USON, ROXANNE

TAXATION REVIEW FINAL EXAM

PART II – 50%
 
UNLESS OTHERWISE INDICATED, EACH OF THE FOLLOWING QUESTIONS IS
WORTH 2%
 
 
II-1. Explain whether the following are deductible from business income
 
1. Capital expenditures-
Answer: No. Capital expenditures are considered as investments in
the business, thus the business can't simply deduct the money spent
on the asset from its gross income. 
2. Capital losses
Answer: No. Capital losses are not deductible from business income
3. Life insurance premiums
Answer: Yes. Life insurance premiums are deductible from business
income, the premiums that are paid on the lives of your employees
are considered a tax deductible life insurance expense and should
be claimed as a general business expense.
4. Gambling losses
Answer: No. Gambling losses are deductible only to the extent of
gambling winnings
5. Litigation expenses
Answer: Yes, if a lawsuit does is from the business activity, the
legal fees and settlement expenses will be deductible.

II-2. A died in December 2020. A has the following assets and no liabilities:
 
1.   house and lot in Alabang, where his heirs reside, with a current fair
market value of P10,000,000.00
2.   a house in Los Angeles, California, USA presently worth P100,000,000.00
3.   shares of stocks in San Miguel Corporation valued at P1,000,000.00
4.   money in a US bank amounting to $1,000,000.00 (assume a conversion
rate of $1:P50)
 
Compute the net estate assuming that A is:
 
a.   a Filipino citizen residing in the USA (3%)
b.   a Nigerian national residing in Mexico (3%)

 
II-3. GHI, Inc. is a corporation authorized to engage in the business of manufacturing
ultra-high density microprocessor unit packages. After its registration on July 5, 2005,
GHI, Inc. constructed buildings and purchased machineries and equipment. As of
December 31, 2005, the total cost of the machineries and equipment amounted to
₱250,000,000.00. However, GHI, Inc. failed to commence operations. Its factory was
temporarily closed effective September 15, 2010. On October 1, 2010, it sold its
machineries and equipment to JKL Integrated for ₱300,000,000.00. Thereafter, GHI,
Inc. was dissolved on November 30, 2010.
 
a. Is the sale of the machineries and equipment to JKL Integrated subject to
normal corporate income tax or capital gains tax? (3%)
Answer: The sale of the machineries and equipment to JKL Integrated is
subject to capital gains tax because the same are capital assets. Sec.
39[A] of the NIRC provides that capital assets do not include property
held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business. Here, the machineries and equipment
sold were not primarily for sale to customers in the ordinary course of
trade or business of GHI, Inc. because the same were intended for the
pursuance of its manufacturing business, and by the fact that GHI, Inc.
failed to commence business operations. That being the case, the
machineries and equipment are not ordinary assets subject to normal
corporate income tax. 
b. Distinguish an ordinary asset from a capital asset. (2%)
Answer: The term “capital assets” means property held by the taxpayer
whether or not connected with his trade or business, but does not
include Stock in trade of the 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, or Property held by the taxpayer primarily
for sale to customers in the ordinary course of his trade or business, or
Property used in trade or business, of a character which is subject to
the allowance for depreciation, or Real property used in trade or
business of the taxpayer. The enumeration of capital assets is made in
the negative manner, the four (4) general types of assets listed are
“ordinary assets.” 
 
II -4. As a way to augment the income of the employees of DEF, Inc., a private
corporation, the management decided to grant a special stipend of ₱50,000.00 for the
first vacation leave that any employee takes during a given calendar year. In addition,
the senior engineers were also given housing inside the factory compound for the
purpose of ensuring that there are available engineers within the premises every time
there is a breakdown in the factory machineries and equipment.
 
a. Is the special stipend part of the taxable income of the employees
receiving the same? If so, what tax is applicable and what is the tax rate?
(3%)

Answer: Yes because it is still clearly part of the income.

 b. Is the cash equivalent value of the housing facilities received by the senior
engineers subject to fringe benefits tax? (3%)

Answer: No. the cash equivalent value of the housing facilities

received by the senior engineers is not subject to fringe benefit tax
since the housing is located within the premises of the company for
the convenience of its employer.
 
II-5. In a civil case for Annulment of Contract of Sale, plaintiff presented in evidence the
Contract of Sale which she sought to be annulled. No documentary stamp tax on the
Contract of Sale was paid because according to plaintiff, there was no need to pay the
same since the sale was not registered with the Register of Deeds. Plaintiff is now
offering the Contract of Sale as her evidence. Is the Contract of Sale admissible?

Answer: No. the contract of sale is inadmissible in evidence. The document is

taxable because the law imposes a documentary stamp tax on sales and
agreements to sell and memoranda of Sale. Since the documentary stamp was
not paid on the contract of sale, it cannot be used as evidence in court.
 
II-6. 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 corporation are subject to VAT since they constitute income payments or
compensation for 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.
(3%)         
 
II-7. A non-stock, non-profit school always had cash flow problems, resulting in failure to
recruit well-trained administrative personnel to effectively manage the school. In 2010,
DL donated P100 million pesos to the school, provided the money shall be used solely
for paying the salaries, wages, and benefits of administrative personnel. The donation
represents less than 10% of DL's taxable income for the year. Is he subject to donor's
taxes?                    

Answer: Yes, because the donation is to be considered for use of administration

purposes.                                  
 
II-8. KI, a Philippine corporation, sold through the local stock exchange 10,000 PLDT
shares that it bought 2 years ago. KI sold the shares for P2 million and realized a net
gain of P200,000.00. How shall it pay tax on the transaction?
 
Answer: It shall pay a tax of one half of 1% of the gross sale of 2,000,000.00

II-9. On September 17, 2015, DR., Inc., a real-estate corporation duly organized and
existing under Philippine law, sold to JV a condominium unit at the Freedom
Residences in Malabon City with an area of 32.31 square meters for a contract price of
₱4,213,000.00. The condominium unit had a zonal value amounting to ₱2,877,000.00
and fair market value amounting to ₱550,000.00.
 
a. Is the transaction subject to value-added tax and documentary stamp tax?
(3%)

Answer: Yes, the transaction is subject to value-added tax and documentary

stamp tax. Sale of real properties in the ordinary course of business is subject to
value-added tax. In addition, all deeds of sale and conveyances of real property
are subject to documentary stamp tax.

b. Would your answer be the same if the property was sold by a bank in a
foreclosure sale? (3%)    

Answer: No, my answer would not be the same. Under Section 121 of the NIRC,
banks are subject to percentage taxes, and consequently, are exempt from value-
added tax under Section 109 of the NIRC. However, the sale is still subject to
documentary stamp tax since it is a sale of real property.

                                
 
II-10. AD, a French citizen permanently residing in the Philippines, received the
following income during the taxable year.
 
a. Consultancy fees received for designing a computer program and installing the
same in the Shanghai facility of a Chinese firm.
b. Interests from his deposits in a local bank of foreign currency earned abroad
converted to Philippine pesos.
c. Dividends received from an American corporation which derived 60% of its
annual gross receipts from Philippine sources for the past 7 years.
d. Gains derived from the sale of his condominium unit located in The Fort,
Taguig City to another resident alien.
 
Should the foregoing be taxed in the Philippines?