SUGGESTED ANSWER TO THE FINAL EXAM

TAXATION 1
ATTY. ARNEL A. DELA ROSA, CPA, REB, REA

PART 1 – MULTIPLE CHOICE

1. In our jurisdiction, which of the following may be erroneous?

a. Taxes are pecuniary in nature.

b. Taxes are enforced contributions.
c. Taxes are imposed on persons and properties within the territorial jurisdiction of the State.
d. Taxes are levied by the executive branch of the government.

Explanation: Taxes are levied by the legislative branch of the government. The power to tax is
legislative in nature and cannot be delegated to the executive branch. Choices a, b, and c are all
characteristics of taxes.

2. Under Republic Act NO. 10963 or the TRAIN Law, which took effect last January 1, 2018, the
Philippine Charity Sweepstakes Office (PCSO) was delisted as among those Government-Owned
or -Controlled Corporations (GOCC) that are exempt for paying corporate income tax. The
following statements are unlikely to be accurate, except this one.

a. The TRAIN Law violates an inherent limitation, i.e. exemption from taxation of government
entities.
b. The removal of the tax exemption of PCSO may be retroactively applied. Thus, BIR may
collect income taxes from PCSO for the taxable years prior to January 1, 2018, consistent
with the Lifeblood Doctrine.
c. The removal of the tax exemption of PCSO may not be questioned in Court as the power to
determine the subject of taxation exclusively belongs to the Congress, whose power is
plenary.
d. The withdrawal of the income tax exemption of PCSO contravenes the provision of the
Constitution granting tax exemptions to charitable institutions.

Explanation: The questions is “which of the statements are unlikely to be accurate, except this
one?” Take note of the “double negative” words – unlikely and except. The question is actually
asking which statement is the more accurate of the choices. Choice (a) is not accurate,
charitable works may not be considered as a sovereign function but more of a proprietary
function. PCSO is a Government-owned or controlled corporation (GOCC) thus it is subject to tax,
as a general rule. Choice (b) is not accurate pursuant to the principle of prospective in the
application of law. There is nothing in the facts that warrants retroactive application. Moreover,
lifeblood doctrine is irrelevant here. Choice (d) is not accurate as the exemption granted under
the Constitution in favor of charitable institutions pertain to real property tax, not income tax.
So, by process of elimination, the best answer is Choice (c). In fact, it is very accurate
statement. First, the Congress has the sole power to determine the subject of taxation. Second;
if the Congress can grant legislative grace or tax exemption, it can also withdraw the same
subject to non-impairment clause and compliance with voting requirements.

3. May Congress abolish the municipal corporations’ power to tax?

a. No, because municipal corporations’ power to tax is an inherent power.
b. Yes, because Congress’ legislative power is supreme and plenary.
c. No, because the Constitution merely requires the Congress to provide guidelines
and limitations on the local government’s power to tax.
 d. Yes, because the local governments’ power to tax is merely delegated power.

Explanation: Choice (a) is not correct because the LGU’s power to tax is not inherent. It was
granted by the Constitution (contra the Congress’s power that requires no Constitutional
mandate). Accordingly, Choice (d) is not correct as the Congress did not delegate such power; it
is the Constitution that grants such power. What the Constitution provides is for the Congress to
provide guidelines and limitations on how the LGU should exercise the power to tax; hence, we
have the Local Government Code. Thus, Choice (c) is correct. Choice (b) is not entirely correct
because although Congress’ power is indeed supreme and plenary, the exercise thereof is always
subject to inherent and constitutional limitations.

4. As a general rule, government agencies are taxable if they perform proprietary functions.
Bangko Sentral ng Pilipines (BSP) is a government instrumentality created under Republic Act No.
7653 as an independent central monetary authority of the State. It functions and operates as an
independent and accountable body corporate in the discharge of its mandated responsibilities
concerning money, banking, and credit. Which of the following income of BSPO is most likely to
be subject to tax.
a. Income received from loans and other credit facilities extended to various banks
under its supervision.
b. Income collected from banks and other non-bank financial institutions during regular
examinations in the exercise of regulatory functions.
c. Income collected from banks and other financial institutions for violations of banking laws,
rules and regulations.
d. Income from promotion of monetary and financial stability and convertibility of pesos, such
as income from maintenance of sufficient dollar and gold reserves.

Explanation: The problem provides the clue. So, you have to look for the income derived from
the exercise of proprietary function. In Choice (b) and (c), the income received are in the
exercise of governmental functions, i.e. in the exercise of regulatory and quasi-judicial functions,
respectively. Choice (d) is also received from the exercise of governmental functions; in fact,
promotion of monetary and financial stability and convertibility of pesos is among the mandates
of BSP under its charter, and no other bank is authorized to perform these. Choice (a) is the
obvious answer. In this case, BSP is acting just like any other ordinary banks.

5. BIR issued a certain revenue regulation consolidating all tax regulations pertaining to sale of
goods and services, whether done online or otherwise. With the prevalence of online
marketplaces, the regulation specifically requires online sellers and resellers of goods and
services to register their business activities with the bureau, file their appropriate tax returns, and
pay their corresponding tax liabilities, if any. Dina G. Bayad, an online seller, filed a petition
assailing the validity of the said revenue regulation for lack of publication. The petition will likely
be:

a. GRANTED. Publication of administrative rules and regulations is an essential element of due

process; non-compliance of which constitutes a violation of due process clause of the
Constitution.
b. GRANTED. The Civil Code requires the publication of an administrative issuance before it
takes effect; such requirement is indispensable.
c. DISMISSED. Publication is not required in this case as the revenue regulation is
merely interpretative in nature and just a summation of already existing
applicable tax regulation on the subject matter thereof.
d. DISMISSED. Publication is no longer required since the revenue regulation covers not only
online sellers, like Dina G. Bayad, but also other sellers or resellers of goods and services.
 Explanation. There is no doubt that publication of administrative issuances, rules and
regulation is part of due process and is indispensable requirement pursuant to the Civil Code and
in the case of Tanada v. Tuvera. The issue in this case is – is publication required under the
premises of the problem? The problem states that the revenue regulations issued is a
consolidation of already existing regulation. Accordingly, there is really nothing new here as BIR
is merely reiterating existing issuances pertaining to sale of goods and services. In AISL v.
Commissioner (GR NO. 222239, January 15, 2020), where the revenue regulation in question was
just a re-issuance of already existing regulation and was just an interpretation of a provision of
the NIRC being administered by BIR, SC ruled that publication, public hearing and registration
with the UP Center of the regulation is no longer required.

6. The Congress passed a bill imposing P3.00 tax to every private citizen vehicle plying the major
tollways, such as the North Luzon Expressway. The tax collected is intended to improve and
rehabilitate the said expressways to abate the escalating incidence of vehicular accidents therein.
The tax measure will most like be declared as:

a. Invalid. Equal protection clause is violated; public utility vehicle that also use the
expressways are not subjected to the same tax.
b. Valid. The tax measure may be adopted and enforced to promote public welfare and safety.
c. Invalid. Congress, in the exercise of its taxing power in this case, violated the
inherent limitation that the taxes must be for public purpose.
d. Valid. Congress has the plenary power to determine the subject of taxation.

Explanation. There is no doubt that Choices (b) and (d) are correct and a tax law is valid IF no
other conditions that may invalidate the law exist. In this case, there are situations that needs to
be considered whether or not the law is valid. There is an apparent issue on equal protection
clause as only private vehicles are covered by the tax. However, note that expressways are
privately owned or operated. As between equal protection clause and public purpose, which is
overriding? In this case, if the law will still be invalid if there is no issue on equal protection
clause, as there is still a violation of the inherent limitation that taxes must be for public purpose.
On the hand, if the law is declared invalid for violation of the limitation that taxes must be for
public purpose, then there is no point discussing equal protection clause.

7. Andy Lim is the “tsinoy” owner of “Mady Lim Pension House” located in Pasay City. On February
2020, the said lodging house was auctioned publicly by the city government for Andy Lim’s failure
to pay the accumulated real property tax thereon amounting to P200,000.00. Andy Lim filed a
petition to annul the public auction on the ground that his property tax liability has been
extinguished by way of compensation when the City of Pasay is yet to pay him P300,000.00 for
the just compensation of one of his properties that the city expropriated in 2018. Is Andy Lim’s
contention tenable?

a. Yes. In this case, the parties involved in the auction sale and in the expropriation are the
same. Hence compensation is proper.
b. No. Andy Lim cannot refuse to pay the tax simply because he has claim against
the government; his remedy is to execute the judgment awarding him the just
compensation.
c. No. The expropriated property is not the same property upon which the real property tax
was levied.
d. Yes. Taxes and just compensation are similar in nature since both arise from the
government’s exercise of its sovereign power, i.e. taxation and eminent domain.

Explanation. The issue here is whether or not compensation is proper. You know very well
that taxes cannot be offset against debts or judgment. First, as consistently been held by the
 SC, the government and the taxpayer are not the debtor and creditor of each other; there is no
reciprocal contractual obligation between the two; Second, taxes and debts/judgments arise from
different sources. There may be other reasons under jurisprudence. Choice (a) is not correct.
In fact, in the auction sale, there are third parties, i.e. buyers in good faith, whose right might be
affected by the petition for annulment, they must be impleaded. Strictly speaking, there no
identity of parties in the auction sale and expropriation. Choice (c) is a correct statement. Andy
Lim has no more obligation to pay the real property tax on the expropriated property;
expropriated property and the property auctioned are totally different. This statement, however,
has no bearing and is irrelevant in the case. Option (d) is partly erroneous because city
government (and other LGUs for that matter) has no sovereign powers; their power to tax is a
constitutional grant; while their power of eminent domain is a delegated power. Choice (b) is
consistent with the discussion above and lifeblood doctrine.

8. St. Lucille University is a non-stock, non-profit institution. Aside from tuition and matriculation
fees, it derives “other income” from its operations of a dormitory, a canteen, and a bookstore,
and from rental of foods stalls and parking slots, all located inside the campus catering to its
students and employees. Is the school’s “other income” taxable?

a. No. The Constitution provides that a non-stock, non-profit educational institution is only
exempt from paying real estate tax.
b. Yes. The Tax Code expressly provides that income of whatever kind and nature of a non-
stock and not-profit educational institution is taxable, regardless of the disposition of the
income.
c. Yes. The receipt by St. Lucille University of the “other income” makes it a proprietary
educational institution. Accordingly, it is subject to 10% tax on its taxable income provided
that the said “other income” does not exceed 50% of its entire gross income.
d. Yes. Revenues and income of a non-stock, not-profit educational institution
regardless of the source are not taxable provided that it is used actually, directly,
and exclusively for educational purposes.

Explanation: Choice (a) is not entirely correct as there is another provision in the constitution
which exempts revenues and income of non-stock, non-profit educational institution from taxes,
provided that it is used actually, directly and exclusively for educational purposes [which is
Choice (d)]. Because of this constitutional exemption [i.e. Choice (d)] on the revenues and
income of non-stock, non-profit educational institutions, the Supreme Court held in CIR v. DLSU
that the last paragraph of Section 30, which states that income of whatever kind and nature of a
non-stock and not-profit educational institution is taxable, regardless of the disposition of the
income (Choice b) not applicable in so far as DLSU and similarly situated are concerned. (note:
The last paragraph of Section 30 was not declared invalid, it was declared as not applicable to
DLSU and similarly situated only). Choice (c) is not correct. Proprietary educational institution is
defined in Section 27, NIRC and not in the manner as provided in Choice (c).

9. The Basilica of Our Lady of Mt. Tupira, a Catholic church, is a well-known destination for local
pilgrims because of the alleged miracles performed by the Lady. Rev. Fr. Benny Bilang, the
parish priest, owns one of the many stalls along the road adjacent to the church that sell
venerated images of the Lady and other religious articles. Pursuant to its tax ordinance, the local
government having jurisdiction over the area demanded Fr. Benny Bilang to pay local taxes and
permit fees on the sale of religious articles. Based on the foregoing, which of the following
statements is least likely to be inaccurate?

a. There is a substantial distinction between a priest selling religious items and ordinary persons
selling the same religious items. As applied to Fr. Benny Bilang, the ordinance violates the
equal protection clause.
 b. The sale of religious items by Fr. Benny Bilang is a religious activity; imposition of the local
business taxes and permit fees curtails his right to free exercise and enjoyment of a religion.
c. The sale of religious items by Fr. Benny Bilang is not an exercise of his religious
profession; he is engaging in a commercial activity. Thus, the imposition is
proper.
d. The imposition of local taxes and permit fees, which is eventually passed on to the pilgrims
who buy religious articles, constitutes curtailment of their pilgrims’ exercise of their religious
freedom.

Explanation. Definitely, Fr. Benny Bilang is engaging in commercial activity. To characterize

that this his ownership of one of the stalls selling religious articles as religious activity while the
other non-priest stall owners as not is a clear discrimination. Stated otherwise, simply because
Fr. Benny Bilang is a priest does not make the sale of religious items as a religious activity. He is
not propagating the faith; he is competing with other stall owners. American Bible case is not
applicable in this case, since what was sold there are bibles and other religious literature, the
intention is to propagate their religion. Moreover, the sale of the bibles in American Bible case is
not intended for profit. In this case, it is clear that Fr. Benny Bilang is engaging a business for
profit. Accordingly, his exercise of religious profession, etc. is not being curtailed. Choice (d) is
not correct; pilgrims are not forced or required to buy the products.

10. Malabanan, Inc. during the conduct of the tax audit by the BIR, executed between September
2004 and December 2008 eight (8) “Waiver[s] of Defense of Prescription under the Statute of
Limitation of the NIRC”. In January 2009, Malabanan received a Formal Assessment Notice
(FAN). For BIR’s inaction on its protest, Malabanan filed a petition for review before the Court of
Tax Appeals. One of the issues raised therein is the validity of the waivers, since, and as found
out during the trial, the waivers had defects, namely: a) the waivers were notarized by BIR’s own
employees who are not validly commissioned to perform notarial acts; b) BIR did not indicate
the date of its acceptance; c) BIR did not specify the amounts of and particular taxes involved,
and d) the Commissioner did not sign the waivers despite the clear mandate of the applicable
BIR issuances on the matter. The petition should be:

a. Dismissed. The parties are in pari delicto; they have no action against each other.
b. Denied. Malabanan is estopped from questioning the validity of the waivers, as it
allowed BIR to rely on them and did not raise the objection thereon until an
assessment was issued to it.
c. Granted. BIR is estopped as the defects of the waivers were of its own acts or omissions.
d. Granted. Since the parties are in pari delicto, it should be ruled against the government as
taxation involves derogation of personal rights and property interest.

Explanation: The facts are similar to CIR vs. Next Mobile, Inc. and in Asian Transmission vs.
CIR. The ruling of the SC in Next Mobile, Inc. is applied squarely in Asian Transmission case. In
those case, the SC ruled that although the parties are in pari delicto, the waivers should be
declared as valid applying lifeblood doctrine. Choice (b) is the most consistent with lifeblood
doctrine.

11. Mr. Yo So, a non-resident Chinese National, was found to be an illegal Philippine Offshore
Gaming Operator (POGO). It was found out that Mr. Yo So provides IT (information technology)-
enabled outsourcing services to their gaming clients in mainland China, who pays him directly to
his account in Bank of China, Hong Kong Branch. Mr. Yo So has six (6) Chinese employees and
rents a house in an exclusive village in Paranaque City that served as his office and place of
operation. Accordingly, BIR assed Mr. Yo So deficiency income taxes. In his protest, Mr. Yo So
argued the following:
 A. The income was sourced abroad since the services are deemed rendered abroad, Mr.
Yo So’s clients being located in mainland China;
B. Moreover, income payments are made directly to his account in Bank of China, Hong
Kong Branch; his income is beyond the reach of Philippine tax authorities;
C. Assuming that his income from the POGO is subject to tax in the Philippines, even if
it’s illegal, he should be allowed deductions for his business expenses such as
salaries and rental; and
D. Likewise, he may claim a Tax Credit for whatever income tax that he may have to
the Government of Hong Kong for the remittances of his income to Bank of China,
Hong Kong Branch.

Based on the foregoing, which of the following is most likely to be TRUE?

a. Only argument C is tenable.

b. Arguments C and D are tenable.
c. Arguments A and B are tenable.
d. Arguments B and C are tenable.

Explanation: Arguments A and B speaks about situs. In this case, what is the applicable situs
of taxation? Under the Tax Code, the situs of taxation of services in the place of performance of
the service. The service is rendered in Paranaque City. Place of payment and location of the
client are immaterial. Argument D is not proper. Under the Partnership Theory, taxes paid
abroad cannot be claimed as tax credit in the Philippines if all income of the taxpayer are derived
from sources within the Philippines (See CIR v. Lednicky). Argument C is true. The “legitimate
expenses of an illegitimate business” are deductible on the theory that the income tax is not a
tax on the gross income even if such income is earned from an illegal source.” (De Leon).

12. Fatness First, Inc. is a domestic corporation engaged in an unlimited buffet-style restaurant
business. For the taxable year 2017, BIR disallowed several expenses claimed by Fatness First
because of the latter’s failure to substantiate the same in accordance with the provisions of the
Tax Code. It appears that Fatness First purchases its ingredients from the public wet markets,
and the only document to prove that these expenses were incurred are the sheets of paper
issued to it by the vendors, indicating therein the items it purchased and the corresponding cost
thereof. Is the disallowance proper?

a. No. If a taxpayer can avail of optional standard deduction where no substantiation of

expenses is required, BIR should allow the expenses since these can be proven by the sheets
of paper issued by the vendors.
b. No. the sheets of paper issued by the vendors may be considered as the “best evidence
obtainable” to substantiate the expenses.
c. No. It appears that the expenses were indeed incurred. Cohan Rule may be
applied provided that the amount claimed as deduction is reasonable.
d. Yes. To support business expenses, the official receipts and invoices must be registered with
the BIR and must meet the requirements of the Tax Code.

Explanation: Choice (a) is not correct; OSD and Itemized Deductions are mutually exclusive
options. In this case, Fatness First chose to avail of itemized deduction. Accordingly, as
required, it must substantiate its claims for expenses. Choice (b) is not correct. The problem
does not necessitate the application of the best evidence obtainable rule. Choice (d) is not totally
correct. The case of Phlmico-Mauri is not squarely applicable; the documents presented in that
case are actual official receipts that did not comply with the requirements of the law. Moreover,
 the SC ruled therein that official receipts are not the only documents that proves expenses. This
problem may warrant the application of Cohan Rule. The existence of the expenses could be
reasonably proven; there is a direct relation between the expense claimed and the nature of the
business. Cohan rule is based on approximation but the amount claimed must be reasonable.

13. Wincard, Inc. is a foreign corporation engaged in fintech (financial technology) business. It
established a branch in BGC. In 2017, it purchased at a price of P10million a residential
condominium in BGC for the use of its General Manager in the Philippines. In May 2020, it
decided to close its business in the Philippines due to the COVID-19 pandemic and it sold the said
condominium unit to Mr. McDonald Berger, a Filipino-American restaurant owner, at a
consideration of P8million. Is Wincard, Inc. liable to pay 6% capital gains tax?

a. Yes, because WinCard, Inc. is not engaged in real estate business; the condominium unit is
not an ordinary asset.
b. No, because of the absence of a provision in the Tax Code imposing 6% capital
gains tax on sale of real property upon resident foreign corporation.
c. Yes, because the condominium unit is not used in connection Wincard’s business.
d. No, because only individuals are subject to the 6% capital gains tax.

14. In problem A-13, is the loss from the sale of the condominium unit of at least P2,000,000.00
deductible from the gross income of Wincard, Inc.?

a. No, because gains or losses are not recognized in a sale of a real estate classified as capital
asset.
b. Yes, because the sale is treated as a sale of ordinary asset, the seller being a
resident foreign corporation.
c. No, the property is not used in connection with Wincard’s usual business activity.
d. No, because the loss is a capital loss.

Explanation for 13 & 14. Pursuant to RR No. 7-2003, when the seller of a real property is a
resident-foreign corporation, the sale is subject to creditable withholding tax (and not final
withholding tax) regardless of the classification of the real property. The reason for this is that,
there is no express provision in the Tax Code requiring a resident foreign corporation to pay 6%
capital gains tax (which is a final tax) on the sale of its real property. The absence of the any
provision in the Tax Code subjecting a resident foreign corporation to 6% capital gains tax
requires that the gain or loss from the sale of such asset to be included in computing the
taxpayer’s net income subject to 30% income tax.

15. The Commissioner of Internal Revenue is authorized to set the ceiling or maximum amount that
a taxpayer may deduct from his/its gross income on the following allowable deductions except on
this:

a. Interest expense
b. Depreciation expense
c. Entertainment, amusement and recreation expense
d. De minimis benefits expense

Explanation. For Choices (b)(c) and (d), BIR have issued revenue regulations imposing the
ceiling or limits for these expenses (See the hand-outs). In the case of interest expense, the law
itself provided for the limit, i.e. interest expense is subject to the tax arbitrage rule. The
rate/amount of reduction of the interest expense is provided for in the law, not by any revenue
issuance from the BIR.
16. Tony, Steve, Clint, Thor, and Natasha, all Filipino professional musicians, formed a pop rock band
and they call themselves the “Marvelous Headvangers”. They regularly perform at night clubs
and event places, and would sometime perform as front act in major concerts. They opened a
joint account with Metro Banco, Idc., where they deposit their talent fees. All band expenses are
paid out of their deposit with Metro Banco. At the end of each month, they divide among
themselves the balance of their deposit with Metro Banco after reserving certain amount to cover
furture band expenses and acquisition of band instruments. Is the band subject to income tax?

a. Yes, Marvelous Headvangers as well as their joint account are considered as an

unregistered partnership since there is an intention to engage in profitable
activity on a continuing basis; the same is subject to corporate income tax.
b. No, since Marvelous Headvangers is not a registered business entity; it has no Tax
Identification Number; only the individual band members are subject to tax.
c. Yes, Marvelous Headvangers is considered as a corporation by estoppel. Accordingly, it is
subject to corporate income tax.
d. No, because Marvelous Headvangers is a general professional partnership; the band
members being professional musicians.

Explanation: There is a clear intention to make the activity profitable and in continuing basis
(they perform at nightclubs, etc., they set up a joint account, etc.) and they divide their profit.
There is a partnership created here. (partnership is a consensual contract; perfected by mere
agreement). Corporation, for tax purposes, as defined in Section 22 of the Tax Code includes
partnerships, regardless of the manner of creation. Accordingly, Marvelous Headvangers is
taxable in the same manner as a corporation. Option (b) is not correct. Prior registration of a
partnership (or even corporations) are not required before it is subject to tax. If income derived
from illegal business is taxable, then income by unregistered entities is likewise taxable. Option
(d) is not correct because the partnership is not a GPP; GPP pertains to partnerships of
professionals regulated by the state (i.e. lawyers, accountants, etc.) formed in the exercise of
such profession.

17. The following statements pertain to Fringe Benefits and Fringe Benefit Tax:
A. Fringe benefits may include opportunity losses (i.e. lost income) sustained by the employer in
granting benefits or privileges to its employees;
B. Expenses for compensation to be deducted from the gross income of the employer includes
the monetary value of the fringe benefits given to its employees;
C. Fringe benefit tax is deductible from the gross income of the employer; and
D. If the fringe benefit granted is a property other than money and ownership is transferred to
the employee, the value of the fringe benefits is equal to the acquisition cost of the said
property. Which of the following statements is TRUE?

a. Only 1 of the statements is true.

b. Only 2 of the statements are true.
c. Only 3 of the statements are true.
d. All of the statements are true.

Explanation: Statement (S) 1 is correct as in the case where the employer grants the employer
a loan which is subject to an interest lower than the 12% benchmark. The difference between
the 12% interest and the actual interest imposed on the loan is in the nature of an opportunity
loss on the part of the employer. S 2 is not correct; the amount that can be deducted is the
grossed-up monetary value of the fringe benefit. S 3 is correct since it is paid in connection with
the business (it is also not among those specifically excluded as deductible taxes). S 4 is
incorrect; the value of the fringe benefit is the fair market value of the property.
18. The following statements pertain to deductibility of expenses. Which of the following is most
likely to be inaccurate?

a. Where the expense is not illegal per se, the same may still be disallowed if the same is
contrary to public policy.
b. If the business is illegal, the taxpayer may not be allowed to claim deductions for
business expenses even if the expense is not per se illegal.
c. Where the expense is illegal, the same is not deductible on grounds of public policy.
d. Expenses of an illegal business of a taxpayer cannot be offset against profits of his legal
business.

Explanation: Choices (a) and (c) are correct. Expenses such as kickbacks (not illegal per se,
sometimes) or bribe (illegal per se if given to public officials) are not deductible by reason of
public policy. In Choice (d), there are 2 businesses, an illegal and a legal one. To allow
deduction of expenses pertaining to the illegal business from the profit of legal business violates
the principle that the expense must be ordinary, necessary, reasonable and must be paid or
incurred in connection with the business. Choice (c) is not accurate because even if the business
is illegal, it may be allowed to deduct expenses which are not illegal per se. (See discussion in
Question 11)

19. Ms. Anne Deres Tud, a Filipino single mom, is a pure compensation income earner with gross
annual salary of P240,000.00, exclusive of 13th month pay and other benefits. During the taxable
year, she only had one employer. Ms. Anne Deres Tud is:
a. Subject to withholding tax on her compensation income.
b. Not required to personally file her income tax return.
c. Liable to pay income tax since she is not a minimum wage earner.
d. Allowed to deduct personal and additional exemptions from her compensation income.

Explanation: Choice (a) is not correct; since the income does not exceed the P250K threshold,
and is therefore tax-exempt, the monthly compensation is not subject to withholding tax.
Persons/entities which are exempt from taxes are generally exempt from withholding tax. Choice
(c) is not correct because annual income of P250K and below is exempt from tax, whether the
employee is a minimum wage earner or not. Choice (d) is not correct, there is no more
deduction for personal and additional exemption granted to individual taxpayer. Section 35 of
the NIRC is already repealed by the Train Law. These personal and additional exemption is
already deemed included in the P250K tax exempt income (remember that TRAIN Law increased
the exempt income from P10K to P250K). Choice (b) is correct; taxpayer is not required to file
an ITR if he had been employed in one and the same employer during the taxable year. The
Certificate of Withholding (BIR Form 2316) is considered as the taxpayer’s ITR under the
Substituted Filing rule.

20. The following statements relate to tax liabilities of an individual taxpayer. Which of the following
is not correct?
a. An individual taxpayer availing the 8% income based on gross sales or receipts
may avail of the optional standard deduction.
b. A non-resident alien engaged in trade or business in the Philippines is exempt from final
withholding tax on his Lotto winnings regardless of the amount won.
c. A non-resident citizen who sells shares of stocks of MERALCO in the USA, which shares of
stocks are listed in New York Stock Exchange, is subject to tax in the Philippines.
d. A minimum wage earner, who is pure compensation income earner, is not subject to income
tax even if his gross annual compensation income, excluding 13 th month pay, exceeds
P250,000.00
 Explanation: Choice (b) is correct. Lotto winnings by A non-resident alien engaged in trade or
business in the Philippines regardless of the amount is exempt. (Note: Lotto Winnings of a
Citizen, Resident Alien and Non-resident Alien Engaged in Trade or Business in the Philippines,
used to be exempt regardless of the amount. Under the Train Law, Lotto Winnings of a Citizen
and Resident Alien of more than P10K is now subject to 20% Final Withholding Tax. The same
tax is not imposed upon the winnings of a NRAETB). Choice (c) is incorrect; the situs of taxation
is within the Philippines, MERALCO being a domestic corporation; place of sale is irrelevant.
Choice (d) is not incorrect. The overtime pay, hazard pay, night shift differential pay, etc. of a
minimum wage earner are also tax exempt. There is a possibility that the basic tax plus these
OT pay, hazard pay, night shift differential, etc. may be more than P250,000.00. What is exempt
here are the income received by the minimum wage earner, so that even if the tax-exempt
compensation (comprising of basic pay, OT pay, etc) exceeds the P250K threshold, the same is
still exempt. Choice (a) is not correct because the 8% tax is based on gross, not based on net
income.

PART B – ESSAY

I
After the tax audit of the books of accounts of PutBull Trading for the taxable year, the BIR issued a
Preliminary Assessment Notice (PAN), then later on a Final Assessment Notice (FAN) to Phil
Yonghusband, the owner, demanding him to pay deficiency income and value added tax in the total
amount of P5,000,000.00, way higher than the amount of P100,000.00 it paid. Despite receipt of the
FAN, Phil Yonghusband did not file his protest, making the assessed deficiency taxes due and
demandable. BIR's efforts to collect the deficiency taxes proved futile. Thus, it issued a Final Demand
Letter to Phil Yonghusband reiterating the demand for payment of the deficiency taxes due, with a
warning that his failure to pay the same will constrain BIR to file a criminal case against him. Still, Phil
Yonghusband failed to comply with BIR's demand, thus a criminal case was filed against him, being the
owner of PutBull Trading, for his alleged willful failure to pay the deficiency taxes.

1. Was the filing of a criminal case against Phil Yonghusband justified considering that taxes are
civil in nature? (3 points)

Suggested Answer: Yes, the filing of a criminal case is justified. Although the rule provides
that taxes are civil liabilities in nature, non-payment of taxes gives rise to a criminal liability. In
this case, Phil Yonghusband refused and continued to refuse to pay the delinquency taxes
despite the efforts exerted by the BIR. Accordingly, Phil Yonghusband may be criminally liable
and therefore, the filing of the criminal case is justified.

2. The judge convicted Phil Yonghusband and ordered him to pay the deficiency taxes based on the
principle that civil liabilities are deemed instituted in the criminal case. Is the judge correct? (2
points)

Suggested Answer No. 1. Yes, the judge is correct. Section 205 of the Tax Code and Section
11, Rule 9 of the Rules of Court of Tax Appeals provide that the judgment in the criminal case
shall not only impose the penalty but shall order payment of the taxes subject of the criminal
case as finally decided by the Commissioner. Pursuant to the said law, since Phil Yonghusband
was convicted of the crime charged, the judgment should include the taxes as finally determined
by the Commissioner.

(Note: there are other sections in the Tax Code which provides similar provision as in Sec. 205)
 Suggested Answer No. 2. No, the judge is incorrect. The Rules of Court provision stating that
civil liabilities are deemed instituted in the criminal case is not applicable because what is deemed
instituted are only those civil liabilities arising from the crime (civil liabilities ex-delicto). Civil
liability arising from other sources of obligation, such as from law, which can stand independently
of the criminal prosecution, is not included. Civil liability to pay taxes arising from the fact that
one has engaged himself in business, and not because of any criminal act committed by him. In
this case, the civil liability of Phil Yonghusband did not arise from the criminal case charged of
him but from the fact that he is the owner of Putbull Trading. Therefore, the judge was
incorrect. (See Gaw v. CIR, G.R. No. 222837, July 23, 2018, as cited in People v. Armada, CTA
Criminal Case No. O-617, June 8, 2020)

II
To ensure the availability of health professionals in the country during health emergencies and
pandemics, the Congress deemed it proper to regulate the deployment of health professionals abroad.
Accordingly, the Congress passed a law imposing travel taxes upon the said health professionals leaving
the country to work abroad in an amount equivalent to 5% of their annual gross income as stipulated in
their employment contract. The taxes collected will be utilized for the construction and/or rehabilitation
of health facilities in the country. The Philippine Overseas Employment Administration (POEA) is tasked
to collect the said taxes prior to the health professionals' departure from the Philippines.

1. May the law be declared as unconstitutional on the ground that it violates the health
professionals' right to travel? (3 points)

Suggested Answer: No, it may not be declared as unconstitutional for violating the health
professional’s right to travel. First, the constitutional guarantee of right to travel is not among
the constitutional limitations of the state’s power of taxation. Secondly, the right to travel is not
absolute. Pursuant to the constitution, the right to travel may be impaired in the interest of
national security, public safety, or public health, as may be provided by law. Third, the instant
law does not prohibit, but only regulates, the health professional’s right to travel. Based on the
foregoing, there is no curtailment of the health professional’s right to travel; hence, the law may
not be declared as unconstitutional on that ground alone.

2. If you are the counsel for the health professionals, how will you argue that the imposition and
collection of the said tax infringes the equal protection clause of the Constitution? (4 points)

Suggested Answer: If I were the counsel for the health professionals, I will argue that this tax
measure is violative of the equal protection clause in the following manner:
a. The law, in so far as it imposes the travel tax, is discriminatory against the health
professional as it is not imposed upon other overseas contract workers who are travelling
abroad for work. Both health professionals and non-health professionals are similarly
situated in this case as they both travel abroad for work;
b. Not only health professionals are needed to respond during health crises or pandemics. Non-
health professionals who are responders during pandemics of health crises include protective
service workers (e.g. security guards, policemen), cashiers in grocery stores, production and
food processing workers, maintenance workers, workers in agricultural sectors, and the like.
The imposition of the travel tax only to health workers going abroad for work, but not to
other non-health workers who are also responders during pandemics or health crisis and who
are also going abroad for work, is clearly discriminatory;
c. The law appears to be applicable whether or not there is a pandemic or health crisis. It is
discriminatory to collect the travel tax upon the health professionals even when there is no
pandemic. The imposition is not germane to the purpose of the law.
 d. The 5% travel tax is in the nature of income tax as it is based on the health professional’s
annual gross income as stipulated in his employment contract. The imposition of 5% travel
tax is tantamount to taxing the health professional working abroad on his income derived
from sources without the Philippines. This is in blatant violation to the principle that
overseas contract workers are taxable only on their income derived from sources within the
Philippines. Again, this is discriminatory and oppresive as other overseas contract workers
are not similarly taxed.

3. Will the collection by the POEA of the said tax violate the constitutional injunction against
delegation of the power to tax? (3 points)

Suggested Answer: No. The general rule is that the Congress cannot delegate its power to
tax or the power to levy tax as this is inherently legislative in nature. However, the Congress is
not prohibited to delegate to the executive branch agencies the collection and enforcement
aspect of taxation as these are purely administrative in nature. Accordingly, collection by the
POEA, an administrative agency under the executive branch of the government is not
unconstitutional.

III
Hari Pata is engaged in the business of piggery, processing and selling of meat products. It has
processing plant in Lamitan City which is subject to local business taxes. In the course of its operation,
pigs are slaughtered in the said processing plant which is additionally subject to "Permit Fee to Slaughter
Animals in the City-operated Slaughterhouses or Those Authorized by the City Government". Because of
the high incidence of African Swine Fever (ASF) in the Mindanao Islands, the City Council of Lamitan City
passed Ordinance No. 2020 requiring the payment of "Ante-Mortem and Post-Mortem Inspection Fees for
the Slaughter of Pigs in the Slaughterhouses operated by the City or those Authorized by the City
Government, and the Use of Corrals at the Slaughterhouse operated by the City Government".

1. State the fundamental principles governing the exercise of local taxing power.

Suggested Answer: Section 130 of the Local Government Code (LGC) enumerates the
fundamental principles governing the exercise of the taxing power and other revenue-raising
powers of local government units, as follows:
a. Taxation shall be uniform in each local government unit;
b. Taxes, fees, charges and other imposition shall:
i. be equitable and based as far as practicable on the taxpayers’ ability to pay;
ii. be levied and collected only for public purpose;
iii. not be unjust, excessive, oppressive, or confiscatory;
iv. not contrary to law, public policy, national economic policy, or in restraint of trade.
c. The collection of local taxes, fees, charges, and other impositions shall in no case be let to
any private person;
d. The revenue collected pursuant to the provisions of the LGC shall inure solely to the benefit
of, and be subject to the disposition by, the local government unit levying the tax, fee,
charge or other imposition unless otherwise specifically provided by the law; and
e. Each local government unit shall, as far as practicable, evolve a progressive system of
taxation.

2. May Ordinance No. 2020 be invalidated on account of direct duplicate taxation?

Suggested Answer: No. Direct double taxation means taxing twice by the same public
authority within the same jurisdiction or taxing district for the same purpose in the same taxable
period some of the property or subject matter in the territory. In this case, the rule on double
 taxation is not applicable as the impositions, i.e. "Permit Fee to Slaughter Animals in the City-
operated Slaughterhouses or Those Authorized by the City Government" and "Ante-Mortem and
Post-Mortem Inspection Fees for the Slaughter of Pigs in the Slaughterhouses operated by the
City or those Authorized by the City Government, and the Use of Corrals at the Slaughterhouse
operated by the City Government" are not taxes but are in the nature of license fees, being
regulatory in nature. Since the impositions are not taxes, there can never be a case of direct
double taxation. Accordingly, Ordinance No. 2020 cannot be invalidated on account of direct
double taxation.

Note: The two impositions are different in purpose. The first one is the Permit to Slaughter, i.e.
before the Hari Pata can slaughter an animal, it needs to pay the said fee. The other one is
Inspection Fees, before and after, the slaughter.

3. Assuming that the sales of Hari Pata tremendously declined because consumers fear that they
might consume ASF-infected meats. May Hari Pata be allowed to deduct "Losses" from its gross
income solely because of the tremendous decline in its sales?

Suggested Answer. One of the requisites for the deductibility of losses is that it must be
evidenced by a closed and completed transaction. A closed and completed transaction is one
which the facts indicate the transaction sufficiently final to ascertain that a loss has occurred. In
this case, tremendous decline in the sale of Hari Pata cannot be considered as an evidence of a
close and completed transaction that warrants recognition of a loss. Moreover, the effect of the
tremendous decline in the sales is already recognized by the taxpayer by recording in its book
only such sales that was actually made or realized. Accordingly, Hari Pata can no longer deduct
such alleged “losses” it sustained because of the sharp decline in its sales.

(Note: when the pigs were slaughtered and buried to avoid the spread of infection, then the
taxpayer is allowed to claim inventory or casualty losses, provided that the other requisites are
met/complied with. But that is not being asked in the problem.)

IV
Express Lane Freight Corporation, a domestic corporation and the Philippine subsidiary of Singapore-
based Express Lane International Freight LLC, is engaged in the business of providing international
freight forwarding, logistics, and customs brokerage services. For its export services, it collects cargoes
from different shippers, consolidates the same and stuff them inside container vans; clears the said
cargoes with the customs and other government agencies; and arranges the freight with international
shipping lines. In consideration of the said services, Express Lane collects the following fees from its
clients: a) trucking and handling fees for the collection and handling of cargoes; b) customs clearing
charges for the clearing of the cargoes with the customs; and c) ocean freight charges. Express Lane
issues its own Bill of Lading to the shippers.

1. Is Express Lane Freight Corporation subject to the 2.5% Tax on Gross Philippine Billings?

Suggested Answer: No. The 2.5% Tax on Gross Philippine Billings is imposed upon resident
foreign corporations which are international carriers of passengers, goods, or mail originating
from the Philippines. In this case, aside from the fact that Express Lane Freight Corporation is a
domestic corporation, it is also not engaged in international shipping of passengers, cargoes or
mail as it is merely an international freight forwarding company that arranges the freight of the
cargoes collected from the shippers with the international shipping lines. Accordingly, Express
Lane Freight Corporation is not subject to 2.5% Tax on Gross Philippine Billings.

Note: The problem is clear. As international freight forwarder, it merely arranges the freight
with international shipping lines.
 2. Will your answer be the same if Express Lane is instead a Philippine Branch of Express Lane
International Freight LLC?

Suggested Answer: Yes, my answer will be the same. Although this time, Express Lane is
already considered as a resident foreign corporation, being the Philippine Branch of Express Lane
International Freight LLC, the fact remains that it is not engaged in international transport of
passengers, cargoes or mail. As already discussed, the 2.5% Tax on Gross Philippine Billings is
imposed only to a resident foreign corporation which are international carriers of passengers,
goods, or mail originating from the Philippines.

3. Assuming that Express Lane incurred net operating losses during the taxable year 2020 due to
the adverse impact of COVID-19 pandemic, what is the potential income tax liability of Express
Lane?

Suggested Answer: Express Lane may be liable to pay income tax under the Minimum
Corporate Income Tax (MCIT) regime assuming it is already operating its business for more than
three (3) years. Under the Tax Code, the income tax liability of a domestic corporation or a
resident foreign corporation is, as a general rule, the higher between the MCIT, which is
computed at 2% of the gross income, and the regular income tax, which is 30% of the net
income. In this case, although Express Lane has zero regular income tax because it incurred net
operating loss, it may still be held liable to pay the 2% MCIT.

4. In relation to Question B-11, what is/are the possible tax benefits that Express Lane may avail of
or enjoy in the taxable year 2021?

Suggested Answer: Express Lane may avail of the benefits of MCIT and NOL (net operating
loss) carry-over. The Tax Code provides that any excess of the minimum corporate income tax
over the normal income tax shall be carried forward and credited against the normal income tax
for the three (3) immediately succeeding taxable years. [Sec 27(E)]. The Tax Code further
provides that the net operating loss of the business for any taxable year immediately preceding
the current taxable year, which has not been previously offset as deduction from gross income
shall be carried over as a deduction from gross income for the next three (3) consecutive taxable
years immediately following the year of such loss, subject to certain conditions [Sec. 34(D)((3)].

V
For valuable consideration, Ken A. Ford, a Filipino-businessman, executed a promissory note in favor of
his favorite son-in-law, Luigi A. Co, a Filipino certified public accountant who also manages the business
of Ken A. Ford, in the amount of P5,000,000.00, payable in 5 annual installments plus accrued interest of
6% per annum on the unpaid portion of the loan. Ken A. Ford paid the first installment in the total
amount of P1,300,000.00, inclusive of interest, on due date, November 1, 2019. Because he will be out
of the country for a cruise vacation for three months, Ken A. Ford, on October 25, 2020, paid Luigi A. Co
the amount of P1,240,000.00, inclusive of interest, representing the second installment of the loan due
November 1, 2020. While on vacation, Ken A. Ford won in the casino abroad M/V Sebo Pacific, a
Singaporean cruise ship, in total amount of P2,000,000.00. Thus, upon his return on February 1, 2021,
Ken A. Ford paid Luigi A. Co the amount of P1,180,000.00 for the third installment of his loan, inclusive of
interest.

1. Did the receipt by Luigi A. Co of the P1,180,000.00 in payment of the third installment of the
loan, which is not yet due and demandable, made him realize a taxable income? If so, how
much?
 Suggested Answer. Yes, Luigi A. Co realized an income to the extent of P180,000.00
representing the interest he earned in extending the loan of Ken A. Ford. The P1,000,000.00 is
considered as a return of his capital, hence not an income. The fact that the Ken A. Ford paid his
obligation in advance is of no moment as the same will be offset with or applied to the loan when
it becomes due within the same taxable year.

2. Will your answer be the same if Ken A. Ford simply gave the said P1,180,000 as a pure gift or
"balato" to Luigi A. Co without any obligation on the part of the latter to apply the said amount to
the loan or to render services in the future? Is the income, if any, subject to income tax?

Suggested Answer: The receipt by Luigi A. Co of the P1,180,000.00 this time is considered as
a gift. Although this is technically an income, Section 32 of the Tax Code specifically excludes
the same from the gross income of the taxpayer since it is subject to donor’s tax. Accordingly, it
is not subject to income tax.

3. Assuming that the amount of P1,180,000.00 was entrusted to Luigi A. Co for safekeeping.
However, instead of safekeeping, Luigi A. Co, without the knowledge or consent of Ken A. Ford,
used the said money to buy for himself a brand-new Rolex wrist watch. Did Luigi A. Co realize
an income?

Suggested Answer: Yes, Luigi A. Co realized an income because he treated the money he held
for safekeeping as his own by appropriating the same for himself and for his own benefit, without
the knowledge or consent of Ken A. Ford. This finds support under the following principles:
1. Under the principle of “all income derived from whatever source”, income includes all income
not expressly exempted within the class of taxable income under the law, irrespective of the
voluntary or involuntary action of the taxpayer in producing the gains and whether derived
from legal or illegal sources. Appropriation of a property entrusted for safekeeping for
personal gain may constitute estafa, an illegal act.
2. The rule is that an unlawful gain constitutes taxable income when its recipient has such
control over it that, as a practical matter, he readily derives readily realizable economic value
from it. (Rutkin v. US). In this case, Luigi A. Co exercised control over the money entrusted
to him by appropriating the same for himself.
3. Under the Economic Benefit Test, any economic benefit that a taxpayer that increases his net
worth, whatever may have been the mode by which it is effected, is taxable. In this case,
when Luigi A. Co appropriated for himself the money entrusted to him for safekeeping, his
net worth definitely increased.

VI
Income Taxi, Inc. is engaged in the business of taxi operations, vehicle lease, car repair shop, and other
related services. There is a big demand for taxi services in Iloilo City and Income Taxi wanted to expand
its operations therein. Income Taxi approached Alabank Financing, Inc., who agreed to finance the
acquisition of the needed 100 units of Chery vehicles. Thus, Income Taxi executed a document
denominated "Vehicle Lease Agreement" containing the following stipulations: that, Income Taxi is
required to pay Alabank the invoice value of the said units plus 8% interest per annum in 60 monthly
installments; that upon full payment of the total invoice value of the 100 units and interests, Alabank
shall transfer the title and ownership thereof to Income Taxi; and that in the meantime that that title to
and ownership over the vehicles is still with Alabank, all monthly payments to it shall be treated as rental
fees. Income Taxi consulted you about the tax implications of the foregoing agreement.
Specifically, it asked you to respond to the following questions:

1. For the monthly payments to be made by Income Taxi to Alabank, will these be allowed as
deductions from its gross income?
 Suggested Answer: No, the monthly payments are not deductible from the gross income. To
be deductible as rent expense, the Tax Code requires that the taxpayer has not taken or is not
taking title to the property or must have no equity in the said property other than that of a
lessee, user, or possessor. The Vehicle Lease Agreement entered into by Income Taxi and
Alabank is in the nature of a finance lease since ownership and title to the vehicles will eventually
pass to Income Taxi upon full payment of the contract price. Accordingly, the monthly payment
is to be treated as capital expenditure.

2. For income tax purposes, how will the interest to be paid by Income Taxi to Alabank be treated?

Suggested Answer: The interest to be incurred by Income Taxi is in connection with its
acquisition of property to be used in the conduct of its trade or business. Pursuant to the Tax
Code [Sec. 34(B)(3)], Income Taxi may opt to treat the interest as a deduction from the gross
income or as a capital expenditure, i.e. part of the acquisition cost of the vehicles.

3. Will Income Taxi be entitled to deduct from its gross income an allowance for depreciation for
the ordinary wear and tear of the units?

Suggested Answer: Yes. The acquisition by Income Taxi of the 100 units of vehicle under the
finance lease is in the nature of a capital expenditure. As such, said vehicles will become part of
the assets of Income Taxi, the benefit of which extends beyond one (1) taxable year. Moreover,
the said vehicles will be used directly in the connection with trade or business of Income Taxi.
Accordingly, Income Taxi may deduct from its gross income a reasonable allowance for
depreciation.

Note: In the problem, Income Taxi is your client. Hence, answer the questions in the point of
view of Income Taxi, not in the point of view of Alabank.

VII
Alan G. Descartes, a French citizen and holder of Philippine Retirement Residency Visa (PRRV) received
the following during the taxable year 2018: a) consultancy fees received for the design of an anti-virus
software and installing the same in the Wuhan facility of a Chinese biotechnology firm; b) winnings in a
casino located in Resorts World, Macau; c) dividends from a French company which derived 80% of its
gross annual income from Philippine sources for the past seven (7) years; d) gains derived from the sale
of his condominium unit in BGC, Taguig City which he sold to another foreigner; and e) monthly pensions
from "Confiance Trust Co.", the private trust company managing and administering the pension and
retirement funds of Schneider, Alan G. Descartes' former employer.

1. Which among the receipts are taxable in the Philippines?

Suggested Answer: Alan G. Discartes, being a holder of Philippine Retirement Residency Visa,
is considered as a resident alien. As such, he is taxable on his income derived only from within
the Philippines. Among the income he received during taxable year 2018, only the following are
considered as sources within the Philippines: a) dividends from a French company; and b) gains
derived from the sale of his condominium unit. Under Section 42 of the Tax Code, dividend
income from a foreign corporation whose gross income derived from Philippine sources for the
past three (3) years prior to the declaration of dividend is at least 50% of its total gross income,
is considered as derived from sources within the Philippines. In this case at bar, the dividend
income from the French Company is considered to be derived from sources within the Philippines
as the conditions mentioned earlier are present. On the other hand, since the property is located
 in the Philippines, the situs of taxation of the gains derived therefrom is also within the
Philippines pursuant to the same section of the Tax Code.

The other income received by Alan G. Discartes are derived from sources outside the Philippines.
In the case of the consultancy fee, since the services was rendered outside the Philippines, the
situs is likewise without the Philippines. For the winnings, the same is without a doubt derived
from sources without the Philippines because it was derived in Resort World, Macau. For the
monthly pension, since he is already a retiree in the Philippines, this is presumably derived from
sources without the Philippines considering that the past services rendered that entitled him to
the pension were rendered presumably abroad.

Note: For the consultancy fee, it may be also argued that the same is an income derived partly
from within and partly without. The sentence structure would seem that only the installation was
done in China, implying that the design aspect is rendered locally.

2. Will your answer be the same if Alan G. Discartes is a non-resident Filipino citizen?

Suggested Answer: Yes, my answer will be the same. Under the Tax Code, a non-resident
Filipino Citizen is taxable on his income derived from sources within the Philippines, similar to a
resident foreign corporation.

Note: This time you can no longer argue that the consultancy is derived partly within and partly
without because he is not residing in the Philippines.

BONUS

By virtue of their "Land Development, Construction and Management Agreement with Special Power of
Attorney", Libing Things, Inc., a real estate developer specializing in memorial cemetery, developed the
huge parcel of land belonging to Lito Lapida, into a high-end Mediterranean-inspired memorial cemetery,
with subdivided memorial lots, columbarium, private mausoleums, and apartment-type tombs, with
chapels, commercial spaces and open parks. Libing Things, Inc. financed the development and provided
its tangible assets as well as its expertise, which was valued at P80million. The land was valued at
P20million. The agreement further provides that the salable lots and inventories will be allocated
between the parties at 80%-20% in favor of Libing Things. The power of attorney incorporated in their
agreement provides that Libing Things will sell the salable lots allocated to Lito Lapida, collect the
proceeds thereof, and remit the same to the latter. Upon completion of the development, the total
salable lots and inventories is projected to worth at least P500million.

1. Did the agreement between Libing Things, Inc. and Lito Lapida create a taxable entity?

Suggested Answer: No, what is created is a non-taxable joint venture. Under the Tax Code
[Sec. 22], joint ventures, no matter how created, are taxable in the same manner as a
corporation, except when such joint venture is formed for the purpose of undertaking
construction projects. In this case, the object of the “Land Development, Construction and
Management Agreement with SPA” is to develop the land belonging to Lito Lapida into a high-
end Mediterranean-inspired memorial cemetery. Such development entails undertaking of
construction activities over the land.

2. Upon completion of the development, did the subdivision and allocation of the salable lots and
inventories each to the parties made them realize taxable income?
 Suggested Answer: No, the subdivision and allocation of the salable lots and inventories each
to the parties are in the nature of a partition of property. As such, the parties to the joint
venture merely received the returns of their capital. They will only realize an income once their
respective shares in or allocations of the salable lots and inventories are actually sold pursuant to
realization test and/or severance test.

3. Assuming that instead of "Land Development, Construction and Management Agreement", Lito
Lapida conveyed the title to his land in favor of Libing Things, Inc., and in exchange thereof,
Libing Things, Inc. issued shares of preferred stocks to Mr. Lapida, will the exchange require
recognition of a gain or loss?

Suggested Answer: The exchange will require recognition of a gain or loss. Pursuant to the
Section 40 of the Tax Code, if a property is transferred to a corporation by a person in exchange
for stock or unit of participation in such corporation of which as a result of such exchange said
person, alone or together with others not exceeding four persons gains control of said
corporation, no gain or loss is to be recognized. In this case, however, what was issued to Lito
Lapida are preferred shares which ordinarily are non-voting shares and do not vest the holder
thereof of any control over the issuing corporation.