University of Santo Tomas

Faculty of Civil Law

Taxation Law
Questions Asked
More Than Once
(QuAMTO 2016)

*QUAMTO is a compilation of past bar questions with answers as

suggested by UPLC and other distinct luminaries in the academe,
and updated by the UST Academics Committee to fit for the 2016
Bar Exams.

*Bar questions are arranged per topic and were selected based on
their occurrence on past bar examinations from 1990 to 2015.
 ACADEMICS COMMITTEE
KATRINA GRACE C. ONGOCO MANAGING EDITOR

REUBEN BERNARD M. SORIANO

ERINN MARIEL C. PEREZ EXECUTIVE COMMITTEE
MA. NINNA ROEM A. BONSOL

REUBEN BERNARD M. SORIANO

JUAN PAOLO MAURINO R. OLLERO LAYOUT AND DESIGN
JOHN REE E. DOCTOR

QUAMTO COMMITTEE MEMBERS

CALOS LEANDRO L. ARRIERO

ELISE MARIE B. BERTOS
GABRIELA LOUISE O.J. CANDELARIA
WARREN RODANTE D. GUZMAN
MARY GRACE D. LUNA
LEAN JEFF M. MAGSOMBOL
JUAN PAOLO MAURINO R. OLLERO
ANN CAIRA C. SURIO
MARY JANE D. VILARAY

ATTY. AL CONRAD B. ESPALDON

ADVISER
 QUAMTO FOR TAXATION LAW (1991-2015)
GENERAL PRINCIPLES OF TAXATION
Nature of Taxation
Q: What is the nature of the power of taxation? (1996,
2005)
A: The power to tax is an attribute of sovereignty and is
inherent in the State. It is a power emanating from
necessity because it imposes a necessary burden to
preserve the State's sovereignty (PhiL Guarantee Co. vs.
Commissioner, L-22074, April 30, 1965). It is inherently
legislative in nature and character in that the power of
taxation can only be exercised through the enactment of
law.
ALTERNATIVE ANSWER: The nature of the power of
taxation refers to its own limitations such as the
requirement that it should be for a public purpose, that
it be legislative, that it is territorial and that it should be
subject to international comity.
Q: Why is the power to tax considered inherent in a
sovereign State? (2003)
A: It is considered inherent in a sovereign State because
it is a necessary attribute of sovereignty. Without this
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 this power is an essential
and inherent attribute of sovereignty, belonging as a
matter of 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).
B. Principle of Sound Tax System
Q: Explain the principles of a sound tax system.
(2015)
A: A sound tax system must be characterized by the
following:
a. Fiscal Adequacy – which means that the sources of
revenue should be sufficient to meet the demands
of public expenditures;
b. Administrative Feasibility – which means that the
tax laws should be capable of convenient, just, and
effective administration; and
c. Theoretical Justice or Equality - which means that
the tax imposed should be proportionate to the
taxpayer’s ability to pay.
Doctrines in Taxation
Imprescriptibility
Q: May the collection of taxes be barred by
prescription? Explain your answer. (2001)
A: Yes. The collection of taxes may be barred by
prescription. The prescriptive periods for collection of
taxes are governed by the tax law imposing the tax.
However, if the tax law does not provide for
prescription, the right of the government to collect
taxes becomes imprescriptible.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
Q: Taxes were generally imprescriptible; statutes,
however, may provide otherwise. State the rules that
have been adopted on this score
(a) The National Internal Revenue Code;
(b) The Tariff and Customs Code; and
(c) The Local Government Code Answer: (1997)
A: The rules that have been adopted on prescription are
as follows:
a. National Internal Revenue Code –
1. 3 years - The statute of limitation for assessment
of tax if a return is filed is within three (3)
years from the last day prescribed by law for
the filing of the return or if filed after the last
day, within three years from date of actual
filing. A return filed before the last day
prescribed by law shall be considered to have
been filed on such last day. The period to collect
the tax is within five years from date of
assessment.
2. 10 years - If no return is filed or the return
filed is false or fraudulent with intent to
evade the tax, the tax may be assessed, or a
proceeding in court for the collection of such
tax may be filed without assessment, at any
time within ten (10) years after the discovery
of the falsity, fraud or omission.
Any internal revenue tax which has been
assessed within the period of limitation as
prescribed hereof may be collected within five
(5) years following the assessment of the tax.
b. Tariff and Customs Code - It does not express any
general statute of limitation; it provided, however,
that “when articles have been entered and passed
free of duty or final adjustments of duties made, with
subsequent delivery, such entry and passage free of
duty or settlements of duties will, after the expiration
of three (3) years from the date of the final payment
of duties, in the absence of fraud or protest or
compliance audit pursuant to the provisions of this
Code, be final and conclusive upon all parties, unless
the liquidation of the import entry was merely
tentative." (Sec. 1603 TCC, as amended by R.A. 9135)
c. Local Government Code - Local taxes, fees, or charges
shall be assessed within five (5) years from the date
they became due. In case of fraud or intent to evade
the payment of taxes, fees or charges the same maybe
assessed within ten (10) years from discovery of the
fraud or intent to evade payment. They shall also be
collected either by administrative or judicial action
within five (5) years from date of assessment (Sec.
194, LGC).
Double Taxation
Q: Differentiate between double taxation in the strict
sense and in a broad sense and give an example of
each. (2015)
A: Double taxation in the strict sense pertains to the
direct double taxation. This means that the taxpayer is
taxed twice by the same taxing authority, within the
same taxing jurisdiction, for the same property and for
the same purpose. Example: Imposition of final
withholding tax on cash dividends and requiring the
taxpayer to declare this tax-paid income in his income tax
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returns.
TEAM BAROPS
ACADEMICS COMMITTEE 2016
 QuAMTO for TAXATION LAW (1991-2015)
On the other hand, double taxation in the broad sense
pertains to indirect double taxation. This extends to all
cases in which there is a burden of two or more
impositions. It is a double taxation other than those
covered by direct double taxation (CIR v. Solidbank Corp,
436 SCRA 416 [2003]). Example: Subjecting the interest
income of banks on their deposits with other banks to the
5% gross receipt tax (GRT) despite of the same income
having been subjected to 20% final withholding tax
(FWT), is only a case of indirect double taxation. The GRT
is a tax on the privilege of engaging in business while the
FWT is a tax on privilege of earning income. (CIR v. Bank
of Commerce, 459 SCRA 638 [2005]).
Q: When an item of income is taxed in the Philippines
and the same income is taxed in another country, is
there a case of double taxation? (1997)
A: Yes. However, it is only a case of indirect duplicate
taxation which is not legally prohibited because the
taxes are imposed by different taxing authorities.
Q: X, a lessor of a property, pays real estate tax on the
premises, a real estate dealer's tax based on rental
receipts and income tax on the rentals. X claims that
this is double taxation? Decide. (1996)
A: There is no double taxation. DOUBLE TAXATION
means taxing for the same tax period the same thing or
activity twice, when it should be taxed but once, by the
same taxing authority for the same purpose and with the
same kind or character of tax. The REAL ESTATE TAX is a
tax on property; the REAL ESTATE DEALER'S TAX is a tax
on the privilege to engage in business; while the INCOME
TAX; a tax on the privilege to earn an income. These taxes
are imposed by different taxing authorities and are
essentially of different kind and character (Villanueva vs.
City of Iloilo, 26 SCRA 578).
Q: Is double taxation a valid defense against the
legality of a tax measure? (1997)
A: No. double taxation standing alone and not being
forbidden by our fundamental law is not a valid
defense against the legality of a tax measure (Pepsi
Cola v. Tanawan 69 SCRA 460). However, if double
taxation amounts to a direct duplicate taxation, in that
the same subject is taxed twice when it should be taxed
but once, in a fashion that both taxes are imposed for the
same purpose by the same taxing authority, within the
same jurisdiction or taxing district, for the same
taxable period and for the same kind or character of a
tax, then it becomes legally objectionable for being
oppressive and inequitable.
Q: What are the usual methods of avoiding the
occurrence of double taxation? (1997)
A: The usual methods of avoiding the occurrence of
double taxation are:
1. Allowing reciprocal exemption either by law or by
treaty;
2. Allowance of tax credit for foreign taxes paid;
3. Allowance of deduction for foreign taxes paid; and
4. Reduction of the Philippine tax rate.
Escape from taxation
*QUAMTO is a compilation of past bar questions with answers as suggested by UPLC and other distinct
luminaries in the academe, and updated by the UST Academics Committee to fit for the 2016 Bar Exams.
Q: Distinguish tax evasion from tax avoidance. (1996)
A: Tax evasion is a scheme used outside of those lawful
means to escape tax liability and, when availed of, it
usually subjects the taxpayer to further or additional civil
or criminal liabilities. Tax avoidance, on the other hand,
is a tax saving device within the means sanctioned by
law, hence legal.
Tax Avoidance
Q: Mr. Pascual's income from leasing his property
reaches the maximum rate of tax under the law. He
donated one-half of his said property to a non-
stock, non-profit educational institution whose
income and assets are actually, directly and
exclusively used for educational purposes, and
therefore qualified for tax exemption under Article
XIV, Sec. 4 (3) of the Constitution and Sec. 30 (h) of the
Tax Code. Having thus transferred a portion of his
said asset, Mr. Pascual succeeded in paying a lesser
tax on the rental income derived from his property.
Is there tax avoidance or tax evasion? Explain. (2000)
A: There is tax avoidance. Mr. Pascual has exploited a fully
permissive alternative method to reduce his income tax
by transferring part of his rental income to a tax exempt
entity through a donation of one-half of the income
producing property. The donation is likewise exempt
from the donor's tax. The donation is the legal means
employed to transfer the incidence of income tax on the
rental income.
Q: Maria Suerte, a Filipino citizen, purchased a lot in
Makati City in 1980 at a price of P1 million. Said
property has been leased to MAS Corporation, a
domestic corporation engaged in manufacturing
paper products, owned 99% by Maria Suerte. In
October 2007, EIP Corporation, a real estate
developer, expressed its desire to buy the Makati
property at its fair market value P300 million,
payable as follows: (a) P60 million down payment;
and (b) balance, payable equally in twenty four (24)
monthly consecutive installments. Upon the advice of
a tax lawyer, Maria Suerte exchanged her Makati
property for shares of stock of MAS Corporation. A
BIR ruling, confirming the tax-free exchange of
property for shares of stock, was secured from the
BIR National Office and a Certificate Authorizing
Registration was issued by the Revenue District
Officer (RDO) where the property was located.
Subsequently, she sold her entire stock holdings in
MAS Corporation to EIP Corporation for P300 million.
In view of the tax advice, Maria Suerte paid only the
capital gains tax of P29,895,000 ( P100,000 x 5% plus
P298,900,00 x 10% ), instead of the corporate income
tax of P104,650,00 ( 35% on P299 million gain from
sale of real property ). After evaluating the capital
gains tax payment, the RDO wrote a letter to Maria
Suerte, stating that she committed tax evasion.
Is the contention of the RDO tenable? Or was it tax
avoidance that Maria Suerte had resorted to? Explain.
(2008)
A: The contention of the RDO is not tenable. Maria Suerte
resorted to tax avoidance and not tax evasion. Tax
avoidance is the use of legal means to reduce tax liability
and it is the legal right of taxpayer to decrease the amount
of what otherwise would be his taxes by means which the
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 QUAMTO FOR TAXATION LAW (1991-2015)
law permits (Heng Tong Textiles Co., Inc. v. Commissioner,
24 SCRA 767 1968). There is nothing illegal about
transferring first the property to a corporation in a tax
free exchange and later selling the shares obtained in the
exchange at a lower tax than what could have been
imposed if the property was sold directly.
ANOTHER SUGGESTED ANSWER:
The contention is devoid of basis. To constitute tax
evasion there must be an integration of three factors,
namely: 1) the end to be achieved, i.e. payment of an
amount of tax less than what is known by the taxpayer to
be legally due; 2) an accompany state of mind which is
described as being evil, in bad faith, willful or
deliberate and not merely accidental: and 3) a course
of action or failure of action which is unlawful. The
second and third factors are not present in the instant
case, hence there is no tax evasion that was committed.
The means employed to reduce taxes being allowed by
law, it was a case of tax avoidance that was resorted to
(CIR v. Toda, 438 SCRA 290 [2004]).
Tax Evasion
Q: Josel agreed to sell his condominium unit to Jess
for P2.5 Million. At the time of the sale, the property
had a zonal value of P2.0 Million. Upon the advice of a
tax consultant, the parties agreed to execute two
deeds of sale, one indicating the zonal value of P2.0
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. What are the implications
and consequences of the action. (2005)
A: The action of the parties constitutes tax evasion
and exposes Josel to:
1. DEFICIENCY FINAL INCOME TAX on the sale of real
property in the Philippines classified as a capital
asset. Under Sec. 24(D) of the NIRC, the final tax of
six percent (6%) shall be based on the gross selling
price of P2.5 Million or zonal value of P2.0 Million,
whichever is higher, i.e., P2.5 Million;
2. FRAUD PENALTY amounting to 50% surcharge on
the amount evaded (Sec. 248[B] NIRC); and
3. DEFICIENCY INTEREST of 20% per annum on the
deficiency (Sec. 249[A][B], NIRC).
ALTERNATIVE ANSWER:
There is tax evasion because of the concurrence of the
following factors:
1. The payment of less than that known by the taxpayer
to be legally due, or the non-payment of tax when it
is shown that a tax is due. It is evident that the parties
that the tax due should be computed based on the
valuation of P2.5 million and not P2.0 million;
2. An accompanying state of mind which is described as
being "evil" on "bad faith," "willful," or "deliberate
and not accidental." Despite the above knowledge,
the parties deliberately misrepresented the true
basis of the sale; and
3. A course of action or failure of action which is
unlawful. This is shown by the preparation of the two
deeds of sale which showed different values
(CIR v. The Estate of Benigno P, Toda, Jr., G.R. No.
147188, September 14, 2004). The tax evasion
committed should result to the imposition of a
50% fraud surcharge on the amount evaded (Sec.
248[B], NIRC), payment of the Deficiency Tax, and
interest of 20% per annum on the deficiency (Sec.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
249[A][B], NIRC). The parties may likewise be
subject to criminal prosecution for willfully failing to
pay the tax, as well as for filing a false and fraudulent
return (Secs. 254, 255 and 257, NIRC).
Q: 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 (2) separate
Deeds of Absolute Sale notarized on the same day by
the same notary public. Investigations 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. Thee 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 Haelton Corporation, if
any? (2014)
A: Haelton 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.
Exemption from Taxation
Q: Why are tax exemptions strictly construed against
the taxpayer? (1996)
A: Tax exemptions are strictly construed against the
taxpayer because such provisions are highly disfavored
and may almost be said to be odious to the law (Manila
Electric Company vs. Vera, 67 SCRA 351). The exception
contained in the tax statutes must be strictly
construed against the one claiming the exemption
because the law does not look with favor on tax
exemptions being contrary to the life-blood theory which
is the underlying basis for taxation.
Q: As an incentive for investors, a law was passed
giving newly established companies in certain
economic zone exemption from all taxes, duties, fees,
imposts and other charges for a period of three
years. ABC Corp. was organized and was granted
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