WESTERN LEYTE COLLEGE OF ORMOC

Final Exam in Tax I

January 16, 2021

Vanderful, Inc.’s income tax return for TY 2015 showed an overpayment due to excess creditable
withholding taxes in the amount of P750,000. The company opted to carry over the excess income tax
credits as tax credit against its quarterly income tax liabilities for the next succeeding years. The taxable
year 2016, the company’s income tax return showed an overpayment due to excess creditable
withholding taxes in the amount of P1,100,000, which included the carry-over from year 2015 in the
amount of P750,000 because its operations resulted in a net loss hence, there was no application for any
tax liability. This time, the company opted and marked the box “to be refunded” in respect of the total
amount of P1,100,000. Is Vanderful, Inc. correct?

II

A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co. has a subsidiary in
Hong Kong (HK Co.) and will assign P for an indefinite period to work full time for HK Co. P will bring his
family to reside in HK and will lease out his residence in the Philippines. The salary of P will be
shouldered 50% by A Co. while the other 50% plus housing, cost of living and educational allowances of
P’s dependents will be shouldered by HK Co. A Co. will credit the 50% of P’s salary to P’s Philippine bank
account. P will sign the contract of employment in the Philippines. P will also be receiving rental income
for lease of his Philippine residence. Are these salaries, allowances and rental subject to the Philippine
income tax?

III

Cebu Development Inc. (CDI) has an authorized capital stock of P5M divided into 50k shares with a par
value of P100.00 per share. Of the authorized capital stock, 25k shares have been subscribed. Mr. Juan
Legaspi is a stockholder of CDI where he has subscription amounting to 13,000 shares. To fully pay his
unpaid subscription in the amount of P950k, Mr. Legaspi transferred to the corporation a parcel of land
that he owns by virtue of a Deed of Assignment. Upon investigation, the BIR discovered that Mr. Legaspi
acquired said property for only P500k.
1. Is Mr. Legaspi liable for any taxable gain?
2. Is CDI liable for any taxable gain?

IV

B transferred his ownership over a 1,000-square meter commercial land and three-door apartment to
ABC Corp., a family corporation of which B is a stockholder. The transfer was in exchange of 10,000
shares of stock of ABC Corp. As a result, B acquired 51 % ownership of ABC Corp., with all the shares of
stock having the right to vote. B paid no tax on the exchange, maintaining that it is a tax avoidance
scheme allowed under the law. The Bureau of Internal Revenue, on the other hand, insisted that B's
alleged scheme amounted to tax evasion. Should B pay taxes on the exchange? Explain.

Mr. H decided to sell the house and lot wherein he and his family have lived for the past 10 years,
hoping to buy and move to a new house and lot closer to his children’s school. Concerned about the
capital gains tax that will be due on the sale of their house, Mr. H approaches you as a friend for advice
if it is possible for the sale of their house to be exempted from capital gains tax and the conditions they
must comply with to avail themselves of said exemption. How will you respond?
 VI

Oriental, Inc. holds a proprietary share of Capital Gold Club, Inc. It assigned without any consideration
this share to X, one of its foreign consultants, to enable him to use its facilities for the duration of his
stay in the Philippines. X signed a Declaration of Trust where he acknowledged that the share is owned
by Oriental Inc. and where he promised to transfer the same to whoever will succeed him as consultant.
When X’s contract with Oriental, Inc. expired, he left the Philippines and assigned for free the share to Y,
his successor in office. What tax, if any, can be imposed by the BIR on the transaction?

VII

X-land Condominium Corporation was organized by the owners of units in X-land Building Corporation in
accordance with the Master Deed with Declaration of Restrictions. The X-land Building Corporation, the
developer of the building, conveyed the common areas in favor of the X-land Condominium
Corporation. Is the conveyance subject to any tax?

VIII

An individual who owns a 10-door apartment with a monthly rental of P10,000 each residential unit sold
this property to another individual taxpayer. Is the seller liable to pay the capital gains tax?

IX

What is meant by taxable income?

A, a doctor by profession, sold in the year 2000 a parcel of land which he bought as a form of investment
in 1990 for P1M. The land was sold to B, his colleague, at a time when the real estate prices had gone
down and so the land was sold only for P800,000 which was then the fair market value of the land. He
used the proceeds to finance his trip to the United Sates. He claims that he should not be made to pay
the six percent final tax because he did not have any actual gain on the sale. Is his contention correct?
Why?

XI

January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for P100,000. This
property has a current fair market value of P10M in view of the construction of a concrete road
traversing the property. Juan Gonzales agrees to exchange his agricultural lot in Laguna for a one-half
hectare residential property located in Batangas, with a fair market value of P10M, owned by Alpha
Corporation, a domestic corporation engaged in the buy and sale of real property. Alpha Corporation
acquired the property in 2007 for P9M.
a. What is the nature of the real properties exchanged for tax purposes-capital asset or ordinary asset?
Explain.
b. Is Juan Gonzales subject to income tax on the exchange of property? If so, what tis the tax base and
rate? Explain.
c. Is Alpha Corporation subject to income tax on the exchange of property? Is so, what is the tax base
and rate? Explain.

XII

On April 30, 2015, Daryl resigned as the production manager of 52 nd Avenue, a television studio owned
by SSS Entertainment Corporation. 52nd Avenue issued to her a Certificate of Withholding Tax on
Compensation (BIR From 2316), which showed that the tax withheld from her compensation was equal
to her income tax due form the period from January 2015 to April 30, 2015. A month after her
resignation, Daryl put up her own studio and started producing sort films. She was able to earn a
meager income from her short films but did not keep record of her production expenses. Is Daryl
qualified for substituted filing for taxable year 2015. Explain your answer.

XIII

Why are tax exemptions strictly construed against the taxpayer?

XIV

Lucky V Corporation (Lucky) owns a 10-storey building on a 2,000 square meter lot in the City of Makati.
It sold the lot and building to Rainier for P80 million. One month after, Rainier sold the lot and building
to Healthy Smoke Company (HSC) for P200 million. Lucky filed its annual tax return and declared its gain
from the sale of the lot and building in the amount of P750,000.00.
An investigation conducted by the BIR revealed that two months prior to the sale of the properties to
Rainier, Lucky received P40 million from HSC and not from Rainier. Said amount of P40 million was
debited by HSC and reflected in its trial balance as “Other inv-Lucky Blg.”. The month after, another P40
million was reflected in HSC’s trial balance as “other inv.-Lucky Bldg.” The BIR concluded that there is
tax evasion since the real buyer of the properties of Lucky is HSC and not Rainier. It issued an
assessment for deficiency income tax in the amount of P79 million against lucky. Lucky argues that it
resorted to tax avoidance or tax saving device, which is allowed by the NIRC and BIR rules since it paid
the correct taxes based on its sale to Rainier. On the other hand, Rainier and HSC also paid the
prescribed arising from the sale by Rainier to HSC. Is the BIR correct in assessing taxes on Lucky?
Explain.

XV

XYZ Colleges is a non-stock, non-profit educational institution, run by the Archdiocese of BP City. It
collected and received the following:
Tuition fees
Dormitory fees
Rentals from canteen concessionaires;
Interest from money market placements of the tuition fees;
Donation of a lot and building by school alumni.
1. Which of these above-cited income and donation would not be exempt from taxation? Explain
briefly.
2. Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop family,
rather than the Archdiocese, which of those above-cited income and donation would be exempt from
taxation?

XVI

Federico, a Filipino citizen, migrated to the United States some six years ago and get a permanent
resident status or green card. Should he pay his Philippine income tax on the gains he derived from the
sale in the New York Stock Exchange of shares of stock in PLDT, a Philippine corporation whose shares
are listed thereat?
 XVII

Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in
international shipping. He and his wife, who manages their business, filed a joint income tax return for
2016 on March 15, 2017. After an audit of the return, the BIR issued on April 20, 2020 a deficiency
income tax assessment for the sum of P250,000, inclusive of interest and penalty. For failure of Mr. and
Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on
August 19, 2001 warrants of distraint and levy to enforce collection of the tax.
a. What is the rule of income taxation with respect to Mr. Sebastian’s income in 1997 as a seaman on
board the Norwegian vessel engaged in international shipping? Explain your answer.
b. If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in
behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary
remedies of warrants of distraint and levy? Explain your answer.

XVIII

Is the BIR authorized to issue a warrant of garnishment against the bank account of a taxpayer despite
the pendency of his protest against the assessment with the BIR or appeal with the Court of Tax
Appeals?

IX

On March 10, 2010, Continental, Inc. received a preliminary assessment notice (PAN) dated March 1,
2010 issued by the Commissioner of Internal Revenue (CIR) for deficiency income tax for 2008. It failed
to protest the PAN. The CIR thereupon issued a final assessment notice (FAN) with letter of demand on
April 30, 2010. The FAN was received by the corporation on May 10, 2010, following which or on May
25, 2010, it filed its protest against it. The CIR denied the protest on the ground that the assessment
had already become final and executory, the corporation having failed to protest the PAN. Is the CIR
correct? Explain.

XX

When is pre-assessment notice required under the following cases?

a. When the finding for any deficiency tax is the result of mathematical error in the computation of the
tax as appearing on the face of the return.
b. When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent.
c. When the excise tax due on excisable articles has been paid.
d. When an article locally purchased or imported by an exempt person, such as but not limited to
vehicles, capital equipment, machineries and spare parts has been sold, traded or transferred to non-
exempt persons.