VIII.

MasarapKumain, Inc. (MKI) is a Value-Added Tax (VAT)-registered company which has

been engaged in the catering business for the past 10 years. It has invested a substantial
portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and
delivery vans. MKI sold its delivery van, already 10 years old and idle, to Magpala Gravel
and Sand Corp. (MGSC), a corporation engaged in the business of buying and selling
gravel and sand. The selling price of the delivery van was way below its acquisition cost.
Is the sale of the delivery van by MKI to MGSC subject to VAT? (4%)
SUGGESTED ANSWER:
Yes, the sale of the delivery van is subject to VAT being a transaction incidental to the catering
business which is a VAT-registered activity of MKI. Transactions that are undertaken incidental
to the pursuit of a commercial or economic activity are considered as entered into in the course
of trade or business (Selection 105, NIRC). A sale of a fully depreciated vehicle that has been
used in business is subject to VAT as an incidental transaction, although such sale may be
considered isolated (Mindanao II Geothermal Partnership v. CIR, G.R. Nos. 193301,194637,
March 11, 2013).
IX.
Mr. Gipit borrowed from Mr. Maunawain P100,000.00 payable in five (5) equal monthly
installments became due, Mr. Gipit rendered general cleaning services in the entire office
building of Mr. Maunawain, and as compensation therefor, Mr. Maunawain cancelled the
indebtedness of Mr. Gipit claims that the cancellation of his indebtedness cannot
considered as gain on his part which must be subject to income tax, because according
to him, he did not actually receive payment from Mr. Maunawain for the general cleaning
services.
Is Mr. Gipit correct? Explain. (4%)
SUGGESTED ANSWER:
No. The cancellation of the indebtedness of up to p75,000 is intended as a compensation for the
general cleaning services rendered by Mr. Gipit. Compensation for services in whatever form
paid is part of gross income (Section 32(A), NIRC).

X.
Which of the following is an exclusion from gross income? (1%)
(A) salaries and wages
(B) cash dividends
(C) liquidating dividends after dissolution of a corporation
(D) deminimis benefits
(E) embezzled money
SUGGESTED ANSWER:
(D) deminimis benefits (Section 33(C)(4); RR No. 3-98).

XI.
Triple Star, a domestic corporation, entered into a Management Service Contract with
Single Star, a non-resident foreign corporation with no property in the Philippines. Under
the contract, Single Star shall provide managerial services for Triple Star’s Hong Kong
branch. All said services shall be performed in Hong Kong.
Is the compensation for the services of Single Star taxable as income from sources
within the Philippines? Explain. (4%)
SUGGESTED ANSWER:
No. The compensation for the services rendered by Single Star is an income derived from
sources without the Philippines. To be considered as income from within, the labor or service
must be performed within the Philippines (Section 42(A)(3) and Section 42(C)(3), NIRC). Since
all the services required to be performed by Single Star, a non-resident foreign corporation, is to
be performed in Hong Kong, the entire income is from sources without.

XII.
Which of the following should not be claimed as deductions from gross income? (1%)
(A) discounts given to senior citizens in certain goods and services
(B) advertising expense to maintain some form of goodwill for the taxpayer’s business
(C) salaries and bonuses paid to employees
(D) interest payment on loans for the purchases of machinery and equipment used in business
SUGGESTED ANSWER:

(B) advertising expense to maintain some form of goodwill for the taxpayer’s business (General Foods
Corporation v. CIR, G.R. No. 143672, April 24, 2003)

XIII.

Hopeful Corporation obtained a loan from Generous Bank and executed a mortgage on its real
property to secure the loan. When Hopeful Corporation failed to pay the loan, Generous Bank
extrajudicially foreclosed the mortgage on the property and acquired the same as the highest
bidder. A month after the foreclosure, Hopeful Corporation exercised its right of redemption and
was able to redeem the property.

Is Generous Bank liable to pay capital gains tax as a result of the foreclosure sale? Explain.
(4%)

SUGGESTED ANSWER:

No. In a foreclosure of real estate mortgage, the capital gains tax accrues only after the lapse of the
redemption period because it is only then that there exists a transfer of property. Thus, if the right to
redeem the foreclosed property was exercised by mortgagor before expiration of the redemption period,
as in this case, the foreclosure is not taxable event (See RR No.4-99; Supreme Transliner, Inc. v. BPI
Family Savings Bank, Inc., G.R. No. 165617, February 25, 2011).

XIV.

Mr. X, a Filipino residing in Alabama, U.S.A., died on January 2, 2013 after undergoing a major
heart surgery. He left behind to his wife and two (2) kids several properties, to wit: (4%)

(1) family home in Makati City;

 (2) condominium unit in Las Pinas City;

(3) proceeds of health insurance from Take Care, a health maintenance

organization in the Philippines; and

(4) land in Alabama U.S.A.

The following expenses were paid:

(1) funeral expenses;

(2) medical expenses; and

(3) judicial expenses in the testate proceedings.

(A) What are the items that must be considered as part of the gross estate income of Mr. X?

(B) What are the items that may be considered as deductions from the gross estate?

SUGGESTED ANSWER:

(A) All the items of properties enumerated in the problem shall form part of the gross estate of Mr. X. the
composition of the gross estate of a decedent who is a Filipino citizen shall include all of his properties,
real or personal, tangible or intangible, wherever situated (Section 85, NIRC).

NOTE: It is suggested that if the examinee answered NONE, the same should be given full credit because
there is no gross estate INCOME in the problem. Likewise, it is suggested that any answer should be
given full credit because of the question is worded in a confusing manner.

(B) All the items of expenses in the problem are deductible from his gross estate. However, the allowable
amount of funeral expenses shall be 5% of the gross estate oractual, whichever is lower, but in no
case shall the amount deductible go beyond P200,000. Likewise, the deductible medical expenses
must be limited to those incurred within one year prior his death but not to exceed P500,000. In addition
to the items of expenses mentioned in the problem, the standard deduction amounting to P1 million is
also allowed as a deduction from the gross estate (Section 86, NIRC).

XIX.

The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC)

No. 65-2012 imposing Value- Added Tax (VAT) on association dues and membership fees collected
by condominium corporations from its member condominium-unit owners. The RMC’s validity
is challenged before the Supreme Court (SC) by the condominium corporations. The Solicitor
General, counsel for BIR, claims that association dues, membership fees, and other
assessment/charges collected by a condominium corporations are subject to VAT since the
beneficial services it provides to its members and tenants.

On the other hand, the lawyer of the condominium corporations argues that such dues and fees are
merely held in trust by the condominium corporations exclusively for their members and used
solely for administrative expenses in implementing the condominium corporations’ purposes.
Accordingly, the condominium corporations do not actually render services for a fee subject to
VAT.

Whose argument is correct? Decide. (5%)

SUGGESTED ANSWERS: (either answer should be given credit):

SUGGESTED ANSWER 1:

The lawyer of the condominium corporations is correct. The association dues, membership fees, and other
assessments/charges do not constitute income payments because they were collected for the benefit of
the unit owners and the condominium corporation is not created as a business entity. The collection is
the money of the unit owners pooled together and will be spent exclusively for the purpose of
maintaining and preserving the building and its premises which they themselves own and possess
(First e-Bank Tower Condominium Corp., v. BIR, Special Civil Action No. 12-1236- RTC Br. 146, Makati
City).

SUGGESTED ANSER 2:

In the case of Office Metro Philippines, Inc. (formerly Regus Centres, Inc.) v. Commissioner of Internal
Revenue, CTA Case No. 8382, the Court only dealt with the EWT issue as the VAT Section 105 shows
that transactions in the course of a trade or business (sells, barters, exchanges, leases goods or
properties, renders services, imports goods) are those subjects to VAT. In the case of a condominium
corporation, the function of the entity is merely for administrative purposes and not a trade or business.
Thus, payments in the form of association dues should not be subjected to VAT.

XX.

During his lifetime, Mr. Sakitin obtained a loan amounting to ten million pesos frmBangko Uno for
the purchase of a parcel of land located in Makati City, using such property as collateral for the
loan. The loan was evidenced by a duly notarized promisorry note. Subsequently, Mr. Sakitin
died. At the time of his death, the unpaid balance of the loan amounted to P2 million. The heirs
of Mr. Sakitin deducted the amount of P2 million from the gross estate, as part of the “Claims
against the Estate.” Such deduction was dis-allowed by the Bureau of Internal Revenue (BIR)
Examiner, claiming that the mortgaged property was not included in the computation of the
gross estate. Do you agree with the BIR? Explain. (4%)

SUGGESTED ANSWER:

Yes. Unpaid mortgages upon, or any indebtedness with respect to property are deductible from the
gross estate only if the value of the decedent’s interest in said property, undiminished by such
mortgage or indebtedness, is included in the gross estate (Section 86(A)(1)(e)). In the instant case, the
interest of the decedent in the property purchased from the loan where the said property was used as
the collateral, was not included in the gross estate. Accordingly, the unpaid balanace of the loan at the
time of Mr. Sakitin’s death is not deductible as “Claims against the Estate”.

XXI.

On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Ms. Pares,
sold a 16-storey commercial building known as Haeltown Building to Mr. Belly for P100 million.
Mr. Belly, in turn, sold the same property on the same day to Bell Gates, Inc. (BGI) for P200
million. These two (2) transactions were evidenced by two separated Deeds of Absolute sale
notarized on the same day by the same notary public. Investigation by the Bureau of Internal
Revenue (BIR) showed that;

(1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale
between HC and Mr. Belly; (2) as early as May 17, 2014, HC received P40 million from BGI, and
not from Mr. Belly; (3) the said payment of P40 million was recorded by BGI in its books as of
June 30, 2014 as investment in Haeltown Building; and (4) the substantial portion of P40 million
was withdrawn by Ms. Pares through the declaration of cash dividends to all its stockholders.
 Based on the foregoing, the BIR sent Haeltown Corporation a Notice of Assessment for
deficiency income tax arising from an alleged simulated sale of the aforesaid commercial
building to escape the higher corporate income tax rate of thirty percent (30%).

What is the liability of Haeltown Corporation, if any?

SUGGESTED ANSWER:

Haeltown Corporation is liable for the deficiency income tax as a result of tax evasion. The purpose of
selling first the property to Mr. Belly is to create a tax shelter. He never controlled the property and did
not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a
sham, and without business purpose and economic substance. The intermediary transaction, which
was prompted more on the mitigation of tax liabilities than for legitimate business purpose constitutes
one of tax evasion. However, being a corporation, Haelton can only be liable for civil fraud which is a
civil liability rather than a criminal fraud which can only be committed by natural persons (CIR v.
Benigno Toda, Jr., G.R. No. 147188, September 14, 2004, 438 SCRA 290).

XIV

Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a
residential house and lot in Quezon City. After the recent wedding of their son, Mario, to Maria,
the spouses donated said real property to them. At the time of donation, the real property has a
fair market value of P2 million.

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

SUGGESTED ANSWER:

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

B) Are Jose and Clara subject to donor’s tax? If so, how much is the taxable gift of each spouse
and what rate shall be applied to the gift? Explain. (4%)

SUGGESTED ANSWER:

b) Yes, Jose and Clara are subject to donor’s tax. Since the real property is either conjugal or absolute
community property, each spouse is deemed to have made separate donation of one-half of thevalue of
the property (Tang Ho v. Board of Tax appeals, 97 Phi. 899 [1955]).

For Jose, he is considered to have made two donations:

One, is in favor of his son who is a relative, and two, in favor of his son’s wife who is stranger. The
taxable gift to the son is P490,000 computed by deducting from the gross gift dowry exclusion of
P10,000. The net gift is subject to the graduated tax rates of 2% to 15%. The taxable gift to his son’s
wife is P500,000 subject to the 30% flat rate on donation to strangers. (Sections 99 abd 101, NIRC).

Clara is subject to the donor’s tax in exactly the same manner as Jose, being considered to have
effected likewise two donations.
VI.
(5%)

Z is a Filipino immigrant living in the United States for more than 10 years. He is retired and he came
back to the Philippines as a balikbayan. Every time he comes to the Philippines, he stays here
for about a month. He regularly receives a pension from his former employer in the United
 States, amounting US$1,000 a month. While in the Philippines, with his pension pay from his
former employer, he purchased three condominium units in Makati which he is renting out for
P15,000 a month each.

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

SUGGESTED ANSWER:

The pension is not taxable. The law provides that pensions received by resident or nonresident citizens of
the Philippines from foreign governments agencies and other institutions, private or public, are
excluded from gross income. (Section 32(B)(6)(c), NIRC).

ALTERNATIVE ANSWER:

Z is still considered as a nonresident Filipino citizen who is subject to tax only on income derived from
Philippines sources. (Section 23, NIRC). His pension from U.S. is an income from without being in the
nature of compensation for past services rendered outside the Philippines. (Section 42, NIRC).
Accordingly, the pension is not subject to the Philippines income tax.

b) Is his purchase of the three condominium units subject to any tax? Reason briefly.

SUGGESTED ANSWER:

Yes. The purchase will be subject to the capital gains tax imposed on the sale of real property and the
documentary stamp tax on conveyance of real property, if these units are acquired from individual unit
owners or domestic corporations who hold them as capital assets. (Section 24(D), 27(D)(5) and 196,
NIRC). If these properties, however, were acquired from dealers and/or lessors of real property the
purchase will give rise to the imposition of the regular income tax, value-added tax and documentary
stamp tax. (Section 24-28 and 196, NIRC).

ALTERNATIVE ANSWER:

Yes, the purchase of the three condominium units is subject to the following taxes:

i. capital gains tax, if held as capital assets by the seller (Section24(D) and 27(D)(5),
NIRC), otherwise the regular income tax (Section 24-28, NIRC);

ii. documentary stamp tax (Section 196, NIRC);

iii. local transfer tax (Section 135, LGC); and

iv. value-added tax if acquired from real estate developers or lessors of real property.

[Note: Value-added tax and documentary stamp taxes are outside the coverage of the BAR
Examination. It is requested that full credit be given even if these two taxes are not
mentioned in the answer.]
2000 BAR EXAMINATION
I
1) Enumerate the 3 stages or aspects of taxation. Explain each. 5%
2) Distinguish “direct taxes” from “indirect taxes”, Give examples. 5%

SUGGESTED ANSWER:
1) The three stages or aspects of taxation are:
a. Levy. This refers to the enactment of a law by Congress authorizing the imposition of
tax.

b. Assessment and Collection. This is the act of administration and implementation of

the tax law by the executive through its administrative agencies.

c. Payment. This is the act of compliance by the taxpayer, including such options,
schemes or remedies as may be legally available to him.

2) Direct taxes are demanded from the very person who, as intended, should pay the tax
which he cannot shift to another, while an indirect tax is demanded in the first instance from one
person with the expectation that he can shift the burden to someone else, not as a tax, but as
part of the purchase price (Maceda v. Macaraig, Jr., 223 SCRA 217 [1993]). Examples of direct
taxes are income tax, estate tax and donor’s tax. Examples of indirect taxes are value-added
tax, percentage tax and excise tax on excisable articles.

XV

Lily’s Fashion, Inc. is a garment manufacturer located and registered as a Subic Bay
Freeport Enterprise under Republic Act No. 7227 and a non-VAT taxpayer. As such, it is
exempt from payment of all local and national internal revenue taxes. During its
operations, it purchased various supplies and materials necessary in the conduct of its
manufacturing business. The suppliers of these goods shifted to Lily’s Fashion, Inc. the
10% VAT on the purchased items amounting to P500,000.00 . Lily’s Fashion, Inc. filed
with the BIR a claim for refund for the input tax shifted to it by the supplier.
If you were the Commissioner of Internal Revenue, will you allow the refund? 5%
SUGGESTED ANSWER:
No. The exemption of Lily’s Fashion Inc. is only for taxes for which it is directly liable, hence, it
cannot claim exemption for a tax shifted to it, which is not at all considered a tax to the buyer but
a part of the purchase price. Lily’s Fashion, Inc. is not the taxpayer in so far as the passed-on
tax is concerned and therefore, it cannot claim for a refund of a tax merely shifted to it. Only
taxpayers are allowed to file a claim for refund (Phil. Acetylene Co., Inc. v. CIR, 20 SCRA 1056
[1987]).

I
a) Describe the power of taxation. May a legislative body enact laws to raise
revenues in the absence of a constitutional provision granting said body the power of
tax? Explain.
b) May taxes be the subject of set-off or compensation? Explain.
c) Can an assessment for a local tax be the subject of set-off or compensation
against a final judgement for a sum of money obtained by the taxpayer against the local
government that made the assessment? Explain.
d) Is a deficiency tax assessment a bar to a claim for tax refund or tax credit? Explain.
e) Is the approval of the court, sitting as probate or estate settlement court, required in
the enforcement and collection of estate tax? Explain. (10%)
SUGGESTED ANSWER:
a) The power of taxation is inherent in the State being an attribute of sovereignty. As an incident
of sovereignty , the power to tax has been described as unlimited in its range, acknowledging in
its very nature no limits, so that security against its abuse is to be found only in the responsibility
of the legislature which imposes the tax on the constituency who are to pay it. [Mactan Cebu
International Airport Authority v. Marcos, 261 SCRA 667, (1996)].
Being an inherent power, the legislature can enact laws to raise revenues even without the
grant of said power in the Constitution. It must be noted that Constitutional provisions relating
the power of taxation do no operate as grants of the power of taxation to the Government, but
instead merely constitute limitations upon a power which would otherwise be practically without
limit. [Cooley, Constitutional Limitations, 1927 8th Ed., p. 787]
b) No. Taxes cannot be the subject of set-off or compensation for the following reasons: (1)
taxes are of distinct kind, essence and nature, and these impositions cannot be classed in
merely the same category as ordinary obligations; (2) the applicable laws and principles
governing each are peculiar, not necessarily common, to each; and (3) public policy is better
subserved if the integrity and independence of taxes are maintained. [Republic v. Mambulao
Lumber Company, 4 SCRA 622 (1962)].
However, if the obligation to pay taxes and the taxpayer’s claim against the government are
both overdue, demandable, as well as fully liquidated, compensation takes place by operation of
law and both obligations are extinguished to their concurrent amounts. [Domingo v. Garlitos, 8
SCRA 443 (1963)].
c) No. Taxes and debts are of different nature and character; hence, no set-off or compensation
between these two different classes if obligations is allowed. The taxes assessed are the
obligations of the taxpayer arising from the law, while the money judgement against the
government is an obligation arising from the contract, whether express or implied. Inasmuch
that taxes are not susceptible to set-off or legal compensation. [Francia v. Intermediate
Appellate Court, 162 SCRA 753 (1988)].
It is only when the local tax assessment and the final judgement are both overdue ,
demandable, as well fully liquidated may set-off or compensation be allowed. [Domingo v.
Garlitos, 8 SCRA 443, (1963)].
d) No. As a general rule, a deficiency tax assessment is not a bar to a claim for tax refund or tax
credit. It is logically appropriate; however, that if the deficiency tax assessment is already final,
the Commissioner should not grant the claim unless the taxpayer pays the deficiency. Likewise,
no tax refund or tax credit will be granted as long as there is pending a deficiency tax
assessment for the same taxable period. To award a tax refund or tax credit despite the
existence of deficiency assessment for the same taxable period is an absurdity and a polarity in
conceptual effects. A taxpayer cannot be entitled to a refund and at the same time be liable for a
tax deficiency assessment. In order to avoid multiplicity of suits, it is logically necessary and
legally appropriate that the issue of deficiency tax assessment be resolved jointly with the
taxpayer’s claim for tax refund, to jointly with the taxpayer’s claim for tax refund. To determine
once and for all in a single proceeding the true and correct amount of tax due or refundable.
[CIR v. CA, City trust Banking Corp. and CTA, 234 SCRA 348 (1994)].
e) No. The approval of the court, sitting in probate, is not a mandatory requirement in the
collection of estate tax. On the contrary, under Section 94 of the NIRC, it is the probate or
settlement court which is forbidden to authorize the executor or judicial administrator of the
decedent’s estate, to deliver any distributive share to any party interested in the estate, unless a
certification from the Commissioner of Internal Revenue that the estate tax has been paid is
shown. [Marcos II v. Court of Appeals, 273 SCRA 47 (1997)].
II
1) Explain briefly whether the following items are taxable or non-taxable:
a) Income from Jueteng;
b) Gain arising from expropriation of property;
c) Taxes paid and subsequently refunded;
d) Recovery of bad debts previously charged off;
e) Gain on the sale of a car used for personal purposes (5%)\
SUGGESTED ANSWER:
1. a) It is taxable. The law imposes a tax on income from any source whatever’ which means
that it includes income whether legal or illegal. (Sec. 32(A), NIRC).
b) Taxable. There is a material gain, not excluded by law, realized out of a closed and
completed transaction. Gains from dealings in property are part of gross income. (Sec. 32(A)(3),
NIRC).
c) It depends. Taxes paid which are allowed as a deduction from gross income are taxable
when subsequently refunded but only to the extent of the income tax benefit of said deduction.
(Sec. 34(C)(1), NIRC). It follows that taxes paid which are not allowed as deduction from gross
income, i.e., income tax, donor’s tax and estate tax, are not taxable when refunded.
d) Recovery of bad debts previously charges off is taxable to the extent of income tax benefit
of said deduction. (SEC. 34 (E)(1), NBIRC).
e) Gain on the sale car used for personal purposes is taxable. This is a gain derived from
dealings in property which is part of the taxpayer’s gross income. (SEC. 32 (A)(3), NIRC). There
is a material gain, not excluded by the law, realized out of a closed and completed transaction.
2. State and discuss briefly whether the following cases may be compromised or may not
be compromised:
a) Delinquent account;
b) Cases under administrative protest, after issuance of final assessment notice to the
taxpayer, which are still vpending;
c) Criminal tax fraud cases;
d) Criminal violations already filed in court;
e) Cases 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 required agreement form. (5%)
SUGGESTED ANSWER:
2. a) Delinquent accounts may be compromised if either of the two conditions is present: (1) the
assessment is of doubtful validity, or (2) the financial position of the taxpayer demonstrates a
clear inability to pay the tax. (Sec. 204(A), NIRC;Sec. 2 of Revenue Regulations No. 30-2002)
b) Theses may be compromised, provided that is premised upon doubtful validity of the
assessment or financial incapacity to pay (ibid).
c) These may not be compromised, so that the taxpayer may not profit from his fraud, thereby
discouraging its commission (ibid).
d) These may not be compromised in order that the taxpayer will not profit from his criminal acts
(ibid)
e) Cases 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 required
agreement form, cannot be compromised. By giving his conformity to the revised assessment,
the taxpayer admits the validity of the assessment and his capacity to pay the same. (Sec. 2 of
Revenue Regulations No. 20-2002).
IV
1) State with reasons the tax treatment of the following in the preparation of annual tax
returns:
a) Proceeds of life insurance received by a child as irrevocable beneficiary;
b) 13th month pay and de mininis benefits;
c) Dividends received by a domestic corporation from (i) another domestic
corporation; and (ii) a foreign corporation;
d) Interest on deposits with (i) BPI Family Bank; and (ii) a local offshore banking unit
of a foreign bank;
e) Income realized from sale of (i) capital assets; and (ii) ordinary assets. (5%)
SUGGESTED ANSWER:
a) The proceeds of life insurance received by a child as irrevocable beneficiary are not to be
reported in the annual income tax returns, because they are excluded from the gross income.
This kind of receipt does not fall within the definition of income- “any weath which flows into the
taxpayer other than a mere return of capital”. Since insurance is compensatory in nature, the
receipt is merely considered as a return of capital. (Section 32 (B)(1), NIRC; Fisher v. Trinidad,
43 Phil. 73 [1922].
b) 13th month pay is excluded from the gross income for income tax purposes to the extent of
P30, 000.00. Any excess will be included in the gross income per income tax return as part of
gross compensation income. (Sec. 32(B)(7)(e), NIRC).
c) Dividends received by a domestic corporation from a foreign corporation are subject to
income tax hence should not be declared in the income tax return. (Sec. 27 (D)(4), NIRC).
d) Interest on deposit with BPI Family Bank is a passive income subject to a final withholding
tax rate of 20%; the interest on deposit with a local offshore banking unit of a foreign bank is
passive income subject to a final withholding tax rate of 7.5% (Sec. 24 (B)(1), NIRC). Both
interest incomes are not to be declared as part of gross income in the income tax return.
e) (i) Generally, income realized from the sale of capital assets are not to be reported in the
income tax return as they are already subject to final taxes (capital gains tax real property and
shares of stocks). What are to be reported in the annual income tax return are the capital gains
derived from the disposition of capital assets other than real property or shares of stocks in
domestic corporations which are not subject to final taxes.
(ii) Income realized from the sale of ordinary assets is taxable and the said income shall
be declared in the annual income tax return. The income constitutes either income derived from
the conduct of trade or business or a gaine derived from dealings in property. (Sec. 32 A(2) and
(3), NIRC).
(2)a) State the conditions required by the Tax Code before the Commissioners of
Internal Revenue could authorize the refund or credit of taxes erroneously or illegally
received.
 b) Does a withholding agent have the right to file an application for tax refund?
Explain. (5%)
SUGGESTED ANSWER:
2. (a) The condition are:
(1) a written claim for refund is filed by the taxpayer with the Commissioner of Internal Revenue.
(Sec. 204, NIRC):
2) the claim for refund must be categorical demand for reimbursement. [Bermejo v. Collector of
Internal Revenue, 87 Phil. 96 (1950)];
3) the claim for refund or tax credit must be filed with the Commissioner, or the suit or
proceeding therefor must be commenced in court within 2years from date of payment of the tax
or penalty regardless of any supervening cause (Sec. 229, NIRC).
SUGGESTED ANSWER:
b.) Yes. A withholding agent should be allowed to claim for tax refund, because under the law
said agent is the one who is held liable for any violation of the withholding tax law should such
violation occur [Commissioner of Internal Revenue v. Wander Philippines, Inc., 160 SCRA 570,
(1988)]. Furthermore, since the withholding agent is made personally liable to deduct6 and
withhold any tax under Section 53 (c) of the Tax Code, it is imperative that he be considered the
taxpayer for all legal intents and purposes. Thus, by any reasonable standard, such person
should be regarded as a party in interest to bring suit for refund of taxes [Commissioner of
Internal Revenue v. Procter and Gamble Philippines Manufacturing Corporation and CTA, 204
SCRA 377, (1991)].

VII
An international airline with no landing rights in the Philippines for air transportation. Is
income derived from such sales of tickets considered taxable income of the said
international air carrier from Philippines sources under the Tax Code? Explain. (5%)
SUGGESTED ANSWER:
No. While the tickets are sold here by the international airline, this is for carriage of persons,
excess baggage, cargo and mail not originating from the Philippines because the airline no
landing rights in the Philippines. The income from the sale of tickets is actually the gross
revenue derived from the carriage of persons, excess baggage, cargo and mail and these
revenues are considered as income from Philippine sources only if the flight originates from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of payment of the
ticket or passage document. (Sec. 28 (A)(3)(a), NIRC). Accordingly, the income mentioned is
not derived from Philippines sources.

X
The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The
southern side and middle part are occupied by the church itself, the southeastern side by
some commercial establishments, while the rest of the property, in particular the
northwestern side, is idle or unoccupied.
May the Church claim tax exemption on the entire land? Decide with reasons. (5%)
SUGGESTED ANSWER:
No. The portions of the land occupied and used by the church, convent and school run by the
church are exempt from real property taxes while the portion of the land occupied by
commercial establishments and the portion, which is idle, are subject to real property taxes. The
“usage” of the property and not the “ownership” is the determining factor whether or not the
property is the taxable. [Lung Center of the Philippines v. Q.C. 433 SCRA 119 (2004)].
XII
Ralph Donald, an American citizen, was a top executive of a U.S. company in the
Philippines until he retired in 1999. He came to like the Philippines so much that
following his retirement, he decided to spend the rest of his life in the country. He
applied for and was granted a permanent resident status the following year. In the spring
of 2004, while vacationing in Orlando, Florida, USA, he suffered a heart attack and died.
At the same time of his death, he left the following properties; (a) bank deposits with
Citibank Makati and Citibank Orlando, Florida; (b) a resthouse in Orlando, Florida; (c) a
condominium unit in Makati; (d) shares of stock in the Philippines subsidiary of the U.S.
Company where he worked; (e) shares of stock in San Miguel Corp. and PLDT; (f) shares
of stock in Disney World in Florida; (g) proceeds from a life insurance policy issued by a
U.S. corporation.
Which of the forgoing assets shall be included in the taxable gross estate in the
Philippines? Explain. (5%)
SUGGESTED ANSWER:
Being a resident of the Philippines at the time of his death, the gross estate of Ralph Donald
shall include all his property, real or personal, tangible or intangible, wherever situated at the
time of his death. (Section 85, NIRC). Thus, the following shall be included in his taxable gross
estate in the Philippines:
a) bank deposits with Citibank Makati and Citibank Orlando, Florida:
b) aresthouse in Orlando, Florida:
c) a condominium unit in Makati;
d) shares of stock in the Philippines subsidiary of the U.S. company where
he worked;
e) shares in San Miguel Corp. and PLDT;
f) shares of stock in Disney World in Florida; and
g) U.S treasury bonds
The proceeds from a life insurance policy issued by a U.S. corporation is included as part of the
gross estate of Ralph Donald, if the designation of the beneficiary is revocable or irrespective of
the nature of designation, if the designated beneficiary is either the estate, the executor or
administrator and the designation is irrevocable, the proceeds shall not form part of his gross
estate. (Section 85 (E), NIRC).
XIII
Josel agreed to sell his condominium unit to Jess for P2.5 million. At the same time of
the sale, the property had a zonal value of P2 million. Upon the advice of a tax
consultant, the parties agreed to executive two deeds of sale, one indicating the zonal
value of P2 million as the selling price and the other showing the true selling price of
P2.5 million. The tax consultant filed the capital gains tax return using the deed of sale
showing the zonal value P2 million as the selling price.
Discuss the tax implications and consequences of the action taken by the parties. (5%)
SUGGESTED ANSWER:
The capital gains tax due on the sale shall be based on the actual selling price of P2.5 million
which is higher than the zonal value of property. (Section 24(D)(1), NIRC). The documentary
stamp tax on the conveyance of real property shall likewise be based on the higher value,
(Section 196, NIRC). Accordingly, a deficiency capital gains tax and documentary stamp are
due from Josel plus the 50% surcharge imposable on a fraudulent return.
Both Josel and his tax consultant, are criminally liable for tax evasion. Here, it is clear that the
three requisite factors to constitute tax evasion are present, viz: (1) the end to be achieved
which is the payment of less than that known by them to be legally due; (2) an accompanying
state of mind which is evil, in bad faith, will full or deliberate and not merely accidental; and (3) a
course of action which is unlawful. [CIR v. Estate of Benigno P. Toda, Jr., 438 SCRA 290
(2004)].
I
Taxes are assessed for the purpose of generating revenue to be used for public needs.
Taxation itself is the power by which the State raises revenue to defray the expenses of
government. A jurist said that a tax is what we pay for civilization.
A. In our jurisdiction, which of the following statements may be erroneous:
1. Taxes are pecuniary in nature.
2. Taxes are enforced charges and contributions.
3. Taxes are imposed on persons and property within the territorial jurisdiction of a State.
4. Taxes are levied by the executive branch of the government.
5. Taxes are assessed according to a reasonable rule of apportionment.
Justify your answer or choice briefly. (5%)
SUGGESTED ANSWER:
A. 4. Taxes are levied by the executive branch of the government.
This statement is erroneous because levy refers to the act of imposition by the legislature which
is done through the enactment of a tax law. Levy is an exercise of the power to tax which is
exclusively legislative in nature and character. Clearly, taxes are not levied by the executive
branch of government. (NPC v. Albay, 186 SCRA 198 [1990]).
B. Which of the following propositions may now be untenable:
1. The court should construe a law granting tax exemption strictly against the taxpayer.
2. The court should construe a law granting a municipal coporation the power to tax
most strictly.
3. The Court of Tax Appeals has jurisdiction over decisions of the Customs
Commissioner in cases involving liability for customs duties.
4. The Court of Appeals has jurisdiction to review decisions of the Court of Tax Appeals.
5. The Supreme Court has jurisdiction to review decisions of the Court of Appeals.
Justified your answer or choice briefly. (5%)
SUGGESTED ANSWER:
B. 2. The court should construe a law granting a municipal corporation the power to tax most
strictly.
 This proposition is now untenable. The basic rationale for the grant of tax power to local
government units is to safeguard their viability and self-sufficiency by directly granting them
general and broad tax powers ( Manila Electric Company v. Province of Laguna et. al., 306
SCRA 750[1999]). Considering that 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 Constitution, in interpreting statutory provisions on municipal fiscal, powers, doubts will,
therefore, have to be resolved in favor of municipal corporations (City Government of San
Pablo, Laguna v. Reyes 305 SCRA 353 [1999]. This means that the court must adopt a liberal
construction of a law granting a municipal corporation the power to tax.
Note: If the examinee chose proposition no. 4 as his answer, it should be given full credit
considering that the present CTA Act (R.A. No. 9282) has made the CTA a coequal judicial
body of the Court of Appeals. The question “Which of the following propositions may now be
untenable” may lead the examinee to choose a proposition which is untenable on the basis of
the new law despite the cut-off date adopted by the Bat Examination Committee. R.A No. 9282
was passed on March 30, 2004.
I
4%
Why is the power to tax considered inherent in a sovereign State?
SUGGESTED ANSWER:
It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty.
Without his power no sovereign state can exist or endure. The power to tax proceeds upon the
theory that the existence of a government is a necessity and his power is an essential and
inherent attribute of sovereignty, belonging as a matter or right to every independent state or
government. No sovereign state can continue to exist without the means to pay its expenses;
and that for those means it has the right to compel all citizens and property within its limits to
contribute, hence, the emergence of the power to tax. (51 Am. Jur., Taxation 40).
II
4%
May Congress, under the 1987 Constitution, abolish the power to tax of local
governments?
SUGGESTED ANSWER:
No. Congress cannot abolish what is expressly granted by the fundamental law. The only
authority conferred to Congress is to provide the guidelines and limitations on the local
government’s exercise of the power to tax. (Sec. 5, Art X, 1987 Constitution).
III
4%
A “fringe benefit” is defined as being any good, service or other benefit furnished or
granted in cash or in kind by an employer to an individual employee. Would it be the
employer or the employee who is legally required to pay an income tax on it? Explain.
SUGGESTED ANSWER:
It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe
benefit is imposed as a final withholding tax placing the legal obligation to remit the tax on the
employer, such that, if the tax is not paid the legal recourse of the BIR is to go after the
employer. Any amount or value received by the employee as a fringe benefit is considered tax
paid hence, net of the income tax due thereon. The person who is legally required to pay (same
as statutory incidence as distinguished from economic incidence) is that person who, in case of
non-payment, can be legally demanded to pay the tax.
IV
8%
On 30 June 2000, X took out a life insurance policy on his own life in the amount of
P2,000,000.00. He designated his wife Y, as irrevocable beneficiary to P1,000,000.00 and
his son, Z, to the balance of P1,000,000.00 but, in the latter designation, reserving his
right to substitute him from one another. On 01 September 2003, X his right to substitute
him for another. On 01 September 2003, X died and his wife and son went to the insurer
to collect the proceeds of X’s life insurance policy.
a) Are the proceeds of the insurance subject to income tax on the part of Y and Z for their
respective shares? Explain.
b) Are the proceeds of the insurance to from part of the gross estate of X? Explain.
SUGGESTED ANSWER:
a) No. The law explicitly provides that proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured are excluded from gross income and is exempt from
taxation. The proceeds of life insurance received upon the death of the insured constitute a
compensation for the loss of life, hence a return of capital, which is beyond the scope of income
taxation. (Section 32(B)(1) 1997 Tax Code)
b) Only the proceeds of P1,000,000.00 given to the son, Z, shall form part of the Gross Estate of
X. Under the Tax Code, proceeds of life insurance shall form part of the gross estate of the
decedent to the extent of the amount receivable by the beneficiary designated in the policy of
the insurance except when it is expressly stipulated that the designation of the beneficiary is
irrevocable. As stated in the problem, only the designation of Y is irrevocable while the insured/
decedent reserved the right to substitute Z as beneficiary for another person. Accordingly, the
proceeds received by Y shall be excluded while the proceeds received by Z shall be included in
the gross estate of X. (Section 85(E), 1997 Tax Code)
VI
4%
a) Distinguish a “capital asset” from an “ordinary asset”
b) What is the rationale for the rule prohibiting the deduction of capital losses from
ordinary gains? Explain.
SUGGESTED ANSWER:
a) The term “capital asset” regards all properties not specifically excluded in the statutory
definition of capital assets, the profits or loss on the sale or the exchange of which are treated
as capital gains or capital losses. Conversely, all those properties specially excluded are
considered as ordinary assets and the profits or losses realized must have to be treated as
ordinary gains or ordinary losses. Accordingly, “capital assets” includes property held by the
taxpayer whether or not connected with his trade or business, but the term does not include any
of the following, which are consequently considered “ordinary assets”:
1) stock in the trade of taxpayer or other property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of the taxable year;
2) property held by the taxpayer primarily for sale to customers in the ordinary course of trade or
business;
3) property used in the trade or business of a character which is subject to the allowance for
depreciation provided in Section 34(F) of the Tax Code; or
4) real property used in trade or business of the taxpayer.
The statutory definition of “capital assets” practically excludes from its scope, it will be noted, all
property held by the taxpayer if used in connection with his trade or business.
(b) It is to insure that only costs or expenses incurred in earning the income shall be deductible
for income tax purposes consonant with the requirement of the law that only necessary
expenses are allowed as deductions from the gross income. The term “necessary expenses”
presupposes that in order to be allowed as deduction, the expense must be business
connected, which is not the case insofar as capital losses are concerned. This is also the
reason why all non-business connected expenses like personal, living and family expenses, are
not allowed as deduction from gross income (Section 36(A)(1) of the 1997 Tax Code).
ALTERNATIVE ANSWER:
The prohibition of deduction of capital losses from ordinary gains designed to forestall the
shifting of deductions from an area subject to lower taxes an area subject to higher taxes,
thereby unnecessarily resulting in leakage of tax revenues. Capital gains are generally taxed at
lower rate to prevent, among others, the bunching of income in one taxable year which us a
liberality in the law begotten from motives of public policy (Rule on Holding Period). It stands to
reason therefore, that if the transaction result in loss, the same should be allowed only form and
to the extent of capital gains and not to be deducted from ordinary gains which are subject to a
higher rate of income tax. (Chirelstein, Federal Income Taxation, 1977 Ed.)