of such retirement or cessation!
c)
d)
CAT$ !o(ere& Transactions (199=)
"he persons liable for the value%added tax are: a! -ellers of goods and properties in the course of trade or businessA b! -ellers of services in the course of trade or business including lessors of goods and propertiesA c! Importers of taxable goods whether in the course of business or not CAT: Transactions >'eeme& Sa"esG (199,)
Cnder the 4alue 9dded tax (49") the tax is imposed on sales barter or exchange of goods and services! "he 49" is also imposed on certain transactions "deemed%sales"! What are these so%called transactions "deemed sales@?
SUGGESTED ANSWER*
"he following transactions shall be deemed sale: a) "ransfer use or consumption not in the course of business of goods originally intended for sale or for use in the course of businessA
transacti ar a ons e ) 49" 1xempt b) sub0ect to 49" at 2/+A or c) sub0ect to 49" at /+: 2) -ale of fresh vegetables by 9ling Ining at the &amilihang ?ayan ng "rece :artire$! N2+O 8) -ervices rendered by Ja#e@s (onstruction (ompany a contractor to the World =ealth Organi$ation in the renovation of its offices in :anila! N2+O )) -ale of tractors and other agricultural implements by ?ung#al Incorporated to local farmers! N2+O
-tate whether the following .) -ale of <"W by (ely@s ?outiBue a Filipino dress designer in her dress shop and other outlets! N2+O Fees for lodging paid by students to ?ahay%?ahayan 'ormitory a private entity operating a student
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; /// which Is exempt from 49" regardless of the amount of aggregate rentals received by the lessor during the year! (-ec! 2/G(x) 6I<()! "he term unit shall mean per person in the case of dormitories boarding houses and bed spaces (-ec! .!2/)%2 <<6o! I%G*)!
C$((ENT: "he problems do not call for a yes or no answer! 9ccordingly a bar candidate who answered only 49" exempt! 49" at 2/+ or 49" at /+! as called for in the problem without further reasons should be given full credit!
CAT$ 2xemption: !onstitutiona"ity (2 *)

9 law was passed exempting doctors and lawyers from the operation of the value added tax! Other professionals complained and filed a suit Buestioning the law for being discriminatory and violative of the eBual protection clause of the (onstitution since complainants were not given the
*)
dormitory (monthly fee &I *//)! N2+O

SUGGESTED ANSWER*
2)
49" exempt! -ale of agricultural products such as fresh vegetables in their original state of a #ind generally used as or producing foods for human consumption is exempt from 49"! (-ection 2/G(c) 6I<()!
49" at /+! -ince Ja#e@s (onstruction (ompany has rendered services to the World =ealth Organi$ation which is an entity exempted from taxation under international agreements to which the &hilippines is a signatory the supply of services is sub0ect to $ero percent (/+) rate! (-ec! 2/;N?2()) 6I<()!
8)
))
49" at 2/+! "ractors and other agricultural implements fall under the definition of goods which include all tangible ob0ects which are capable of pecuniary estimation (-ec! 2/EN92(2) 6I<( the sales of which are sub0ect to 49" at 2/+! "his is sub0ect to 49" at 2/+! "his transaction also falls under the definition of goods which include all tangible ob0ects which are capable of pecuniary estimation (-ec! 2/EN92(2) 6I<( the sales of which are sub0ect to 49" at 2/+! 49" 1xempt! "he monthly fee paid by each student falls under the lease of residential units with a monthly rental per unit not exceeding &hp
.)
*)
same exemption! Is the suit meritorious or not? <eason briefly! (*+)

SUGGESTED ANSWER*
?! 5es the suit is meritorious! "he 49" is designed for economic efficiencyA hence should be neutral to those who belong to the same class! &rofessionals are a class of taxpayers by themselves who in compliance with the rule of eBuality of taxation must be treated ali#e for tax purposes! 1xempting lawyers and doctors from a burden to which other professionals are sub0ected will ma#e the law discriminatory and violative of the eBual protection clause of the (onstitution! While singling out a class for taxation purposes will not infringe upon this constitutional limitation ( S:e-v. Va%, "( P:i-. 74" 8!"3(9) singling out a taxpayer from a class will no doubt transgress the constitutional limitation (Or5,c S.gar C,. I%c. v. Trea+.rer ,1 Or5,c Ci/0 22 SCRA ')7 8!"'4O)! "reating doctors and lawyers as a different class of professionals will not comply with the reBuirements of a reasonable hence valid classification because the classification is not based upon substantial distinction which ma#es real differences! "he classification does not comply with the reBuirement that it should be germane to the purpose of the law either! (Pe*+i;C,-a B,//-i%g C,. I%c. v. Ci/0 ,1 B./.a% 2( SCRA #4" 8!"'49)!
ANOT/ER ANSWER*
-ubic ?ay Freeport 1nterprise under <epublic 9ct 6o! I88I and a non%49" taxpayer! 9s such it is exempt from payment of all local and national internal revenue taxes! 'uring its operations it purchased various supplies and materials necessary in the conduct of its manufacturing business! "he suppliers of these goods shifted to 3ily@s Fashion Inc! the 2/+ 49" on the purchased items amounting to & *// ///!//! 3ily@s Fashion Inc! filed with the ?I< a claim for refund for the input tax shifted to it by the suppliers! If you were the (ommissioner of Internal <evenue will you allow the refund? (*+)
ALTERNATI1E ANSWER*
6o I will not allow the refund! Only 49"% <egistered taxpayers are entitled to refund of their
6o! "he suit is not meritorious! "he eBual protection clause of the (onstitution merely reBuires that all persons sub0ected to legislation shall be treated ali#e under li#e circumstances and conditions both in the privileges conferred and in the liabilities imposed! "he eBuality in taxation rule is not violated if classifications or distinctions are made as long as the same are based on reasonable and substantial differences! DPe*+i;C,-a B,//-i%g C,. I%c. v. Ci/0 ,1 B./.a% 2( SCRA #4" 8!"'4O)! In the instant case the professions of doctors and lawyers are not principally aimed at earning money but for the service of the people! "he exemption granted to doctors and lawyers from the operation of the 49" is 0ustified as it is not discriminatory against the other professionals because they have reasonable and substantial differences in the conduct of their professions!
CAT$ 7on:CAT taxpayer$ !"aim for 8efun& (2 6) 3ily@s Fashion Inc! is a garment manufacturer located and registered as a
unappliedLunused Input 49" ("ax <eform 9ct -ection 228N9O N2GGIO)!

ALTERNATI1E ANSWER*
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6o! "he exemption of 3ily@s Fashion Inc! is only for taxes for which it is directly liable! =ence it can not claim exemption for a tax shifted to it which is not at all considered a tax to the buyer but a part of the purchase price! 3ily@s fashion is not the taxpayer in so far as the passed%on tax is concerned and therefore it can not claim for a refund of a tax merely shifted to it (&hil! 9cetylene (o! Inc! v! (I< 3%2GI/I 9ug! 2I 2G;I)!
(NCTA 34N4: This concept pertains to the 2AT law which is excluded from the 3ar coverage #uidelines for &((. 3ar 4xaminations )une %&((.)
dispose of as exclusively his own without the intervention of the other heirs and accordingly he becomes liable individually for all taxes in connection therewith! If after such partition he allows his shares to be held in common with his co%heir under a single management to be used with the intent of ma#ing profit thereby in proportion to his share there can be no doubt that even if no document or instrument were executed for the purpose for tax purposes at least an unregistered partnership is formed
(L,re%E, O%a e/ a- v. CIR (3 SCRA #()!
ALTERNATI1E ANSWER*
6o the assessments are not 0ustified! "he mere sharing of income does not of itself establish a partnership absent any clear intention of the co%owners who are only awaiting liBuidation of the estate! BI8: !o""ection of Tax 'eficiency (1999)
REMEDIES IN INTERNAL RE1ENUE TAXES

BI8: Assessment: <nregistere& Partners#ip (199,)
:r! -antos died intestate in 2G;G leaving his spouse and five children as the only heirs! "he estate consisted of a family home and a four%door apartment which was being rented to tenants! Within the year an extra0udicial settle% ment of the estate was executed from the heirs each of them receiving hisLher due share! "he surviving spouse assumed administration of the property! 1ach year the net income from the rental property was distributed to all proportionately on which they paid respectively the corresponding income tax! In 2GG. the income tax returns of the heirs were examined and deficiency income tax assessments were is% sued against each of them for the years 2G;G to 2GG) inclusive as having entered into an unregistered partnership! Were the assessments 0ustified?
SUGGESTED ANSWER*
5es the assessments were 0ustified because for income tax purposes the co%ownership of inherited property is automatically converted into an unregistered partnership from the moment the said properties are used as a common fund with intent to produce profits for the heirs in proportion to their shares in the inheritance! From the moment of such partition the heirs are entitled already to their respective definite shares of the estate and the income thereof for each of them to manage and
9 died survived by his wife and three children! "he estate tax was properly paid and the estate settled and divided and distributed among the four heirs! 3ater the ?I< found out that the estate failed to report the income received by the estate during administration! "he ?I< issued a deficiency income tax assessment plus interest surcharges and penalties! -ince the ) children are residing abroad the ?I< sought to collect the full tax deficiency only against the widow! Is the ?I< correct? (2/+)
SUGGESTED ANSWER*
BI8: !ompromise$ 2xtent of Aut#ority (1996) 1xplain the extent of the authority of the (ommissioner of Internal <evenue to compromise and abate taxes?
SUGGESTED ANSWER*
"he authority of the (ommissioner to compromise encompasses both civil and criminal liabilities of the tax% payer! "he civil compromise is allowed only in cases
28) where the tax assessment is of doubtful validity or

2)) when the financial position of the taxpayer demonstrates a clear inability to pay the tax! "he compromise of the tax liability is possible at any stage of litigation and the amount of compromise is left to the discretion of the (ommissioner except with respect to
5es the ?I< is correct! In a case where the estate has been distributed to the heirs the collection remedies available to the ?I< in collecting tax liabilities of an estate may either (2) sue all the heirs and collect from each of them the amount of tax proportionate to the inheritance received or (8) by virtue of the lien created under -ection 82G sue only one heir and sub0ect the property he received from the estate to the payment of the estate tax! "he ?I< therefore is correct in pursuing the second remedy although this will give rise to the right of the heir who pays to see# reimbursement from the other heirs!
2! SCRA !)3$. In no case however can the ?I< enforce the tax liability in excess of the share of the widow in the inheritance! (CIR v. Pi%eda
BI8: !ompromise$ !on&itions (2 ) Cnder what conditions may the (ommissioner of Internal <evenue be authori$ed to: . (ompromise the payment of any internal revenue tax? (8+)
SUGGESTED ANSWER*
"he (ommissioner of Internal <evenue may be authori$ed to compromise the payment of any internal revenue tax where: 2) 9 reasonable doubt as to the validity of the claim against the taxpayer existsA or 8) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax! ?! 9bate or cancel a tax liability? ()+)
SUGGESTED ANSWER*
"he (ommissioner of Internal <evenue may abate or cancel a tax liability when: 2) "he tax or any portion thereof appears to be un0ustly or excessively assessedA or 8) "he administration and collection costs involved do not 0ustify the collection of the amount due! N-ec! 8/. (?) 6I<( of 2GGIO
wherein the (ommissioner cannot compromise for less than fifty percent (*/+)! 9ny compromise involving large taxpayers lower than fifty percent (*/+) shall be sub0ect to the approval of the -ecretary of Finance! 9ll criminal violations except those involving fraud can be compromised by the (ommissioner but only prior to the filing of the information with the (ourt! "he (ommissioner may also abate or cancel a tax liability when 2! the tax or any portion thereof appears to have been un0ustly or excessively assessedA or 8! the administrative and collection costs involved do not Justify collection of the amount due! (-ec! 8/. 6I<() BI8: !ompromise$ -it##o"&ing Agent (199=) :ay the (ommissioner of the Internal <evenue compro% mise the payment of withholding tax (tax deducted and withheld at source) where the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax? N*+2
SUGGESTED ANSWER*
final assessments again larg taxpay st e issued ers
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<egional "rial (ourt for the collection of the tax! (ounsel for 4alera filed an in0unctive suit in the <egional "rial (ourt to compel the ?I< to hold the collection of the tax in abeyance until the decision on the protest was rendered! 9! (an the ?I< file the civil action for collection pending decision on the administrative protest? 1xplain! ()+)
SUGGESTED ANSWER*
9! 5es because there is no prohibition for this procedure considering that the filing of a civil action for collection during the pendency of an administrative protest constitutes the final decision of the (ommissioner on the protest (CIR v. U%i,% S:i**i%g C,r*. 43 SCRA 3(4 8!"")9)!
6o! 9 taxpayer who is constituted as withholding agent who has deducted and withheld at source the tax on the income payment made by him holds the taxes as trust funds for the government (-ec! *;N'O) and is obligated to remit them to the ?I<! "he subseBuent inability of the withholding agent to payLremit the tax withheld is not a ground for compromise because the withholding tax is not a tax upon the withholding agent but it is only a procedure for the collection of a tax!
BI8: !orporation: 'istraint ; /e(y (2 2) On :arch 2* 8/// the ?I< issued a deficiency income tax assessment for the taxable year 2GGI against the 4alera ,roup of (ompanies (4alera) in the amount of &2/ million! (ounsel for 4alera protested the assessment and reBuested a reinvestigation of the case! 'uring the investigation it was shown that 4alera had been transferring its properties to other persons! 9s no additional evidence to dispute the assessment had been presented the ?I< issued on June 2E 8/// warrants of distraint and levy on the properties and ordered the filing of an action in the
?!
9s counsel for 4alera what action would you ta#e in order to protect the interest of your client? 1xplain your answer! (8+)
taxpayer may be prosecuted for willfully attempting in any manner to evade or defeat any tax imposed by the Internal <evenue (ode? N*+)
SUGGESTED ANSWER*
SUGGESTED ANSWER*
?! I will wait for the filing of the civil action for collection and consider the same as an appealable decision! I will not file an in0unctive suit because it is not an available remedy! I would then appeal the case to the (ourt of "ax 9ppeals and move for the dismissal of the collection case with the <"(! Once the appeal to the ("9 is filed on time the ("9 has exclusive 0urisdiction over the case! =ence the collection case in the <"( should be dismissed (Ta6e+ v. F-,K, !!3 SCRA 2#4 8!"429)!
6o! 9ssessment is not necessary before a taxpayer maybe prosecuted if there is a prima facie showing of a willful attempt to evade taxes as in the taxpayer@s failure to declare a specific item of taxable income in his income tax returns (U%ga6 v. C.+i "# SCRA 4##)! On the contrary if the taxes alleged to have been evaded is computed based on reports approved by the ?I< there is a presumption of regularity of the previous payment of taxes so that unless and until the ?I< has made a final determination of what is supposed to be the correct taxes the taxpayer should not be placed in the crucible of
BI8: !ourt of Tax Appea"s: !o""ection of Taxes$ 5roun&s for !ompromise (1996)
2! :ay the (ourt of "ax 9ppeals issue an in0unction to en0oin the collection of taxes by the ?ureau of
Internal <evenue? 1xplain!

SUGGESTED ANSWER*
5es! When a decision of the (ommissioner on a tax protest is appealed to the ("9 pursuant to ,ec. %% of $A. No. %%&- (law creating the !TA) in relation to ,ec. &&* of the N6$! such appeal does not suspend the payment levy distraint andLor sale of any of the taxpayer@s property for the satisfaction of his tax liability! =owever when in the opinion of the ("9 the collection of the tax may 0eopardi$e the interest of the ,overnment andLor the taxpayer the (ourt at any stage of the proceedings may suspend or restrain the collection of the tax and reBuire the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the (ourt! 8! :ay the tax liability of a taxpayer be compromised during the pendency of an appeal? 1xplain!
SUGGESTED ANSWER*
5es! 'uring the pendency of the appeal the taxpayer may still enter into a compromise settlement of his tax liability for as long as any of the grounds for a compromise i!e!A doubtful validity of assessment and financial incapacity of taxpayer is present! 9 compromise of a tax liability is possible at any stage of litigation even during appeal although legal propriety demands that prior leave of court should be obtained (Pa+.dec, v+. CIR L;7"74# <.%e 2" !"42)!
BI8: !rimina" Prosecution: Tax 2(asion (199=) Is assessment necessary before
I! -upreme (ourt
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criminal prosecution (CIR v. F,r/.%e 73 T,6acc, C,r*. GR N,. !!"722 <.%e ( !""')! BI8: 2xtinction$ !rimina" /ia+i"ity of t#e Taxpayer (2 2)
:r! (han a manufacturer of garments was investigated for failure to file tax returns and to pay taxes for the taxable year 2GGI! 'espite the subpoena duces tecum issued to him he refused to present and submit his boo#s of accounts and allied records! Investigators therefore raided his factory and sei$ed several bundles of manufactured garments supplies and unpaid imported textile materials! 9fter his apprehension and based on the testimony of a former employee deficiency income and business taxes were assessed against :r! (han on 9pril 2* 8///! It was then that he paid the taxes! (riminal action was nonetheless instituted against him in the <egional "rial (ourt for violation of the "ax (ode! :r! (han moved to dismiss the criminal case on the ground that he had already paid the taxes assessed against him! =e also demanded the return of the garments and materials sei$ed from his factory! =ow will you resolve :r! (han@s motion? (*+)
SUGGESTED ANSWER*
49
of
SUGGESTED ANSWER*
2! &rotest with the (ollector of (ustoms (,ec. &5(/ T!!) 8! 9ppeal to the (ommissioner of (ustoms (,ec. &5%5 T!!). )! 9ppeal to the ("9 ($A *&/&) .!&etition for <eview on (ertiorari -upreme (ourt ($ule "of the %**' $ules of !ivil 9rocedure ($A *&/&). Taxpayer$ Prescripti(e Perio&$ Assessment$ 'eficiency Income Tax (2 6) "he (ommissioner of Internal <evenue issued an assess% ment for deficiency income tax for taxable year 8/// last July )2 8//E in the amount of & 2/ :illion inclusive of
"he motion to dismiss should be denied! "he satisfaction of the civil liability is not one of the grounds for the extinction of criminal action (Pe,*-e v. I-de1,%+, Tierra !2 SCRA ''' 8!"'(9)! 3i#ewise the payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provision of the "ax (ode (-ec! 8*)NaO 6I<()! =owever the garments and materials sei$ed from the factory should be ordered returned because the payment of the tax had released them from any lien that the ,overnment has over them! !ustoms$ Huris&iction$ Assessment$ <npai& !ustoms 'utiesETaxes (2 6)
"he (ollector of (ustoms issued an assessment for un% paid customs duties and taxes on the importation of your client in the amount of &G;/ ///!//! Where will you file your case to protect your client@s right? (hoose the correct courtsL agencies observing their proper hierarchy! (*+)
2! (ourt of "ax 9ppeals 8! (ollector of (ustoms )! (ommissioner of (ustoms .! <egional "rial (ourt *! :etropolitan "rial (ourt E! (ourt of 9ppeals
ALTERNATI1E ANSWER*
surcharge and interests! If the delinBuent taxpayer is your client what steps will you ta#e? What is your defense? (2/+)
ALTERNATI1E ANSWER*
9s (ounsel I shall move to cancel the 9ssessment because of prescription! "he three ()) year period of assessment for the Income "ax <eturns of 8/// starts on 9pril 2* 8//2 and ends on 9pril 2E 8//.! "he assessment of July )2 8//E is beyond the three ()) year prescriptive period and can no longer have any legal binding effect (Tax $eform Act Title 2666 !hapter 6 ,ection &(5 A%**'@).
ALTERNATI1E ANSWER*
I will advice the ?an# to promptly pay the deficiency documentary stamp tax and the interest charges to avoid any further increase in the tax liability! "he ?an# should have appealed to the (ourt of "ax 9ppeals when the ?I< failed to decide on its <eBuest for <econsideration within thirty ()/) days after the inaction of the ?I< for one hundred eighty (2;/) days or on 'ecember )2 8//)! "he "ax 9ssessment has already become final executory and unappealable at that point (BPI v. CIR G.R. N,. !7"#7'
Oc/,6er !# 2))3$.
Taxpayer$ CAT:registere&$ !"aim for Tax 8efun& (2 6)
-ince my client has lost his right to protest I will advise him to wait for a collection action by the (ommissioner! "hen I will file a petition for review with the ("9 to Buestion the collection! -ince the assessment was issued beyond the prescriptive period to assess the action to collect an invalid assessment is not warranted
(P:i-. <,.r; %a-i+/+ I%c. v. CIR !'2432 Dece56er !' 2))($. G.R. N,.
Taxpayer$ Assessment$ 'eficiency Tax (2 6) On June 2 8//) ,lobal ?an# received a final notice of assessment from the ?I< for deficiency documentary stamp tax in the amount of &* :illion! On June )/ 8//) ,lobal ?an# filed a reBuest for reconsideration with the (ommissioner of Internal <evenue! "he (ommissioner denied the reBuest for reconsideration only on :ay )/ 8//E at the same time serving on ,lobal ?an# a warrant of distraint to collect the deficiency tax! If you were its counsel what will be your advice to the ban#? 1xplain! (*+)
ALTERNATI1E ANSWER*
"he denial for the reBuest for reconsideration is the final decision of the (I<!! I would advise ,lobal ?an# to appeal the denial to the (ourt of "ax 9ppeals (("9) within )/ days from receipt! I will further advise the ban# to file a motion for in0unction with the (ourt of "ax 9ppeals to en0oin the (ommissioner from enforcing the assessment pending resolution of the appeal! While an appeal to the ("9 will not suspend the payment levy distraint andLor sale of any property of the taxpayer for the satisfaction of its tax liability the ("9 is authori$ed to give in0unctive relief if the enforcement would 0eopardi$e the interest of the taxpayer as in this case where the assessment has not become final (La+c,%a La%d C,. v
CIR CTA Ca+e N,. 3### <a%.ar0 ( 2)))? See a-+, Revi+ed CTA R.-e+ a**r,ved 60 /:e S.*re5e C,.r/ ,% Dece56er !3 2))3$.
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<oyal :ining is a 49"% registered
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domestic
BI8: 5arnis#ment: BanB Account of a Taxpayer (199=)

Is the ?I< authori$ed to issue a warrant of garnishment against the ban# account of a taxpayer despite the pendency of his protest against the assessment with the ?I< or appeal with the (ourt of "ax 9ppeals? N*+O
SUGGESTED ANSWER*
mining entity! One of its products is silver being sold to the ?ang#o -entral ng &ilipinas! It filed a claim with the ?I< for tax refund on the ground that under -ection 2/E of the "ax (ode sales of precious metals to the ?ang#o -entral ng &ilipinas are considered export sales sub0ect to $ero%rated 49"! Is <oyal :ining@s claim meritorious? 1xplain! (*+)
SUGGESTED ANSWER*
6o <oyal :ining@s claim is not meritorious because it is the sale to the ?ang#o -entral ng &ilipinas of gold and not silver which is considered export sales at Hero% rated 49" (Tax $eform Act Title 62 ,ection %(.A&@Aa@ A"@).
(NOTA BENE: 42AT is excluded from the 3ar coverage #uidelines for &((. 3ar 4xaminations )une %- &((.)
"he ?I< is authori$ed to issue a warrant of garnishment against the ban# account of a taxpayer despite the pendency of protest (Ba6e+ v. F-,K, !3 SCRA 2#4 )! 6owhere in the "ax (ode is the (ommissioner reBuired to rule first on the protest before he can institute collection proceedings on the tax assessed! "he legislative policy is to give the (ommissioner much latitude in the speedy and prompt collection of taxes because it is in taxation that the ,overnment depends to obtain the
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (199=) What constitutes prima facie evidence of a false or fraudulent return? N8+O
SUGGESTED ANSWER*
"here is prima facie evidence of a false or fraudulent return when the taxpayer has willfully and #nowingly filed it with the intent to evade a part or all of the tax legally due from him (U%ga6 v. C.+i "# SCRA 4##)! "here must appear a design to mislead or deceive on the part of the taxpayer or at least culpable negligence! 9 mista#e not culpable in respect of its value would not constitute a false return! (+ords and 9hrases 2ol. %. page %'5).
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (2 2) What constitutes prima facie evidence of a false or fraudulent return to 0ustify the imposition of a */+ surcharge on the deficiency tax due from a taxpayer? 1xplain! (*+)
SUGGESTED ANSWER*
"here is a prima facie evidence of false or fraudulent return when the taxpayer ,E3,TANT6A??G ENB4$- B4!?A$4B his taxable sales receipts or income or ,E3,TANT6A??G C24$,TAT4B his deductions the taxpayer@s failure to report sales receipts or income in an amount exceeding )/+ of that declared per return and a claim of deduction in an amount exceeding )/+ of actual deduction shall render the taxpayer liable for substantial underdeclaration and overdeclaration respectively and will 0ustify the imposition of the */+ surcharge on the deficiency tax due from the taxpayer! (,ec. &"/ N6$!).
means to carry on its operations (Re*.6-ic .. Ti5 Tia% Te%g S,%+ I%c. !' SCRA 34()!
ALTERNATI1E ANSWER*
6o because the assessment has not yet become final executory and demandable! "he basic consideration in the collection of taxes is whether the assessment is final and unappealable or the decision of the (ommissioner is final executory and demandable the ?I< has legal basis to collect the tax liability by either administrative or 0udicial action! BI8: Pre:Assessment 7otice not 7ecessary (2 2)
In the investigation of the withholding tax returns of 9H :edina -ecurity 9gency (9H :edina) for the taxable years 2GGI and 2GG; a discrepancy between the taxes withheld from its employees and the amounts actually remitted to the government was found! 9ccordingly before the period of prescription commenced to run the ?I< issued an assessment and a demand letter calling for the immediate payment of the deficiency withholding taxes in the total amount of &8*/ ///!//! (ounsel for 9H :edina protested the assessment for being null and void on the ground that no pre%assessment notice had been issued! =owever the protest was denied! (ounsel then filed a petition for prohibition with the (ourt of "ax 9ppeals to restrain the collection of the tax!
ancillary to its appellate 0urisdiction! "he ("9 is not vested with original 0urisdiction to issue writs of prohibition or in0unction independently of and apart from an appealed case! "he remedy is to appeal the decision of the ?I<! (C,--ec/,r v. B.+ec, 7 SCRA 7!7 8!"'!9)!
BI8: Prescripti(e Perio&: !i(i" Action (2 2) On 9ugust * 2GGI 9damson (o! Inc! (9damson) filed a reBuest for reconsideration of the deficiency withholding tax assessment on July 2/ 2GGI covering the taxable year 2GG.! 9fter administrative hearings the original assessment of &2*/ ///!// was reduced to &I*!///!// and a modified assessment was thereafter issued on 9ugust /* 2GGG! 'espite repeated demands 9damson failed and
9!
Is the contention of the counsel tenable? 1xplain (8+)
SUGGESTED ANSWER*
9! 6o the contention of the counsel is untenable! -ection 88; of the "ax (ode expressly provides that no pre%assessment notice is reBuired when a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent! -ince the amount assessed relates to deficiency withholding taxes the ?I< is correct in issuing the assessment and demand letter calling for the immediate payment of the deficiency withholding taxes! (-ec! 88; 6I<()!
?!
Will the special civil action for prohibition brought before the ("9 under -ec! 22 of <!9 6o! 228* prosper? 'iscuss your answer! ()+)
SUGGESTED ANSWER*
?! "he special civil action for prohibition will not prosper because the ("9 has no 0urisdiction to entertain the same! "he power to issue writ of in0unction provided for under -ection 22 of <9 228* is only
refuse modifie assessm ent! d to pay the d
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(onseBuently the ?I< brought an action for collection in the <egional "rial (ourt on -eptember 2* 8///! 9damson moved to dismiss the action on the ground that the government@s right to collect the tax by 0udicial action has prescribed! 'ecide the case! (*+)
SUGGESTED ANSWER*
"he right of the ,overnment to collect by 0udicial action has not prescribed! "he filing of the reBuest for reconsideration suspended the running of the prescriptive period and commenced to run again when a decision on the protest was made on 9ugust * 2GGG! It must be noted that in all cases covered by an assessment the period to collect shall be five (*) years from the date of the assessment but this period is suspended by the filing of a reBuest for reconsideration which was acted upon by the (ommissioner of Internal <evenue
(CIR v. =0e/: S.ac, 2)2 SCRA !23 8!""!9)! La6,ra/,rie+ I%c.
"5 (orporation filed its final ad0usted income tax return for 2GG) on 9pril 28 2GG. showing a net loss from operations! 9fter investigation the ?I< issued a pre% assessment notice on :arch )/ 2GGE! 9 final notice and demand letter dated 9pril 2* 2GGI was issued personally delivered to and received by the company@s chief accountant! For willful refusal and failure of "5 (orporation to pay the tax warrants of distraint and levy on its properties were issued and served upon it! On January 2/ 8//8 a criminal charge for violation of the "ax (ode was instituted in the <egional "rial (ourt with the approval of the (ommissioner! "he company moved to dismiss the criminal complaint on the ground that an act for violation of any provision of the "ax (ode prescribes after five (*) years and in this case the period commenced to run on :arch )/ 2GGE when the pre% assessment was issued! =ow will you resolve the motion? 1xplain your answer! (*+)
BI8: Prescripti(e Perio&$ Assessment ; !o""ection (1999) 9 (o! a &hilippine (orporation filed its 2GG* Income "ax <eturn (I"<) on 9pril 2* 2GGE showing a net loss! On 6ovember 2/ 2GGE it amended its 2GG* I"< to show more losses! 9fter a tax investigation the ?I< disallowed certain deductions claimed by 9 (o! putting 9 (o! in a net income position! 9s a result on 9ugust * 2GGG the ?I< issued a deficiency income assessment against 9 (o! 9 (o! protested the assessment on the ground that it has prescribed: 'ecide! (*+)
SUGGESTED ANSWER*
"he right of the ?I< to assess the tax has not prescribed! The rule is that internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return. (,ection &(5 N6$!) =owever if the return originally filed is amended substantially the counting of the three%year period starts from the date the amended return was filed! (CIR v. P:,e%i> A++.ra%ce C,. L/d. !( SCRA 32)! "here is a substantial amendment in this case because a new return was filed declaring more losses which can only be done either (2) in reducing gross income or (8) in increasing the items of deductions claimed! BI8: Prescripti(e Perio&$ !rimina" Action (2 2)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics SUGGESTED ANSWER*
"he motion to dismiss should not be granted! It is only when the assessment has become final and unappealable that the *% year period to file a criminal action commences to run (T.*aE v. U-,* 7!' SCRA !!4 8!"""9)! "he pre% assessment notice issued on :arch )/ 2GGE is not a final assessment which is enforceable by the ?I<! It is the issuance of the final notice and demand letter dated 9pril 2* 2GGI and the failure of the taxpayer to protest within )/ days from receipt thereof that made the assessment final and unappealable! "he earliest date that the assessment has become final is :ay 2E 2GGI and since the criminal charge was instituted on January 2/ 8//8 the same was timely filed!
inability to pay the tax assessed his application shall not be considered unless and until he waives in writing his privilege under <!9! 6o! 2./* and such waiver shall constitute the authority of the (ommissioner to inBuire into the ban# deposits of the taxpayer!
BI8$ !onse3uence$ Taxpayer gui"ty of Tax 2(asion (2 9)

Josel agreed to sell his condominium unit to Jess for &8!* :illion! 9t the time of the sale the property had a $onal value of &8!/ :illion! Cpon the advice of a tax consultant the parties agreed to execute two deeds of sale one indicating the $onal value of &8!/ :illion as the selling price and the other showing the true selling price of &8!* :illion! "he tax consultant filed the capital gains tax return using the deed of sale showing the $onal value of
BI8: Secrecy of BanB 'eposits /a1 (199=) (an the (ommissioner of Internal <evenue inBuire into the ban# deposits of a taxpayer? If so does this power of the (ommissioner conflict with <!9! 2./* (-ecrecy of ?an# 'eposits 3aw) N*+O
SUGGESTED ANSWER*
"he (ommissioner of Internal <evenue is authori$ed to inBuire into the ban# deposits of: 2) a decedent to determine his gross estateA
8) any taxpayer who has filed an application for compromise of his tax liability by means of financial incapacity to pay his tax liability (-ec! E(F)! 6I<()! Where the taxpayer has signed a waiver authori$ing the (ommissioner or his duly authori$ed representatives to InBuire into the ban# deposits!
))
(Note: This answer was not part of the answers enumerated in the E9 ?aw Answers to the 3ar in this but was later added in the recent E9 ?aw Answers to the 3ar as a result of A8?A ?aw of &((%)
"he limited power of the (ommissioner does not conflict with <!9! 6o! 2./* because the provisions of the "ax (ode granting this power is an exception to the -ecrecy of ?an# 'eposits 3aw as embodied in a later legislation! Furthermore in case a taxpayer applies for an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear
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&8!/ :illion as the selling price! 'iscuss the tax implications and conseBuences of the action! (*+)
ALTERNATI1E ANSWER*
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levy upon and sale of real properties of the decedent without first securing the authority of the court sitting in probate over the supposed will of the decedent?
SUGGESTED ANSWER*
(2) '1FI(I16(5 FI693 I6(O:1 "9> on the sale of real property in the &hilippines classified as a capital asset! Cnder -ec! 8.(') of the 6I<( the final tax of six percent (E+) shall be based on the gross selling price of &8!* :illion or $onal value of &8!/ :illion whichever is higher i!e! &8!* :illionA
"he action of the parties constitutes tax evasion and exposes Josel to:
(8) F<9C' &1693"5 amounting to */+ surcharge on the amount evaded (-ec! 8.;N?O 6I<()A and ()) '1FI(I16(5 I6"1<1-" of 8/+ per annum on the deficiency! (-ec! 8.GN9ON?O 6I<()
ALTERNATI1E ANSWER*
5es! "he ?I< is authori$ed to collect estate tax deficiency through the summary remedy of levying upon and sale of real properties of a decedent without the cognition and authority of the court sitting in probate over the supposed will of the deceased because the collection of estate tax is executive in character! 9s such the estate tax is exempted from the application of the statute of non%claims and this is 0ustified by the necessity of government funding immortali$ed in the maxim that taxes are the lifeblood of the government (Marc,+ v. CIR G.R. N,. !2)44) <.%e 3 !""#)!
ALTERNATI1E ANSWER*
"here is tax evasion because of the concurrence of the following factors: 2)"he payment of less than that #nown by the taxpayer to be legally due or the non% payment of tax when it is shown that a tax is due! It is evident that the parties that the tax due should be computed based on the valuation of &8!* million and not &8!/ millionA 8) 9n accompanying state of mind which is described as being "evil" on "bad faith " "willful " or "deliberate and not accidental!" 'espite the above #nowledge the parties deliberately misrepresented the true basis of the saleA and
)) 9 course of action or failure of action which is unlawful! "his is shown by the preparation of the two deeds of sale which showed different values!
(C,55i++i,%er ,1 I%/er%aReve%.e v. T:e E+/a/e ,1Be%ig%, P T6da <r. G.R. N,. !(#!44 Se*/e56er !( 2))($
"he tax evasion committed should result to the imposition of a */+ fraud surcharge on the amount evaded (,ec. &"/A3@ N6$!) payment of the 'eficiency "ax and interest of 8/+ per annum on the deficiency! (,ec. &"*AA@A3@ N6$!) "he parties may li#ewise be sub0ect to criminal prosecution for willfully failing to pay the tax as well as for filing a false and fraudulent return!
(,ees. &-" &-- and &-' N6$!) BI8: Summary 8eme&y: 2state Tax 'eficiencies (199=) Is the ?I< authori$ed to collect estate tax deficiencies by the summary remedy of
5es if the tax assessment has already become final executory and enforceable! "he approval of the court sitting in probate over the supposed will of the deceased is not a mandatory reBuirement for the collection of the estate tax! "he probate court is determining issues which are not against the property of the decedent or a claim against the estate as such but is against the interest or property right which the heir legatee devisee etc! has in the property formerly held by the decedent! ( Marc,+ v. CIR G.R N,. !2)44) <.%e 3 !""I)!
BI8: <npai& Taxes (s) !"aims for <npai& -ages (1999)

For failure of Oceanic (ompany Inc! (O(196I() to pay deficiency taxes of &8/ :illion the (ommissioner of Internal <evenue issued warrants of distraint on O(196I(@s personal properties and levied on its real properties! :eanwhile the 'epartment of 3abor through the 3abor 9rbiter rendered a decision ordering O(196I( to pay unpaid wages and other benefits to its employees! Four barges belonging to O(196I( were levied upon by the sheriff and later sold at public auction!
the computation of the tax liabilities of the erring taxpayer! "he corporation filed a motion to dismiss the criminal complaint on the ground that there has been as yet no assessment of its tax liabilityA hence the criminal complaint was premature! "he 'OJ denied the motion on the ground that an assessment of the tax deficiency of the corporation is not a precondition to the filing of a criminal complaint and that in any event the 0oint affidavit of the ?I< examiners may be considered as an assessment of the tax liability of the corporation! Is the ruling of the 'OJ correct? 1xplain! (*+)
SUGGESTED ANSWER*
"he 'OJ is correct in ruling that an assessment of the tax deficiency of the corporation is not a precondition to the filing of a criminal complaint! "here is no need for an
"he (ommissioner of Internal <evenue filed a motion with the 3abor 9rbiter to annul the sale and en0oin the sheriff from disposing the proceeds thereof! "he employees of O(196I( opposed the motion contending that 9rt! 22/ of the 3abor (ode gives first preference to claims for unpaid wages! <esolve the motion! 1xplain!
SUGGESTED ANSWER*
"he motion filed by the (ommissioner should be granted because the claim of the government for unpaid taxes are generally preferred over the claims of laborers for unpaid wages! "he provision of 9rticle 22/ of the 3abor (ode which gives laborers@ claims for preference applies only in case of ban#ruptcy or liBuidation of the employer@s business! In the instant case Oceanic is not under ban#ruptcy or liBuidation at the time the warrants of distraint and levy were issued hence the opposition of the employees is unwarranted!
(CIR v+. NLRC e/ a- G.R. N,.
#("'3 N,ve56er " !""($.
BI8$ Assessment$ !rimina" !omp"aint (2 9)

In 2GG* the ?I< filed before the 'epartment of Justice ('OJ) a criminal complaint against a corporation and its officers for alleged evasion of taxes! "he complaint was supported by a sworn statement of the ?I< examiners showing
assessment so long as
prim ther is a a e facie showing of violation of the provisions of the "ax (ode! 9fter all a criminal charge is instituted not to demand payment but to penali$e the tax payer for violation of the "ax (ode! (C,55i++i,%er ,1 I%/er%aReve%.e v. Pa+c,r
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decision was rendered by the court ordering 6> to pay the tax due plus penalties and surcharges! "he 0udgment became final and executory but attempts to execute the 0udgment award were futile! -ubseBuently 6> offered the (ommissioner a compromise settlement of */+ of the 0udgment award representing that this amount is all he could really afford! 'oes the (ommissioner have the power to accept the compromise offer? Is it legal and ethical? 1xplain briefly! (*+)
SUGGESTED ANSWER*
Rea-/0 a%d Deve-,*5e%/ G.R. N,. !247!3 <.%e
C,r*,ra/i,% 2" !""" )
Furthermore there is nothing in the problem that shows that the ?I< in filing the case is also interested in collecting the tax deficiency! =owever it is in error when it ruled that the 0oint affidavit of the ?I< examiners may be considered as an assessment of the tax liability of the corporation! "he 0oint affidavit showing the computation of the tax liabilities of the erring taxpayer is not a tax assessment because it was not sent to the taxpayer and does not demand payment of the tax within a certain period of time! 9n assessment is deemed made only when the ?I< releases mails or sends such notice to the taxpayer! (C,55i++i,%er ,1 I%/er%aReve%.e v. Pa+c,r Rea-/0 a%d Deve-,*5e%/ C,r*,ra/i,% G.R. N,. !247!3 <.%e 2" !"""$ N,/e+ a%d C,55e%/+D A plea is made for liberality in correcting the examinees answers because the examination is very long.
5es! "he (ommissioner has the power to accept the offer of compromise if the financial position of the taxpayer clearly demonstrates a clear inability to pay the tax (-ection 8/. 6I<()!
BI8$ Aut#ority$ 8efun& or !re&it of Taxes (2 9)

-tate the conditions reBuired by the "ax (ode before the (ommissioner of Internal <evenue could authori$e the refund or credit of taxes erroneously or illegally received!
SUGGESTED ANSWER*
Cnder -ec! 8/.(() 6I<( the following conditions must be met: 2! "here must be a written claim for refund filed by the taxpayer with the (ommissioner! 8! "he claim for refund must be a categorical demand for reimbursement! )! "he claim for refund must be filed within two (8) years from date of payment of the tax or penalty regardless of any supervening cause! BI8$ !ompromise (2 *) 9fter the tax assessment had become final and unappealable the (ommissioner of Internal <evenue initiated the filing of a civil action to collect the tax due from 6>! 9fter several years a
9s represented by 6> in his offer only */+ of the 0udgment award is all he could really afford! "his is an offer for compromise based on financial incapacity which the (ommissioner shall not accept unless accompanied by a waiver of the secrecy of ban# deposits (-ection ENFR 6I<()! "he waiver will enable the (ommissioner to ascertain the financial position of the taxpayer although the inBuiry need not be limited only to the ban# deposits of the taxpayer but also as to his financial position as reflected in his financial statements or other records upon which his property holdings can be ascertained!
If indeed the financial position of 6> as determined by the (ommissioner demonstrates a clear inability to pay the tax the acceptance of the offer is legal and ethical because the ground upon which the compromise was anchored is within the context of the law and the rate of compromise is well within and far exceeds the minimum prescribed by law which is only 2/+ of the basic tax assessed! BI8$ !ompromise (2 9) -tate and discuss briefly whether the following cases may be compromised or may not be compromised: a) 'elinBuent accountsA b) (ases under administrative protest after issuance of the final assessment notice to the taxpayer which are still pendingA c) (riminal tax fraud casesA d) (riminal violations already filed in courtA e) (ases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the reBuired agreement form! (*+)
SUGGESTED ANSWERS*
?CN#4$ 34 !C89$O:I-1' ($.$. 5(-(& A&((&@) because the taxpayer has not paid his taxes for reasons other than his financial incapacity or the doubtful validity of the assessment: a) (<I:I693 "9> F<9C' cases as may be determined by the (ommissioner or his authori$ed agents may not be compromisedA b) (<I:I693 4IO39"IO693<19'5 FI31' I6 (OC<" so that the taxpayer will not profit from his fraud which would encourage tax evasionA and c) (ases where final reports of reinvestigation or reconsideration have been issued resulting in the reduction of the original assessment agreed to by the taxpayer when he signed the reBuired agreement form! "he taxpayer is estopped from applying for a compromise!
"he following cases may still be compromised ($.$. 5(-(& A&((&@) because of the taxpayer@s financial incapacity to pay the tax due or the assessment@s doubtful validity: a) '13I6KC16" 9((OC6"- may be compromised because there is no showing that there is a duly%approved schedule of installment paymentsA and b) (ases under administrative protest after issuance of the final assessment notice to the taxpayer which are still pending! "he following cases 8AG NC
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BI8$ 'eficiency Tax Assessment (s) Tax 8efun& E Tax !re&it (2 9) Is a deficiency tax assessment a bar to a claim for tax refund or tax credit? 1xplain!
SUGGESTED ANSWER*
foreign national income taxes paid to arrive at his ad0usted income during the year! =is ad0usted income will be sub0ect to the graduated tax rates of 2+ to )+! (,ec. &% (b) Tax !ode of %*/.A9B %%-/@ as amended by 9B %**").
N6ote: "he bar candidates are not expected to be familiar with tax history! (onsidering that this is already the fourth year of implementation of the "ax (ode of 2GGI bar candidates were taught and prepared to answer Buestions based on the present law! It is therefore reBuested that the examiner be more lenient in chec#ing the answers to this Buestion! &erhaps an answer based on the present law be given full credit!O
5es the deficiency tax assessment is a bar to a tax refund or credit! "he "axpayer cannot be entitled to a refund and at the same time liable for a tax deficiency assessment for the same year! "he deficiency assessment creates a doubt as to the truth and accuracy of the "ax <eturn! -aid <eturn cannot therefore be the basis of the refund
(C,55i++i,%er ,1 I%/er%a- Reve%.e v. A--/e- 82))29 ci/i%g C,55i++i,%er ,1 I%/er%a- Reve%.e v. C,.r/ ,1 A**ea-+ Ci/0 Tr.+/ Ba%Ai%g C,r*,ra/i,% a%d C,.r/ ,1 Ta> A**ea-+ G.R. N,. !)''!! <.-0 2! !""($
?!
If you are the lawyer of :r! and :rs! -ebastian what possible defense or defenses will you raise in behalf of your clients against the action of the ?I< in enforcing collection of the tax by the summary remedies of warrants of distraints and levy?
1xplain your answer! ()+)

SUGGESTED ANSWER*
BI8$ 'istraint$ Prescription of t#e Action (2 2)

:r! -ebastian is a Filipino seaman employed by a 6orwegian company which is engaged exclusively in international shipping! =e and his wife who manages their business filed a 0oint income tax return for 2GGI on :arch 2* 2GG;! 9fter an audit of the return the ?I< issued on 9pril 8/ 8//2 a deficiency income tax assessment for the sum of &8*/!///!// inclusive of interest and penalty! For failure of :r! and :rs! -ebastian to pay the tax within the period stated in the notice of assessment the ?I< issued on 9ugust 2G 8//2 warrants of distraint and levy to enforce collection of the tax! 9! What is the rule of income taxation with respect to :r! -ebastian@s income in 2GGI as a seaman on board the 6orwegian vessel engaged in
international shipping? 1xplain your answer! (8+)

SUGGESTED ANSWER*
9! "he income of :r! -ebastian as a seaman is considered as income of a non%resident citi$en derived from without the &hilippines! "he total gross income in C- dollars (or if in other foreign currency its dollar eBuivalent) from without shall be declared by him for income tax purposes using a separate income tax return which will not include his income from business derived within (to be covered by another return)! =e is entitled to deduct from his dollar gross income a personal exemption of S. *// and
?! I will raise the defense of prescription! "he right of the ?I< to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tax returns when the said return is filed on time! (-ection 8/) 6I<()! "he last day for filing the 2GGI income tax return is 9pril 2* 2GG;! -ince the assessment was issued only on 9pril 8/ 8//2 the ?I<@s right to assess has already prescribed! BI8$ Fa"se (s) Frau&u"ent 8eturn (1996) 'istinguish a false return from a fraudulent return!
SUGGESTED ANSWER*
<,+e1i%a Lea- G.R. N,. !!7(3" N,ve56er !4 2))2? Ta> Re1,r5 Ac/ RA 4(2( Ti/-e I Sec. ( 8!""#9$. (NOTA BENED This concept pertains to the 2AT law which is excluded from the bar coverage #uidelines for &((. 3ar 4xaminations )une %- &((.)
BI8$ Prescripti(e Perio&$ Assessment$ Frau&u"ent 8eturn (2 2)

:r! (astro inherited from his father who died on June 2/ 2GG. several pieces of real property in :etro :anila! "he estate tax return was filed and the estate tax due in the amount of &8*/!///!// was paid on 'ecember /E 2GG.! "he "ax Fraud 'ivision of the ?I< investigated the case on the basis of confidential information given by :r! -antos on January /E 2GG; that the return filed by :r! (astro was fraudulent and that he failed to declare all
"he distinction between a false return and a fraudulent return is that the first merely implies a deviation from the truth or fact whether intentional or not whereas the second is intentional and deceitful with the sole aim of evading the correct tax due (AE%ar .+. C,55i++i,%er L; 2)3'" A.g.+/ 27 !"#()!
ALTERNATI1E ANSWER*
9 false return contains deviations from the truth which may be due to mista#es carelessness or ignorance of the person preparing the return! 9 fraudulent return contains an intentional wrongdoing with the sole ob0ect of avoiding the tax and it may consist in the intentional underdeclaration of income intentional overdeclaration of deductions or the recurrence of both! 9 false return is not necessarily tainted with fraud because the fraud contemplated by law is actual and not constructive! 9ny deviation from the truth on the other hand whether intentional or not constitutes falsity! (AE%ar v+. C,55i++i,%er L;2)3'" A.g.+/ 27 !"#()
BI8$ Huris&iction$ 8e(ie1 8u"ings of t#e !ommissioner (2 6) :r! 9braham 1ugenio a pawnshop operator after having been reBuired by the <evenue 'istrict Officer to pay value added tax pursuant to a <evenue :emorandum Order (<:O) of the (ommissioner of Internal <evenue filed with the <egional "rial (ourt an action Buestioning the validity of the <:O! If you were the 0udge will you dismiss the case? (*+)
SUGGESTED ANSWER*
5es! "he <:O is in reality a ruling of the (ommissioner in implementing the provisions of the "ax (ode on the taxability of pawnshops! Jurisdiction to review rulings of the (ommissioner is lodged with the (ourt of "ax 9ppeals and not with the <egional "rial (ourt (CIR v.
properties left by his father with intent to evade payment of the correct tax! 9s a result a deficiency estate tax assessment for &2 8*/ ///!// inclusive of */+ surcharge for fraud interest and penalty was issued against him on January 2/ 8//2! :r! (astro protested the assessment on the ground of prescription! 9! 'ecide :r! (astro@s protest! (8+)
SUGGESTED ANSWER*
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run from the day of the violation of the law! "he crime was committed when ,erry willfully refused to pay despite repeated demands in 8//8! -ince the information was filed in June 8//E the criminal case was instituted within the five%year period reBuired by law (T.*aE v. U-e* G.R. N,.
!2#### Oc/,6er
! !"""? Sec/i,% 24! NIRC$.
BI8$ Taxpayer: !i(i" Action ; !rimina" Action (2 2)

:inolta &hilippines Inc! (:inolta) is an 1&H9% registered enterprise en0oying preferential tax treatment under a special law! 9fter investigation of its withholding tax returns for the taxable year 2GGI the ?I< issued a deficiency withholding tax assessment in the amount of &2*/!///!//! On :ay 2* 2GGG because of financial difficulty the deficiency tax remained unpaid as a result of which the assessment became final and executory! "he
9! "he protest should be resolved against :r! (astro! What was filed is a fraudulent return ma#ing the prescriptive period for assessment ten (2/) years from discovery of the fraud (-ection 888 6I<()! 9ccordingly the assessment was issued within that prescriptive period to ma#e an assessment based on a fraudulent return!
?! What legal reBuirementLs must :r! -antos comply with so that he can claim his reward? 1xplain! ()+)
SUGGESTED ANSWER*
"he legal reBuirements that must be complied by :r! -antos to entitle him to reward are as follows: 2) =e should voluntarily file a confidential information under oath with the 3aw 'ivision of the ?ureau of Internal <evenue alleging therein the specific violations constituting fraudA 8) "he information must not yet be in the possession of the ?ureau of Internal <evenue or refer to a case already pending or previously investigated by the ?ureau of Internal <evenueA )) :r! -antos should not be a government employee or a relative of a government employee within the sixth degree of consanguinityA and .) "he information must result to collections of revenues andLor fines and penalties! (-ec! 8;8 6I<() BI8$ Prescripti(e Perio&$ !rimina" Action (2 6)
,erry was being prosecuted by the ?I< for failure to pay his income tax liability for (alendar 5ear 2GGG despite several demands by the ?I< in 8//8! "he Information was filed with the <"( only last June 8//E! ,erry filed a motion to Buash the Information on the ground of prescription the Information having been filed beyond the *%year reglementary period! If you were the 0udge will you dismiss the Information? Why? (*+)
SUGGESTED ANSWER*
6o! "he trial court can exercise 0urisdiction! &rescription of a criminal action begins to
inability to pay the tax!
?I< also found that in violation of the provisions of the 6ational Internal <evenue (ode :inolta did not file its final corporate income tax return for the taxable year 2GG; because it allegedly incurred net loss from its operations! On :ay 2I 8//8 the ?I< filed with the <egional "rial (ourt an action for collection of the deficiency withholding tax for 2GGI!
9! Will the ?I<@s action for collection prosper? 9s counsel of :inolta what action will you ta#e?
!ustom: Cio"ation of Tax ; !ustom 'uties (2 2)

"he (ollector of (ustoms of the &ort of (ebu issued warrants of sei$ure and detention against the importation of machineries and eBuipment by 33' Import and 1xport (o! (33') for alleged nonpayment of tax and customs duties in violation of customs laws! 33' was notified of the sei$ure but before it could be heard the (ollector of (ustoms issued a notice of sale of the articles! In order to restrain the (ollector from carrying out the order to sell 33' filed with the (ourt of "ax 9ppeals a petition for review with application for the issuance of a writ of prohibition! It also filed with the ("9 an appeal for refund of overpaid taxes on its other importations of raw materials which has been pending
1xplain your answer! (*+)

SUGGESTED ANSWER*
9! 5es ?I<@s action for collection will prosper because the assessment is already final and executory it can already be enforced through 0udicial action! 9s counsel of :inolta I will introduce evidence that the income payment was reported by the payee and the income tax was paid thereon in 2GGI so that my client may only be allowed to pay the civil penalties for non% withholding pursuant to <:O 6o! );%;)! NNote: 6t is not clear whether this is a case of non- withholding; underwithholding or non-remittance of tax withheld. As such the tax counsel may be open to other remedies against the assessment!O
?! :ay criminal violations of the "ax (ode be compromised? If :inolta ma#es a voluntary offer to compromise the criminal violations for non% filing and non%payment of taxes for the year 2GG; may the (ommissioner accept the offer? 1xplain
(*+)
SUGGESTED ANSWER*
?! 9ll criminal violations of the "ax (ode may be compromised except those already filed in court or those involving fraud (-ection 8/. 6I<()! 9ccordingly if :inolta ma#es a voluntary offer to compromise the criminal violations for non% filing and non%payment of taxes for the year 2GG; the (ommissioner may accept the offer which is allowed by law! =owever if it can be established that a tax has not been paid as a conseBuence of non%filing of the return the civil liability for taxes may be dealt with independently of the criminal violations! "he compromise settlement of the criminal violations will not relieve the taxpayer from its civil liability! ?ut the civil liability for taxes may also be compromised if the financial position of the taxpayer demonstrates a clear
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with the (ollector of (ustoms! "he ?ureau of
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(ustoms moved to dismiss the case for lac# of 0urisdiction of the (ourt of "ax 9ppeals!
9! 'oes the (ourt of "ax 9ppeals have 0urisdiction over the petition for review and writ of prohibition?
1xplain ()+)
SUGGESTED ANSWER*
9! 6o because there is no decision as yet by the (ommissioner of (ustoms which can be appealed to the ("9! 6either the remedy of prohibition would lie because the ("9 has not acBuired any appellate 0urisdiction over the sei$ure case! "he writ of prohibition being merely ancillary to the appellate 0urisdiction the ("9 has no 0urisdiction over it until it has acBuired 0urisdiction on the petition for review! -ince there is no appealable decision the ("9 has no 0urisdiction over the petition for review and writ of prohibition! (C,55i++i,%er ,1 C.+/,5+ v. A-iA*a-a 7' SCRA 2)4 8!"#)9)! ?! Will an appeal to the ("9 for tax refund be possible? 1xplain (8+)
SUGGESTED ANSWER*
review neither the (ommissioner of (ustoms nor the -ecretary of Finance would #now about the decision laid down by the (ollector favoring the taxpayer! "he power to decide sei$ure and protest cases may be abused if no chec#s are instituted! 9utomatic review is necessary because nobody is expected to appeal the decision of the (ollector which is favorable to the taxpayer and adverse to the ,overnment! "his is the reason why whenever the decision of the (ollector is adverse to the ,overnment the said decision is automatically elevated to the (ommissioner for reviewA and if such decision is affirmed by the (ommissioner the same shall be automatically elevated to and be finally reviewed by the -ecretary of Finance (Ba,Aa+i% v. C,55i++i,%er ,1 C.+/,5+ !4) SCRA 3"! 8!"4"9)!
?! 6o because the (ommissioner of (ustoms has not yet rendered a decision on the claim for refund! "he 0urisdiction of the (ommissioner and the ("9 are not concurrent in so far as claims for refund are concerned! "he only exception is when the (ollector has not acted on the protested payment for a long time the continued inaction of the (ollector or (ommissioner should not be allowed to pre0udice the taxpayer! (6estle &hils! Inc! v! (ourt of 9ppeals ,< 6o! 2).22. July E 8//2)!
!ustoms$ Basis$ Automatic 8e(ie1 (2 2) Whenever the decision of the (ollector of (ustoms is adverse to the government it is automatically elevated to the (ommissioner for review and if it is affirmed by him it is automatically elevated to the -ecretary of Finance for review! What is the basis of the automatic review procedure in the ?ureau of (ustoms? 1xplain your answer! (*+)
SUGGESTED ANSWER*
9utomatic review is intended to protect the interest of the ,overnment in the collection of taxes and customs duties in sei$ure and protest cases! Without such automatic
'e"in3uent Tax 8eturn (199=) When is a revenue tax considered delinBuent? N)+)
SUGGESTED ANSWER*
9 revenue tax is considered delinBuent when it is unpaid after the lapse of the last day prescribed by law for its payment! 3i#ewise it could also be considered as delinBuent where an assessment for deficiency tax has become final and the taxpayer has not paid it within the period given in the notice of assessment! Huris&iction: !ustoms (s) !TA (2 )
a) On the basis of a warrant of sei$ure and detention issued by the (ollector of (ustoms for the purpose of enforcing the "ariff and (ustoms 3aws assorted brands of cigarettes said to have been illegally imported into the &hilippines were sei$ed from a store where they were openly offered for sale! 'issatisfied with the decision rendered after hearing by the (ollector of (ustoms on the confiscation of the articles the importer filed a petition for review with the (ourt of "ax 9ppeals! "he (ollector moved to dismiss the petition for lac# of Jurisdiction! <ule on the motion!
6o! "he legislators intended to divest the <egional "rial (ourts of the 0urisdiction to replevin a property which is a sub0ect of sei$ure and forfeiture proceedings for violation of the "ariff and (ustoms (ode otherwise actions for forfeiture of property for violation of the (ustoms laws could easily be undermined by the simple device of replevin! (De -a F.e%/e v. De Ve0ra e/. a- !2) SCRA (33)
"here should be no unnecessary hindrance on the government@s drive to prevent smuggling and other frauds upon the (ustoms! Furthermore the <egional "rial (ourt do not have Jurisdiction in order to render effective and efficient the collection of Import and export duties due the -tate which enables the government to carry out the
(8+)
SUGGESTED ANSWER*
:otion granted! "he (ourt of "ax 9ppeals has 0urisdiction only over decisions of the (ommissioner of (ustoms in cases involving sei$ures detention or release of property affected! (-ec! I <!9! 6o! 228*)! "here is no decision yet of the (ommissioner which is sub0ect to review by the (ourt of "ax 9ppeals!
ALTERNATI1E ANSWER*
:otion granted! "he (ourt of "ax 9ppeals has no 0urisdiction because there is no decision rendered by the (ommissioner of (ustoms on the sei$ure and forfeiture case! "he taxpayer should have appealed the decision rendered by the (ollector within fifteen (2*) days from receipt of the decision to the (ommissioner of (ustoms! "he (ommissionerPs adverse decision would then be the sub0ect of an appeal to the (ourt of "ax 9ppeals! b) Cnder the same facts could the importer file an action in the <egional "rial (ourt for replevin on the ground that the articles are being wrongfully detained by the (ollector of (ustoms since the importation was not illegal and therefore exempt from sei$ure? 1xplain!
()+)
SUGGESTED ANSWER*
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functions It has been Instituted to perform! (<a, e/ a- C,.r/ ,1 A**ea-+ e/ a- a%d c,5*a%i,% ca+e 2(" SCRA 73 (7)
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taxes should be assessed against him!

b! If the (ommissioner of Internal <evenue issues an assessment notice the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within thirty
/5<: !o""ection of TaxesF Fees ; !#arges (199,) ,ive the remedies available to local government units to enforce the collection of taxes fees and charges?
SUGGESTED ANSWER*
"he remedies available to the local government units to enforce collection of taxes fees and charges are: 2) 9':I6I-"<9"I41 <1:1'I1of distraint of personal property of whatever #ind whether tangible or intangible and levy of real property and interest thereinA and 8) JC'I(I93 <1:1'5 by institution of an ordinary civil action for collection with the regular courts of proper 0urisdiction! Tax Amnesty (s) Tax 2xemption (2 1) 'istinguish a tax amnesty from a tax exemption! ()+)
SUGGESTED ANSWER*
()/) days from receipt of the notice of assessment! (.th par!! -ec! 88; 6I<( of 2GGI) c! Within sixty (E/) days from filing of the protest the taxpayer shall submit all relevant supporting documents!
"he *UDICI L RE(EDIES of an aggrieved taxpayer relative to an ASSESSMENT NOTICE are as follows:
"ax amnesty is an immunity from all criminal civil and administrative liabilities arising from nonpayment of taxes! It is a general pardon given to all taxpayers! It applies only to past tax periods hence of retroactive application! (Pe,*-e v. C,+/,%ed, G.R. N,. L;('44! !"44)!
"ax exemption is an immunity from the civil liability only! It is an immunity or privilege a freedom from a charge or burden to which others are sub0ected! (F-,rer v. S:erida% !7# I%d. 24 7' ME 7'3 )! It is generally prospective in application! Taxpayer: A&ministrati(e ; Hu&icia" 8eme&ies (2 )
'escribe separately the procedures on the legal remedies under the "ax (ode available to an aggrieved taxpayer both at the administrative and 0udicial levels! (*+)
SUGGESTED ANSWER*
"he legal remedies of an aggrieved taxpayer under the "ax (ode both at the administrative and 0udicial levels may be classified into those for a++e++5e%/ c,--ec/i,% and re1.%d! "he procedures for the D(INISTR TI#E RE(EDIES for ASSESSMENT are as follows: a! 9fter receipt of the &re%9ssessment 6otice he must within fifteen (2*) days from receipt explain why no additional
a! Where the (ommissioner of Internal <evenue has not acted on the taxpayer@s protest within a period of one hundred eighty (2;/) days from submission of all relevant documents then the taxpayer has a period of thirty ()/) days from the lapse of said 2;/ days within which to interpose a petition for review with the (ourt of "ax 9ppeals! b! -hould the (ommissioner deny the taxpayer@s protest then he has a period of thirty ()/) days from receipt of said denial within which to interpose a petition for review with the (ourt of "ax 9ppeals! In both cases the taxpayer must apply with the (ourt of "ax 9ppeals for the Issuance of an In0unctive writ to en0oin the ?ureau of Internal <evenue from collecting the disputed tax during the pendency of the proceedings! N$TE: 9 8//. 9mendment % "he decision of the division of ("9 is in turn appeallable within fifteen (2*) days to the ("9 en banc! "he decision of the ("9 en banc is directly appeallable to the -upreme (ourt on Buestion of law on certiorari! "he employment by the ?ureau of Internal <evenue of any of the dministrative Remedies for the c,--ec/i,% ,1 /:e /a> li#e distraint levy etc! may be administratively appealed by the taxpayer to the (ommissioner whose decision is appealable to the (ourt of "ax 9ppeals under other matter arising under the provisions of the 6ational Internal <evenue (ode! "he 0udicial appeals starts with the (ourt of "ax 9ppeals and continues in the same manner as shown above! -hould the ?ureau of Internal <evenue decide to utili$e its Judicial tax remedies for collecting the taxes by means of an ordinary suit filed with the regular courts for the collection of a sum of money the taxpayer could oppose the same going up the ladder of 0udicial processes from the :unicipal "rial (ourt (as the case may be) to the <egional "rial (ourt to the (ourt of 9ppeals thence to the -upreme (ourt!
"he remedies of an aggrieved taxpayer on a claim for refund is to appeal the adverse decision of the (ommissioner to the ("9 in the same manner outlined above! Taxpayer: Assessment: Protest: !"aims for refun& (2 )
On June 2E 2GGI the ?ureau of Internal <evenue (?I<) issued against the 1state of Jose de la (ru$ a notice of deficiency estate tax assessment inclusive of surcharge interest and compromise penalty! "he 1xecutor of the 1state of Jose de la (ru$ (1xecutor) filed a timely protest against the assessment and reBuested for waiver of the surcharge interest and penalty! "he protest was denied by the (ommissioner of Internal <evenue ((ommissioner) with finality on -eptember 2) 2GGI! (onseBuently the 1xecutor was made to pay the deficiency assessment on October 2/ 2GGI! "he following day the 1xecutor filed a &etition with the (ourt of "ax 9ppeals (("9) praying for
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refun surchar the d of the ge
intere an st d
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compromise penalty! "he ("9 too# cogni$ance of the case and ordered the (ommissioner to ma#e a refund! "he (ommissioner filed a &etition for <eview with the (ourt of 9ppeals assailing the 0urisdiction of the ("9 and the Order to ma#e refund to the 1state on the ground that no claim for refund was filed with the ?I<!
motion to that effect shall have been presented in court and granted by it on the basis that such collection will 0eopardi$e the interest of the taxpayer or the ,overnment (Pir,va%, v. CIR !( SCRA 472 8!"'39)!
"he ("9 is empowered to suspend the collection of internal revenue taxes and customs duties in cases pending appeal only when: (2) in the opinion of the court the collection by the ?I< will 0eopardi$e the interest of the ,overnment andLor the taxpayerA and (8) the taxpayer is willing to deposit the amount being collected or to file a surety bond for not more than double the amount of the tax to be fixed by the court (,ection %% )$.A. No. %%&-).
Is the stand of the (ommissioner correct? <eason! (8+)
SUGGESTED ANSWER*
5es! "here was no claim for refund or credit that has been duly filed with the (ommissioner of Internal <evenue which is reBuired before a suit or proceeding can be filed in any court (-ec! 88G! 6I<( of 2GGI)! "he denial of the claim by the (ommissioner is the one which will vest the (ourt of "ax 9ppeals 0urisdiction over the refund case should the taxpayer decide to appeal on time! &. Why is the filing of an administrative claim with the ?I< necessary? ()+)
Taxpayer: BI8 Au&it or In(estigation (1999)
SUGGESTED ANSWER*
"he filing of an administrative claim for refund with the ?I< is necessary in order: 2) "o afford the (ommissioner an opportunity to consider the claim and to have a chance to correct the errors of subordinate officers ( G,%Ea-e+ v. CTA e/ a- !( SCRA #")A and 8) "o notify the ,overnment that such taxes have been Buestioned and the notice should be borne in mind in estimating the revenue available for expenditures! (Ber5eK, v. C,--ec/,r G.R. N,. L; 7)24. <.-0 2" !"3)) Taxpayer: Assessment$ In@unction (2 *) << disputed a deficiency tax assessment and upon receipt of an adverse decision by the (ommissioner of Internal <evenue filed an appeal with the (ourt of "ax 9ppeals! While the appeal is pending the ?I< served a warrant of levy on the real properties of << to enforce the collection of the disputed tax! ,ranting arguendo that the ?I< can legally levy on the properties what could << do to stop the process? 1xplain briefly! (*+)
SUGGESTED ANSWER*
<< should file a motion for in0unction with the (ourt of "ax 9ppeals to stop the administrative collection process! 9n appeal to the ("9 shall not suspend the enforcement of the tax liability unless a
9 (o! a &hilippine corporation is a big manufacturer of consumer goods and has several suppliers of raw materi% als! "he ?I< suspects that some of the suppliers are not properly reporting their income on their sales to 9 (o! "he (I< therefore: 2) Issued an access letter to 9 (o! to furnish the ?I< information on sales and payments to its suppliers! 8) Issued an access letter to a ban# ((> ?an#) to furnish the ?I< on deposits of some suppliers of 9 (o! on the alleged ground that the suppliers are committing tax evasion! 9 (o! > ?an# and the suppliers have not been issued by the ?I< letter of authority to examine! 9 (o! and > ?an# believe that the ?I< is on a "fishing expedition" and come to you for counsel! What is your advice? (2/+)
SUGGESTED ANSWER*
Taxpayer: !"aim for 8efun&$ Proce&ure (2 2) 9! What must a taxpayer do in order to claim a refund of or tax credit for taxes and penalties which he alleges to have been erroneously illegally or excessively assessed or collected? ()+)
SUGGESTED ANSWER*
"he taxpayer must comply with the following procedures in claiming a refund of or tax credit for taxes and penalties which he alleges to have been erroneously illegally or excessively assessed or collected: 8! =e should file a written claim for refund with the (ommissioner within two years after the date of payment of the tax or penalty (-ec! 8/. 6I<()A
I will advise 9 (o! and ? (o! that the ?I< is 0ustified only in getting information from the former but not from the latter! "he ?I< is authori$ed to obtain information from other persons other than those whose internal revenue tax liability is sub0ect to audit or investigation! =owever this power shall not be construed as granting the (ommissioner the authority to inBuire into ban# deposits! (,ection -. N6$!). Taxpayer: !ity Boar& of Assessment 'ecision$ -#ere to appea" (1999) 9 (o! a &hilippine corporation is the owner of machin% ery eBuipment and fixtures located at its plant in :untinlupa (ity! "he (ity 9ssessor characteri$ed all these properties as real properties sub0ect to the real property tax! 9 (o! appealed the matter to the :untinlupa ?oard of 9ssessment 9ppeals! "he ?oard ruled in favor of the (ity! In accordance with <9 228* (9n 9ct creating the (ourt of "ax 9ppeals)! 9 (o! brought a petition for review before the ("9 to appeal the decision of the (ity ?oard of 9ssessment 9ppeals! Is the &etition for <eview proper? 1xplain! (*+)
SUGGESTED ANSWER*
6o! "he ("9Ps devoid of 0urisdiction to entertain appeals from the decision of the (ity ?oard of 9ssessment 9ppeals! -aid decision is instead appealable to the (entral ?oard of 9ssessment 9ppeals which under the 3ocal ,overnment (ode has appellate 0urisdiction over deci% sions of 3ocal ?oard of 9ssessment 9ppeals! (Ca-/e>
P:i-+ 1,e. v. Ce%/ra- B,ard ,1 A++e++5e%/ A**ea-+ L; 3)('' Ma0 7! !"42)!
)! "he claim filed must state a categorical

C,--ec/,r 4#
. ! P:i-. "' 8!"3)9$.
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demand for reimbursement (Ber5eK, v. )) "he suit or proceeding for

recover y must be commenced in court within two years from date of
payment of the tax or penalty regardless of any supervening event that will arise after payment (-ec! 88G 6I<()!
.)
your client before he included in his 2GG. return the amount of &*/!///!// as 2GG) income to avoid the fraud surcharge? 1xplain! (onsidering that -tephen 5ang had already been assessed a deficiency income tax for 2GG) for his failure to report the &*/!///!// income what would you advise him to do to avoid the penalties for tax delinBuency? 1xplain!
What would you advise -tephen 5ang to do with regard to the income tax he paid for the &*/!///!// in his 2GG. return? In case your remedy fails what is
ANote: 6f the answer given is only number % it is suggested that the same shall be given full credit considering that this is the only
re7uirement for the !ommissioner to ac7uire 1urisdiction over the claim.@
your other recourse? 1xplain!

SUGGESTED ANSWERS*
?! (an the (ommissioner grant a refund or tax credit even without a written claim for it? (8+)
SUGGESTED ANSWER*
2) "he examiner is correct in assessing a deficiency income tax for taxable year 2GG) but not in imposing the */+ fraud surcharge! "he amount of all items of gross income must be included in gross income during the year in which received or reali$ed (-ec! ); 6I<()! "he */+
?! 5es! When the taxpayer files a return which on its face shows an overpayment of the tax and the option to refundL claim a tax credit was chosen by the taxpayer the (ommissioner shall grant the refund or tax credit without the need for a written claim! "his is so because a return filed showing an overpayment shall be considered as a written claim for credit or refund! ( ,ees. '. and &(" N6$!)! :oreover the law provides that the (ommissioner may even without a written claim therefor refund or credit any tax where on the face of the return upon which payment was made such payment appears clearly to have been erroneously paid! (,ec. &&* N6$!)!
Taxpayer: 'eficiency Income Tax (1999)

?usinessman -tephen 5ang filed an income tax return for 2GG) showing business net income of &)*/ ///!// on which he paid an income tax of &E2 ///!//! 9fter filing the return he reali$ed that he forgot to include an item of business income in 2GG) for &*/!///!//! ?eing an honest taxpayer he included this income in his return for 2GG. and paid the corresponding income tax thereon! In the examination of his 2GG) return the ?I< examiner found that -tephen 5ang failed to report this item of &*/!///!// and assessed him a deficiency income tax on this item plus a */+ fraud surcharge!
2) 8)
Is the examiner correct? 1xplain! If you were the lawyer of -tephen 5ang what would you have advised
fraud surcharge attaches only if a false or fraudulent return is willfully made by :r! 5ang (-ec!8.; 6I<()! "he fact that :r! 5ang included the income in his 2GG. return belies any claim of willfulness but is rather indicative of an honest mista#e which was sought to be rectified by a subseBuent act that is the filing of the 2GG. return! 8) :r! 5ang should have amended his 2GG) Income tax return to allow for the inclusion of the &*/!/// income during the taxable period it was reali$ed! )) :r! 5ang should file a protest Buestioning the */+ surcharge and as# for the abatement thereof!
ALTERNATI1E ANSWER*
remedy he must first exhaust administrative remedies by filing a protest within )/ days from receipt of the assessment! It is the (ommissioner@s decision on the protest that give the "ax (ourt 0urisdiction over the case provided that the appeal is filed within )/ days from receipt of the (ommissioner@s decision! 9n assessment by the ?I< is not the (ommissioner@s decision from which a petition for review may be filed with the (ourt of "ax 9ppeals! <ather it is the action ta#en by the (ommissioner in response to the taxpayer@s protest on the assessment that would constitute the appealable decision (-ection I <9 228*)!
:r! 5ang should pay the deficiency income tax on or before the day prescribed for its payment per notice of demand! 9fter payment and within two years thereafter he should file a claim for refund of taxes erroneously paid to recover the excessive surcharge imposed!
(b) 6o the petition for review can not be entertained by the (ourt of 9ppeals since decisions of the
.) :r! 5ang should file a written claim for refund with the (ommissioner of Internal <evenue of the taxes paid on the &*/!/// income included in 2GG. within two years from payment pursuant to -ection 8/.()) of the "ax (ode! -hould this remedy fail in the administrative level a 0udicial claim for refund can be instituted before the expiration of the two year period! Taxpayer: 2x#austion of A&ministrati(e 8eme&ies (199,)
(a) 9 taxpayer received on 2* January 2GGE an as% sessment for an internal revenue tax deficiency! On
2/ February 2GGE the taxpayer forthwith filed a petition for review with the (ourt of "ax 9ppeals! (ould the "ax (ourt entertain the petition?
(b) Cnder the above factual setting the taxpayer instead of Buestioning the assessment he received on 2* January 2GGE paid on /2 :arch 2GGE the "deficiency tax" assessed! "he taxpayer reBuested a refund from the (ommissioner by submitting a written claim on
2 :arch 2GGI! It was denied! "he taxpayer on 2* :arch 2GGI filed a petition for review with the (ourt of 9ppeals! (ould the petition still be entertained?
SUGGESTED ANSWER*
(a) 6o! ?efore taxpayer can avail of Judicial
(ommissioner on cases involving claim for tax refunds are within the exclusive and primary 0urisdiction of the (ourt of "ax 9ppeals (-ection I!<9228*)!
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consider the continuous inaction of the (ommissioner as a denial and elevate the case to the ("9 before the expiration of the two%year period! Cnder the Tariff and Customs Code taxpayer@s reme% dies arise only after payment of duties! .) "he administrative remedies consist of filing a claim for refund which may ta#e the form of abatement or drawbac#! *) "he taxpayer can also file a protest within 2* days from payment if he disagrees with the ruling or decision of the (ollector of (ustoms regarding the legality or correctness of the assessment of customs duties!
Taxpayer: Fai"ure to -it##e"& ; 8emit Tax (2 ) 9 domestic corporation failed to withhold and remit the tax on income received from &hilippine sources by a non% resident foreign corporation! In addition to the civil penalties provided for under the "ax (ode a compromise penalty was imposed for violation of the withholding tax provisions! :ay the (ommissioner of Internal <evenue legally enforce the collection of compromise penalty? (*+)
SUGGESTED ANSWER*
6o! "here is no showing that the compromise penalty was imposed by the (ommissioner of Internal <evenue with the agreement and conformity of the taxpayer! (=,%der
Mec:a%ica- E%gi%eeri%g C,r*,ra/i,% .. C,.r/ ,1 Ta> A**ea-+ e/. a-. '( SCRA 333)! Taxpayer: 7I8! (s) T!! 8eme&ies (1996)
(ompare the taxpayer@s remedies under the 6ational Internal <evenue (ode and the "ariff and (ustoms (ode!
SUGGESTED ANSWER*
"he taxpayer@s remedies under the N TI$N L INTERN L RE#ENUE C$DE may be categori$ed into remedies before payment and remedies after payment! "he remedy BEFORE PABMENT consists of
(a) Ad5i%i+/ra/ive Re5ed0 which is the filing of protest within )/ days from receipt of assessment and (b) <.dicia- Re5ed0 which is the appeal of the adverse decision of the (ommissioner on the protest with the (ourt of "ax 9ppeals and finally with the -upreme (ourt! "he remedy AFTER PABMENT is availed of (c) by paying the assessed tax within )/ days from receipt of assessment and (d) the filing of a claim for refund or tax credit of these taxes on grounds that they are erroneously paid within two years from date of payment! (e) 6f there is a denial of the claim appeal to the ("9 shall be made within )/ days from denial but within two years from date of payment! If the (ommissioner fails to act on the claim for refund or tax credit and the two%year period is about to expire the taxpayer should
E) If the decision of the (ollector is adverse to the taxpayer he can notify the (ollector within 2* days from receipt of said decision of his desire to have his case reviewed by the (ommissioner! "he decision of the (ollector on the taxpayer@s protest if adverse to the ,overnment is automatically elevated to the (ommissioner for reviewA and if such decision is affirmed by the (ommissioner the same shall be automatically elevated to and finally reviewed by the -ecretary of Finance! <esort to 0udicial relief can be had by the taxpayer by appealing the decision of the (ommissioner or of the -ecretary of Finance (for cases sub0ect to automatic review) within )/ days from the promulgation of the adverse decision to the ("9!
tax return on :arch 8/ 2GG*! On 'ecember 2* 2GG* he left the &hilippines as an immigrant to 0oin his family in (anada! 9fter the investigation of said returnLthe ?I< issued a notice of deficiency income tax assessment on 9pril 2* 2GG;! :r! <eyes returned to the &hilippines as a bali#bayan on 'ecember ; 2GG;! Finding his name to be in the list of delinBuent taxpayers he filed a protest against the assessment on the ground that he did not receive the notice of assessment and that the assessment had prescribed! Will the protest prosper? 1xplain! (*+)
SUGGESTED ANSWER*
6o! &rescription has not set in because the period of limitations for the ?ureau of Internal <evenue to issue an assessment was SUSPENDED during the time that :r! <eyes was out of the &hilippines or from the period
Taxpayer: %(er1it#o"&ing !"aim for 8efun& (1999)

9 (o! is the wholly owned subsidiary of ? (o! a non% resident ,erman company! 9 (o! has a trademar# licensing agreement with ? (o! On Feb! 2/ 2GG* 9 (o! remitted to ? (o! royalties of & 2/ /// /// which 9 (o! sub0ected to a withholding tax of 8*+ or &8 *// ///! Cpon advice of counsel 9 (o! reali$ed that the proper withholding tax rate is 2/+! On :arch 8/ 2GGE 9 (o! filed a claim for refund of &8!*//!/// with the ?I<! "he ?I< denied the claim on 6ov! 2* 2GGE! On 6ov! 8; 2GGE 9 (o! filed a petition for review with the ("9! "he ?I< attac#ed the capacity of 9 (o! as agent to bring the refund case! 'ecide the issue! (*+)
SUGGESTED ANSWER*
9 (o! the withholding agent of the non% resident foreign corporation is entitled to claim the refund of excess withholding tax paid on the income of said corporation in the &hilippines! ?eing a withholding agent it is the one held liable for any violation of the withholding tax law should such a violation occur! In the same vein it should be allowed to claim a refund in case of overwitholding!
(CIR v. =a%der P:i-+. I%c. GR N,. '47#4 A*ri- !3 !"44 !') SCRA 3#7? CIR v. Pr,c/er @ Ga56-e PMC 2O( SCRA 7##)!
Taxpayer: Prescripti(e Perio&: Suspen&e& (2
:r! <eyes a Filipino citi$en engaged in the real estate business filed his 2GG. income
'ecember 2* 2GG* up to 'ecember ; 2GG;! (,ec. &&5 in relation to ,ec. &(5 both of the N6$! of %**')
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Taxpayer: Prescripti(e Perio&$ !"aim for 8efun& (199,)

9 corporation files its income tax return on a calendar year basis! For the first Buarter of 2GG) it paid on )/ :ay 2GG) its Buarterly income tax in the amount of &)!/ million! On 8/ 9ugust 2GG) it paid the second Buarterly income tax of &/!* million! "he third Buarter resulted in a net loss and no tax was paid! For the fourth and final return for 2GG) the company reported a net loss for the year and the taxpayer indicated in the income tax return that it opted to claim a refund of the Buarterly income tax payments! On 2/ January 2GG. the corporation filed with the ?ureau of Internal <evenue a written claim for the refund of &)!* million!
so that on 9pril 2* 2G;E it declared a net loss of &2 /// ///!// in its annual income tax return! 9fter failing to get a refund >(13 filed on :arch 2 2G;; a case with the (ourt of "ax 9ppeals to recover the &*//!///!// in taxes paid on :ay 2* 2G;*!
Is the action to recover the taxes filed timely?

SUGGESTED ANSWER*
"he action for refund was filed in the (ourt of "ax 9ppeals on time! In the case of
C,55i++i,%er v. TMX Sa-e+ I%c. 2)3 SCRA !4(
which is similar to this case the -upreme (ourt ruled that in the case of overpaid Buarterly corporate income tax the two%year period for filing claims for refund in the ?I< as well as in the institution of an action for refund in the ("9 the two%year prescriptive period for tax refunds (-ec! 8)/ "ax (ode) is counted from the filing of the final ad0ustment return under -ec! EI of the "ax (ode and not from the filing of the
?I< failed to act on the claim for refundA hence on /8 :arch 2GGE the corporation filed a petition for review with the (ourt of "ax 9ppeals on its claim for refund of the overpayment of its 2GG) Buarterly income tax! ?I< in its answer to the petition alleged that the claim for refund was filed beyond the reglementary period! 'id the claim for refund prescribe?
SUGGESTED ANSWER*
"he claim for refund has prescribed! "he counting of the /&,;0ear *re+cri*/ive *eri,d 1,r 1i-i%g a c-ai5 1,r re1.%d is counted not from the date when the Buarterly income taxes were paid but on the date when the final ad0ustment return or annual income tax return was filed
(CIR v. TMX Sa-e+ I%c. G.R. N,. 47#7' <a%.ar0 !3 !""2?
CIR v. P:iLA5 Li1e I%+.ra%ce C,. I%c. G.R. N,. !)32)4 Ma0 2" !""3 )! It is obvious
that the annual income tax return was filed before January 2/ 2GG. because the written claim for refund was filed with the ?I< on January 2/ 2GG.! -ince the two%year prescriptive period is not only a limitation of action in the administrative stage but also a limitation of action for bringing the case to the 0udicial stage the petition for review filed with the ("9 on :arch /8 2GGE is beyond the reglementary period!
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (199*)

>(13 (orporation filed its Buarterly income tax return for the first Buarter of 2G;* and paid an income tax of &*//!///!// on :ay 2* 2G;*! In the subseBuent Buarters >(13 suffered losses
!43 SCRA 3(#)!
Buarterly return and payment of the Buarterly tax! "he ("9 action on :arch 2 2G;; was clearly within the reglementary two%year period from the filing of the final ad0ustment return of the corporation on 9pril 2* 2G;E!
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (2 *) On :arch 28 8//2 <16 paid his taxes! "en months later he reali$ed that he had overpaid and so he immediately filed a claim for refund with the (ommissioner of Internal <evenue! On February 8I 8//) he received the decision of the (ommissioner denying <16@s claim for refund! On :arch 8. 8//) <16 filed an appeal with the (ourt of "ax 9ppeals! Was his appeal filed on time or not? <eason! (*+)
SUGGESTED ANSWER*
Within thirty ()/) days from receipt of such denial "in clear and uneBuivocal language " I shall then file a petition for review with the (ourt of "ax 9ppeals! LTERN TI#E NS!ER: Within thirty ()/) days from receipt of the warrant of distraint and levy I shall file a petition for review with the (ourt of "ax 9ppeals with an application for issuance of a writ of preliminary in0unction to en0oin the ?ureau of Internal <evenue from enforcing the warrant!
"his is the action I shall ta#e because I shall consider the issuance of the warrant as a final decision of the (ommissioner of Internal <evenue which could be the
"he appeal was not filed on time! "he two% year period of limitation for filing a claim for refund is not only a limitation for pursuing the claim at the administrative level but also a limitation for appealing the case to the (ourt of "ax 9ppeals! "he law provides that "no suit or proceeding shall be filed after the expiration of two years from the date of the payment of the tax or penalty regardless of any supervening cause that may arise after payment (-ection 88G J4H<(J! -ince the appeal was only made on :arch 8. 8//) more than two years had already elapsed from the time the taxes were paid on :arch 28 8//)! 9ccordingly <16 had lost his 0udicial remedy because of prescription! Taxpayer: Protest against Assessment (199=) (F? (orporation a domestic corporation engaged in food processing and other allied activities received a letter from the ?I< assessing it for delinBuency income taxes! (F? filed a letter of protest! One month after a warrant of distraint and levy was served on (F? (orporation! If you were the lawyer engaged by (F? (orporation to contest the assessment made by the ?I< what steps will you ta#e to protect your client? (*+)
SUGGESTED ANSWER*
I shall immediately file a motion for reconsideration of the issuance of the warrant of distraint and levy and see# from the ?I< (ommissioner a denial of the protest "in clear and uneBuivocal language!" "his is so because the issuance of a warrant of distraint and levy is not considered as a denial by the ?I< of the protest filed by (F? (orporation (CIR v. U%i,% S:i**i%g C,r*.
sub0ect of appeal to the (ourt of "ax 9ppeals
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(Ba6e+ v. F-,K, !3 SCRA 2#4? Sa% <.a% v. Va+C.eE 7 SCRA "2)! "here is no final
(B,6e+ .. F-,K, !3 SCRA 2#4 )! "he ("9 may however remand the case to the ?I< and reBuire the (ommissioner to specifically rule on the protest! "he decision of the (ommissioner if adverse to my client would then constitute an appealable decision! Taxpayer: Protest against Assessment (1999)
9 (o! a &hilippine corporation received an income tax deficiency assessment from the ?I< on :ay * 2GG*! On :ay )2 2GG* 9 (o! filed its protest with the ?I<! On July )/ 2GG* 9 (o! submitted to the ?I< all relevant supporting documents! "he (I< did not formally rule on the protest but on January 8* 2GGE 9 (o! was served a summons and a copy of the complaint for collection of the tax deficiency filed by the ?I< with the <egional "rial (ourt (<"()! On February 8/ 2GGE 9 (o! brought a &etition for <eview before the ("9! "he ?I< contended that the &etition is premature since there was no formal denial of the protest of 9 (o! and should therefore be dismissed! 2! =as the ("9 0urisdiction over the case?
SUGGESTED ANSWER6
executory and demandable assessment which can be enforced by the ?I< once a timely appeal is filed!
Taxpayer: Protest against Assessment (1999)

9 (o! a &hilippine corporation received an income tax deficiency assessment from the ?I< on 6ovember 8* 2GGE! On 'ecember 2/ 2GGE 9 (o! filed its protest with the ?I< On :ay 8/ 2GGI the ?I< issued a warrant of distraint to enforce the assessment! "his warrant was served on 9 (o! on :ay 8* 2GGI! In a letter dated June . 2GGI and received by 9 (o! * days later the (I< formally denied 9 (o!@s protest stating that it constitutes his final decision on the matter! On July E 2GGI 9 (o! filed a &etition for <eview with the ("9! "he ?I< moved to
5es the ("9 has 0urisdiction over the case because this Bualifies as an appeal from the (ommissioner@s decision on disputed assessment! When the (ommissioner decided to collect the tax assessed without first deciding on the taxpayer@s protest the effect of the (ommissionerPs action of filing a 0udicial action for collection is a decision of denial of the protest in which event the taxpayer may file an appeal with the ("9! (Re*.6-ic v. Li5 Tia% Te%g @
S,%+ I%c. !' SCRA 34(? Da0ri/ v. Cr.E L;7""!) Se*/. 2' !"44)! 8! =as the <"( 0urisdiction over the collection case filed by the ?I<? 1xplain!
SUGGESTED ANSWER6
"he <"( has no 0urisdiction over the collection case filed by the ?I<! "he filing of an appeal with the ("9 has the effect of divesting the <"( of 0urisdiction over the collection case! 9t the moment the taxpayer appeals the case to the (ourt of "ax 9ppeals in view of the (ommissioner@s filing of the collection case with the <"( which was considered as a decision of denial it gives a 0ustifiable basis for the taxpayer to move for dismissal in the <"( of the ,overnment@s action to collect the tax liability under dispute!
dismiss the &etition on the ground that the ("9 has no 0urisdiction over the case! 'ecide! (2/+)
SUGGESTED ANSWER*
"he ("9 has 0urisdiction over the case! "he appealable decision is the one which categorically stated that the (ommissioner@s action on the disputed assessment is final and therefore the rec#oning of the )/%day period to appeal was on June G 2GGG! "he filing of the petition for review with the ("9 was timely made! "he -upreme (ourt has ruled that the (I< must categorically state that his action on a disputed assessment is finalA otherwise the period to appeal will not commence to run! "hat final action cannot be implied from the mere issuance of a warrant "of distraint and levy! (CIR v. U%i,% S:i**i%g C,r*,ra/i,% !43 SCRA 3(#)!
sent a Final 6otice before -ei$ure to the taxpayer! :ay this action of the (ommissioner of Internal <evenue be deemed a denial of the reBuest for reconsideration of the taxpayer to entitle him to appeal to the (ourt of "ax 9ppeals? 'ecide with reasons! (*+)
SUGGESTED ANSWER*
5es the final notice before sei$ure was in effect a denial of the taxpayer@s reBuest for reconsideration not only was the notice the only response received its nature content and tenor supports the theory that it was the ?I<@s final act regarding the reBuest for reconsideration! (CIR v.
I+a6e-a C.-/.ra- C,r*,ra/i,% !732!) <.-0 !! 2))!$ G.R. N,.
Taxpayer: Protest$ !"aim of 8efun& (1996) Is protest at the time of payment of taxes and duties a reBuirement to preserve the taxpayers@ right to claim a refund? 1xplain!
SUGGESTED ANSWER*
For T %ES imposed under the NIRC+ protest at the time of payment is not reBuired to preserve the taxpayers@ right to claim refund! "his is clear under ,ection &5( of the N6$! which provides that a suit or proceeding maybe maintained for the recovery of national internal revenue tax or penalty alleged to have been erroneously assessed or collected whether such tax or penalty has been paid under protest or not! For DUTIES imposed under the Tariff and Customs Code a protest at the time of payment is reBuired to preserve the taxpayers@ claim for refund! "he procedure under the "(( is to the effect that when a ruling or decision of the (ollector of (ustoms is made whereby liability for duties is determined the party adversely affected may protest such ruling or decision by presenting to the (ollector at the time when payment is made or within 2* days thereafter a written protest setting forth his ob0ections to the ruling or decision in Buestion (-ec! 8)/;! "(()!
Taxpayer$ Appea" to t#e !ourt of Tax Appea"s (2 9) 9 taxpayer received a tax deficiency assessment of &2!8 :illion from the ?I< demanding payment within 2/ days otherwise it would collect through summary remedies! "he taxpayer reBuested for a reconsideration stating the grounds therefor! Instead of resolving the reBuest for reconsideration the ?I<
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73
Taxpayer$ !"aim for Tax !re&its (2 6)
(ongress enacts a law granting grade school and high school students a 2/+ discount on all school%prescribed textboo#s purchased from any boo#store! "he law allows boo#stores to claim in full the discount as a tax credit!
discount to the taxpayer is a mere privilege and can be revo#ed anytime!
Taxpayer$ !ompromise after !rimina" Action (199=) 9n information was filed in court for willful non%payment of income tax the assessment of which has become final! "he accused through counsel presented a motion that he be allowed to compromise his tax liability sub0ect of the information! "he prosecutor indicated his conformity to the motion! Is this procedure correct? N*+O
SUGGESTED ANSWER*
2! If in a taxable year a boo#store has no tax due on which to apply the tax credits can the boo#store claim from the ?I< a tax refund in lieu of tax credit? 1xplain! (8!*+)
SUGGESTED ANSWER*
6o the boo#store cannot claim from the ?I< a tax refund in lieu of tax credit! "here is nothing in the law that grants a refund when the boo#store has no tax liabil% ity against which the tax credit can be used (CIR v. Ce%/ra- L.E,% Dr.g G.R. N, !3"'(# A*ri- !3 2))3$! 9 tax credit is in the nature of a tax exemption and in case of doubt the doubt should be resolved in strictissimi 1uris against the claimant! 8! (an the ?I< reBuire the boo#stores to deduct the amount of the discount from their gross income? 1xplain! (8!*+)
SUGGESTED ANSWER*
6o! (riminal violations if already filed in court may not be compromised (,ec. &("A3@ N6$!). Furthermore the payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provisions of the "ax (ode (,ec. &"'(a) N6$!). Finally there is no showing that the prosecutor in the problem is a legal officer of the ?ureau of Internal
6o! "ax credit which reduces the tax liability is different from a tax deduction which merely reduces the tax base! -ince the law allowed the boo#stores to claim in full the discount as a tax credit the ?I< is not allowed to expand or contract the legislative mandate (CIR v. Bic,-a%dia
Dr.g C,r*. G.R. N,. !(4)47 <.-0 2! 2))'? CIR v. Ce%/ra- L.E,% Dr.g C,r*. G.R. N,. !3"'(# A*ri- !3 2))3$.
)! If a boo#store closes its business due to losses with% out being able to recoup the discount can it claim reimbursement of the discount from the government on the ground that without such reimbursement the law constitutes ta#ing of private property for public use without 0ust compensation? 1xplain! (*+)
SUGGESTED ANSWER*
9 boo#store closing its business due to losses cannot claim reimbursement of the discount from the government! If the business continues to operate at a loss and no other taxes are due thus compelling it to close shop the credit can never be applied and will be lost altogether (CIR v. Ce%/ra- L.E,% Dr.g G.R. N,. !3"'(# A*ri- !3 2))3$. "he grant of the
<evenue to whom the conduct of criminal actions are lodged by the "ax (ode!
ALTERNATI1E ANSWER*
to evade donor@s tax! (,ec. *%(b) N6$!). Taxpayer$ -it##o"&ing Agent$ !"aim of Tax 8efun& (2 9) 'oes a withholding agent have the right to file an application for tax refund? 1xplain!
SUGGESTED ANSWER*
6o! If the compromise referred to is the civil aspect the procedure followed is not correct! (ompromise for the payment of any internal revenue tax shall be made only by the (ommissioner of Internal <evenue or in a proper case the 1valuation ?oard of the ?I< (-ec! 8/. 6I<()! 9pplying the law to the case at bar compromise settlement can only be effected by leave of (ourt!
Taxpayer$ Protest against Assessment$ 'onor6s Tax (1999)

:r! <odrigo an ;/%year old retired businessman fell in love with 8/%year old "etchie -onora a night club hospitality girl! 9lthough she refused to marry him she agreed to be his "live%in" partner! In gratitude :r! <odrigo transferred to her a condominium unit where they both live under a deed of sale for &2/ :illion! :r! <odrigo paid the capital gains tax of *+ of &2/ :illion!
5es! 9 taxpayer is "any person sub0ect to tax!" -ince the withholding tax agent who is "reBuired to deduct and withheld any tax" is made "personally liable for such tax" should the amount of the tax withheld be finally found to be less than that reBuired to be withheld by law then he is a taxpayer! "hus he has sufficient legal interest to file an application for refund of the amount he believes was illegally collected from him!
(C,55i++i,%er ,1 I%/er%aReve%.e v. Pr,c/er @ Ga56-e G.R. N,. ''474 Dece56er 2 !""!$
"he (ommissioner of Internal <evenue found that the property was transferred to "etchie -onora by :r! <odrigo because of the companionship she was providing him! 9ccordingly the (ommissioner made a determination that -onora had compensation income of &2/ :illion in the year the condominium unit was transferred to her and issued a deficiency income tax assessment! "etchie -onora protests the assessment and claims that the transfer of the condominium unit was a gift and therefore excluded from income! =ow will you rule on the protest of "etchie -onora? 1xplain!
SUGGESTED ANSWER*
I will grant the protest and cancel the assessment! "he transfer of the property by :r! <odrigo to :s! -onora was gratuitous! "he deed of sale indicating a &2/ million consideration was simulated because :r! <odrigo did not receive anything from the sale! "he problem categorically states that the transfer was made in gratitude to :s! -onora@s companionship! "he transfer being gratuitous is sub0ect to donor@s tax! :r! <odrigo should be assessed deficiency donor@s tax and a */+ surcharge imposed for fraudulently simulating a contract of sale
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LOCAL - REAL PROPERTY TAXES

/oca" Taxation: Actua" <se of Property (2 2)
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"he real property of :r! and :rs 9ngeles situated in a commercial area in front of the public mar#et was declared in their "ax 'eclaration as residential because it had been used by them as their family residence from the time of its construction in 2GG/! =owever since January 2GGI when the spouses left for the Cnited -tates to stay there permanently with their children the property has been rented to a single proprietor engaged in the sale of appliances and agri%products! "he &rovincial 9ssessor reclassified the property as commercial for tax purposes starting January 2GG;! :r! and :rs! 9ngeles appealed to the 3ocal ?oard of 9ssessment 9ppeals contending that the "ax 'eclaration previously classifying their property as residential is binding! =ow should the appeal be decided? (*+)
SUGGESTED ANSWER*
three other taxes and not three other real property taxes! 9ccordingly an alternative answer should be considered and given full creditO 9! "he following taxes aside from basic real estate tax may be imposed by: 2! &rovincial ,overnment a! &rinter@s or publisher@s tax b!Franchise "ax c!&rofessional tax
8! (ity ,overnment % may levy taxes which the province or municipality are authori$ed to levy (-ec! 2*2 3,()
a! b! c!
&rinter@s or publisher@s tax Franchise tax &rofessional tax
"he appeal should be decided against :r! and :rs! 9ngeles! "he law focuses on the actual use of the property for classification valuation and assessment purposes regardless of ownership! -ection 82I of the 3ocal ,overnment (ode provides that "real property shall be classified valued and assessed on the basis of its actual use regardless of where located whoever owns it and whoever uses it"! /oca" Taxation: !o(erage (2 2) 9side from the basic real estate tax give three ()) other taxes which may be imposed by provincial and city governments as well as by municipalities in the :etro :anila area! ()+)
SUGGESTED ANSWER*
"he following real property taxes aside from the basic real property tax may be imposed by provincial and city governments as well as by municipalities in the :etro :anila area: 2! 9dditional levy on real property for the -pecial 1ducation Fund (-ec! 8)* 3,()A 8! 9dditional 9d%valorem tax on Idle lands (-ec! 8)T 3,()A and )! -pecial levy (-ec! 8./)! NNote: "he Buestion is susceptible to dual interpretation because it is as#ing for
)! :unicipalities in the :etro :anila 9rea % may levy taxes at rates which shall not exceed by */+ the maximum rates prescribed in the 3ocal ,overnment (ode! a! 9nnual fixed tax on manufacturers assemblers repac#ers processors brewers distillers rectifiers and compounders of liBuors distilled spirits and wines or manufacture of any article of commerce of whatever #ind or natureA b! 9nnual fixed tax on wholesalers distributors or dealers in any article of commerce of whatever #ind or natureA c! &ercentage tax on retailers
N6ote: Other taxes may comprise the enumeration because many other taxes are authori$ed to be imposed by 3,Cs!O
:ay local governments impose an annual realty tax in addition to the basic real property tax on idle or vacant lots located in residential subdivisions within their respective territorial 0urisdictions? ()+)
SUGGESTED ANSWER*
6ot all local government units may do so! Only provinces cities and municipalities within the :etro :anila area (,ec. &5& ?ocal #overnment !ode) may impose an ad va-,re5 /a> not exceeding five percent (*+) of the assessed value (,ec. &5. 6bid.) of idle or vacant residential lots in a subdivision duly approved by proper authorities regardless of area! (,ec.&5' 6bid.)
/oca" Taxation: 2xemption$ 8ea" Property Taxes (2 2) Cnder the 3ocal ,overnment (ode what properties are exempt from real property taxes? (*+)
SUGGESTED ANSWER*
"he following properties are exempt from real property taxes: (-ec! 8). 3,()!
2!
<eal property owned by the <epublic of the &hilippines or any of its political subdivisions except when the beneficial use thereof has been granted for consideration or otherwise to a taxable personA 9ll lands buildings and improvements actually directly and exclusively used for religious charitable or educational purposes by charitable institutions churches parsonages or convents appurtenant thereto mosBues nonprofit or religious cemeteriesA
8!
)!
9ll machineries and eBuipment that are actually directly and exclusively used by local water districts and government%owned or controlled corporations engaged in the supply and distribution of water andLor generation and transmission of electric powerA 9ll real property owned by duly registered cooperatives as provided for under <!9! 6o! EG);A and :achinery and eBuipment used for pollution control and environmental protection! )
.!
*!
/oca" Taxation: Imposition of A& Ca"orem Tax (2
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/oca" Taxation: /ega"ityE !onstitutiona"ity$ Tax
6. of 73
%r&inance (2 4)
Fig.erre+ v. C,.r/ ,1 A**ea-+ GRN,. !!"!#2 Marc: 23 !"""$! /oca" Taxation: Po1er to Impose (2 4) In order to raise revenue for the repair and maintenance of the newly constructed (ity =all of :a#ati the (ity :ayor ordered the collection of &2!// called "elevator tax" every time a person rides any of the high%tech elevators in the city hall during the hours of ;:// a!m! to 2/:// a!m! and .:// p!m! to E:// p!m! Is the "elevator tax" a valid imposition? 1xplain! (;+)
SUGGESTED ANSWER*
> a taxpayer who believes that an ordinance passed by the (ity (ouncil of &asay is unconstitutional for being discriminatory against him want to #now from you his tax lawyer whether or not he can file an appeal! In the affirmative he as#s you where such appeal should be made: the -ecretary of Finance or the -ecretary of Justice or the (ourt of "ax 9ppeals or the regular courts! What would your advice be to your client >? (;+)
SUGGESTED ANSWER*
"he appeal should be made with the -ecretary of Justice! 9ny Buestion on the constitutionality or legality of a tax ordinance may be raised on appeal with the -ecretary of Justice within )/ days from the effectivity thereof! (Sec.
!4# LGC? Hag,%,0 MarAe/ Ve%d,r A++,cia/i,% v. M.%ici*a-i/0 ,1 Hag,%,0 7#' SCRA 7#' 82))29$!
6o! "he imposition of a tax fee or charge or the generation of revenue under the 3ocal ,overnment (ode shall be exercised by the -96,C6I96 of the local government unit concerned through an appropriate
/oca" Taxation: /ega"ity$ Imposition of 8ea" Property Tax 8ate (2 2) 9n Ordinance was passed by the &rovincial ?oard of a &rovince in the 6orth increasing the rate of basic real property tax from /!//E+ to 2 + of the assessed value of the real property effective January 2 8///! <esidents of the municipalities of the said province protested the Ordinance on the ground that no public hearing was conducted and therefore any increase in the rate of real property tax is void! Is there merit in the protest? 1xplain your answer! (8+)
SUGGESTED ANSWER*
"he protest is devoid of merit! 6o public hearing is reBuired before the enactment of a local tax ordinance levying the basic real property tax (9rt! )8. 3,( <egulations)!
ALTERNATI1E ANSWER*
5es there is merit in the protest provided that sufficient proof could be introduced for the non%observance of public hearing! ?y implication the -upreme (ourt recogni$ed that public hearings are reBuired to be conducted prior to the enactment of an ordinance imposing real property taxes! 9lthough it was concluded by the highest tribunal that presumption of validity of a tax ordinance can not be overcome by bare assertions of procedural defects on its enactment it would seem that if the taxpayer had presented evidence to support the allegation that no public hearing was conducted the (ourt should have ruled that the tax ordinance is invalid! (Be-e%
ordinance (,ection %5& of the ?ocal #overnment !ode). "he city mayor alone could not order the collection of the taxA as such the "elevator tax" is an invalid imposition! /oca" Taxation: 8emissionE!on&onation of Taxes (2 *)
<( is a law%abiding citi$en who pays his real estate taxes promptly! 'ue to a series of typhoons and adverse economic conditions an ordinance is passed by :: (ity granting a */+ discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the late payment! 9rguing that the ordinance rewards delinBuent taxpayers and discriminates against prompt ones <( demands that he be refunded an amount eBuivalent to one%half of the real taxes he paid! "he municipal attorney rendered an opinion that <( cannot be reimbursed because the ordinance did not provide for such reimbursement! <( files suit to declare the ordinance void on the ground that it is a class legislation! Will his suit prosper? 1xplain your answer briefly! (*+)
SUGGESTED ANSWER*
problem! "here exists no substantial standard used in the classification by the (ity of :a#ati!
9nother issue is the fact that the tax is imposed on the driver of the vehicle and not on the registered owner of the same! "he tax does not only violate the reBuirement of uniformity but the same is also un0ust because it places the burden on someone who has no control over the route of the vehicle! "he ordinance is therefore invalid for violating the rule of uniformity and eBuality as well as for being un0ust! /oca" Taxation$ Situs of Professiona" Taxes (2 9) :r! Fermin a resident of Kue$on (ity is a (ertified &ublic 9ccountant%3awyer engaged in the practice of his
"he suit will not prosper! "he remission or condonation of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination! 1ach set of taxes is a class by itself and the law would be open to attac# as class legislation only if all taxpayers belonging to one class were not treated ali#e ,<.a% L.%a S.6divi+i,%
I%c. v. Sar5ie%/, "! P:i-. 7#! 8!"329$.
/oca" Taxation: 8u"e of <niformity an& 23ua"ity (2 4) "he (ity of :a#ati 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 pea# hours from ;:// a!m! to G:// a!m! from :ondays to Fridays but exempts those cars carrying more than two occupants excluding the driver! Is the ordinance valid? 1xplain! (;+)
SUGGESTED ANSWER*
"he ordinance is in violation of the <ule of Cniformity and 1Buality which reBuires that all sub0ects or ob0ects of taxation similarly situated must be treated ali#e in eBual footing and must not classify the sub0ects in an arbitrary manner! In the case at bar the ordinance exempts cars carrying more than two occupants from coverage of the said ordinance! Furthermore the ordinance only imposes the tax on private cars and exempts public vehicles from the imposition of the tax although both contribute to the traffic
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mai offic i two professions! ha s his n =e e n :a#ati (ity and maintains a branch office in &asig (ity! :r! Fermin pays his professional tax as a (&9 in :a#ati (ity and his professional tax as a lawyer in &asig (ity! (*+) a) :ay :a#ati (ity where he has his main office reBuire him to pay his professional tax as a lawyer? 1xplain!
SUGGESTED ANSWER*
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individual owners who shall be liable for the additional tax! (3ast par! -ec! 8)I)
6o! :a#ati (ity where :r! Fermin has his main office may not reBuire him to pay his professional tax as a lawyer! :r! Fermin has the option of paying his professional tax as a lawyer in &asig (ity where he practices law or in :a#ati (ity where he maintains his principal office! (,ec. %5*Ab@ ?ocal #overnment !ode)
"he term "Idle 3ands" means land not devoted directly to any crop or to any definite purpose for at least one year prior to the notice of expropriation except for reasons other than force ma1eure or any fortuitous event but used to be devoted or is suitable to such crop or is contiguous to land devoted directly to any crop and does not include land devoted permanently or regularly to other essential and more productive purpose. (9hilippine ?egal 4ncyclopedia by ,ibal %*/. 4d.)
Finally I would advise them to construct or place improvements on their idle lands by ma#ing valuable additions to the property or ameliorations in the land@s
b) :ay Kue$on (ity where he has his residence and where he also practices his two professions go after him for the payment of his professional tax as a (&9 and a lawyer? 1xplain!
SUGGESTED ANSWER*
6o the situs of the professional tax is the city where the professional practices his profession or where he maintains his principal office in case he practices his profession in several places! "he local government of Kue$on (ity has no right to collect the professional tax from :r! Fermin as the place of residence of the taxpayer is not the proper situs in the collection of the professional tax! /oca" Taxation$ Specia" /e(y on I&"e /an&s (2 9) 9 city outside of :etro :anila plans to enact an ordinance that will impose a special levy on idle lands located in residential subdivisions within its territorial 0urisdiction in addition to the basic real property tax! If the lot owners of a subdivision located in the said city see# your legal advice on the matter what would your advice be? 'iscuss! (*+)
SUGGESTED ANSWER*
I would advise the lot owners that a city even if it is outside :etro :anila may levy an annual tax on idle lands at the rate not exceeding five percent (*+) of the assessed value of the property which shall be in addition to the basic real property tax! (,ec. &5. ?ocal #overnment !ode) I would li#ewise advise them that the levy may apply to residential lots regardless of land area in subdivisions duly approved by proper authorities the ownership of which has been transferred to
of notice are sufficient compliance with the reBuirements of the law!
conditions so the lands would not be considered as idle! (-ec! 2GGNmO) In this manner their properties would not be sub0ect to the ad valorem tax on idle lands! 8ea" Property Tax: <n&ergroun& 5aso"ine TanBs (2 4)
Cnder 9rticle .2* of the (ivil (ode in order for machinery and eBuipment to be considered real property the pieces must be placed by the owner of the land and in addition must tend to directly meet the needs of the industry or wor#s carried on by the owner! Oil companies install underground tan#s in the gasoline stations located on land leased by the oil companies from the owners of the land where the gasoline stations NareO located! 9re those underground tan#s which were not placed there by the owner of the land but which were instead placed there by the lessee of the land considered real property for purposes of real property taxation under the local ,overnment (ode? 1xplain! (;+)
SUGGESTED ANSWER*
2! If you were the 0udge how will you resolve this issue? (8!*+)
SUGGESTED ANSWER*
I will resolve the issue in favor of Joachin! In auction sales of property for tax delinBuency notice to delinBuent landowners and to the public in general is an essential and indispensable reBuirement of law the non% fulfillment of which vitiates the same
(Ti,%gc, v. P:i-. Ve/era%+ Ba%A G.R. N,. 42#42 A.g. 3 !""2$. "he failure to give notice
to the right person i!e! the real owner will render an auction sale void (Ta% v. Ba%/eg.i
G.R. N, !3()2# Oc/,6er 2(
2))3? Ci/0 Trea+.rer ,1 I.C. v. CA G.R. N,. !2)"#( Dec. 22 !""#$.
5es! "he properties are considered as necessary fixtures of the gasoline station without which the gasoline station would be useless! :achinery and eBuipment installed by the
lessee of leased land is not real property for purposes of execution of a final 0udgment only! "hey are considered as real property for real property tax purposes as "other improvements to affixed or attached real property under the 9ssessment 3aw and the <eal &roperty "ax (ode!
,Ca-/e> v. Ce%/ra- B,ard ,1 A++e++5e%/ A**ea-+ !!( SCRA 2"' 8!"429-.
8ea" Property Tax$ 8e3uirements$ Auction Sa"es of Property for Tax 'e"in3uency (2 6)
Kue$on (ity published on January )/ 8//E a list of delinBuent real property taxpayers in 8 newspapers of general circulation and posted this in the main lobby of the (ity =all! "he notice reBuires all owners of real properties in the list to pay the real property tax due within )/ days from the date of publication otherwise the properties listed shall be sold at public auction! Joachin is one of those named in the list! =e purchased a real property in 2GGE but failed to register the document of sale with the register of 'eeds and secure a new real property tax declaration in his name! =e alleged that the auction sale of his property is void for lac# of due process considering that the (ity "reasurer did not send him personal notice! For his part the (ity "reasurer maintains that the publication and posting
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8! 9ssuming Joachin is a registered owner will your answer be the same? (8!*+)
SUGGESTED ANSWER*
5es! "he law reBuires that a notice of the auction sale must be properly sent to Joachin and not merely through publication
(Ta% v. Oc/,6er Ba%/eg.i G.R. N, !3()2#
2( 2))3? E+/a/e ,1 Mercede+ <ac,6 v. CA G.R. N,. !2)(73 Dec. 22 !""#$.
is not a capital asset! "hese are the gains derived from the sale or exchange of property such as stoc# in trade of the taxpayer or other property of a #ind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year or property held by the taxpayer primarily for sale to customers in the course of his trade or business or property used in trade or business of a character which is sub0ect to the allowance for depreciation or real property used in trade or business of the taxpayer! (,ec. && AM@ in relation to ,ec. 5*AA@(%) both of the N6$!).
ALTERNATI1E ANSWER*
8ea" Property Taxation: !apita" Asset (s) %r&inary Asset (1999)

In 2GG/ :r! 6aval bought a lot for &2 /// ///!// In a subdivision with the intention of building his residence on it! In 2GG. he abandoned his plan to build his residence on it because the surrounding area became a depressed area and land values in the subdivision went downA instead he sold it for &;//!///!//! 9t the time of the sale the $onal value was &*//!///!//!
"he term ordinary income includes income from performance of services whether professional or per% sonal gains accruing from business and profit arising from the sale or exchange of ordinary assets!
2) Is the land a capital asset or an ordinary asset? 1xplain! 8) Is there any income tax due on the sale? 1xplain!
SUGGESTED ANSWERS*
2) "he land is a capital asset because it is neither for sale in the ordinary course of business nor a property used in the trade or business of the taxpayer! (-ec! ))! 6I<()! 8) 5es :r! 6aval is liable to the *+ capital gains tax imposed under -ection 82(e) of the "ax (ode based on the gross selling price of &;//!///!// which is an amount higher than the $onal value! 8ea" Property Taxation: !apita" 5ains (s) %r&inary 5ains (199=) What is the difference between capital gains and ordinary gains? N)+O
SUGGESTED ANSWER*
(9&I"93 ,9I6- are gains reali$ed from the sale or exchange of capital assets while O<'I69<5 ,9I6- refer to gains reali$ed from the sale or disposition of ordinary assets! 8ea" Property Taxation: !o(erage of %r&inary Income (199=) What does the term "ordinary income" include? N8+O
SUGGESTED ANSWER*
"he term ordinary income includes any gain from the sale or exchange of property which
8ea" Property Taxation: 2xc#ange of /ot$ !apita" 5ain Tax (199,)
9 corporation engaged in real estate@ development executed deeds of sale on various subdivided lots! One buyer after going around the subdivision bought a corner lot with a good view of the surrounding terrain! =e paid &2!8 million and the title to the property was issued! 9 year later the value of the lot appreciated to a mar#et value of &2!E million and the buyer decided to build his house thereon! Cpon inspection however he discovered that a huge tower antennae had been erected on the lot frontage totally bloc#ing his view! When he complained the realty company exchanged his lot with another corner lot with an eBual area but affording a better view! Is the buyer liable for capital gains tax on the exchange of the lots?
SUGGESTED ANSWER*
to the awardeesLdonees be finally transferred and donated to them! 'etermine the tax conseBuence of the foregoing dispositions with respect to 9ce "obacco (orporation the :unicipal ,overnment of &ateros and the occupantsLbeneficiaries! N*+O
SUGGESTED ANSWER*
"he donation by 9ce "obacco (orporation is e>e5*/ 1r,5 /:e d,%,rM+ /a> because it Bualifies as a gift to or for the use of any political subdivision of the 6ational ,overnment (-ection 2/2(8) 6I<()! "he conveyance is li#ewise exempt from documentary stamp tax because it is a transfer without consideration!
-ince the donation is to be used as a relocation site for the less fortunate constituents of the municipality! It may be considered as an underta#ing for human settlements
5es the buyer is sub0ect to capital gains tax on the exchange of lots on the basis of prevailing fair mar#et value of the property transferred at the time of the exchange or the fair mar#et value of the property received whichever is higher (,ection &%(e) N6$!). <eal property transactions sub0ect to capital gains tax are not limited to sales but also exchanges of property unless exempted by a specific provision of law!
ALTERNATI1E ANSWER*
6o! "he exchange is not sub0ect to capital gains tax because it is merely done to comply with the intentions of the parties to the previous contract regarding the sale and acBuisition of a property with a good view! "his is a simple substitution of the ob0ect of sale and since the previous transaction was already sub0ected to tax no new tax should be imposed on the exchange (36$ $uling No. &%(e) (-5/* ((/-*-). 8ea" Property Taxation: 2xemptionE'e&uctions$ 'onor6s Tax (199=)
9ce "obacco (orporation bought a parcel of land situated at &ateros and donated it to the :unicipal ,overnment of &ateros for the sole purpose of devoting the said land as a relocation site for the less fortunate constituents of said municipality! In accordance therewith the :unicipal ,ov% ernment of &ateros issued to the occupantsLbeneficiaries (ertificates of 9ward giving to them the respective areas where their houses are erected! "hrough Ordinance 6o! 8 -eries of 2GG; the said municipal government ordained that the lots awarded
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hence the value of the land 5a0 6e ded.c/i6-e
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i% 1.-- 1r,5 /:e gr,++ i%c,5e of 9ce "obacco (orporation if in accordance to a 6ational &riority &lan determined by the 6ational 1conomic 'evelopment 9uthority! (,ec. 5"K=@(&)(a) N6$!). If the utili$ation is not in accordance to a 6ational &riority &lan determined by the 6ational 1conomic 'evelopment 9uthority then 9ce "obacco (orporation may deduct the value of the land donated only to the extent of five (*+) percent of its taxable income derived from trade or business as computed without the benefit of the donation! (,ec. 5"A=@(&)(a) in relation to ,ec. 5"A=@(%) N6$!).
"en :illion &esos (&2/ /// ///!//) with the intention of using the proceeds to acBuire or construct a new principal residence in 9urora =ills ?aguio (ity! What conditions must be met in order that the capital gains presumed to have been reali$ed from such sale may not be sub0ect to capital gains tax? (*+)
SUGGESTED ANSWER*
"he conditions are: 2! "he proceeds are fully utili$ed in acBuiring or constructing a new principal residence within eighteen (2;) calendar months from the sale or disposition of the principal residence or eighteen (2;) months from July 28 8///!
"he :unicipality of &ateros is not sub0ect to any donor@s tax on the value of land it subseBuently donated it being exempt from taxes as a political subdivision of the 6ational ,overnment! "he occupantsLbeneficiaries are sub0ect to real property taxes because they now own the land!
on Taxability of 8unicipality and Awardees:
ALTERNATI1E ANSWER
"he awarding by the :unicipal ,overnment of lots to specific awardees or donees is li#ewise exempt from the donor@s tax because it is only an implementation of the purpose for which the property was given by 9ce "obacco (orporation! "he purpose of the first donation is to devote the land as a relocation site for the less fortunate constituents! If later on the :unicipality gives out (ertificates of 9ward over specific lots occupied by the Bualified occupantsLbeneficiaries this is intended to perpetuate the purpose of the previous donor the :u% nicipality acting merely as a conduit and not the true donor! "his is simply a donation by the :unicipality in form but not in substance!
"he receipt by the occupant beneficiaries of their respective lots through the (ertificate of 9ward has no tax implications! "hey are however liable for real prop% erty taxes! 8ea" Property Taxation: 2xemption: Ac3uiring 7e1 Principa" 8esi&ence (2 ) 3ast July 28 8/// :r! U :rs! &eter (amacho sold their principal residence situated in "andang -ora Kue$on (ity for
8! "he historical cost or ad0usted basis of the real property sold or disposed shall be carried over to the new principal residence built or acBuired!
)! "he (ommissioner of Internal <evenue must have been informed by :r! U :rs! &eter (amacho within thirty ()/) days from the date of sale or disposition on July 28 8/// through a prescribed return of their intention to avail of the tax exemption!
"he examinee should be given credit if he chooses the above two (8) or any two (8) of those enumerated below:
2) 9ssessment must be on the basis of uniform classificationA 8) 9ppraisal assessment levy and collection shall not be let to private personsA and )) 9ppraisal and assessment must be eBuitable! (,ec. %*/ ?ocal #overnment !ode)
.! "hat the said exemption can only be availed of once every ten (2/) years! *! If there is no full utili$ation of the proceeds of sale or disposition the portion of the gain presumed to have been reali$ed from the sale or disposition shall be sub0ect to capital gains tax A,ec. &" (B) (&) N6$! of %**'@ 8ea" Property Taxation: Fun&amenta" Princip"es (199,) -tate the fundamental principles underlying real property taxation in the &hilippines!
SUGGESTED ANSWER*
"he following are the fundamental principles governing real property taxation: 2) <eal property shall be appraised at its current and fair mar#et valueA 8) <eal property shall be classified for assessment purposes on the basis of its actual use: )) <eal property shall be assessed on the basis of a uniform classification within each local government unitA .) "he appraisal assessment levy and collection of real property tax shall not be let to any private personA and *) "he appraisal and assessment of real property shall be eBuitable! 8ea" Property Taxation: Princip"es ; /imitations: /5< (2 ) ,ive at least two (8) fundamental principles governing real property taxation which are limitations on the taxing power of local governments insofar as the levying of the realty tax is concerned! (8+)
SUGGESTED ANSWER*
"wo (8) fundamental principles governing real property taxation are: 2) "he appraisal must be at the current and fair mar#et valueA and
8) (lassification for assessment must be on the basis
of actual use! (,ec. %*/ ?ocal #overnment !ode)

ALTERNATI1E ANSWER*
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8ea" Property Taxation: Property So"& is an
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%r&inary Asset (199=)
9n individual taxpayer who owns a ten (2/) door apart% ment with a monthly rental of &2/ /// each residential unit sold this property to another individual taxpayer! Is the seller liable to pay the capital gains tax? N*+O
SUGGESTED ANSWER*
(2) <eal property owned by the <1&C?3I( OF "=1 &=I3I&&I61- or any of its political subdivisions except when the beneficial use thereof has been granted for consideration or otherwise to a taxable personA
(8) (=9<I"9?31 I6-"I"C"IO6churches parsonages or convents appurtenant thereto mosBues non% profit or religious cemeteries and all lands buildings and improvements actually directly and exclusively used for religious charitable or educational purposesA ()) 9ll machineries and eBuipment that are actually directly and exclusively used by 3O(93 W9"1< C"I3I"I1- and government%owned or controlled corporations engaged in the supply and distribution
6o! "he seller is not liable to pay the capital gains tax because the property sold is an ordinary asset i!e! real property used in trade or business! It is apparent that the taxpayer is engaged in the real estate business regularly renting out the ten (2/) door apartment!
8ea" Property Taxation: <n&ergroun& 5aso"ine TanBs (2 1) Cnder 9rticle .2* of the (ivil (ode in order for machinery and eBuipment to be considered real property they must be placed by the owner of the land and in addition must tend to directly meet the needs of the industry or wor#s carried on by the owner! Oil companies such as (altex and -hell install underground tan#s in the gasoline stations located on land leased by the oil companies from others! 9re those underground tan#s which were not placed there by the owner of the land but which were instead placed there by the lessee of the land considered real property for purposes of real property taxation under the 3ocal ,overnment (ode? 1xplain your answer! (*+)
SUGGESTED ANSWER*
5es! "he underground tan#s although installed by the lessee -hell and (altex are considered as real property for purposes of the imposition of real property taxes! It is only for purposes of executing a final 0udgment that these machinery and eBuipment installed by the lessee on a leased land would not be considered as real property! ?ut in the imposition of the real property tax the underground tan#s are taxable as necessary fixtures of the gasoline station without which the gasoline station would not be operational! ( Ca-/e> P:i-+. I%c v. CBAA !!( SCRA. 2"')! 8ea" Property Taxation$ 2xempte& Properties (2 6) What properties are exempt from the real property tax? (*+)
SUGGESTED ANSWER*
"he following properties are exempt from the real property tax (-ection 8). 3ocal ,overnment (ode):
of water andLor generation and transmission of electric powerA (.) 9ll real property owned by duly <1,I-"1<1' (OO&1<9"I41as provided for under <!9! EG);A and (*) :achinery and eBuipment used for 9C??ET6CN !CNT$C? and 4N26$CN84NTA? 9$CT4!T6CN.
payment of the tax liability through 0udicial action since the tax liability of the importer constitutes a personal debt to the government therefore enforceable by action! In this case 0udicial remedy is normally availed of instead of the administrative remedy!
!ustoms: Importation (1999) When does importation begin and when does it end?
SUGGESTED ANSWER*
TARI33 AND CUSTOMS DUTIES

!ustoms: IF"exi+"e Tariff !"auseG (2 1) What do you understand by the term "flexible tariff clause" as used in the "ariff and (ustoms (ode? (*+) SUGGESTED NS!ER:
I:&O<"9"IO6 begins from the time the carrying vessel or aircraft enters &hilippine territorial 0urisdiction with the intention to unload therein and ends at the time the goods are released or withdrawn from the customhouse upon
"he term "1-e>i6-e /ari11 c-a.+e "refers to the authority given to the &resident to ad0ust tariff rates under -ection ./2 of the "ariff and (ustoms (ode which is the enabling law that made effective the delegation of the taxing power to the &resident under the (onstitution!
NNote: 6t is suggested that if the examinee cites the entire provision of ,ec. "(% of the Tariff L !ustoms !ode he should also be given full credit!O !ustoms: A&ministrati(e (s) Hu&icia" 8eme&ies (199,)
"he "ariff and (ustoms (ode allows the ?ureau of (ustoms to resort to the administrative remedy of sei$ure such as by enforcing the tax lien on the imported article and to the 0udicial remedy of filing an action in court! When does the ?ureau of (ustoms normally avail itselfA
(a) of the administrative instead of the 0udicial remedy or (b) of the latter instead of the former remedy?
SUGGESTED ANSWER*
(a) "he ?ureau of (ustoms normally avails itself of the 9':I6I-"<9"I41 <1:1'5 of sei$ure such as by enforcing the tax lien on the imported articles instead of the 0udicial remedy when the goods to which the tax lien attaches regardless of ownership is still in the custody or control of the ,overnment! In the case however of importations which are prohibited or undeclared the remedy of sei$ure and forfeiture may still be exercised by the ?ureau of (ustoms even if the goods are no longer in its custody!
(b) On the other hand when the goods are properly released and thus beyond the reach of tax lien the govern% ment can see#
payment of the dutie wit leg customs s or h al permit to withdraw (Vid.0a v+. Berdiag, #7 SCRA 337)! !ustoms: Huris&iction$ Sei?ure ; Forfeiture Procee&ings (1996)
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a) b) c) d)
E)
dumping duties countervailing duties mar#ing duties discriminatory duties?

D.5*i%g d./ie+ are special duties imposed by the -ecretary of Finance upon recommendation of the "ariff (ommission when it is found that the price of the imported articles is deliberately or continually fixed at less than the fair mar#et value or cost of production and the importation would cause or li#ely cause an in0ury to local industries engaged in the manufacture or production of the same or similar articles or prevent their establishment!
SUGGESTED ANSWER*
On January 2 2GGE armed with warrants of sei$ure and detention issued by the ?ureau of (ustoms members of the customs enforcement and security services coordinated with the Kue$on (ity police to search the premises owned by a certain :r! =o along Qalayaan 9venue Kue$on (ity which allegedly contained untaxed vehicles and parts! While inside the premises the member of the customs enforcement and security services noted articles which were not included in the list contained in the warrant! =ence on January 2* 2GGE an amended warrant and sei$ure was issued! On January 8* 2GGE the customs personnel started hauling the articles pursuant to the amended warrant! "his prompted :r! =o to file a case for in0unction and damages with a prayer for a restraining order before the <egional "rial (ourt of Kue$on (ity against the ?ureau of (ustoms on January 8I 2GGE! On the same date the "rial (ourt issued a temporary restraining order!
9 motion to dismiss was filed by the ?ureau of (ustoms on the ground that the <egional "rial (ourt has no 0uris% diction over the sub0ect matter of the complaint claiming that it was the ?ureau of (ustoms that has exclusive 0urisdiction over it! 'ecide!
SUGGESTED ANSWER*
"he motion to dismiss should be granted! -ei$ure and forfeiture proceedings are within the exclusive 0urisdiction of the (ollector of (ustoms to the exclusion of regular (ourts! <egional "rial (ourts are devoid of competence to pass upon the validity or regularity of sei$ure and forfeiture proceedings conducted by the ?ureau of (ustoms and to en0oin or otherwise interfere with these proceedings (Re*.6-ic v+. CFI ,1 Ma%i-a 8Bra%c:
XXII9 G.R. N,. (7#(# Se*/e56er 2 !""2? <a, v+. CA G.R. N,. !)(')( Oc/,6er ' !""3)! !ustoms: Jin&s of !ustom 'uties (1999) Cnder the "ariff and (ustoms (ode what are
I)
C,.%/ervai-i%g d./ie+ are special duties imposed by the -ecretary of Finance upon prior investigation and report of the "ariff (ommission to offset an excise or inland revenue tax upon articles of the same class manufactured at home or subsidies to foreign producers or manufacturers by their respective governments!
reBuires that foreign importations must be mar#ed in any official language of the &hilippines the name of the country of origin of the articleA
;)
MarAi%g d./ie+ are special duties eBuivalent to *+ ad valorem imposed on articles not properly mar#ed! "hese are collected by the (ommissioner of (ustoms except when the improperly mar#ed articles are exported or destroyed under customs supervision and prior to final liBuidation of the corresponding entry! "hese duties are designed to prevent possible deception of the customers! Di+cri5i%a/,r0 d./ie+ are special duties collected in an amount not exceeding 2//+ ad valorem imposed by the &resident of the &hilippines against goods of a foreign country which discriminates against &hilippine commerce or against goods coming from the &hilippines and shipped to a foreign country!
(d) Di+cri5i%a/,r0 ,r Re/a-ia/,r0 D./0 % "his is a duty imposed on imported goods whenever it is found as a fact that the country of origin discriminates against the commerce of the &hilippines in such a manner as to place the commerce of the &hilippines at a disadvantage compared with the commerce of any foreign country! !ustoms: 8eme&ies of an Importer (1996) 'iscuss briefly the remedies of an importer during the pendency of sei$ure proceedings!
G)
!ustoms: Jin&s of !ustom 'uties (199,) 1xplain briefly each of the special customs duties authori$ed under the "ariff and (ustoms (ode!
SUGGESTED ANSWER*
"he following are the S*ecia- D./ie+ imposed under the "ariff and (ustoms (ode: (a) D.5*i%g D./0 % "his is a duty levied on imported goods where it appears that a specific #ind or class of foreign article is being imported into or sold or is li#ely to be sold in the &hilippines at a price less than its fair valueA
(b) C,.%/ervai-i%g D./0 % "his is a duty eBual to the ascertained or estimated amount of the subsidy or bounty or subvention granted by the foreign country on the production manufacture or exportation into the &hilippines of any article li#ely to in0ure an industry in the &hilippines or retard or considerable retard the establishment of such industryA (c) MarAi%g D./0 % "his is a duty on an ad valorem basis imposed for improperly mar#ed articles! "he law
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SUGGESTED ANSWER*
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'uring the pendency of sei$ure proceedings the importer may secure the release of the imported property for legitimate use by posting a bond in an amount to be fixed by the (ollector conditioned for the payment of the appraised value of the article andLor any fine expenses and costs which may be ad0udged in the caseA provided that articles the importation of which is prohibited by law shall not be released under bond. "he importer may also offer to pay to the collector a fine imposed by him upon the property to secure its release or in case of forfeiture the importer shall offer to pay for the domestic mar#et value of the sei$ed article which offer sub0ect to the approval of the (ommissioner may be accepted by the (ollector in settlement of the sei$ure case except when there is fraud! Cpon payment of the fine or domestic mar#et value the property shall be forthwith released and all liabilities which may or might attach to the property by virtue of the offense which was the occasion of the sei$ure and all liability which might have been incurred under any bond given by the importer in respect to such property shall thereupon be deemed to be discharged! !ustoms: 8eturning 8esi&ents: TouristETra(e"ers (2 4) > and his wife 5 Filipinos living in the &hilippines went on a three%month pleasure trip around the world during the months of June July and 9ugust 8//8! In the course of their trip they accumulated some personal effects which were necessary appropriate and normally used in leisure trips as well as souvenirs in non%commercial Buantities! 9re they "returning residents" for purposes of -ection 2/* of the "ariff and (ustoms (ode? 1xplain! (;+)
SUGGESTED ANSWER*
affirmative considering that travelers or tourists are given the same tax treatment as that of returning residents treating their personal effects not in commercial 7uantities as conditionally free importation.@
!ustoms: Sei?ure ; Forfeiture: 2ffects (199*) In smuggling a shipment of garlic the smugglers used an eight%wheeler truc# which they hired for the purpose of ta#ing out the shipment from the customs $one! 'anny the truc# owner did not have a certificate of public convenience to operate his truc#ing business! 'anny did not #now that the shipment of garlic was illegally imported! (an the (ollector of (ustoms of the port sei$e and forfeit the truc# as an instrument in the smuggling?
SUGGESTED ANSWER*
5es the (ollector of (ustoms of the port can sei$e and forfeit the truc# as an instrument in the smuggling activity since the same was used unlawfully in the importation of
6o! "he term "returning residents" refers to nationals who have stayed in a foreign country for a period of at least six (E) months! (,ection %(-(f) of the Tariff and !ustoms !ode). 'ue to their limited duration of stay abroad > and 5 are not considered as "returning residents" but they are merely considered as travelers or tourists who en0oy the benefit of conditionally free importation!
ANote: !redit must li>ewise be given if the candidate answered in the
smuggled articles! "he mere carrying of such articles on board the truc# (in commercial Buantities) shall sub0ect the truc# to forfeiture since it was not being used as a duly authori$ed common carrier which was chartered or leased as such! (-ec! 8*)/ NaO "(()
:oreover although forfeiture of the vehicle will not be effected if it is established that the owner thereof had no #nowledge of or participation in the unlawful act there arises a prima facie presumption or #nowledge or participation if the owner is not in the business for which the conveyance is generally used! "hus not having a certificate of public convenience to operate a truc#ing business he is legally deemed not to have been engaged in the truc#ing business! (,ec. &-5% Tariff and !ustoms !ode)
for another fifteen (2*) days or such period as the (ourt of "ax 9ppeals may decide! !ustoms$ Basis of 'utia+"e Ca"ue$ Importe& Artic"e (2 9) -tate and explain the basis of dutiable value of an imported article sub0ect to an ad valorem tax under the "ariff and (ustoms (ode!
ALTERNATI1E ANSWER*
"he basis of dutiable value of an imported article sub0ect to an ad valorem tax under the "ariff and (ustoms (ode is its "<96-9("IO6 493C1! (,ec. &(%AA@ Tariff and !ustoms !ode as amended by $.A. No. *%5-) If such value could not be determined then the following values are to be utili$ed in their seBuence: Tra%+ac/i,% va-.e ,1 ide%/icag,,d+ (,ec. &(%A3@): Tra%+ac/i,% va-.e ,1
!ustoms: Steps in(o"(ing Protest !ases (199*)

"he (ollector of (ustoms instituted sei$ure proceedings against a shipment of motor vehicles for having been misdeclared as second%hand vehicles! -tate the procedure for the review of the decision up to the -upreme (ourt of the (ollector of (ustoms adverse to the importer!
SUGGESTED ANSWER*
"he procedure in sei$ure cases may be summari$ed as follows: (a) "he collector issues a warrant for the detention or forfeiture of the imported articlesA (-ec! 8)/2 "ariff and (ustoms (ode) (b) "he (ollector gives the importer a written notice of the sei$ure and fixes a hearing date to give the importer an opportunity to be heardA (-ec! 8)/) "(() (c) 9 formal hearing is conductedA (-ec! 8)28 "(() (d) "he (ollector renders a declaration of forfeitureA (-ec! 8)28 "(() (e) "he Importer aggrieved by the action of the (ollector in any case of sei$ure may appeal to the (ommissioner for his review within fifteen (2*) days from written notice of the (ollector@s decisionA (-ec! 8)2) "(() (f) "he importer aggrieved by the action or ruling of the (ommissioner in any case of sei$ure may appeal to the (ourt of "ax 9ppealsA (-ec! 8./8 "(()
(g) "he importer adversely affected by the decision of the (ourt of "ax 9ppeals ('ivision) may appeal to the (ourt of "ax 9ppeals (en banc) within fifteen
(2*)
days which may be extended
sirdondee@gmail.com
+i5i-ar g,,d+ (,ec. &(%A!@):
Ded.c/ive va-.e
22 of 73
(,ec. 66.4.% !A.C. No. "-&(("): C,5*./ed va-.e (,ec. 66.<.l !.A.C. No. %-&(("() and Fa--6acA va-.e! (,ec. &(%A<@)
ALTERNATI1E ANSWER*
returned to the &hilippines bringing with him his personal effects including a personal computer and a car! Would Jacob be liable for taxes on these items? 'iscuss fully! (*+)
SUGGESTED ANSWER*
"he basis of dutiable value of an imported article sub0ect to an ad valorem tax under the "ariff and (ustoms (ode is its transaction value which shall be the price actually paid or payable for the goods when sold for export to the &hilippines ad0usted by adding certain cost elements to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods! (,ec. &(%AA@ Tariff and !ustoms !ode as amended by $.A. *%5-)
If such value could not be determined then the following values are to be utili$ed in their seBuence: "ransaction value of identical goods (-ec! 8/2N?O)A "ransaction value of similar goods (-ec! 8/2N(O)A 'eductive value (-ec! II!1!2 (9!O! 6o! .% 8//.)A (omputed value (-ec! II!F!l (!9!O! 6o! 2%8//./) and Fallbac# value! (-ec! 8/2NFO)
6o Jacob is not liable for taxes on his personal computer and the car because he is tax%exempt by law! =e has met the following reBuirements for exemption under &!'! 6o! G88 (2GIE): a) =e was a military attache assigned to Ja#artaA b) =e has served abroad for not less than two (8) yearsA c) =e is returning to the &hilippines after serving his tour of dutyA and d) =e has not availed of the tax exemption for the past four (.) years! =e is entitled to tax exemption on his personal and household effects including a carA provided
!ustoms$ !ounter(ai"ing 'uty (s) 'umping 'uty (2 9) 'istinguish countervailing duty from dumping duty! (*+)
SUGGESTED ANSWER*
"he distinctions between countervailing duty and dumping duty are the following: (2) ?asis: "he countervailing duty is imposed whenever there is granted upon the imported article by the country of origin a specific subsidy upon its production manufacture or exportation and this results or threatens in0ury to local industry while the basis for the imposition of dumping duty is the importation and sale of imported items at below their normal value causing or li#ely to cause in0ury to local industry! (8) 9mount: "he countervailing duty imposed is eBuivalent to the value of the specific subsidy while the dumping duty is eBuivalent to the margin of dumping which is eBual to the difference between the export price to the &hilippines and the normal value of the imported article! !ustoms$ Taxa+i"ity$ Persona" 2ffects (2 9) Jacob after serving a *%year tour of duty as military attache in Ja#arta
a) "he car must have been ordered or purchased prior to the receipt by the &hilippine mission or consulate in Ja#arta of Jacob@s recall orderA b) the car is registered in Jacob@s nameA c) the exemption shall apply to the value of the carA d) the exemption shall apply to the aggregate value of his personal and household effects (including the personal computer) not exceeding thirty per centum ()/+) of the total amount received by Jacob as salary and allowances during his assignment in Ja#arta but not to exceed four (.) yearsA e) Jacob must not have availed of the exemption more oftener than one every four years! (?ast par. ,ec. %(- Tariff and !ustoms !ode)
c) Where the taxpayer has signed a waiver authori$ing the (ommissioner or his duly authori$ed representatives to InBuire into the ban# deposits! BI8: Secrecy of BanB 'eposit /a1 (2 4)
> dies in year 8/// leaving a ban# deposit of &8 /// ///!// under 0oint account with his associates in a law office! 3earning of >@s death from the newspapers the (ommissioner of Internal <evenue wrote to every ban# in the country as#ing them to disclose to him the amount of deposits that might be outstanding in his name or 0ointly with others at the date of his death! :ay the ban# holding the deposit refuse to comply on the ground of the -ecrecy of ?an# 'eposit 3aw? 1xplain! (;+)
SUGGESTED ANSWER*
sirdondee@gmail.com
2+ of 73
OT/ER RELATED MATTERS

BI8: BanB 'eposits Secrecy Cio"ation (2 ) 9 taxpayer is suspected not to have declared his correct gross income in his return filed for 2GGI! "he examiner reBuested the (ommissioner to authori$e him to inBuire into the ban# deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud! :ay the examiner be allowed to loo# into the taxpayer@s ban# deposits? In what cases may the (ommissioner or his duly authori$ed representative be allowed to inBuire or loo# into the ban# deposits of a taxpayer? (*+)
SUGGESTED ANSWER*
6o! as this would be violative of <epublic 9ct 6o! 2./* the ?an# 'eposits -ecrecy 3aw! "he (ommissioner of Internal <evenue or his duly authori$ed representative may be allowed to inBuire or loo# into the ban# deposits of a taxpayer in the following cases: a) For the purpose of determining the gross estate of a decedentA b) Where the taxpayer has filed an application for compromise of his tax liability by reason of financial incapacity to pay such tax liability! (-ec! E (F) 6I<( of 2GGIO
6o! "he (ommissioner of Internal <evenue has the authority to inBuire into ban# deposit accounts of a decedent to determine his gross estate notwithstanding the provisions of the ?an# -ecrecy 3aw! =ence the ban#s holding the deposits in Buestion may not refuse to disclose the amount of deposits on the ground of secrecy of ban# deposits! (-ection E(F) of the 2GGI "ax (ode)! "he fact that the deposit is a 0oint account will not preclude the (ommissioner from inBuiring thereon because the law mandates that if a ban# has #nowledge of the death of a person who maintained a ban# deposit account alone or 0ointly with another it shall not allow any withdrawal from the said deposit account unless the (ommissioner has certified that the taxes imposed thereon have been paid! (-ection GI of the 2GGI "ax (ode)! =ence to be able to give the reBuired certification the inclusion of the deposit is imperative which may be made possible only through the inBuiry made by the (ommissioner!

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

"nderstandin. of the iss"es

time for the )ar E/ams 2334 "nder time

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

2xc"usions ; Inc"usions$ /ife Insurance Po"icy (2 4)...................................................................................32

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

BUSINESS TAXES """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" 4#

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (2 *)................................................................................62

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

!"# SCRA ##!$

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

occurrence of double taxation?

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

Po1er of Taxation: 23ua" Protection of t#e /a1 (2

or 0udicial action within FI41 (*) 519<from date

"here are substantial

<evenue <egulation valid?

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

attribute of right without people!

granting them general and broad tax powers

that "the power to

(C.<. Mar+:a-- i% McC.--,c: v. Mar0-a%d ( =:ea/ 7!' ( L. Ed. 3#" ')#$

may now be untenable" may 73 lead the examinee to choose a

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

taxes cannot be the sub0ect of set%off

<.%e 2" !"'7

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

(P:i-. Tr.+/ @ C,. v.

of sale thus shifting the tax burden to the 73 ultimate consumer!

where the sub0ect of it is found

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

employer is an obstetrician? Why?

16 of and from incidental or outside 73 operations or sources (-ec! .) <ev! <eg!

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

what are the tax implications? 1xplain!

!orporate$ Income Tax$ 8easona+"eness of t#e

flight information services!

reservation and tic#eting

!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (199*)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

'isguised dividends are those income payments made by a domestic corporation

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

rend pay on this latter ta the x date will er

IT8$ 'omestic !orporate Taxation (199,)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

IT8$ 'omestic !orporate Taxation (2 1)

year? 1xplain the process! ()+)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

Partners#ip: Income Tax (1999)

partnerships! Is this contention correct? 1xplain!

2) "he contention is not correct! ,eneral

<egulatio <evenue n 6o!

Persona"$ Income Tax: 7on:8esi&ent !iti?en (1999)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

Persona"$ Income Tax$ !ontract of /ease (1999)

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics

Taxa+"e or 7on:Taxa+"e$ Income an& 5ains (2 9)