Taxation Bar Q&A 1994-2006

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) sirdondee@gmail.
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ANSWERS TO BAR
EXAMINATION QUESTIONS
IN
TAXATION LAW
* ARRANGED BY TOPIC *
(1994 2006)
Edited and Arranged by:

ROMUALDO L. SEERIS II
Silliman University - College of Law
From the ANSWERS TO BAR EXAMINATION QUESTIONS

by the UP LAW COMPLEX & PHILIPPINE ASSOCIATION
OF LAW SCHOOLS
June 3, 2007
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 2 of 73
FOREWARD
This work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may be
freely copied and distributed, nevertheless, PERMISSION TO COPY from the editors is
ADVISABLE to protect the interest of the ORIGINAL SOURCES/REFERENCES of this
material. It is primarily intended for all those who desire to have a deeper understanding of
the issues commonly touched by the Philippine Bar Examinations and its trend on specifically
on Taxation Laws. It is specifically intended for law students from the provinces who, very
often, are recipients of deliberately distorted notes from other unscrupulous law schools and
students.
I would like to seek the indulgence of the reader for some Bar Questions which are improperly
classified under a topic and for some topics which are improperly or ignorantly phrased, for
nd
the arranger is just a Bar Reviewee who has prepared this work while reviewing for the 2
time for the Bar Exams 2007 under time constraints and within his limited knowledge of the
law. I would like to seek the readers indulgence also for a number of typographical errors in
this work.
The Arranger
Detailed Table of Contents

GENERAL PRINCIPLES........................................................................................................................... 8
Basic Features: Present Income Tax System (1996) .................................................................................................... 8
Basic Stages or Aspects of Taxation (2006) ................................................................................................................ 8
Collection of Taxes: Authority; Ordinary Courts
(2001)............................................................................................... 8 Collection of Taxes: Prescription (2001)
..................................................................................................................... 8 Direct Tax vs. Indirect Tax
(1994)................................................................................................................................ 8 Direct Tax vs. Indirect
Tax (2000)................................................................................................................................ 8 Direct Tax vs.
Indirect Tax (2001)................................................................................................................................ 8 Direct Tax
vs. Indirect Tax (2006)................................................................................................................................ 9 Double
Taxation (1997)............................................................................................................................................... 9 Double
Taxation: What Constitutes DT? (1996) ........................................................................................................... 9
Double Taxation; Indirect Duplicate Taxation (1997)
................................................................................................... 9 Double Taxation; License Fee vs. Local Tax
(2004)..................................................................................................... 9 Double Taxation; Methods of Avoiding
DT (1997) ....................................................................................................... 9 Imprescriptibility of Tax Laws
(1997) .......................................................................................................................... 9 Power of Taxation: Equal
Protection of the Law (2000) ............................................................................................ 10 Power of Taxation:
Inherent in a Sovereign State (2003) ........................................................................................... 10 Power of
Taxation: Legality; Local Govt Taxation (2003).......................................................................................... 10
Power of Taxation: Legislative in Nature (1994) ........................................................................................................
10 Power of Taxation: Limitations of the Congress (2001)
............................................................................................. 10 Power of Taxation: Limitations: Passing of Revenue
Bills (1997) .............................................................................. 11 Power of Taxation: Limitations; Power to
Destroy (2000) .......................................................................................... 11 Power of Taxation: Revocation of
Exempting Statutes (1997) ................................................................................... 11 Power of Taxation; Inherent
in a Sovereign State (2005) ........................................................................................... 11 Power of Taxation;
Legislative in Nature (1996) ........................................................................................................ 12 Purpose of
Taxation; Interpretation (2004)................................................................................................................ 12 Purpose
of Taxation; Legislative in Nature (2004) ..................................................................................................... 12 Rule
on Set-Off or Compensation of Taxes (1996) ..................................................................................................... 12
Rule on Set-Off or Compensation of Taxes (2001).....................................................................................................
12 Rule on Set-Off or Compensation of Taxes
(2005)..................................................................................................... 13 Rule on Set-Off or Compensation on
Taxes (2005).................................................................................................... 13 Tax Avoidance vs. Tax Evasion
(1996)...................................................................................................................... 13 Tax Avoidance vs. Tax
Evasion (2000)...................................................................................................................... 13 Tax Exemptions:
Nature & Coverage; Proper Party (2004) ........................................................................................ 13 Tax Laws;
BIR Ruling; Non-Retroactivity of Rulings (2004) ....................................................................................... 14 Tax
INCOME
Pyramiding; TAXATION
Definition ................................................................................................................................
& Legality (2006) ............................................................................................................ 14 14
Basic:
Taxpayer Allowable
Suit; Deductions
When Allowed vs. Personal Exemptions (2001) .................................................................................. 14
(1996).........................................................................................................................
Basic:
14 Meaning of Taxable Income
Uniformity in (2000) .................................................................................................................
the Collection of Taxes (1998)
15 Basic: Principle of Mobilia Sequuntur Personam (1994)............................................................................................
............................................................................................................. 14
15 Basic: Proper Allowance of Depreciation (1998)
....................................................................................................... 15 Basic: Sources of Income: Taxable Income
(1998) .................................................................................................... 15 Basic: Tax Benefit Rule (2003)
.................................................................................................................................. 15 Basic; Basis of Income Tax
(1996) ............................................................................................................................ 16 Basic; Gross Income:
Define (1995).......................................................................................................................... 16 Basic; Income vs.
Capital (1995)............................................................................................................................... 16 Basic; Schedular
Treatment vs. Global Treatment (1994) ......................................................................................... 16
Compensation; Income Tax: Due to Profitable Business Deal (1995)
........................................................................ 16 Corporate: Income: Donors tax; Tax Liability (1996)
................................................................................................ 17 Corporate; Income Tax; Reasonableness of the
Bonus (2006) .................................................................................. 17 Corporate; Income: Coverage; "Off-Line"
Airline (1994)............................................................................................ 17 Corporate; Income: Coverage;
"Off-Line" Airline (2005)............................................................................................ 17 Dividends: Disguised
dividends (1994)..................................................................................................................... 18 Dividends; Income
Tax; Deductible Gross Income (1999) ......................................................................................... 18
Effect; Condonation of Loan in Taxation (1995) ........................................................................................................ 18
Fringe Benefit Tax: Covered Employees
(2001)......................................................................................................... 18 Fringe Benefit Tax: Employer
required to Pay (2003) ................................................................................................ 19 Interest: Deficiency
Interest: define (1995 Bar) .......................................................................................................... 19 Interest:
Delinquency Interest: define (1995)............................................................................................................. 19
ITR: Personal Income; Exempted to File ITR
(1997)................................................................................................... 19 ITR; Domestic Corporate Taxation
(1997).................................................................................................................. 19 ITR; Domestic Corporate
Taxation (2001).................................................................................................................. 20 ITR; Personal
Income: Two Employment (2001) ........................................................................................................ 20 ITR;
Personal Income; GSIS Pension (2000) ............................................................................................................. 20
ITR; Personal Income; Married Individual (2004)
....................................................................................................... 20 ITR; Taxpayer; Liabilities; Falsified Tax
Return (2005) .............................................................................................. 20 Partnership:

................................................................................................................................ Income
21 Personal; Tax (1995)
Income Tax:
Non-Resident Alien (2000) .................................................................................................... 21 Personal; Income
Tax: Non-Resident Citizen (1999).................................................................................................. 21 Personal;
Income Tax: Tax-Free Exchange (1997) ..................................................................................................... 22
Personal; Income Tax; Contract of Lease (1995)
....................................................................................................... 22 Personal; Income Tax; Married Individual
(1997)....................................................................................................... 22 Personal; Income Tax; Retiring
Alien Employee (2005) ............................................................................................. 23 Personal; Income
Taxation: Non-Resident Citizen (1997) .......................................................................................... 23 Taxable
Income: Illegal Income (1995 Bar)................................................................................................................ 23
Taxable or Non-Taxable; Income and Gains (2005)
................................................................................................... 23 Withholding Tax: Non-Resident Alien
(2001)............................................................................................................. 24 Withholding Tax: Retirement
Benefit (2000).............................................................................................................. 24 Withholding Tax:
Retirement Benefit (2000).............................................................................................................. 24 Withholding
Tax: Royalty (2002) ............................................................................................................................... 24
Withholding Tax; Coverage (2004)
............................................................................................................................ 25 Withholding Tax; Domestic
DEDUCTIONS,
Corporation; CashEXEMPTIONS,
Dividends (2001)
Income subject thereto EXCLUSIONS & INCLUSIONS
.............................................................................. 25 Withholding Tax;
.....................................................
(2001) ....................................................................................................... 25 Withholding
Deduction: Facilitation Fees or "kickback" (1998) .....................................................................................................
26 26
Tax; Non-Resident Alien (1994)............................................................................................................. 25
Deductions: Ordinary Business Expenses (2004)
Withholding Tax; Non-Resident Corporation (1994)
.................................................................................................... 26 Deductions: Amount for Bribe
.................................................................................................. 26 Withholding Tax; Reader's Digest Award
(2001)........................................................................................................................ 27 Deductions: Capital
(1998)........................................................................................................ 26 Withholding Tax; Time Deposit
Losses; Prohibitions (2003) ...................................................................................................... 27 Deductions:
Interest; GSIS Pension (1994) .................................................................................. 26
Deductible Items from Gross Income (1999).......................................................................................... 27
Deductions: Income Tax: Donation: Real Property (2002)
........................................................................................ 27 Deductions: Non-Deductible Items; Gross Income
(1999) ......................................................................................... 28 Deductions: Requisites; Deducibility of a
Loss (1998) .............................................................................................. 28 Deductions; Income Tax: Allowable
Deductions (2001)............................................................................................. 28 Deductions; Vanishing
Deduction; Purpose (2006) ................................................................................................... 28 Exclusion &
Inclusion; Gross Receipts (2006) .......................................................................................................... 28
Exclusion vs. Deduction from Gross Income
(2001).................................................................................................. 28 Exclusions & Inclusions: Benefits on
Account of Injury (1995) ................................................................................. 29 Exclusions & Inclusions:
Executive Benefits (1995).................................................................................................. 29 Exclusions &
Inclusions; Assets; Resident Alien (2005) ........................................................................................... 29
Exclusions & Inclusions; Benefits on Account of Death (1996)
................................................................................. 30 Exclusions & Inclusions; Benefits on Account of Injury
(2005) ................................................................................. 30 Exclusions & Inclusions; Compensation for
personal injuries or sickness (2003) ..................................................... 30 Exclusions & Inclusions; Facilities
or Privileges; Military Camp (1995) ..................................................................... 30 Exclusions & Inclusions;
Gifts over and above the Retirement Pay (1995) ................................................................ 31 Exclusions &
Inclusions; ITR; 13th month pay and de minimis benefits (2005) ......................................................... 31
Exclusions & Inclusions; ITR; Dividends received by a domestic corporation (2005)
................................................ 31 Exclusions & Inclusions; ITR; Income realized from sale
(2005)................................................................................ 31 Exclusions & Inclusions; ITR; Interest on deposits
(2005)......................................................................................... 31 Exclusions & Inclusions; ITR; Proceeds of
life insurance (2005) ............................................................................... 32 Exclusions & Inclusions; Life
Insurance Policy (2003) .............................................................................................. 32
Exemptions: Charitable Institutions (2000) ............................................................................................................... 32
Exemptions: Charitable Institutions; Churches (1996)
.............................................................................................. 32 Exemptions: Educational institution
(2004)............................................................................................................... 32 Exemptions: Gifts & Donations
(1994) ...................................................................................................................... 32 Exemptions: Head of the
Family: (1998)................................................................................................................... 33 Exemptions:
Non-Profit Educational Institutions (2000) ............................................................................................ 33
Exemptions: Non-Profit Entity; Ancillary Activity & Incidental Operations (1994)
...................................................... 33 Exemptions: Non-Stock/ Non-Profit Association (2002)
............................................................................................ 34 Exemptions: Prize of Peace Poster Contest
(2000).................................................................................................... 34 Exemptions: Prizes & Awards;
Athletes (1996) ......................................................................................................... 34 Exemptions: Retirement
Benefits: Work Separation (1999) ....................................................................................... 34 Exemptions:
Separation Pay (1994) .......................................................................................................................... 35
Exemptions: Separation
.......................................................................................................................... Pay
35 Exemptions: Separation(1995)
Pay
(2005) .......................................................................................................................... 36 Exemptions: Stock
Dividends (2003) ........................................................................................................................ 36 Exemptions:
Strictly Construed (1996) ..................................................................................................................... 36
Exemptions: Terminal Leave Pay (1996)
................................................................................................................... 36 Exemptions; Charitable Institutions
(2006) ............................................................................................................... 36 Exemptions; Educational
institution (2004)............................................................................................................... 36 Exemptions;
Exemptions are Unilateral in Nature (2004)........................................................................................... 37
CAPITAL
Exemptions; GAIN TAX................................................................................................................................
Govt Bonus, Gifts, & Allowances 38
(1994)
Capital Asset vs. Ordinary Asset (2003) .................................................................................................................... 38
.............................................................................................. 37 Exemptions; Personal & Additional Exemption
Capital Gain Tax; Nature (2001)
(2006) .............................................................................................. 37 Exemptions; Roman Catholic Church;
................................................................................................................................ 38 Ordinary Sale of a Capital
Limitations (2005) ......................................................................................... 38
Asset (1994)..................................................................................................................... 38 Sales of Share of
Stocks: Capital Gains Tax Return (1999) ....................................................................................... 39 Tax Basis:
Capital Gains: Merger of Corporations (1994) .......................................................................................... 39 Tax
Basis: Capital Gains: Tax-Free Exchange of Property (1994) ..............................................................................
CORPORATION
39 & PARTNERSHIP...................................................................................................... 39
Bad Debts; Factors; Elements thereof (2004) ............................................................................................................ 39
Condominium Corp.; Sale of Common Areas (1994)
................................................................................................. 40 Corporation; Sale; Creditable Withholding
Tax (1994)............................................................................................... 40 Dividends: Withholding Tax (1999)
........................................................................................................................... 40 Effect: Dissolution; Corporate
Existence (2004)........................................................................................................ 41 Minimum Corporate
Income Tax (2001)..................................................................................................................... 41 Minimum
Corporate Income Tax; Exemption (2001) .................................................................................................. 41
ESTATE & DONORS TAXES
...............................................................................................................
Donors Tax: Election Contributions (1998) ..............................................................................................................
41 41
Donors Tax; Basis for Determining Gain (1995)
....................................................................................................... 41 Donors Tax; Dacion en Pago; Effect:
Taxation (1997) .............................................................................................. 42 Donors Tax; Donation to a
Sibling (2001)................................................................................................................. 42 Donors Tax; Donation
to Non-Stock, Non-Profit Private Educational Institutions (2000)........................................... 42 Donors Tax;
Donation to Political Candidate (2003) ................................................................................................. 43
Donors Tax; Donee or Beneficiary; Stranger (2000)
................................................................................................. 43 Donors Tax; Sale of shares of Stock & Sale of
Real Property (1999)......................................................................... 43 Estate Tax: Comprehensive Agrarian
Reform Law (1994).......................................................................................... 43 Estate Tax: Donation Mortis
Causa (2001) ................................................................................................................ 43 Estate Tax: Donation

Mortis Causa vs. Inter Vivos (1994) ......................................................................................... 44 Estate Tax:
Gross Estate: Allowable Deduction (2001).............................................................................................. 44 Estate
Tax: Gross Estate: Deductions (2000) ............................................................................................................ 44
Estate Tax: Inclusion: Resident Alien (1994)
............................................................................................................. 44 Estate Tax: Payment vs. Probate
Proceedings (2004) ............................................................................................... 45 Estate Tax: Situs of
Taxation: Non-Resident Decedent (2000)................................................................................... 45 Estate Tax:
BUSINESS
Vanishing Deductions TAXES ..................................................................................................................................
(1994).................................................................................................................. 45 Estate
45
Tax; Payment vs. Probate Proceedings (2005) ............................................................................................... 45
VAT: Basis of VAT (1996) .......................................................................................................................................... 45
VAT: Characteristics of VAT
(1996)........................................................................................................................... 45 VAT: Exempted
Transactions (1996)......................................................................................................................... 45 VAT: Liable
for Payment (1996) ................................................................................................................................ 46 VAT:
Transactions "Deemed Sales (1997) ............................................................................................................... 46
VAT; Covered Transactions (1998)
BIR: Assessment: Unregistered Partnership (1997) ..................................................................................................
........................................................................................................................... 46 VAT; Exemption: 47
BIR:
Constitutionality Collection of Tax Deficiency
(2004) ................................................................................................................. 46 (1999)
VAT;
REMEDIES IN INTERNAL REVENUE TAXES ...................................................................................
................................................................................................................... 47 BIR: Compromise; Conditions
Non-VAT taxpayer; Claim for Refund (2006) .....................................................................................................
(2000)
47 47
........................................................................................................................ 48 BIR: Compromise; Extent
of Authority (1996) ........................................................................................................... 48 BIR: Compromise;
Withholding Agent (1998)............................................................................................................ 48 BIR:
Corporation: Distraint & Levy (2002) .................................................................................................................
48 BIR: Court of Tax Appeals: Collection of Taxes; Grounds for Compromise (1996)
.................................................... 49 BIR: Criminal Prosecution: Tax Evasion
(1998)......................................................................................................... 49 BIR: Extinction; Criminal Liability
of the Taxpayer (2002).......................................................................................... 49 BIR: Fraudulent Return;
Prima Facie Evidence (1998)............................................................................................... 50 BIR: Fraudulent
Return; Prima Facie Evidence (2002)............................................................................................... 50 BIR:
Garnishment: Bank Account of a Taxpayer (1998) .............................................................................................
50 BIR: Pre-Assessment Notice not Necessary (2002)
................................................................................................... 51 BIR: Prescriptive Period: Civil Action (2002)
............................................................................................................. 51 BIR: Prescriptive Period; Assessment
& Collection (1999)........................................................................................ 51 BIR: Prescriptive Period;
Criminal Action (2002)....................................................................................................... 51 BIR: Secrecy of
Bank Deposits Law (1998) ............................................................................................................... 52 BIR:
Summary Remedy: Estate Tax Deficiencies (1998) ............................................................................................
52 BIR: Unpaid Taxes vs. Claims for Unpaid Wages
(1995)............................................................................................ 53 BIR; Assessment; Criminal Complaint
(2005)............................................................................................................ 53 BIR; Authority; Refund or Credit
of Taxes (2005) ...................................................................................................... 53 BIR; Compromise
(2004)........................................................................................................................................... 53 BIR;
Compromise
BIR; (2005)...........................................................................................................................................
Deficiency Tax Assessment vs. Tax Refund / Tax Credit 54
(2005)
......................................................................... 54 BIR; Distraint; Prescription of the Action
(2002)........................................................................................................ 54 BIR; False vs. Fraudulent Return
(1996).................................................................................................................... 55 BIR; Jurisdiction; Review
Rulings of the Commissioner (2006)................................................................................. 55 BIR; Prescriptive
Period; Assessment; Fraudulent Return (2002).............................................................................. 55 BIR;
Prescriptive Period; Criminal Action (2006)....................................................................................................... 55
BIR; Taxpayer: Civil Action & Criminal Action (2002)
................................................................................................ 55 Custom: Violation of Tax & Custom Duties
(2002)..................................................................................................... 56 Customs; Basis; Automatic Review
(2002)................................................................................................................ 56 Delinquent Tax Return (1998)
................................................................................................................................... 57 Jurisdiction: Customs vs.
CTA (2000)...................................................................................................................... 57 LGU: Collection of
Taxes, Fees & Charges (1997) ..................................................................................................... 57 Tax Amnesty
vs. Tax Exemption (2001) .................................................................................................................... 57
Taxpayer: Administrative & Judicial Remedies
(2000)............................................................................................... 57 Taxpayer: Assessment: Protest: Claims
for refund (2000)......................................................................................... 58 Taxpayer: Assessment; Injunction
(2004) ................................................................................................................. 58 Taxpayer: BIR Audit or
Investigation (1999).............................................................................................................. 58 Taxpayer: City
Board of Assessment Decision; Where to appeal (1999) .................................................................... 59
Taxpayer: Claim for Refund; Procedure
(2002).......................................................................................................... 59 Taxpayer: Deficiency Income Tax
(1995)................................................................................................................... 59 Taxpayer: Exhaustion of
Administrative Remedies (1997)......................................................................................... 60 Taxpayer: Failure
to Withheld & Remit Tax (2000)..................................................................................................... 60 Taxpayer:
NIRC vs. TCC Remedies (1996) ................................................................................................................. 60
Taxpayer: Overwitholding Claim for Refund (1999)
................................................................................................... 61 Taxpayer: Prescriptive Period: Suspended
(2000)..................................................................................................... 61 Taxpayer: Prescriptive Period; Claim
for Refund (1997) ............................................................................................ 61 Taxpayer: Prescriptive Period;
Claims for Refund (1994) .......................................................................................... 61 Taxpayer: Prescriptive
Period; Claims for Refund (2004) .......................................................................................... 62
Taxpayer: Protest against Assessment (1998) .......................................................................................................... 62
Taxpayer: Protest against Assessment (1999)
.......................................................................................................... 62 Taxpayer: Protest against Assessment
(1999) .......................................................................................................... 62 Taxpayer: Protest; Claim of
Refund (1996)................................................................................................................ 63 Taxpayer; Appeal to
the Court of Tax Appeals (2005)................................................................................................ 63 Taxpayer;
Claim for Tax Credits (2006) ..................................................................................................................... 63
Taxpayer; Compromise after Criminal Action (1998)
................................................................................................. 63 Taxpayer; Protest against Assessment;
Donors Tax (1995) ..................................................................................... 64 Taxpayer; Withholding Agent;
LOCAL
Claim of & TaxREAL Refund PROPERTY TAXES..................................................................................................
(2005) ....................................................................................... 64 64
Local Taxation: Actual Use of Property (2002) .......................................................................................................... 64
Local Taxation: Coverage (2002)...............................................................................................................................
64 Local Taxation: Exemption; Real Property Taxes (2002)
........................................................................................... 65 Local Taxation: Imposition of Ad Valorem Tax
(2000) ............................................................................................... 65 Local Taxation: Legality/
Constitutionality; Tax Ordinance (2003) ............................................................................. 65 Local Taxation:
Legality; Imposition of Real Property Tax Rate (2002) ...................................................................... 65 Local
Taxation: Power to Impose (2003) ................................................................................................................... 65
Local Taxation: Remission/Condonation of Taxes
(2004).......................................................................................... 66 Local Taxation: Rule of Uniformity and
Equality (2003)............................................................................................. 66 Local Taxation; Situs of
Professional Taxes (2005)................................................................................................... 66 Local Taxation;
Special Levy on Idle Lands (2005) .................................................................................................... 66 Real
Property Tax: Underground Gasoline Tanks (2003)...........................................................................................
67 Real Property Tax; Requirements; Auction Sales of Property for Tax Delinquency (2006)
......................................... 67 Real Property Taxation: Capital Asset vs. Ordinary Asset (1995)
.............................................................................. 67 Real Property Taxation: Capital Gains vs. Ordinary
Gains (1998) .............................................................................. 67 Real Property Taxation: Coverage of
Ordinary Income (1998) ................................................................................... 67 Real Property Taxation:
Exchange of Lot; Capital Gain Tax (1997)............................................................................ 68 Real Property
Taxation: Exemption/Deductions; Donors Tax (1998)......................................................................... 68 Real
Property Taxation: Exemption: Acquiring New Principal Residence (2000)
....................................................... 68 Real Property Taxation: Fundamental Principles (1997)
............................................................................................ 69 Real Property Taxation: Principles &
Limitations: LGU (2000)................................................................................... 69 Real Property Taxation:
TARIFF
PropertyAND Sold CUSTOMS
is an Ordinary DUTIES
Asset (1998)........................................................................................................
........................................................................... 69 Real Property
Customs: Flexible Tariff Clause (2001) ..................................................................................................................
70 70
Taxation: Underground Gasoline Tanks (2001) ................................................................................... 69 Real
Customs: Administrative vs. Judicial Remedies (1997)
Property Taxation; Exempted Properties (2006) ................................................................................................
............................................................................................ 70 Customs: Importation (1995)
69
.................................................................................................................................... 70 Customs: Jurisdiction;
Seizure & Forfeiture Proceedings (1996) ............................................................................. 70 Customs: Kinds
of Custom Duties (1995) ................................................................................................................. 70 Customs:
Kinds of Custom Duties (1997) ................................................................................................................. 71
Customs: Remedies of an Importer (1996)
................................................................................................................ 71 Customs: Returning Residents:
Tourist/Travelers (2003) .......................................................................................... 71 Customs: Seizure &
Forfeiture: Effects (1994) .......................................................................................................... 71 Customs: Steps
involving Protest Cases (1994)........................................................................................................ 72 Customs;
Basis of Dutiable Value; Imported Article (2005) ....................................................................................... 72
Customs; Countervailing Duty vs. Dumping Duty
OTHER RELATED MATTERS...............................................................................................................
(2005)........................................................................................... 72 Customs; Taxability; Personal Effects 73
BIR: Bank Deposits Secrecy Violation (2000) ............................................................................................................ 73
(2005)............................................................................................................ 72
BIR: Secrecy of Bank Deposit Law (2003)
................................................................................................................. 73
GENERAL PRINCIPLES
Collection of Taxes: Authority; Ordinary Courts (2001)
Basic Features: Present Income Tax System (1996)
What are the basic features of the present income tax May the courts enjoin the collection of revenue taxes?
system"? Explain your answer. (2%)
SUGGESTED ANSWER:
SUGGESTED ANSWER:
As a general rule, the courts have no authority to enjoin the
Our present income tax system can be said to have the
following basic features: collection of revenue taxes. (Sec. 218, NIRC). However, the
(a) It has adopted a COMPREHENSIVE TAX Court of Tax Appeals is empowered to enjoin the collection
SITUS by using the nationality, residence, and source rules. of taxes through administrative remedies when collection
This makes citizens and resident aliens taxable on their could jeopardize the interest of the government or taxpayer.
income derived from all sources while non-resident aliens are (Section 11, RA 1125).
taxed only on their income derived from within the
Philippines. Domestic corporations are also taxed on Collection of Taxes: Prescription (2001)
universal income while foreign corporations are taxed only May the collection of taxes be barred by prescription?
on income from within. Explain your answer. (3%)
SUGGESTED ANSWER:
Yes. The collection of taxes may be barred by prescription.
The prescriptive periods for collection of taxes are governed
(b) The individual income tax system is mainly
by the tax law imposing the tax. However, if the tax law
PROGRESSIVE IN NATURE in that it provides a
does not provide for prescription, the right of the
graduated rates of income tax. Corporations in general are
government to collect taxes becomes imprescriptible.
taxed at a flat rate of thirty five percent (35%) of net
income.
(c) It has retained MORE SCHEDULAR THAN Direct Tax vs. Indirect Tax (1994)
GLOBAL FEATURES with respect to individual Distinguish a direct from an indirect tax.
SUGGESTED ANSWER:
taxpayers but has maintained a more global treatment on
A DIRECT TAX is one in which the taxpayer who pays
corporations.
the tax is directly liable therefor, that is, the burden of
Note: The following might also be cited by the bar candidates as
paying the tax falls directly on the person paying the tax.
eatures of the income tax system:
Individual compensation income earners are taxed on
An INDIRECT TAX is one paid by a person who is not
modified Gross Income (Gross compensation income less
directly liable therefor, and who may therefore shift or pass
personal exemptions). Self-employed and professionals are taxed
on the tax to another person or entity, which ultimately
on net income with deductions limited to seven items or in lieu
assumes the tax burden. (Maceda v. Macaraig, 197 SCRA
thereof the forty percent (40%) maximum deduction plus the
personal exemptions. Corporations are generally taxed on net 771)
income except for non-resident foreign corporations which are Direct Tax vs. Indirect Tax (2000)
taxed on gross income. Among the taxes imposed by the Bureau of Internal
The income tax is generally imposed via the Revenue are income tax, estate and donor's tax, value-added
self-assessment system or pay-as-you-file concept of imposing the
tax, excise tax, other percentage taxes, and documentary
tax although certain incomes. Including income of non-residents,
stamp tax. Classify these taxes into direct and indirect taxes,
are taxed on the pay-asyou-earn concept or the so called
and differentiate direct from Indirect taxes. (5%)
withholding tax.
The corporate income tax is a one-layer tax in that SUGGESTED ANSWER:
distribution of profits to stockholders (except to nonresidents) are not Income tax, estate and donor's tax are considered as direct
subject to income tax. taxes. On the other hand, value-added tax, excise tax, other
percentage taxes, and documentary stamp tax are indirect
taxes.
DIRECT TAXES are demanded from the very person

Basic Stages or Aspects of Taxation (2006) who, as intended, should pay the tax which he cannot shift
Enumerate the 3 stages or aspects of taxation. Explain to another; while an INDIRECT TAX is demanded in the
each. (5%) first instance from one person with the expectation that he
SUGGESTED ANSWER: can shift the burden to someone else, not as a tax but as a
The aspects
(1) of taxation
LEVYING are:
the act of the legislature in part of the purchase price.
choosing the persons, properties, rights or privileges to be Direct Tax vs. Indirect Tax (2001)
subjected to taxation. Distinguish direct taxes from indirect taxes, and give an
(2) ASSESSMENT and COLLECTION This is example for each one. (2%)
the act of executing the law through the administrative SUGGESTED ANSWER:
agencies of government. DIRECT TAXES are taxes wherein both the incidence (or
(3) PAYMENT the act of the taxpayer in settling liability for the payment of the tax) as well as the impact or
his tax obligations. burden of the tax falls on the same person. An
example of this tax is income tax where the person subject There is no double taxation. DOUBLE TAXATION
to tax cannot shift the burden of the tax to another person. 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
INDIRECT TAXES, on the other hand, are taxes wherein same kind or character of tax. The REAL ESTATE TAX is
the incidence of or the liability for the payment of the tax a tax on property; the REAL ESTATE DEALER'S TAX is
falls on one person but the burden thereof can be shifted or a tax on the privilege to engage in business; while the
passed on to another person. Example of this tax is the INCOME TAX is a tax on the privilege to earn an income.
value-added tax. These taxes are imposed by different taxing authorities and
are essentially of different kind and character (Villanueva vs.
ALTERNATIVE ANSWER: City of Iloilo, 26 SCRA 578).
A direct tax is a tax which is demanded from the person
who also shoulders the burden of the tax. Example:
corporate and individual income tax. Double Taxation; Indirect Duplicate Taxation (1997)
When an item of income is taxed in the Philippines and the
An indirect tax is a tax which is demanded from one person same income is taxed in another country, is there a case of
in the expectation and intention that he shall indemnify double taxation?
himself at the expense of another, and the burden finally SUGGESTED ANSWER:
resting on the ultimate purchaser or consumer. Example: Yes, but it is only a case of indirect duplicate taxation which
value added tax. is not legally prohibited because the taxes are imposed by
different taxing authorities.
Direct Tax vs. Indirect Tax (2006)
Distinguish "direct taxes" from "indirect taxes." Give Double Taxation; License Fee vs. Local Tax (2004)
examples. (5%) A municipality, BB, has an ordinance which requires that all
SUGGESTED ANSWER: stores, restaurants, and other establishments selling liquor
DIRECT TAXES are demanded from the very person who should pay a fixed annual fee of P20.000. Subsequently, the
should pay the tax and which he can not shift to another. municipal board proposed an ordinance imposing a sales tax
An INDIRECT TAX is demanded from one person with equivalent to 5% of the amount paid for the purchase or
the expectation that he can shift the burden to someone consumption of liquor in stores, restaurants and other
else, not as a tax but as part of the purchase price. establishments. The municipal mayor, CC, refused to sign
Examples of direct taxes are the income tax, the estate tax the ordinance on the ground that it would constitute double
and the donor's tax. Examples of indirect taxes are the taxation. Is the refusal of the mayor justified? Reason
value-added tax, the percentage tax and the excise tax on briefly. (5%)
exciseable articles. SUGGESTED ANSWER:
No. The refusal of the mayor is not justified. The
Double Taxation (1997) impositions are of different nature and character. The fixed
Is double taxation a valid defense against the legality of a annual fee is in the nature of a license fee imposed through
tax measure? the exercise of police power while the 5% tax on purchase
SUGGESTED ANSWER: or consumption is a local tax imposed through the exercise
No, double taxation standing alone and not being forbidden of taxing powers. Both a license fee and a tax may be
by our fundamental law is not a valid defense against the imposed on the same business or occupation, or for selling
legality of a tax measure (Pepsi Cola v. Tanawan, 69 SCRA the same article and this is not in violation of the rule
460). However, if double taxation amounts to a direct against double taxation {Campania General de Tabacos
duplicate taxation, de Filipinos v. City of Manila, 8 SCRA 367 [1963]).
1 in that the same subject is taxed twice when it should be
taxed but once,
2 in a fashion that both taxes are imposed for the same Double Taxation; Methods of Avoiding DT (1997)
purpose What are the usual methods of avoiding the occurrence of
3 by the same taxing authority, within the same jurisdictiondouble taxation?
or taxing district, SUGGESTED ANSWER:
4 for the same taxable period and The usual methods of avoiding the occurrence of double
5 for the same kind or character of a tax taxation are:
1 Allowing reciprocal exemption either by law or by
then it becomes legally objectionable for being treaty;
oppressive and inequitable. 2 Allowance of tax credit for foreign taxes paid;
3 Allowance of deduction for foreign taxes paid;
Double Taxation: What Constitutes DT? (1996) and
X, a lessor of a property, pays real estate tax on the 4 Note: Any
Reduction threePhilippine
of the of the methodstax
shall be given full credit.
rate.
premises, a real estate dealer's tax based on rental receipts
and income tax on the rentals. X claims that this is double Imprescriptibility of Tax Laws (1997)
taxation? Decide. Taxes were generally imprescriptible; statutes, however,
SUGGESTED ANSWER: may provide otherwise. State the rules that have been
adopted on this score by -
(a) The National Internal Revenue There are substantial differences between big investors
(b) The Tariff and Customs Code; and
Code; being enticed to the "secured area" and the business
(c) The Local Government Code Answer: operators outside that are in accord with the equal
SUGGESTED ANSWERS: protection clause that does not require territorial uniformity
The rules that have been adopted on prescription are as of laws. The classification applies equally to all the resident
follows: individuals and businesses within the "secured area". The
(a) National Internal Revenue Code - The statute residents, being in like circumstances to contributing
of limitation for assessment of tax if a return is filed is directly to the achievement of the end purpose of the law,
within three (3) years from the last day prescribed by law for are not categorized further. Instead, they are similarly
the filing of the return or if filed after the last day, within treated, both in privileges granted and obligations required.
three years from date of actual filing. If no return is filed or (Tiu, et al, v. Court of 4npeals, et al, G.R. No. 127410, January 20,
the return filed is false or fraudulent, the period to assess is 1999)
within TEN YEARS from discovery of the omission, fraud
or falsity. Power of Taxation: Inherent in a Sovereign State (2003)
Why is the power to tax considered inherent in a sovereign
State? (4%)
The period to collect the tax is within THREE YEARS SUGGESTED ANSWER:
from date of assessment. In the case, however, of It is considered inherent in a sovereign State because it is a
omission to file or if the return filed is false or necessary attribute of sovereignty. Without this power no
fraudulent, the period to collect is within TEN YEARS sovereign State can exist or endure . The power to tax proceeds upon
from discovery without need of an assessment. the theory that the existence of a government is a necessity and this
ower is an essential and inherent attribute of sovereignty, belonging as
a matter of right to every independent state or government. No
(b) Tariff and Customs Code - It does not express sovereign state can continue to exist without the means to
any general statute of limitation; it provided, however, that pay its expenses; and that for those means, it has the right
"when articles have entered and passed free of duty or final to compel all citizens and property within its limits to
adjustment of duties made, with subsequent delivery, such contribute, hence, the emergence of the power to tax. (51
entry and passage free of duty or settlement of duties will, m. Jur.,Taxation 40).
after the expiration of ONE (1) YEAR, from the date of the
final payment of duties, in the absence of fraud or protest, Power of Taxation: Legality; Local Govt Taxation (2003)
be final and conclusive upon all parties, unless the May Congress, under the 1987 Constitution, abolish the
liquidation of Import entry was merely tentative" (Sec 1603, power to tax of local governments? (4%)
TCC). SUGGESTED ANSWER:
No. Congress cannot abolish what is expressly granted by
(c) Local Government Code - Local taxes, fees, the fundamental

Congress law. The
is to provide theonly authority
guidelines andconferred
limitationstoon the
or charges shall be assessed within FIVE (5) YEARS from local government's exercise of the power to tax (Sec. 5, Art.
the date they became due. In case of fraud or intent to X, 1987 Constitution).
evade the payment of taxes, fees or charges the same maybe
assessed within TEN YEARS from discovery of the fraud Power of Taxation: Legislative in Nature (1994)
or intent to evade payment. They shall also be collected The Secretary of Finance, upon recommendation of the
either by administrative or judicial action within FIVE (5) Commissioner of Internal Revenue, issued a Revenue
YEARS from date of assessment (Sec. 194, LGC). Regulation using gross income as the tax base for
corporations doing business in the Philippines. Is the
Revenue Regulation valid?
Power of Taxation: Equal Protection of the Law SUGGESTED ANSWER:
(2000)
An Executive Order was issued pursuant to law, granting The regulation establishing gross income as the tax base for
tax and duty incentives only to businesses and residents corporations doing business in the Philippines (domestic as
within the "secured area" of the Subic Economic Special well as resident foreign) is not valid. This is no longer
Zone, and denying said incentives to those who live within implementation of the law but actually it constitutes
the Zone but outside such "secured area". Is the legislation because among the powers that are exclusively
constitutional right to equal protection of the law violated within the legislative authority to tax is the power to
by the Executive Order? Explain. (3%) determine -the amount of the tax. (See 1 Cooley 176-184).
SUGGESTED ANSWER: Certainly, if the tax is limited to gross income without
No. Equal protection of the law clause is subject to deductions of these corporations, this is changing the
reasonable classification. Classification, to be valid, must amount of the tax as said amount ultimately depends on the
(1) rest on substantial distinctions, (2) be germane to the taxable base.
purpose of the law, (3) not be limited to existing conditions
only, (4) apply equally to all members of the same class. Power of Taxation: Limitations of the Congress (2001)
Congress, after much public hearing and consultations with
various sectors of society, came to the conclusion that it
will be good for the country to have only one
system of taxation by centralizing the imposition and broadest scope of all the powers of government because in
collection of all taxes in the national government. the absence of limitations, it is considered as unlimited,
Accordingly, it is thinking of passing a law that would plenary, comprehensive and supreme. The two limitations
abolish the taxing power of all local government units. In on the power of taxation are the inherent and constitutional
our opinion, would such a law be valid under the present limitations which are intended to prevent abuse on the
Constitution? Explain your answer. (5%) exercise of the otherwise plenary and unlimited power. It is
SUGGESTED ANSWER: the Court's role to see to it that the exercise of the power
No. The law centralizing the imposition and collection of all does not transgress these limitations.
taxes in the national government would contravene the
Constitution which mandates that: . . . "Each local
government unit shall have the power to create their own Power of Taxation: Revocation of Exempting Statutes
sources of revenue and to levy taxes, fees, and charges (1997)
subject to such guidelines and limitations as Congress may "X" Corporation was the recipient in 1990 of two tax
provide consistent with the basic policy of local autonomy." exemptions both from Congress, one law exempting the
It is clear that Congress can only give the guidelines and company's bond issues from taxes and the other exempting
limitations on the exercise by the local governments of the the company from taxes in the operation of its public
power to tax but what was granted by the fundamental law utilities. The two laws extending the tax exemptions were
cannot be withdrawn by Congress. revoked by Congress before their expiry dates. Were the
revocations constitutional?
Power of Taxation: Limitations: Passing of Revenue Bills SUGGESTED ANSWER:
(1997) Yes. The exempting statutes are both granted unilaterally by
The House of Representatives introduced HB 7000 which Congress in the exercise of taxing powers. Since taxation is
envisioned to levy a tax on various transactions. After the the rule and tax exemption, the exception, any tax exemption
bill was approved by the House, the bill was sent to the unilaterally granted can be withdrawn at the pleasure of the
Senate as so required by the Constitution. In the upper taxing authority without violating the Constitution (Mactan
house, instead of a deliberation on the House Bill, the Cebu International Airport Authority v, Marcos, G.R
Senate introduced SB 8000 which was its own version of No. 120082, September 11, 1996 ).
the same tax. The Senate deliberated on this Senate Bill and
approved the same. The House Bill and the Senate Bill
were then consolidated in the Bicameral Committee. Neither of these were issued by the taxing authority in a
Eventually, the consolidated bill was approved and sent to contract lawfully entered by it so that their revocation
the President who signed the same. The private sectors would not constitute an impairment of the obligations of
affected by the new law questioned the validity of the contracts.
enactment on the ground that the constitutional provision ALTERNATIVE ANSWER:
requiring that all revenue bills should srcinate from the No. The withdrawal
deprivation of without
of property the tax due
exemption
process amounts to a
of law, hence
House of Representatives had been violated. Resolve the
issue. unconstitutional.
SUGGESTED ANSWER:
There is no violation of the constitutional requirement that Power of Taxation; Inherent in a Sovereign State (2005)
all revenue bills should srcinate from the House of Describe the power of taxation. May a legislative body enact
Representatives. What is prohibited is for the Senate to laws to raise revenues in the absence of a constitutional
enact revenue measures on its own without a bill srcinating provision granting said body the power to tax? Explain.
from the House. But once the revenue bill was passed by the
House and sent to the Senate, the latter can pass its own SUGGESTED ANSWER:
version on the same subject matter consonant with the Yes, the legislative body may enact laws even in the absence
latter's power to propose or concur with amendments. This of a constitutional provision because the power to tax is
follows from the co-equality of the two chambers of inherent in the government and not merely a constitutional
Congress (Tolentino v. Secretary of Finance, GR No. grant. The power of taxation is an essential and inherent
115455, Oct. 30, 1995). attribute of sovereignty belonging as a matter of right to
every independent government without being expressly
Power of Taxation: Limitations; Power to Destroy (2000) granted by the people. (Pepsi-Cola Bottling Company of the
ustice Holmes once said: The power to tax is not the power to Philippines, Inc. v. Municipality of
anauan, Leyte, G.R. No. L-31156, February 27,1976)
destroy while this Court (the Supreme Court) sits." Describe the
power to tax and

SUGGESTED its limitations. (5%)
ANSWER: Taxation is the inherent power of a State to collect enforced
The power to tax is an inherent power of the sovereign proportional contribution to support the expenses of
which is exercised through the legislature, to impose government. Taxation is the power vested in the legislature
burdens upon subjects and objects within its Jurisdiction to impose burdens or charges upon persons and property in
for the purpose of raising revenues to carry out the order to raise revenue for public purposes.
legitimate objects of government. The underlying basis for
its exercise is governmental necessity for without it no
The power to tax is so unlimited in force and so searching
government can exist nor endure. Accordingly, it has the
in extent that courts scarcely venture to declare it is
subject to any restrictions whatever, except such as rest in the may now be untenable" may lead the examinee to
discretion of the authority which exercises it. (Tio v. Videogram choose a proposition which is untenable on the basis of
Regulatory Board, G.R. No. L-75697, June 18, 1987) So potent is the new law despite the cut-off date adopted by the Bar
Examination Committee. R.A. No. 9282 was passed on
the power to tax that it was once opined that "the power to tax
March 30, 2004.
involves the power to destroy."
(C.J. Marshall in McCulloch v. Maryland, 4 Wheat, 316 4 L.
Purpose of Taxation; Legislative in Nature (2004)
Ed. 579, 607)
Taxes are assessed for the purpose of generating revenue to
Power of Taxation; Legislative in Nature (1996) be used for public needs. Taxation itself is the power by
What is the nature of the power of taxation? which the State raises revenue to defray the expenses of
SUGGESTED ANSWER: government. A jurist said that a tax is what we pay for
The POWER TO TAX is an attribute of sovereignty and is civilization.In our jurisdiction, which of the following
inherent in the State. It is a power emanating from necessity statements may be erroneous: 1) Taxes are pecuniary in
because it imposes a necessary burden to preserve the nature. 2) Taxes are enforced charges and contributions. 3)
State's sovereignty (Phil Guarantee Co. vs. Commissioner, Taxes are imposed on persons and property within
L-22074, April 30, 1965). It is inherently legislative in nature
and character in that the power of taxation can only be the territorial jurisdiction of a State. 4) Taxes are levied by the
exercised through the enactment of law. executive branch of the government. 5) Taxes are assessed
according to a reasonable rule of apportionment. Justify your
ALTERNATIVE ANSWER: answer or choice briefly. (5%)
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 SUGGESTED ANSWER:
that it should be subject to international comity. A. 4. Taxes are levied by the executive branch of government . This
statement is erroneous because levy refers to the act of
Purpose of Taxation; Interpretation (2004) imposition by the legislature which is done through the
Which of the following propositions may now be untenable: enactment of a tax law. Levy is an exercise of the power to
1) The court should construe a law granting tax tax which is exclusively legislative in nature and character.
Clearly, taxes are not levied by the executive branch of
exemption strictly against the taxpayer. 2) The court should government. (JVPC v. Albay, 186 SCRA 198 [1990]).
construe a law granting a municipal corporation the power
to tax most strictly. Rule on Set-Off or Compensation of Taxes (1996)
3) The Court of Tax Appeals has jurisdiction over X is the owner of a residential lot situated at Quirino
decisions of the Customs Commissioner in cases involving Avenue, Pasay City. The lot has an area of 300 square
liability for customs duties. meters. On June 1, 1994, 100 square meters of said lot
4) The Court of Appeals has jurisdiction to review decisions owned by X was expropriated by the government to be used
of the Court of Tax Appeals. 5) The Supreme Court has in the widening of Quirino Avenue, for P300.000.00
jurisdiction to review decisions of the Court of Appeals. representing the estimated assessed value of said portion.
ustify your answer or choice briefly. (5%) From 1991 to 1995, X, who is a businessman, has not been
paying his income taxes. X is now being assessed for the
SUGGESTED ANSWER: unpaid income taxes in the total amount of P150,000.00. X
2. The court should construe a law granting a municipal corporation claims his income tax liability has already been compensated
the power to tax most strictly. by the amount of P300.000.00 which the government owes
This proposition is now untenable. The basic rationale for him for the expropriation of his property. Decide.
the grant of tax power to local government units is to
safeguard their viability and self-sufficiency by directly SUGGESTED ANSWER:
granting them general and broad tax powers (Manila Electric The income tax liability of X can not be compensated with the
Company v. Province of Laguna et. al., 306 SCRA 750 [1999]) . amount owed by the Government as compensation for his
Considering that inasmuch as the power to tax may be property expropriated, taxes are of distinct kind, essence and
exercised by local legislative bodies, no longer by valid nature than ordinary obligations. Taxes and debts cannot be the
congressional delegation but by direct authority conferred subject of compensation because the Government and X are
by the Constitution, in interpreting statutory provisions on not mutually creditors and debtors of each other and a claim for
municipal fiscal powers, doubts will, therefore, have to be taxes is not a debt, demand, contract, or Judgment as is
resolved in favor of municipal corporations (City allowable to be set off. (Francia vs. IAC. G.R 76749, June
Government of San Pablo, Laguna v. Reyes, 305 SCRA 353
[1999]). This means that the court must adopt a liberal 28. 1988)
construction of a law granting a municipal corporation the
power to tax. Rule on Set-Off or Compensation of Taxes (2001)
Note: If the examinee chose proposition no. 4 as his May a taxpayer who has pending claims for VAT input
answer, it should be given full credit considering that credit or refund, set-off said claims against his other tax
the present CTA Act (R.A. No. 9282) has made the liabilities? Explain your answer. (5%)
CTA a coequal judicial body of the Court of Appeals. SUGGESTED ANSWER:
The question "Which of the following propositions
No. Set-off is available only if both obligations are liquidated referring to Republic of the Philippines v. Mambulao
and demandable. Liquidated debts are those where the exact Lumber Co., G.R. No. L-17725, February 28, 1962; and
amounts have already been determined. In the instant case, Francia v. Intermediate Appellate Court, G.R. No. L-67649,
the claim of the taxpayer for VAT refund is still pending and une 28,1998.
the amount has still to be determined. A fortiori, the
liquidated obligation of the taxpayer to the government can There is, however, legal basis to state that an assessment for
not, therefore, be set-off against the unliquidated claim a local tax may be the subject of set-off or compensation
which the taxpayer conceived to exist in his favor. ( Philex against a final judgment for a sum of money obtained by the
Mining Corp. v. CIR, GR No. 125704, August 29, 1998). taxpayer against the local government by operation of law
where the local government and the taxpayer are in their
ALTERNATIVE ANSWER: own right reciprocally debtors and creditors of each other,
No. Taxes and claims for refund cannot be the subject of and that the debts are both due and demandable. This is
set-off for the simple reason that the government and the consistent with the ruling in Domingo v. Garlitos, G.R. No.
taxpayer are not creditors and debtors of each other. There L-18994, June 29,1963, relying upon Arts. 1278 and 1279 of
is a material distinction between a tax and a claim for refund. the Civil Code, where these provisions were applied in
Claims for refunds just like debts are due from the relation to the national tax, and should therefore be
government in its corporate capacity, while taxes are due to applicable to a local tax.
the government in its sovereign capacity. ( Philex Mining
Corp. v. CIR, GR No. 125704, August 29, 1998).
Tax Avoidance vs. Tax Evasion (1996)
Distinguish tax evasion from tax avoidance.
Rule on Set-Off or Compensation of Taxes (2005) SUGGESTED ANSWER:
May taxes be the subject of set-off or compensation? Tax evasion is a scheme used outside of those lawful means
Explain. to escape tax liability and, when availed of, it usually
SUGGESTED ANSWER. subjects the taxpayer to further or additional civil or
No, taxes cannot be the subject of set-off or compensation criminal liabilities. Tax avoidance, on the other hand, is a
for the following reasons: 1) The lifeblood theory requires tax saving device within the means sanctioned by law,
that there should be no unnecessary impediments to the hence legal.
collection of taxes to make available to the government the
wherewithal to meet its legitimate objectives; and Tax Avoidance vs. Tax Evasion (2000)
Mr. Pascual's income from leasing his property reaches the
maximum rate of tax under the law. He donated one-half of
2) The payment of taxes is not a contractual obligation but his said property to a non-stock, non-profit educational
arises out of a duty to pay, and in respect of the positive acts institution whose income and assets are actually, directly
and exclusively used for educational purposes, and therefore
of
thegovernment, regardingofthethe
personal consent making and enforcing
individual taxpayerofistaxes,
not qualified for tax exemption under Article XIV, Section 4 (3)
required. (Republic v. Mambulao Lumber Co., G.R. No. of the Constitution and Section 30 (h) of the Tax Code.
L-17725, February 28, 1962; Caltex v. Commission on Audit, Having thus transferred a portion of his said asset, Mr.
G.R. No. 92585, May 8, 1992; and Philex v. Commissioner of Pascual succeeded in paying a lesser tax on the rental
Internal Revenue, G.R. No. 125704, August 28, 1998) income derived from his property. Is there tax avoidance or
tax evasion? Explain. (2%)
SUGGESTED ANSWER:
However, there is a possibility that set-off may arise, if the There is tax avoidance. Mr. Pascual has exploited a fully
claims against the government have been recognized and an permissive alternative method to reduce his income tax by
amount has already been appropriated for that purpose. Where transferring part of his rental income to a tax exempt entity
both claims have already become overdue and demandable as through a donation of one-half of the income producing
well as fully liquidated. Compensation takes place by operation property. The donation is likewise exempt from the donor's
of law under Art. 1200 in relation to Articles 1279 and 1290 of tax. The donation is the legal means employed to transfer
the New Civil Code. the incidence of income tax on the rental income.
(Domingo v. Garlitos, G.R. No. L-18994, June 29, 1963)
Rule on Set-Off or Compensation on Taxes (2005) Tax Exemptions: Nature & Coverage; Proper Party (2004)
Can an assessment for a local tax be the subject of set-off or As an incentive for investors, a law was passed giving newly
compensation against a final judgment for a sum of money established companies in certain economic zone exemption
obtained
made the by the taxpayer
assessment? against the local government that
Explain. from all taxes, duties, fees, imposts and other charges for a
period of three years. ABC Corp. was organized and was
SUGGESTED ANSWER: granted such incentive. In the course of business, ABC
No, taxes cannot be the subject of set-off even when there is Corp. purchased mechanical equipment from XYZ Inc.
a final judgment for a sum of money against the local
Normally, the sale is subject to a sales tax.
government making the assessment. The government and the
taxpayer are not the "mutual creditors and debtors" of each XYZ Inc. claims, however, that since it sold the equipment
other who can avail of the remedy of compensation which to ABC Corp. which is tax exempt, XYZ
Art. 1278 (Civil Code) is
should not be liable to pay the sales tax. Is this claim sale, thus, shifting the tax burden to the ultimate
tenable? (5%) consumer.
SUGGESTED ANSWER: (NOTABENE: This concept pertains to the VAT law which is excluded
A. No. Exemption from taxes is personal in nature and rom the bar coverage, Guidelines for 2006 Bar Examinations, June 15,
covers only taxes for which the taxpayer-grantee is directly 2006)
liable. The sales tax is a tax on the seller who is not exempt
from taxes. Since XYZ Inc. is directly liable for the sales tax Taxpayer Suit; When Allowed (1996)
and no tax exemption privilege is ever given to him, When may a taxpayer's suit be allowed?
therefore, its claim that the sale is tax exempt is not tenable. SUGGESTED ANSWER:
A tax exemption is construed in strictissimi juris and it can not A taxpayer's suit may only be allowed when an act
be permitted to exist upon vague implications (Asiatic complained of, which may include a legislative enactment,
Petroleum Co., Ltd. V. Llanes, 49 Phil 466 [1926]). directly involves the illegal disbursement of public funds
derived from taxation (Pascual vs. Secretary of Public
Works, 110 Phil. 331).
Assume arguendo that XYZ had to and did pay the sales
tax. ABC Corp. later found out, however, that XYZ merely Uniformity in the Collection of Taxes (1998)
shifted or passed on to ABC the amount of the sales tax by Explain the requirement of uniformity as a limitation in the
increasing the purchase price. ABC Corp. now claims for a imposition and/or collection of taxes. (5%|
refund from the Bureau of Internal Revenue in an amount SUGGESTED ANSWER:
corresponding to the tax passed on to it since it is tax Uniformity in the imposition and/or collection of taxes means that
exempt. Is the claim of ABC Corp. meritorious? (5%) all taxable articles, or kinds of property of the same class shall be
taxed at the same rate. The requirement of uniformity is complied
SUGGESTED ANSWER; with when the tax operates with the same force and effect in every
B. No. The claim of ABC Corp. is not meritorious. place where the subject of it is found (Churchill & Tail v.
Although the tax was shifted to ABC Corp. by the seller, Conception, 34 Phil. 969). It does not mean that lands, chattels,
what is paid by it is not a tax but part of the cost it has securities, income, occupations, franchises, privileges, necessities
assumed. Hence, since ABC Corp. is not a taxpayer, it has and luxuries shall be assessed at the same rate. Different articles
no capacity to file a claim for refund. The taxpayer who can maybe taxed at different amounts provided that the rate is uniform
file a claim for refund is the person statutorily liable for the on the same class everywhere with all people at all times.
payment of the tax. Accordingly, singling out one particular class for taxation purposes
does not infringe the requirement of uniformity.
Tax Laws; BIR Ruling; Non-Retroactivity of Rulings (2004)
Due to an uncertainty whether or not a new tax law is
applicable to printing companies, DEF Printers submitted FIRST ALTERNATIVE ANSWER:
a legal query to the Bureau of Internal Revenue on that The criteria is met when the tax laws operate equally and
issue. The BIR issued a ruling that printing companies are uniformly on all persons under similar circumstances. All
not covered by the new law. Relying on this ruling, DEF persons are treated in the same manner, the conditions not
Printers did not pay said tax. being different, both in privileges conferred and liabilities
imposed. Uniformity in taxation also refers to geographical
Subsequently, however, the BIR reversed the ruling and uniformity. Favoritism and preference is not allowed.
issued a new one stating that the tax covers printing
companies. Could the BIR now assess DEF Printers for SECOND ALTERNATIVE ANSWER:
back taxes corresponding to the years before the new A tax is deemed to have satisfied the uniformity rule when it
ruling? Reason briefly. (5%) operates with the same force and effect in every place where
SUGGESTED ANSWER: the subject maybe found. (Phil. Trust & Co. v. Yatco, 69 Phil.
No. Reversal of a ruling shall not be given a retroactive 420).
application if said reversal will be prejudicial to the taxpayer.
Therefore, the BIR can not assess DEF printers for back
taxes because it would be violative of the principle of
non-retroactivity of rulings and doing so would result in
grave injustice to the taxpayer who relied on the first ruling
INCOME TAXATION
Basic: Allowable Deductions vs. Personal Exemptions
in good faith (Section 246, NIRC; CIR v. Burroughs, Inc.,
(2001)
142 SCRA 324[1986]).
Distinguish Allowable Deductions from Personal
Tax Pyramiding; Definition & Legality (2006) Exemptions.

another Give
example foranpersonal
exampleexemption.
of an allowable
(5%) deduction and
What is tax pyramiding? What is its basis in law? (5%)
SUGGESTED ANSWER:
SUGGESTED ANSWER:
Tax Pyramiding is the imposition of a tax upon another tax. The distinction between allowable deductions and personal
It has no basis in fact or in law (People v. Sandiganbayan, exemptions are as follows:
G.R. No. 152532, August 16, 2005). There is also tax a. As to amount Allowable deductions
pyramiding when sales taxes are incorrectly applied to goods generally refer to actual expenses incurred in the pursuit
several times from production to final of trade, business or practice of profession while
personal exemptions are arbitrary amounts allowed The facts given in the problem are sufficient to compute the
by law. annual depreciation either under the declining-balance method or
As to nature Allowable deductions constitute sum-of-years-digit method. Any answer arrived at by using any of
business expenses while personal exemptions pertain to personalthe recognized methods should be given full credit. It is suggested
expenses. that no question requiring computation should be given in future
As to purpose Deductions are allowed to enable bar examinations.
the taxpayer to recoup his cost of doing business while personal Basic: Sources of Income: Taxable Income (1998)
exemptions are allowed to cover personal, family and living From what sources of income are the following
expenses.
persons/corporations taxable by the Philippine government?
As to claimants Allowable deductions can be 2) Citizen of the Philippines residing therein; [1%] 3)
claimed by all taxpayers, corporate or otherwise, while personal Non-resident citizen; [1%1 4) An individual citizen of the
exemptions can be claimed only by individual taxpayers. Philippines who is
working and deriving income from abroad as an overseas

Basic: Meaning of Taxable Income (2000)
What is meant by taxable income? (2%) contract worker;
resident or not of[1%]
the 5) An alien individual, whether a
SUGGESTED ANSWER:
TAXABLE INCOME means the pertinent items of gross Philippines; [1%] 6) A domestic corporation; [1%]
income specified in the Tax Code, less the deductions SUGGESTED ANSWER: (Section 23, NIRC of 1997) 1) A
citizen of the Philippines residing therein is
and/or personal and additional exemptions, if any,
authorized for such types of income by the Tax Code or
taxable on all income derived from sources within and
other special laws. (Sec. 31, NIRC of 1997)
without the Philippines. 2) A nonresident citizen is taxable
Basic: Principle of Mobilia Sequuntur Personam (1994) only on income derived from sources within the
What is the principle of mobilia sequuntur personam in income Philippines.
3) An individual citizen of the Philippines who is
taxation?
SUGGESTED ANSWER:
working and deriving income from abroad as an overseas
Principle of Mobilia Sequuntur Personam in income taxation contract worker is taxable only on income from sources
refers to the principle that taxation follows the property or within the Philippines.
person who shall be subject to the tax. 4) An alien individual, whether a resident or not of
the Philippines, is taxable only on income derived from
Basic: Proper Allowance of Depreciation (1998) sources within the Philippines.
1 What is the proper allowance for depreciation of any 5) A domestic corporation is taxable on all income
property used in trade or business? [3%) derived from sources within and without the Philippines.
2asset withWhat
a costisof
theP100,000
annual depreciation of a depreciable
and an estimated fixed
useful life of 20
ears and salvage value of P 10,000 after its useful life? Basic: Tax Benefit Rule (2003)
(a) What is meant by the "tax benefit rule"?
SUGGESTED ANSWER: SUGGESTED ANSWER:
1. The proper allowance of depreciation of any
(a) TAX BENEFIT RULE states that the taxpayer is
property used in trade or business refers to the reasonable
obliged to declare as taxable income subsequent recovery of
allowance for the exhaustion, wear and tear (includin
bad debts in the year they were collected to the extent of
reasonable allowance for obsolescence) of said property. The
the tax benefit enjoyed by the taxpayer when the bad debts
reasonable allowance shall include, but not limited to, an
were written-off and claimed as a deduction from income.
allowance computed under any of the following methods:
It also applies to taxes previously deducted from gross
income but which were subsequently refunded or credited.
(a) straight-line
The taxpayer is also required to report as taxable income
(b)
method; declining-balance
the subsequent tax refund or tax credit granted to the
(c)
method; sum-of-years-digit method;
extent of the tax benefit the taxpayer enjoyed when such
and
(d) any other method which may be prescribed
taxes were previously claimed as deduction from income.
by the Secretary of Finance upon recommendation of
the Commissioner of Internal Revenue (Sec. 34(F).
NIRC). (b) Give an illustration of the application of the tax
benefit rule.
2. The annual depreciation of the depreciable fixed asset may
be computed on the straight-line method which will allow the
taxpayer to deduct an annual depreciation of Php4,500,
arrived at by dividing the depreciable value (Php
l00.000-Phpl0.000) of Php90,000 by the estimated useful life
(20 years).
NOTE: The bar candidate may give a different figure depending

on the method he used in computing the annual depreciation.
SUGGESTED ANSWER:
(b) X Company has a business connected receivable
amounting to P100,000.00 from Y who was declared
bankrupt by a competent court. Despite earnest efforts to
collect the same, Y was not able to pay, prompting X
Company to write-off the entire liability. During the year of
write-off, the entire amount was claimed as a deduction for
income tax purposes reducing the taxable net income of X
Company to only P1,000,000.00. Three years later, Y
voluntarily paid his obligation previously written-off to X and from incidental or outside operations or
Company. In the year of recovery, the entire amount sources (Sec. 43, Rev. Reg. No. 2).
constitutes part of gross income of X Company because it
was able to get full tax benefit three years earlier. Basic; Income vs. Capital (1995)
How does "Income" differ from "capital"? Explain.
Basic; Basis of Income Tax (1996) SUGGESTED ANSWER:
X is employed as a driver of a corporate lawyer and receives Income differs from capital in that INCOME is any wealth
a monthly salary of P5,000.00 with free board and lodging which flows into the taxpayer other than a return of capital
with an equivalent value of P1,500.00. while capital constitutes the investment which is the source
1 What will be the basis of X's income tax? Why of income. Therefore, capital is fund while income is the
2 Will your answer in question (a) be the same if X's flow. Capital is wealth, while income is the service of
employer is an obstetrician? Why? wealth. Capital is the tree while income is the fruit (Vicente
SUGGESTED ANSWERS: Madrigal et al v. James Rqfferty, 38 Phil. 414 ).
1) The basis of Xs income tax would depend on whether
his employer is an employee or a practicing corporate Basic; Schedular Treatment vs. Global Treatment
lawyer. Distinguish "schedular treatment" from "global treatment" as
(1994)
If his employer is an employee, the basis of X's income used in income taxation.
tax is P6,500.00 equivalent to the total of the basic salary and the SUGGESTED ANSWER:
value of the board and lodging. This is so because the Under a SCHEDULER SYSTEM, the various types/items of
employer/corporate lawyer has no place of business where the freeincome (compensation; business/professional income) are classified
board and lodging may be given. accordingly and are accorded different tax treatments, in
On the other hand, if the corporate lawyer is a "practicingaccordance with schedules characterized by graduated tax
lawyer (self-employed), X should be taxed only on P5,000.00 rates. Since these types of income are treated separately, the
provided that the free board and lodging is given in the business allowable deductions shall likewise vary for each type of
premises of the lawyer and for his convenience and that the free income.
lodging was given to X as a condition for employment.
Under the GLOBAL SYSTEM, all income received by the
taxpayer are grouped together, without any distinction as to
the type or nature of the income, and after deducting
therefrom expenses and other allowable deductions, are
2) If the employer is an obstetrician who is self-employed, subjected to tax at a fixed rate.
the basis of X's income will only be P5,000.00 if it is proven
Compensation; Income Tax: Due to Profitable Business
that the free board and lodging is given within the business
premises of said employer for his convenience and that the Deal (1995)
free lodging is required to be accepted by X as condition for Mr. Osorio,

Perez, a bank executive,
a manufacturing while playing
firm executive, golf with
mentioned to Mr.
the
employment. Otherwise, X would be taxed on P6,500.00.
latter that his (Osorio) bank had just opened a business
relationship with a big foreign importer of goods which
Basic; Gross Income: Define (1995) Perez' company manufactures. Perez requested Osorio to
What is "gross Income" for purposes of the Income tax? introduce him to this foreign importer and put in a good
SUGGESTED ANSWER: word for him (Perez), which Osorio did. As a result, Perez
GROSS INCOME means all income from whatever source was able to make a profitable business deal with the foreign
derived, including (but not limited to) compensation for Importer.
services, including fees, commissions, and similar items;
gross income from business; gains derived from dealings in In gratitude, Perez, in behalf of his manufacturing firm,
property; interest; rents; royalties; dividends; annuities; prizes sent Osorio an expensive car as a gift. Osorio called Perez
and winnings; pensions; and partner's distributive share of and told him that there was really no obligation on the part
the gross income of general professional partnership (Sec. 28, of Perez or his company to give such an expensive gift. But
NIRC). Perez insisted that Osorio keep the car. The company of
ALTERNATIVE ANSWER: Perez deducted the cost of the car as a business expense.
a) Gross income means all wealth which flows into the
taxpayer other than as a mere return of capital. It includes
the forms of income specifically described as gains and The Commissioner of Internal Revenue included the fair
profits including gains derived from the sale or other market value of the car as Income of Osorio who protested
disposition of capital. that the car was a gift and therefore excluded from income.
Who is correct, the Commissioner or Osorio? Explain.
b) Gross income means income (in the broad sense) less
income which is, by statutory provision or otherwise, SUGGESTED ANSWER:
exempt from the tax imposed by law (Sec. 36, Rev. Reg. The Commissioner is correct. The car having been given to
No. 2). Gross income from business means total sales, less Mr. Osorio in consideration of having introduced Mr.
cost of goods sold, plus any income from investments Perez to a foreign Importer which resulted to a profitable
business deal is considered to be a compensation for
services rendered. The transfer is not a gift because it is not made Corporate; Income Tax; Reasonableness of the
out of a detached or disinterested generosity but for a benefit Bonus (2006)
accruing to Mr. Perez. The fact that the company of Mr. Perez Gold and Silver Corporation gave extra 14th month bonus
takes a business deduction for the payment indicates that it was to all its officials and employees in the total amount of P75
considered as a pay rather than a gift. Hence, the fair market value Million. When it filed its corporate income tax return the
of the car is includable in the gross income pursuant to Section following year, the corporation declared a net operating
28(a)(l) of the Tax Code (See 1974 Federal Tax Handbook, p. 145). A loss. When the income tax return of the corporation was
payment though voluntary, if it is in return for services rendered, reviewed by the BIR the following year, it disallowed as
or proceeds from the constraining force of any moral or legal duty item of deduction the P75 Million bonus the corporation
or a benefit to the payer is anticipated, is a taxable income to the gave its officials and employees on the ground of
payee even if characterized as a 'gift' by the payor (Commissioner unreasonableness. The corporation claimed that the bonus
vs. Duberstein, 363 U.S. 278). is an ordinary and necessary expense that should be
allowed. If you were the BIR Commissioner, how will you
resolve the issue? (5%)
ALTERNATIVE ANSWER: SUGGESTED ANSWER:
Mr. Osorio is correct. The car was not payment for services I will disallow the expense. A bonus is ordinary and
rendered. There was no prior agreement or negotiations necessary where said expenditure is (1) appropriate and
between Mr. Osorio and Mr. Perez that the former will be helpful in the development of the taxpayers business
compensated for his services. Mr. Perez, in behalf of his (Martens, Law of Federal Income Taxation, Volume IV, p. 315)
company, gave the car to Mr. Osorio out of gratitude. The and (2) is normal in relation to the business of the taxpayer
transfer having been made gratuitously should be treated as a and the surrounding circumstances (p. 316, Ibid).
gift subject to donor's tax and should be excluded from the
gross income of the recipient, Mr. Osorio. The Commissioner To determine the reasonableness of the bonus it must be
should cancel the assessment of deficiency income tax to Mr. commensurate with services performed by the officials and
Osorio and instead assess deficiency donor's tax on Mr Perez' employees. Other factors to consider are whether the
company. (Sec. 28(b)(3), NIRC; Pirovano vs. payment was made in good faith; the character of the
Commissioner) taxpayer's business; the volume and amount of its net
earnings; its locality; the type and extent of the services
rendered; the salary policy of the corporation; the size of the
Corporate: Income: Donors tax; Tax Liability (1996) particular business; the employees' qualification and
X, a multinational corporation doing business in the contributions to the business venture; and general economic
Philippines donated 100 shares of stock of said corporation conditions (Atlas Mining v. CIR, G.R. No. L26911, January
to Mr. Y, its resident manager in the Philippines. 1) What is 27, 1981). However, since the business suffers from a net
the tax liability, if any, of X corporation? 2) Assuming the operating loss, I will rule that the bonus is an unreasonable
shares of stocks were given to Mr. Y expense.
in consideration of his services to the corporation,
what are the tax implications? Explain. Corporate; Income: Coverage; "Off-Line" Airline (1994)
SUGGESTED ANSWERS: Caledonia Aircargo is an off-line international carrier
1) Foreign corporations effecting a donation are subject to without any flight operations in the Philippines. It has,
donor's tax only if the property donated is located in the however, a liaison office in the Philippines which is duly
Philippines. Accordingly, donation of a foreign corporation licensed with the Securities and Exchange Commission,
of its own shares of stocks in favor of resident employee is established for the purpose of providing passenger and
not subject to donor's tax (BIR Ruling No. 018-87, January flight information, reservation and ticketing services. Are
26, 1987). However, if 85% of the business of the foreign the revenues of Caledonia Aircargo from tickets reserved by
corporation is located in the Philippines or the shares its Philippine office subject to tax?
donated have acquired business situs in the Philippines, the SUGGESTED ANSWER:
donation may be taxed in the Philippines subject to the rule The revenues in the Philippines of Caledonia Aircargo as
of reciprocity. an "off-line" airline from ticket reservation services are
taxable income from "whatever source" under Sec. 28(a) of
2) If the shares of stocks were given to Mr. Y in the Tax Code. This case is analogous to Commissioner
consideration of his services to the corporation, the same v. BOAC, G.R No. No. 65773-74, April 30, 1987 where the
shall constitute taxable compensation income to the Supreme Court ruled that the income received in the
recipient because it is a compensation for services rendered Philippines from the sale of tickets by an "off-line" airline is
under an employer-employee relationship, hence, subject to taxable as income from whatever source.
income tax.
Corporate; Income: Coverage; "Off-Line" Airline (2005)
The par value or stated value of the shares issued also An international airline with no landing rights in the
constitutes deductible expense to the corporation provided it Philippines sold tickets in the Philippines for air
is subjected to withholding tax on wages. transportation. Is income derived from such sales of tickets
considered taxable income of the said international
air carrier from Philippine sources under the Tax Code? 1) Non-voting;
Explain. (5%) 2) Preferred and cumulative dividends at the rate of
ALTERNATIVE ANSWER: 10% per annum, whether or not in any period the
Yes. The income derived from the sales of tickets in the amount is covered by earnings or projects; 3) In the event
Philippines is considered taxable income of the international of dissolution of the issuer, holders of
air carrier from Philippine sources. preferred stock shall be paid in full or ratably as the
assets of the issuer may permit before any
The source of income is the property, activity or service that distribution shall be made to common stockholders;
produced the income. The sale of tickets in the Philippines is and 4) The issuer has the option to redeem the preferred
the activity that produces the income. The absence of landing
rights in the Philippines cannot alter the fact that revenues stock.
were derived from ticket sales within the Philippines.
(Commissioner of Internal Revenue A Co. declared dividends on the preferred stock and claimed
v. Japan Air Lines, G.R. No. 60714, October 4, 1991 reiterating the dividends as interests deductible from its gross Income
British Overseas Airways Corp., Air India and American for income tax purposes. The BIR disallowed the deduction.
Airlines, Inc.) ANSWER:
ALTERNATIVE A Co. maintains that the preferred shares with their features
No, under Sec. 3 of R.R. No. 15-2002 , an off-line airline are really debt and therefore the dividends are realty
having a branch office or a sales agent in the Philippines interests. Decide. (10%)
SUGGESTED ANSWER:
which sells passage documents for compensation or
The dividends are not deductible from gross income.
commission to cover off-line flights of its principal or head
Preferred shares shall be considered capital regardless of the
office, or for other airlines covering flights srcinating from
conditions under which such shares are issued and,
Philippine ports or off-line flights, is not considered engaged
therefore, dividends paid thereon are not considered
in business as an international air carrier in the Philippines
'interest' which are allowed to be deducted from the gross
and is, therefore, not subject to Gross Philippine Billings
income of the corporation. (Revenue Memorandum Circular No.
Tax nor to the 3% common carrier's tax.
17-71, July 12, 1971).
Effect; Condonation of Loan in Taxation (1995)

Based on the foregoing, the international airline company is
Mr. Francisco borrowed P10,000.00 from his friend Mr.
not considered as engaged in business in the Philippines and
Gutierrez payable in one year without interest. When the
is therefore a non-resident foreign corporation. A
loan became due Mr. Francisco told Mr. Gutierrez that he
non-resident foreign corporation is subject to the gross
(Mr. Francisco) was unable to pay because of business
income tax on its income derived from sources within the
reverses. Mr. Gutierrez took pity on Mr. Francisco and
Philippines. The income from sale of tickets shall not form
condoned the loan. Mr. Francisco was solvent at the time
part of taxable income because the term "taxable income" as
defined under Sec. 31 of the NIRC refers only to income of he borrowed
condoned. theMr.
Did P 10,000.00
Francisco and at the
derive anytime the from
income loan was
the
those taxpayers who pay by way of the net income tax.
cancellation or condonation of his indebtedness? Explain.
Taxable income means the pertinent items of gross income
SUGGESTED ANSWER:
specified in the NIRC, less the deductions and/or personal No, Mr. Francisco did not derive any income from the
and additional exemptions, if any, authorized for such types cancellation or condonation of his indebtedness. Since it is
of income by the NIRC or other special laws. obvious that the creditor merely desired to benefit the
debtor in view of the absence of consideration for the
cancellation, the amount of the debt is considered as a gift
Dividends: Disguised dividends (1994) from the creditor to the debtor and need not be included in
Disguised dividends in income taxation? Give an example. the latter's gross income.
SUGGESTED ANSWER:
Disguised dividends are those income payments made by a
Fringe Benefit Tax: Covered Employees (2001)
domestic corporation, which is a subsidiary of a nonresident
X was hired by Y to watch over Vs fishponds with a salary
foreign corporation, to the latter ostensibly for services
of Php 10,000.00. To enable him to perform his duties well,
rendered by the latter to the former, but which payments
he was also provided a small hut, which he could use as his
are disproportionately larger than the actual value of the
residence in the middle of the fishponds. Is the fair market
services rendered. In such case, the amount over and above
value of the use of the small hut by X a "fringe benefit" that
the true value of the service rendered shall be treated as a
is subject to the 32% tax imposed by Section 33 of the
dividend, and shall be subjected to the corresponding tax of
National Internal Revenue Code? Explain your answer.
35% on Philippine
preferential sourced
rate as may gross income,
be provided underor such other
a corresponding (5%)
SUGGESTED ANSWER:
Tax Treaty. Example: Royalty payments under a No. X is neither a managerial nor a supervisory employee.
corresponding licensing agreement. Only managerial or supervisory employees are entitled to a
fringe benefit subject to the fringe benefits tax. Even
assuming that he is a managerial or supervisory employee,
Dividends; Income Tax; Deductible Gross Income (1999) the small hut is provided for the convenience of the
A Co., a Philippine corporation, issued preferred shares of
stock with the following features:
employer, hence does not constitute a taxable fringe pay on this latter date will render the tax delinquent and
benefit. (Section 33, NERC). will require the payment of delinquency interest.
Fringe Benefit Tax: Employer required to Pay (2003)

A "fringe benefit" is defined as being any good, service or ITR: Personal Income; Exempted to File ITR (1997)
other benefit furnished or granted in cash or in kind by an A bachelor was employed by Corporation A on the first
employer to an individual employee. Would it be the working day of January 1996 on a part-time basis with a
employer or the employee who is legally required to pay an salary of P3,500.00 a month. He then received the 13th
income tax on it? Explain. (4%) month pay. In September 1996, he accepted another
SUGGESTED ANSWER: part-time Job from Corporation B from which he received
It is the employer who is legally required to pay an income a total compensation of P14,500.00 for the year 1996. The
tax on the fringe benefit. The fringe benefit tax is imposed correct total taxes were withheld from both earnings. With
as a FINAL WITHHOLDING TAX placing the legal the withholding taxes already paid, would he still be
obligation to remit the tax on the employer, such that, if the required to file an income tax return for his 1996 income?
tax is not paid the legal recourse of the BIR is to go after SUGGESTED ANSWER:
the employer. Any amount or value received by the Yes, because what is exempt from filing are those
employee as a fringe benefit is considered tax paid hence, individuals who have total compensation income not
net of the income tax due thereon. The person who is exceeding P60.000 with the taxes correctly withheld only by
legally required to pay (same as statutory incidence as distinguished one employer. In this case, even if his aggregate
rom economic incidence) is that person who, in case of compensation income from both his employers does not
non-payment, can be legally demanded to pay the tax. exceed P60.000 and that total withholding taxes were
correctly withheld by his employers, the fact that he derives
compensation income concurrently from two employers at
Interest: Deficiency Interest: define (1995 Bar) anytime during the taxable year, does not exempt him from
What is a "deficiency interest" for purposes of the income filing his income tax return (RA 7497, as implemented by RR
tax? Illustrate. No. 4-93).
SUGGESTED ANSWER:
DEFICIENCY INTEREST for purposes of the income ITR; Domestic Corporate Taxation (1997)
tax is the interest due on any amount of tax due or During the year, a domestic corporation derived the
installment thereof which is not paid on or before the date following items of revenue: (a) gross receipts from a trading
prescribed for its payment computed at the rate of 20% per business; (b) interests from money placements in the banks;
annum or the Manila Reference Rate, whichever is higher, (c) dividends from its stock investments in domestic
from the date prescribed for its payment until it is fully corporations; (d) gains from stock transactions through the
paid. Philippine Stock Exchange; (e) proceeds under an insurance
If for example after the audit of the books of XYZ Corp. policy
incomeontaxthe loss ofwhat
return, goods. In preparing
should be the taxthe corporate
treatment on
for taxable year 1993 there was found to be due a deficiency each of the above items?
income tax of P125,000.00 inclusive of the 25% surcharge SUGGESTED ANSWER:
imposed under Section 248 of the Tax Code, the interest The gross receipts from trading business is includible as
will be computed on the P125.000.00 from April 15, 1994 an item of income in the corporate income tax return and
up to its date of payment. subject to corporate income tax rate based on net income.
Interest: Delinquency Interest: define (1995)

What is a "delinquency interest" for purposes of the income The other items of revenue will not be included in the
tax? Illustrate. corporate income tax return. The interest from
SUGGESTED ANSWER: money market placements is
Delinquency interest is the interest of 20% or the Manila subject to a final withholding tax of 20%; The
Reference Rate, whichever is higher, required to be paid in dividends from domestic corporation are exempt
case of failure to pay: from income tax; and gains from stock transactions
(a) the amount of the tax due on any return required with the Philippine
to be filed; or Stock Exchange are subject to transaction tax which
(b) the amount of the tax due for which return is is in lieu of the income tax. The proceeds under an
required; or insurance policy on the loss
(c) the deficiency tax or any surcharge or interest of goods is not an item of income but merely a return
thereon, on the due date appearing in the notice and of capital hence not taxable.
demand of the Commissioner of Internal Revenue.
ALTERNATIVE ANSWER:
If in the above illustration the assessment notice was The gross receipts from trading business is includible as an
released on December 31, 1994 and the amount of item of income in the corporate income tax return.
deficiency tax, inclusive of surcharge and deficiency interest Likewise, the gain or loss realized as a consequence of the
were computed up to January 30, 1995 which is the due date receipt of proceeds under an insurance policy on the loss of
for payment per assessment notice, failure to goods will be included in the corporate income tax
return either as a taxable gain or a deductible loss. The gain the tax withheld is equal to the tax due. (Section 5
or loss is arrived at by deducting from the proceeds of l(A](2)(b), NIRC).
insurance (amount realized) the basis of the good lost (Sec.
34(a), NIRC). The net income of the corporation shall be There is no mention in the problem of the amount of
subject to corporate income tax rate of 35%. personal and additional personal exemption to quantify how
much is that compensation income that did not exceed the
The other items of revenue will not be included in the personal and additional personal exemptions. There is no,
corporate income tax return. The interest from money mention, either, of whether or not the employers withheld
market placements is subject to a final withholding tax of taxes and that the amount withheld is equal to the tax due.
20%; dividends from domestic corporations are exempt Whether or not she will be required to file an income tax
from income tax; and gains from stock transactions with return last April 15 on the 2000 income will depend on her
the Philippine Stock Exchange are subject to transaction compliance with the requirements of the law.
tax which is in lieu of the income tax.
ITR; Domestic Corporate Taxation (2001) ITR; Personal Income; GSIS Pension (2000)
a) How often does a domestic corporation file income Mr. Javier is a non-resident senior citizen. He receives a
tax return for income earned during a single taxable monthly pension from the GSIS which he deposits with
ear? Explain the process. (3%) the PNB-Makati Branch. Is he exempt from income tax
SUGGESTED ANSWER: and therefore not required to file an income tax return?
a) A domestic corporation is required to file income tax (5%)
returns four (4) times for income earned during a single SUGGESTED ANSWER:
taxable year. Quarterly returns are required to be filed for Mr. Javier is exempt from income tax on his monthly GSIS
the first three quarters where the corporation shall declare pension (Sec. 32(B)(6)(f), NIRC of 1997) but not on the
its quarterly summary of gross income and deductions on a interest income that might accrue on the pensions deposited
cumulative basis. (Section 75, NIRC) . Then, a final with PNB which are subject to final withholding tax.
adjustment return is required to be filed covering the total Consequently, since Mr. Javier's sole taxable income would
taxable income for the entire year, calendar or fiscal. (Section have been subjected to a final withholding tax, he is not
76, NIRC). required anymore to file an income tax return. (Sec. 51 (A) (2)
(c). Ibid].
b) What is the reason for such procedure? (2%)
SUGGESTED ANSWER: ITR; Personal Income; Married Individual (2004)
b) The reason for this procedure is to ensure the timeliness RAM got married to LISA last January 2003. On November
of collection to meet the budgetary needs of the 30, 2003, LISA gave birth to twins. Unfortunately, however,
government. Likewise, it is designed to ease the burden on LISA died in the course of her delivery. Due to
the taxpayer
scheme, ratherbythan
providing it with
requiring an installment
the payment of the payment
tax on a complications,
2003. one of the twins also died on December 15,
lump-sum basis after the end of the year.
ALTERNATIVE ANSWER: In preparing his Income Tax Return (ITR) for the year
b) The reason for the quarterly filing of tax returns is to 2003, what should RAM indicate in the ITR as his civil
allow partial collection of the tax before the end of the status: (a) single; (b) married; (c) Head of the family; (d)
taxable year and also to improve the liquidity of government widower; (e) none of the above? Why? Reason. (5%)
SUGGESTED ANSWER:
RAM should indicate "(b) married" as his civil status in
ITR; Personal Income: Two Employment (2001) preparing his Income Tax Return for the year 2003. The
In the year 2000, X worked part time as a waitress in a death of his wife during the year will not change his status
restaurant in Mega Mall from 8:00 a.m. to 4:00 p.m. and because should the spouse die during the taxable year, the
then as a cashier in a 24-hour convenience store in her taxpayer may still claim the same exemptions (that of being
neighborhood. The total income of X for the year from the married) as if the spouse died at the close of such year
two employers does not exceed her total personal and (Section 35/Cj, NIRC).
additional exemptions for the year 2000. Was she required
to file an income tax return last April? Explain your answer. ITR; Taxpayer; Liabilities; Falsified Tax Return (2005)
(5%) Danilo, who is engaged in the trading business, entrusted to
SUGGESTED ANSWER: his accountant the preparation of his income tax return and
Yes. An individual deriving compensation concurrently the payment of the tax due. The accountant filed a falsified
from two or more employers at any time during the taxable tax return by underdeclaring the sales and overstating the
ear shall file an income tax return (Sec. 51(A)(2)(b), NIRC.) expense deductions by Danilo. Is Danilo liable for the
deficiency tax and the penalties thereon? What is the
ALTERNATIVE ANSWER:
liability, if any, of the accountant? Discuss. (5%)
It depends. An individual with pure compensation income is
not required to file an income tax returns when she meets
SUGGESTED ANSWER:
the following conditions; (1) the total gross compensation Danilo is liable for the deficiency tax as well as for the
income does not exceed Php60,000.00 and deficiency interest. He should not be held liable for the
(2) the income tax has been correctly withheld, meaning
fraud penalty because the accountant acted beyond the 2) No. Revenue Regulation No. 2-93 implementing RA No.
limits of his authority. There is no showing in the problem 7496 have indeed significantly reduced the items of
that Danilo signed the falsified return or that it was prepared deduction by limiting it to direct costs and expenses or the
under his direction. {On the other hand the accountant may 40% of gross receipts maximum deduction in cases where
be held criminally liable for violation of the Tax Code when the direct costs are difficult to determine. The allowance of
he falsified the tax return by underdeclaring the sale and limited deductions however, is still in consonance with the
overstating the expense deductions. If Danny's accountant is net income taxation scheme rather than the gross income
a Certified Public Accountant, his certificate as a CPA shall method. While it is true that not all the expenses of earning
automatically be revoked or cancelled upon conviction. the income might be allowed, this can well be justified by
the fact that deductions are not matters of right but are
matters of legislative grace.
Partnership: Income Tax (1995)
Five years ago Marquez, Peneyra, Jayme, Posadas and
Manguiat, all lawyers, formed a partnership which they Personal; Income Tax: Non-Resident Alien (2000)
named Marquez and Peneyra Law Offices. The Commis- Mr. Cortez is a non-resident alien based in Hong Kong.
sioner of Internal Revenue thereafter issued Revenue Regu- During the calendar year 1999, he came to the Philippines
lation No. 2-93 implementing RA. 7496 known as the Simplified several times and stayed in the country for an aggregated
Net Income Taxation Scheme (SNITS). Revenue Regulation period of more than 180 days. How will Mr. Cortez be
No. 2-93 provides in part: taxed on his income derived from sources within the
Sec. 6. General Professional Partnership. Philippines and from abroad? (5%)
The general professional partnership and the SUGGESTED ANSWER:
partners are covered by R.A. 7496. Thus, in Mr. Cortez being a non-resident alien individual who has
determining profit of the partnership, only the stayed for an aggregated period of more than 180 days
direct costs mentioned in said law are to be during the calendar year 1999, shall for that taxable year be
deducted from partnership income. Also, the deemed to be a non-resident alien doing business in the
expenses paid or Incurred by partners in their Philippines.
individual capacities in the practice of their
profession which are not reimbursed or paid by Considering the above, Mr. Cortez shall be subject to an
the partnership but are not considered as direct income tax in the same manner as an individual citizen and a
costs are not deductible from his gross income. resident alien individual, on taxable income received from all
sources within the Philippines. [Sec. 25 (A) (1), NIRC of 1997
1) Marquez and Peneyra Law Offices filed a taxpayer's Thus, he is allowed to avail of the itemized deductions
suit alleging that Revenue Regulation No. 2-93 violates the including the personal and additional exemptions but subject
principle of uniformity in taxation because general to the rule on reciprocity on the personal exemptions. (Sec.
professional partnerships are now subject to payment of 34
(D),(A) to (J) and (M) in relation to Sec. 25 (A) (1), Ibid, Sec. 35
Ibid.]
income tax and that there is a difference in the tax treatment
between individuals engaged in the practice of their NOTE: It is suggested that full credit should be given if the
respective professions and partners in general professional examinee's answer only cover the first two paragraphs.
partnerships. Is this contention correct? Explain.
Personal; Income Tax: Non-Resident Citizen (1999)
SUGGESTED ANSWER: A Co., a Philippine corporation, has an executive (P) who is
1) The contention is not correct. General professional a Filipino citizen. A Co. has a subsidiary in Hong Kong
partnerships remain to be a non-taxable entity. What is (HK Co.) and will assign P for an indefinite period to work
taxable are the partners comprising the same and they are full time for HK Co. P will bring his family to reside in HK
obligated to report as income their share in the income of and will lease out his residence in the Philippines. The salary
the general professional partnership during the taxable year of P will be shouldered 50% by A Co. while the other 50%
whether distributed or not. The SNITS treat professionals as plus housing, cost of living and educational allowances of
one class of taxpayer so that they shall be treated alike P's dependents will be shouldered by HK Co. A Co. will
irrespective of whether they practice their profession alone credit the 50% of P's salary to P's Philippine bank account.
or in association with other professionals under a general P will sign the contract of employment in the Philippines. P
professional partnership. What are taxed differently are will also be receiving rental income for the lease of his
individuals and corporations. All individuals similarly Philippine residence. Are these salaries, allowances and
situated are taxed alike under the regulations, therefore, the rentals subject to the Philippine income tax? (5%)
principle of uniformity in taxation is not violated. On the
contrary, all the requirements of a valid classification have SUGGESTED ANSWER:
The salaries and allowances received by P are not subject to
been complied with (Ton vs. Del Rosario et al G.R No.
Philippine income tax. P qualifies as a nonresident citizen
109289, Octobers, 1994).
because he leaves the Philippines for employment requiring
2) Is Revenue Regulation No. 2-93 now considered him to be physically present abroad most of the time during
as having adopted a gross income method instead of the taxable year. (Section 22(E), NIRC). A nonresident
retaining the net income taxation scheme? Explain. citizen is taxable only on income derived from Philippine
SUGGESTED ANSWER: sources. (Section 23, NIRC). The salaries and
allowances received from being employed abroad are will erect a building on the land which will become the
incomes from without because these are compensation for property of Mr. Domingo at the end of the lease without
services rendered outside of the Philippines. (Section 42, compensation or reimbursement whatsoever for the value
NIRC). of the building.
However, P is taxable on rental income for the lease of his Mr. Enriquez erects the building. Upon completion the
Philippine residence because this is an income derived from building had a fair market value of P1 Million. At the end
within, the leased property being located in the Philippines. of the lease the building is worth only P900.000.00 due to
(Section 42, NIRC). depreciation.
Personal; Income Tax: Tax-Free Exchange (1997) Will Mr. Domingo have income when the lease expires and
Three brothers inherited in 1992 a parcel of land valued for becomes the owner of the building with a fair market value
real estate tax purposes at P3.0 million which they held in of P900.000.00? How much income must he report on the
co-ownership. In 1995, they transferred the property to a building? Explain.
newly organized corporation as their equity which was SUGGESTED ANSWER:
placed at the zonal value of P6.0 million. In exchange for When a building is erected by a lessee in the leased
the property, the three brothers thus each received shares premises in pursuance of an agreement with the lessor that
of stock of the corporation with a total par value of P2.0 the building becomes the property of the lessor at the end
million or, altogether, a total of P6.0 million. No business of the lease, the lessor has the option to report income as
was done by the Corporation, and the property remained follows: 1) The lessor may report as income the market
idle. In the early part of 1997, one of the brothers, who was value of
in dire need of funds, sold his shares to the two brothers the building at the time when such building is
for P2.0 million. Is the transaction subject to any internal completed; or 2) The lessor may spread over the life of the
revenue tax (other than the documentary stamp tax)? lease the
estimated depreciated value of such building at the
SUGGESTED ANSWER: termination of the lease and report as income for
Yes. The exchange in 1995 is a tax-free exchange so that the each year of the lease an aliquot part thereof (Sec.
subsequent sale of one of the brothers of his shares to the 49, RR No. 2).
other two (2) brothers in 1997 will be subject to income tax.
This is so because the tax-free exchange merely deferred the Under the first option, the lessor will have no income when
recognition of income on the exchange transaction. The the lease expires and becomes the owner of the building.
gain subject to income tax in the sale is measured by the The second option will give rise to an income during the
difference between the selling price of the shares (P2 ear of lease expiration of P90.000.00 or 1/10 of the
Million) and the basis of the real property in the hands of depreciated value of the building.
the transferor
market value ofathisthe timein of
share theexchange which
real property is the
at the timefair
of The availment of the first option will require Mr. Domingo
inheritance (Section 34(b)(2), NIRC). The net gain from the to report an income of P1.000,000.00 during the year when
sale of shares of stock is subject to the schedular capital the building was completed. A total of P900.000.00 income
gains tax of 10% for the first P100.000 and 20% for the will be reported under the second option but will be spread
excess thereof (Section 2l(d), NIRC). over the life of the lease or P90.000.00 per year.
ALTERNATIVE ANSWER:
The exchange effected in 1995 did not qualify as a tax-free ALTERNATIVE ANSWER:
exchange because there is no showing that the three Mr. Domingo will realize an income when the lease expires
brothers gained control of the corporation by acquiring at and becomes the owner of the building with a fair market
least 51% of the voting rights. Since the entire gain on the value of P900.000.00 because the condition for the lease is
exchange was previously subjected to income tax, then, the the transfer of the building at the expiration of the lease.
sale will also be taxable if a gain results therefrom. In the The income to be realized by Mr. Domingo at the time of
instant case, the sale will not be subject to any internal the expiration will consist of the value of the building which
revenue tax other than the documentary stamp tax, because is P900.000.00 and any rental income that has accrued as of
the seller did not realize any gain from the sale. The gain is said date.
measured by the difference between the amount realized
(selling price) and the basis of the property. Incidentally, the Personal; Income Tax; Married Individual (1997)
basis to him is his share in the value of the property Mar and Joy got married in 1990. A week before their
received at the time of exchange, which is P2 Million, an marriage. Joy received, by way of donation, a condominium
amount, just equal to the amount realized from the sale. unit worth P750.000.00 from her parents. After marriage,
some renovations were made at a cost of P150.000.00. The
spouses were both employed in 1991 by the same company.
Personal; Income Tax; Contract of Lease (1995) On 30 December 1992, their first child was born, and a
Mr. Domingo owns a vacant parcel of land. He leases the second child was born on 07 November 1993. In 1994, they
land to Mr. Enriquez for ten years at a rental of P12,000.00 sold the condominium unit and bought a new unit. Under
per year. The condition is that Mr. Enriquez the foregoing facts, what
were the events in the life of the spouses that had income accordance with the schedular graduated rates of 1%, 2%
tax incidences? and 3%. based on the adjusted gross income derived by
SUGGESTED ANSWER: non-resident citizens from all sources without the
The events in the life of spouses. Mar and Joy, which have Philippines during each taxable year.
income tax incidences are the following: 1) Their marriage
in 1990 qualifies them to claim Taxable Income: Illegal Income (1995 Bar)
personal exemption for married individuals; 2) Their Mr. Lajojo is a big-time swindler. In one year he was able to
employment in 1991 by the same company earn P1 Million from his swindling activities. When the
will make them liable to the income tax imposed on Commissioner of Internal Revenue discovered his income
gross compensation income; 3) Birth of their first child in from swindling, the Commissioner assessed him a deficiency
December 1992 would income tax for such income. The lawyer of Mr. Lajojo
give rise to an additional exemption of P5,000 for protested the assessment on the following grounds: 1) The
taxable year 1992; 4) Birth of their second child in income tax applies only to legal income, not to
November 1993 would illegal income; 2) Mr. Lajojo's receipts from his swindling
likewise entitle them to claim additional exemption did not
of P5,000 raising their additional personal constitute income because he was under obligation
exemptions to P 10,000 for taxable year 1993; and 5) Sale to return the amount he had swindled, hence, his
of their condominium unit in 1994 shall make receipt from swindling was similar to a loan, which
the spouses liable to the 5% capital gains tax on the is not income, because for every peso borrowed he
gain presumed to have been realized from the sale. has a corresponding liability to pay one peso; and 3) If he
has to pay the deficiency income tax assess
Personal; Income Tax; Retiring Alien Employee (2005) ment, there will be hardly anything left to return to
An alien employee of the Asian Development Bank (ADB) the victims of the swindling. How will you rule on each of
who is retiring soon has offered to sell his car to you which the three grounds for the protest? Explain.
he imported tax-free for his personal use. The privilege of
exemption from tax is granted to qualified personal use SUGGESTED ANSWERS:
under the ADB Charter which is recognized by the tax 1) The contention that the income tax applies to legal
authorities. If you decide to purchase the car, is the sale income and not to illegal income is not correct. Section
subject to tax? Explain. (5%) 28(a) of the Tax Code includes within the purview of gross
SUGGESTED ANSWER: income all Income from whatever source derived. Hence,
The sales transaction is subject to value added tax (VAT) the illegality of the income will not preclude the imposition
under Sec. 107(B) of the NIRC, although this provision is of the income tax thereon.
expressly excluded from the coverage of the 2005 bar
exam. 2) The contention that the receipts from his swindling did
The proceeds from the sale are subject to income tax. The not constitute
the amount incomeisbecause
swindled likewiseofnot
hiscorrect.
obligation to return
When a
car is considered a capital asset of the retiring alien taxpayer acquires earnings, lawfully or unlawfully, without
employee because he is not engaged in the business of the consensual recognition, express or implied, of an
buying and selling cars. He therefore derived income, which obligation to repay and without restriction as to their
should be reported in his income tax return. (Sees. 32 and disposition, he has received taxable income, even though it
39, NIRC) may still be claimed that he is not entitled to retain the
money, and even though he may still be adjudged to restore
Personal; Income Taxation: Non-Resident Citizen (1997) its equivalent (James vs. U.S.,366 U.S. 213, 1961). To treat the
uan, a Filipino citizen, has immigrated to the United States embezzled funds not as taxable income would perpetuate
where he is now a permanent resident. He owns certain injustice by relieving embezzlers of the duty of paying
income-earning property in the Philippines from which he income taxes on the money they enrich themselves with
continues to derive substantial income. He also receives through embezzlement, while honest people pay their taxes
income from his employment in the United States on which on every conceivable type of income. (James vs. U.S.)
the US income tax is paid. On which of the above income
is the taxable, if at all, in the Philippines, and how, in
general terms, would such income or incomes be taxed? 3) The deficiency income tax assessment is a direct tax
imposed on the owner which is an excise on the privilege to
SUGGESTED ANSWER: earn an income. It will not necessarily be paid out of the
uan, shall be taxed on both his income from the Philippines same income that were subjected to the tax. Mr. Lajojo's
and on his Income from the United States because his being liability to pay the tax is based on his having realized a
a citizen makes him taxable on all Income wherever derived. taxable income from his swindling activities and will not
For the income he derives from his property in the affect his obligation to make restitution. Payment of the tax
Philippines, Juan shall be taxed on his net income under the is a civil obligation imposed by law while restitution is a
Simplified Net Income Taxation Scheme (SNITS) civil liability arising from a crime.
whereby he shall be considered as a self-employed
individual. His Income as employee in the United States, on Taxable or Non-Taxable; Income and Gains (2005)
the other hand, shall be taxed in
Explain briefly whether the following items are taxable or of its territorial jurisdiction to file a return; for this reason,
non-taxable: (5%) a) Income from JUETENG; the income tax on income derived from within must be
collected through the withholding tax system and thus
SUGGESTED ANSWER: relieve the recipient of the income the duty to file income
Taxable. Gross income includes "all income derived from whatever tax returns. (Section 51, NIRC).
source" (Sec. 32[A], NIRC), which was inter preted as all income not
expressly excluded or exempted from the class of taxable income, Withholding Tax: Retirement Benefit (2000)
irrespective of the voluntary or involuntary action of the taxpayer To start a business of his own, Mr. Mario de Guzman
in producing the income. Thus, the income may proceed from a opted for an early retirement from a private company after
legal or illegal source such as from jueteng. Unlawful gains, ten (10) years of service. Pursuant to the company's
gambling winnings, etc. are subject to income tax. The tax code qualified and approved private retirement benefit plan, he
stands as an indifferent neutral party on the matter of where the was paid his retirement benefit which was subjected to
income comes from. withholding tax. Is the employer correct in withholding the
tax? Explain. (2%)
(Commissioner of Internal Revenue v. Manning, G.R. No. SUGGESTED ANSWER:
L-28398, August 6, 1975)
(a) It depends. An employee retiring under a company's
b) Gain arising from EXPROPRIATION OF qualified and private retirement plan can only be exempt
PROPERTY; from income tax on his retirement benefits if the following
SUGGESTED ANSWER: requisites
(1) are met:
that the retiring employee must have been in
Taxable. Sale exchange or other disposition of property to service of the same employer for at least ten (10) years;
the government of real property is taxable. It includes taking (2) that he is not less than 50 years of age at the time
by the government through condemnation proceedings. of retirement; and
(Gonzales v. Court of Tax Appeals, G.R. No. L-14532, May 26, (3) the benefit is availed of only
1965) once.
In the instant case, there is no mention whether the
c) TAXES paid and subsequently refunded;
SUGGESTED ANSWER:
employee has likewise complied with requisites number
Taxable only if the taxes were paid and claimed as deduction (2) and (3).
and which are subsequently refunded or credited. It shall be
included as part of gross income in the year of the receipt to Withholding Tax: Retirement Benefit (2000)
the extent of the income tax benefit of said deduction. (Sec. Under what conditions are retirement benefits received by
34[C][1], NIRC) Not taxable if the taxes refunded were not officials and employees of private firms excluded from
srcinally claimed as deductions. gross income and exempt from taxation? (3%)
SUGGESTED ANSWER:
d) Recovery of BAD DEBTS previously charged off; The conditions

received to be and
by officials met in order thatofretirement
employees benefits
private firms are
SUGGESTED ANSWER:
Taxable under the TAX BENEFIT RULE. Recovery of excluded from gross income and exempt from taxation are
bad debts previously allowed as deduction in the preceding as follows:
ears shall be included as part of the gross income in the 2. Under Republic Act No. 4917 (those received
ear of recovery to the extent of the income tax benefit of under a reasonable private benefit plan):
said deduction. (Sec. 34[E][1], NIRC) This is sometimes
referred as the RECAPTURE RULES. a. the retiring official or employee must have
been(10)
in service
years; of the same employer for at least ten
e) Gain on the sale of a car used for personal purposes. b. that he is not less than fifty (50) years of age
SUGGESTED ANSWER: at the time of retirement; and
Taxable. Since the car is used for personal purposes, it is c. that the benefit is availed of only
considered as a capital asset hence the gain is considered once.
income. (Sec. 32[A][3] and Sec. 39[A][1], NIRC) 3. Under Republic Act No. 7641 (those received
from employers without any retirement plan):
Withholding Tax: Non-Resident Alien (2001)
Is a non-resident alien who is not engaged in trade or
business or in the exercise of profession in the Philippines
but who derived rental income from the Philippines
required to file an income tax return on April of the year
following his receipt of said income? If not, why not?
Explain your answer. (5%)
SUGGESTED ANSWER:
No. The income tax on all income derived from Philippine
sources by a non-resident alien who is not engaged in trade
or business in the Philippines is withheld by the lessee as a
Final Withholding Tax. (Section 57(A), NIRC). The
government can not require persons outside
Those received under existing collective
bargaining agreement and other agreements are exempt;
and
In the absence of retirement plan or agreement
providing for retirement benefits the benefits are
excluded from gross income and exempt from income
tax if:
i. retiring employee must have served
at least five(5) years; and
ii. that he is not less than sixty (60)
ears of age but not more than sixty five
(65).
Withholding Tax: Royalty (2002)
The MKB-Phils. is a BOI-registered domestic corporation a resident citizen or alien from a domestic corporation, is to
licensed by the MKB of the United Kingdom to distribute, ensure the collection of income tax on said income. If we
support and use in the Philippines its computer software subject the dividend to the progressive tax rate, which can
systems, including basic and related materials for banks. The only be done through the filing of income tax returns, there
MKB-Phils. provides consultancy and technical services is no assurance that the taxpayer will declare the income,
incidental thereto by entering into licensing agreements with especially when there are other items of gross income
banks. Under such agreements, the MKB-Phils. will not earned during the year. It would be extremely difficult for
acquire any proprietary rights in the licensed systems. The the BIR to monitor compliance considering the huge
MKB-Phils. pays royalty to the MKB-UK, net of 15% number of stockholders. By shifting the responsibility to
withholding tax prescribed by the RP-UK Tax Treaty. remit the tax to the corporation, it is very easy to check
compliance because there are fewer withholding agents
compared to the number of income recipients.
Is the income of the MKB-Phils. under the licensing
agreement with banks considered royalty subject to 20%
final withholding tax? Why? If not, what kind of tax will its Likewise, the imposition of a final withholding tax will
income be subject to? Explain. (5%) make the tax available to the government at an earlier time.
SUGGESTED ANSWER: Finally, the final withholding tax will be a sure revenue to
Yes. The income of MKB-Phils. under the licensing the government unlike when the dividend is treated as a
agreement with banks shall be considered as royalty subject returnable income where the recipient thereof who is in a
to the 20% final withholding tax. The term royalty is broad tax loss position is given the chance to offset such loss
enough to include technical advice, assistance or services against dividend income thereby depriving the government
rendered in connection with technical management or of the tax on said dividend income. [ Note: It is recommended
administration of any scientific, industrial or commercial that any of the foregoing answers can be given full credit because the
undertaking, venture, project or scheme. (Sec. 42(4)(f), question involves a policy issue which can only be found in the
NIRC). Accordingly, the consultancy and technical services deliberations of Congress.]
rendered by MKB-Phils, which are incidental to the ALTERNATIVE ANSWER:
distribution, support and use of the computer systems of The reason why cash dividends received by a resident
MKB-UK are taxable as royalty. citizen or alien from a domestic corporation are subjected
to the final withholding tax of 10% and not at the
Withholding Tax; Coverage (2004) progressive rate tax schedule is to lessen the impact of a
Citing Section 10, Article VIII of the 1987 Constitution second layer of tax on the same income.
which provides that salaries of judges shall be fixed by law
and that during their continuance in office their salary shall Withholding Tax; Income subject thereto (2001)
not be decreased, a judge of MM Regional Trial Court What is meant by income subject to "final tax"? Give at
questioned the deduction of withholding taxes from his least twotoexamples
subject of income
the final tax. (3%) of resident individuals that is
salary since it results into a net deduction of his pay. Is the
contention of the judge correct? Reason briefly. (5%) SUGGESTED ANSWER:
SUGGESTED ANSWER: Income subject to final tax refers to an income wherein the
No. The contention is incorrect. The salaries of judges are tax due is fully collected through the withholding tax
not tax-exempt and their taxability is not contrary to the system. Under this procedure, the payor of the income
provisions of Section 10, Article VIII of the Constitution withholds the tax and remits it to the government as a final
on the non-diminution of the salaries of members of the settlement of the income tax due on said income. The
judiciary during their continuance in office. The clear intent recipient is no longer required to include the item of
of the Constitutional Commission that framed the income subjected to "final tax" as part of his gross income
Constitution is to subject their salaries to tax as in the case in his income tax returns. Examples of income subject to
of all taxpayers. Hence, the deduction of withholding taxes, final tax are dividend income, interest from bank deposits,
being a manner of collecting the income tax on their royalties, etc.
salary, is not a diminution contemplated by the
fundamental law. (Nitafan et. al. v. CIR, 152 SCRA 284 Withholding Tax; Non-Resident Alien (1994)
[1987]). Four Catholic parishes hired the services of Frank Binatra, a
foreign non-resident entertainer, to perform for four (4)
Withholding Tax; Domestic Corporation; Cash nights at the Folk Arts Theater. Binatra was paid
Dividends(2001) P200.000.00 a night. The parishes earned P1,000,000.00
which they used for the support of the orphans in the city.
What do you
received by athink is thecitizen
resident reasonor
why cashfrom
alien dividends, when
a domestic Who are liable to pay taxes?
corporation, are taxed only at the final tax of 10% and not SUGGESTED ANSWER:
The following are liable to pay income taxes:
at the progressive tax rate schedule under Section 24(A) of
the Tax Code? Explain your answer. (5%) (a) The four catholic parishes because the income
received by them, not being income earned "as such" in the
SUGGESTED ANSWER:
performance of their religious functions and duties, is
The reason for imposing final withholding tax rather than taxable income under the last paragraph of Sec. 26, in
the progressive tax schedule on cash dividends received b y relation to Sec. 26(e) of the Tax Code. In
promoting and operating the Binatra Show, they ear but not more than ten (10) years (1st par.,
engaged in an activity conducted for profit. (Ibid.) Sec. 255, NIRC).
(b) The income of Frank Binatra, a non-resident alien COMMENT: It is suggested that any of the following answers
under our law is taxable at the rate of 30%, final to the question, "What are the liabilities for failure to withhold
withholding tax based on the gross income from the show. such a tax?" be given full credit: 1) The payor shall be liable for
Mr. Binatra is not engaged in any trade or business in the the payment of the tax which
Philippines. was not withheld. 2) The payer/withholding agent shall be liable
to both civil
and criminal penalties imposed by the Tax Code.
Withholding Tax; Non-Resident Corporation (1994)
Bates Advertising Company is a non-resident corporation duly Withholding Tax; Time Deposit Interest; GSIS Pension
organized and existing under the laws of Singapore. It is not (1994)
doing business and has no office in the Philippines. Pilipinas Maribel Santos, a retired public school teacher, relies on
Garment Incorporated, a domestic corporation, retained the her pension from the GSIS and the Interest Income from a
services of Bates to do all the advertising of its products
abroad. For said services, Bates' fees are paid through outward time
Santosdeposit
liable toofpayP500.000.00 with
any tax on her ABC Bank. Is Miss
Income?
remittances. Are the fees received by Bates subject to any SUGGESTED ANSWER:
withholding tax? Maribel Santos is exempt from tax on the pension from the
SUGGESTED ANSWER: GSIS (Sec. 28(b((7)(F), Tax Code). However, as regards her
The fees paid to Bates Advertising Co., a non-resident time deposit, the interest she receives thereon is subject to
foreign corporation are not subject to withholding tax since 20% final withholding tax. (Sec. 21(a)(c), Tax Code).
they are not subject to Philippine tax. They are exempt
because they do not constitute income from Philippine
sources, the same being compensation for labor or personal
services performed outside the Philippines (Sec. 36{c) (3)
DEDUCTIONS, EXEMPTIONS,
and Sec. 25(b)(l), Tax Code). EXCLUSIONS & INCLUSIONS
Deduction: Facilitation Fees or "kickback" (1998)
Withholding Tax; Reader's Digest Award (1998)
Is the prize of one million pesos awarded by the Reader's
Digest subject to withholding of final tax? Who is
responsible for withholding the tax? What are the liabilities
for failure to withhold such tax? [5%]
SUGGESTED ANSWER:
1 It depends. If the prize is considered as winnings

)
derived from sources within the Philippines, it is
subject to withholding of final tax (Sec. 24[B] in
relation to Sec. 57[A], NIRC). If derived from
sources without the Philippines, it is not subject to
withholding of final tax because the Philippine tax
law and regulations could not reach out to foreign
jurisdictions.
2
The tax shall be withheld by the Reader's Digest or
)
local agent who has control over the payment of
the
prize.
3
Any person required to withhold or who willfully
)
fails to withhold, shall, in addition to the other
penalties provided under the Code, be liable upon
conviction to a penalty equal to the total amount of
Any person required under the Tax Code or by rules
tax not withheld (Sec. 251, NIRC). In case of
and regulations to withhold taxes at the time or
failure
times required by law or rules and regulations shall,
to withhold the tax or in case of under
in addition to other penalties provided by law, upon
conviction be punished by a fine of not less than
Ten thousand pesos (Php 10.0OO) and suffer
imprisonment of not less than one (1)
MC Garcia, a contractor who won the bid for the
construction of a public highway, claims as expenses,
facilitation fees which according to him is standard
operating procedure in transactions with the government.
Are these expenses allowable as deduction from gross
income? [5%]
SUGGESTED ANSWER:
No. The alleged

operating facilitation
procedure fees whichwith
in transactions he claims as standard
the government
comes in the form of bribes or "kickback" which are not
allowed as deductions from gross income (Section 34(A)(l)(c),
NIRC).
Deductions: Ordinary Business Expenses

(2004)
OXY is the president and chief executive officer of ADD
Computers, Inc. When OXY was asked to join the
government service as director of a bureau under the
Department of Trade and Industry, he took a leave of
absence from ADD. Believing that its business outlook,
goodwill and opportunities improved with OXY in the
government, ADD proposed to obtain a policy of insurance
on his life. On ethical grounds, OXY objected to the
insurance purchase but ADD purchased the policy anyway.
Its annual premium amounted to P100,000. Is said premium
deductible by ADD Computers, Inc.? Reason. (5%)
SUGGESTED ANSWER:
No. The premium is not deductible because it is not an
ordinary business expense. The term "ordinary" is used in
the income tax law in its common significance and it has the
connotation of being normal, usual or customary (Deputy v.
Du Pont, 308 US 488 [1940]) . Paying premiums for the
insurance of a person not connected to the company is not
normal, usual or customary.
Another reason for its non-deductibility is the fact that it ordinary gains which are subject to a higher rate of income
can be considered as an illegal compensation made to a tax. (Chirelstein, Federal Income Taxation, 1977 Ed.)
government employee. This is so because if the insured, his
estate or heirs were made as the beneficiary (because of the
requirement of insurable interest) , the payment of premium will Deductions: Deductible Items from Gross Income (1999)
constitute bribes which are not allowed as deduction from Explain if the following items are deductible from gross
gross income (Section 34[A][l][c], NIRC). income for income tax purposes. Disregard who is the
person claiming the expense. (5%) 1) Interest on loans used
On the other hand, if the company was made the to acquire capital equipment
beneficiary, whether directly or indirectly, the premium is or machinery. 2) Depreciation
not allowed as a deduction from gross income (Section of goodwill.
36[A}14], NIRC). SUGGESTED ANSWER:
1) Interest on loans used to acquire capital equipment
Deductions: Amount for Bribe (2001) or machinery is a deductible item from gross income. The
In order to facilitate the processing of its application for a law gives the taxpayer the option to claim as a deduction or
license from a government office, Corporation A found it treat as capital expenditure interest incurred to acquire
necessary to pay the amount of Php 100,000 as a bribe to property used in trade, business or exercise of a profession.
the approving official. Is the Php 100,000 deductible from (Section 34(B) (3), NIRC).
the gross income of Corporation A? On the other hand, is
the Php 100,000 taxable income of the approving official? 2) Depreciation for goodwill is not allowed as deduction
Explain your answers. (5%) from gross income. While intangibles maybe allowed to be
SUGGESTED ANSWER: depreciated or amortized, it is only allowed to those
Since the amount of Phpl00.000 constitutes a bribe, it is not intangibles whose use in the business or trade is definitely
allowed as a deduction from gross income of Corporation A, limited in duration. (Basilan Estates, Inc. v, CIR, 21
(Section 34(A)(l)(c), NIRC). However, to the recipient government SCRA 17). Such is not the case with goodwill.
official, the same constitutes a taxable income. All income from
legal or illegal sources are taxable absent any clear provision of law ALTERNATIVE ANSWER:
Depreciation of goodwill is allowed as a deduction from
exempting the same. This is the reason why gross income had
gross income if the goodwill is acquired through capital
been defined to include income from whatever source derived.
outlay and is known from experience to be of value to the
(Section 32(A), NIRC). Illegally acquired income constitutes realized
business for only a limited period. (Section 107, Revenue
income under the claim of right doctrine (Rutkin
Regulations No. 2) . In such case, the goodwill is allowed to be
amortized over its useful life to allow the deduction of the
v. US, 343 US 130).
current portion of the expense from gross income, thereby
Deductions: Capital Losses; Prohibitions (2003) paving

revenuesthewhich
way isforana essential
proper matching
feature ofofthecosts against
income tax
What is the rationale for the rule prohibiting the deduction
of capital losses from ordinary gains? Explain. system.
SUGGESTED ANSWER:
It is to insure that only costs or expenses incurred in Deductions: Income Tax: Donation: Real Property
earning the income shall be deductible for income tax (2002)
On December 06, 2001, LVN Corporation donated a piece
purposes consonant with the requirement of the law that of vacant lot situated in Mandaluyong City to an accredited
only necessary expenses are allowed as deductions from and duly registered non-stock, non-profit educational
gross income. The term " NECESSARY EXPENSES" institution to be used by the latter in building a sports
presupposes that in order to be allowed as deduction, the complex for students.
expense must be business connected, which is not the case A. May the donor claim in full as deduction from its
insofar as capital losses are concerned. This is also the gross income for the taxable year 2001 the amount of the
reason why all non-business connected expenses like donated lot equivalent to its fair market value/zonal value at
personal, living and family expenses, are not allowed as the time of the donation? Explain your answer. (2%)
deduction from gross income (Section 36(A)(1) of the 1997
Tax Code). SUGGESTED ANSWER:
A. No. Donations and/or contributions made to
The prohibition of deduction of capital losses from qualified donee institutions consisting of property
ordinary gains is designed to forestall the shifting of other than money shall be based on the acquisition
deductions from an area subject to lower taxes to an area cost of the property. The donor is not entitled to claim
subject to higher taxes, thereby unnecessarily resulting in as full deduction the fair market value/zonal value of
leakage of tax revenues. Capital gains are generally taxed at a the lot donated. (Sec. 34(H), NIRC).
lower rate to prevent, among others, the bunching of
income in one taxable year which is a liberality in the law B. In order that donations to non-stock, non-profit
begotten from motives of public policy (Rule on Holding educational institution may be exempt from the donor's gift
Period). It stands to reason therefore, that if the transaction tax, what conditions must be met by the donee? (3%)
results in loss, the same should be allowed only from and to
SUGGESTED ANSWER:
the extent of capital gains and not to be deducted from
B. In order that donations to non-stock, non-profit that they are not allowed to deduct any item from their gross
educational institution may be exempt from the donor's income for purposes of computing their net taxable income.
gift tax, it is required that not more than 30% of the With the passage of the Comprehensive Tax Reform Act of
said gifts shall be used by the donee-institution for 1997, is this complaint still valid? Explain your answer. (5%)
administration purposes. (Sec. 101(A)(3), NIRC).
SUGGESTED ANSWER:
Deductions: Non-Deductible Items; Gross Income (1999) No more. Gross compensation income earners are now
Explain if the following items are deductible from gross allowed at least an item of deduction in the form of
income for income tax purposes. Disregard who is the premium payments on health and/or hospitalization
person claiming the deduction. (5%) insurance in an amount not exceeding P2,400 per annum
1. Reserves for bad debts. [Section 34(M)]. This deduction is allowed if the aggregate
2. Worthless securities family income do not exceed P250.000 and by the spouse,
SUGGESTED ANSWER: in case of married individual, who claims additional personal
1 RESERVE FOR BAD DEBTS are not allowed as exemption for dependents.
deduction from gross income. Bad debts must be charged off
during the taxable year to be allowed as deduction from gross Deductions; Vanishing Deduction; Purpose (2006)
income. The mere setting up of reserves will not give rise to any Vanishing deduction is availed of by taxpayers to:
deduction. (Section 34(E). NTRC). Correct his accounting records to reflect the
2 WORTHLESS SECURITIES, which are ordinary actual deductions made
assets, are not allowed as deduction from gross income because Reduce his gross income
the loss is not realized. However, if these worthless securities are Reduce his output value-added tax liability
capital assets, the owner is considered to have incurred a capital Reduce his gross estate Choose the correct
loss as of the last day of the taxable year and, therefore, deductibleanswer. Explain. (5%)
to the extent of capital gains. (Section 34(D)(4), NIRC). This SUGGESTED ANSWER:
deduction, however, is not allowed to a bank or trust company. (D) reduce his gross estate. Vanishing deduction or prop-
(Section 34(E)(2), NIRC). erty previously taxed is one of the items of deduction
allowed in computing the net estate of a decedent (Section
86[A][2] and 86[B][2], NIRC).
Exclusion & Inclusion; Gross Receipts (2006)

Deductions: Requisites; Deducibility of a Loss (1998) Congress enacts a law imposing a 5% tax on gross receipts
Give the requisites for deducibility of a loss. (5%1 of common carriers. The law does not define the term
SUGGESTED ANSWER: "gross receipts." Express Transport, Inc., a bus company
The requisites for deducibility of a loss are 1) loss belongs plying the Manila-Baguio route, has time deposits with ABC
to the taxpayer;
during the taxable2) actually sustained and charged off Bank. In 2005, Express Transport earned P1 Million
interest, after deducting the 20% final withholding tax from
ear; 3) evidenced by a closed and completed transaction; its time deposits with the bank. The BIR wants to collect a
4) not compensated by Insurance or other forms of 5% gross receipts tax on the interest income of Express
Transport without deducting the 20% final withholding tax.
indemnity; 5) not claimed as a deduction for estate tax Is the BIR correct? Explain. (5%)
purposes in case of individual taxpayers; and 6) if it is a ALTERNATIVE ANSWER:
casualty loss it is evidenced by a declaration of loss filed Yes. The term "Gross Receipts" is broad enough to include income
within 45 days with the BIR. constructively received by the taxpayer. The amount withheld is
paid to the government on its behalf, in satisfaction of withholding
taxes. The fact that it did not actually receive the amount does not
COMMENT: alter the fact that it is remitted in satisfaction of its tax obligations.
The question is vague. There are different kinds of losses Since the income withheld is an income owned by Express
recognized as deductible under the Tax Code. These are losses, in Transport, the same forms part of its gross receipts (CIR v.
general (Sec. 34[D](1); net operating loss carryover (Sec. 34[D](3); Solidbank Corp., G.R. No. 148191, November 25, 2003).
capital losses (Sec. 34[D](4); Losses from wash sales of stocks or
securities (Sec. 34[D](5) in relation to Sec. 38); wagering losses
(Sec. 34[D](6); and abandonment losses (Sec. 34(D](7). Losses are ALTERNATIVE ANSWER:
also deductible from the gross estate (Sec. 86[A](l)(e), NIRC). No. The term "gross receipts," as applied to the business
of a common carrier consists of revenues from carriage of
Considering the time allotted for a five (5) point question is only goods, cargoes, and passengers. It does not comprehend or
nine (9) minutes, the candidates would not be able to write down include interest income which is properly described as
a complete answer. It is suggested that any answer which states "Other Income."
the requisites for the deducibility of any of the above losses be (NOTA BENE: This question pertains to a percentage tax on Gross
given full credit. Receipts which is excluded from the Bar coverage)
Deductions; Income Tax: Allowable Deductions (2001) Exclusion vs. Deduction from Gross Income (2001)
Taxpayers whose only income consists of salaries and
wages from their employers have long been complaining
Distinguish "Exclusion from Gross Income" from which are exclusions from gross income pursuant
"Deductions From Gross Income". Give an example of to Section 28(b)(5) of the Tax Code.
each. (2%)
SUGGESTED ANSWER: Exclusions & Inclusions: Executive Benefits (1995)
EXCLUSIONS from gross income refer to a flow of Mr. Adrian is an executive of a big business corporation.
wealth to the taxpayer which are not treated as part of gross Aside from his salary, his employer provides him with the
income, for purposes of computing the taxpayers taxable following benefits: free use of a residential house in an
income, due to the following reasons: (1) It is exempted by exclusive subdivision, free use of a limousine and
the fundamental law; (2) It is exempted by statute; and (3) It membership in a country club where he can entertain
does not come within the definition of income. (Section 61, customers of the corporation. Which of these benefits, if
RR No. 2). DEDUCTIONS from gross income , on the any, must Mr. Adrian report as income? Explain.
other hand, are the amounts, which the law allows to be SUGGESTED ANSWER:
deducted from gross income in order to arrive at net Mr. Adrian must report the imputed rental value of the
income. house and limousine as income. If the rental value exceeds
the personal needs of Mr. Adrian because he is expected to
Exclusions pertain to the computation of gross income, provide accommodation in said house for company guests
while deductions pertain to the computation of net income. or the car is used partly for business purpose, then Mr.
Exclusions are something received or earned by the Adrian is entitled only to a ratable rental value of the house
taxpayer which do not form part of gross income while and limousine as exclusion from gross income and only a
deductions are something spent or paid in earning gross reasonable amount should be reported as income. This is
income. because the free housing and use of the limousine are given
partly for the convenience and benefit of the employer
Example of an exclusion from gross income is proceeds of (Collector vs. Henderson).
life insurance received by the beneficiary upon the death of ALTERNATIVE ANSWER:
the insured which is not an income or 13th month pay of Remuneration for services although not given in the form
an employee not exceeding P30.000 which is an income not of cash constitutes compensation income. Accordingly, the
recognized for tax purposes. Example of a deduction is value for the use of the residential house is part of his
business rental. compensation income which he must report for income tax
purposes. However, if the residential house given to Mr.
Exclusions & Inclusions: Benefits on Account of Injury Adrian for his free use as an executive is also used for the
(1995) benefit of the corporation/employer, such as for
Mr. Infante was hit by a wayward bus while on his way to entertaining customers of the corporation, only 50% of the
work. He survived but had to pay P400.000.00 for his rental value or depreciation (if the house is owned by the
hospitalization. He was unable to work for six months corporation) shall form part of compensation income
which meant
10,000.00 that he
a month or adid not
total of receive his usual
P60.000.00. salary
He sued theofbus
P (RAMO 1-87).
company and was able to obtain a final judgment awarding The free use of a limousine and the membership in a
him P400.000.00 as reimbursement for his hospitalization, country club is not part of Mr. Adrian's compensation
P60.000 for the salaries he failed to receive while income because they were given for the benefit of the
hospitalized, P200,000.00 as moral damages for his pain and employer and are considered to be necessary incidents for
suffering, and P 100,000.00 as exemplary damages. He was the proper performance of his duties as an executive of the
able to collect in full from the judgment. How much income corporation.
did he realize when he collected on the judgment? Explain.
The membership fee in the country club needs to be
SUGGESTED ANSWER: reported as income. It appears that the membership of Mr.
None. The P200.000 moral and exemplary damages are Adrian to the country club is primarily for the benefit and
compensation for injuries sustained by Mr. Infante. The convenience of the employer. This is to enable Mr. Adrian to
P400.000.00 reimbursement for hospitalization expenses entertain company guests (Collector vs. Henderson).
and the P60.000.00 for salaries he failed to receive are
'amounts of any damages received whether by suit or
agreement on account of such injuries.' Section 28(b)(5) of Exclusions & Inclusions; Assets; Resident Alien (2005)
the Tax Code specifically exclude these amounts from the Ralph Donald, an American citizen, was a top executive of
gross income of the individual injured. (Section 28(b), a U.S. company in the Philippines until he retired in 1999.
NIRC and Sec. 63 Rev. Reg. No. 2) He came to like the Philippines so much that following his
ALTERNATIVE ANSWER: retirement, he decided to spend the rest of his life in the
The income realized from the judgment is only the recovery country. He applied for and was granted a permanent
for lost salaries. This constitutes taxable income because resident status the following year. In the spring of 2004,
were it not for the injury, he could have received it from his while vacationing in Orlando, Florida, USA, he suffered a
employer as compensation income. All the other amounts heart attack and died. At the time of his death, he left the
received are either compensation for injuries or damages following properties: (a) bank deposits with Citibank Makati
received on account of such injuries' and Citibank Orlando, Florida; (b) a resthouse in Orlando,
Florida; (c) a condominium unit in
Makati; (d) shares of stock in the Philippine subsidiary of was reached under the terms of which JR was paid the
the U.S. Company where he worked; (e) shares of stock in following amounts: P500,000.00 for his hospitalization;
San Miguel Corp. and PLOT; (f) shares of stock in Disney P250,000.00 as moral damages; and P300,000.00 for loss of
World in Florida; (g) U.S. treasury bonds; and (g) proceeds income during the period of his treatment and recuperation.
from a life insurance policy issued by a U.S. corporation. In addition, JR received from his employer the amount of
Which of the foregoing assets shall be included in the P200,000.00 representing the cash equivalent of his earned
taxable gross estate in the Philippines? Explain. (5%) vacation and sick leaves. Which, if any, of the amounts he
SUGGESTED ANSWER: received are subject to income tax? Explain. (5%)
All of the properties enumerated except (g), the proceeds
from life insurance, are included in the taxable gross estate SUGGESTED ANSWER:
in the Philippines. Ralph Donald is considered a resident All amounts received from the airline company are excluded
alien for tax purposes since he is an American Citizen and from gross income. Under Sec. 32(B)(4) of the NIRC,
was a permanent resident of the Philippines at the time of amounts of damages received, whether by suit or
his death. The value of the gross estate of a resident alien agreement, on account of personal injuries or sickness are
decedent shall be determined by including the value at the excluded from gross income. Since the amounts received
time of his death of all property, real or personal, tangible from the airline company were received as damages by
or intangible, wherever situated. (Sec. 85, NIRC) The other agreement on account of personal injuries, all shall be
item, (g) proceeds from a life insurance policy, may also be excluded from JR's gross income.
included on the assumption that it was Ralph Donald who
took out the insurance upon his own life, payable upon his The amount of P200,000.00, less the equivalent of not
death to his estate. (Sec. 85[E], NIRC) more than 10 days of vacation leave, received by JR from
his employer, is subject to income tax under Sec. 2.78.1 (a)
Exclusions & Inclusions; Benefits on Account of Death (7) of R.R. No. 2-98.
(1996)
X, an employee of ABC Corporation died. ABC Exclusions & Inclusions; Compensation for personal
Corporation gave Xs widow an amount equivalent to Xs injuries or sickness (2003)
salary for one year. Is the amount considered taxable income X, while driving home from his office, was seriously injured
to the widow? Why? when his automobile was bumped from behind by a bus
SUGGESTED ANSWER: driven by a reckless driver. As a result, he had to pay
No. The amount received by the widow from the decedent's P200,000.00 to his doctor and P100, 000.00 to the hospital
employer may either be a gift or a separation benefit on where he was confined for treatment. He filed a suit against
account of death. Both are exclusions from gross income the bus driver and the bus company and was awarded and
pursuant to provisions of Section 28(b) of the Tax Code. paid actual damages of P300, 000.00 (for his doctor and
hospitalization bills), P100,000.00 by way of moral damages,
ALTERNATIVE ANSWER:
No. Since the amount was given to the widow and not to and P50,000.00 for what he had to pay his attorney for
bringing his case to court. Which, if any, of the foregoing
the estate, it becomes obvious that the amount is more of a
awards are taxable income to X and which are not? Explain.
gift. In one U.S. tax case (Estate of Hellstrom vs.
(8%)
Commissioner, 24 T.C. 916 ), it was held that payments to the SUGGESTED ANSWER:
widow of the president of a corporation of the amount the Nothing is taxable. Under the Tax Code, any amount
president would have received in salary if he lived out the received as compensation for personal injuries or sickness,
ear constituted a gift and not an income. plus the amounts for any damages received whether by suit
or agreement, on account of such injuries or sickness shall
The controlling facts which would lead to the conclusion be excluded from gross income. Since the entire amount of
that the amount received by the widow is not an income P450, 000.00 received are award of damages on account of
are as follows: 7) the gift was made to the widow rather the injuries sustained; all shall be excluded from his gross
than the income. Obviously, these damages are considered by law as
estate: 8) there was no obligation for the corporation to mere return of capital. (Section 32(B)(4), 1997 Tax Code)
make
further payments to the deceased; 9) the widow had never
worked for the corporation; 10) the corporation received Exclusions & Inclusions; Facilities or Privileges;
no economic benefit; and 11) the deceased had been fully MilitaryCamp (1995)
compensated for his Capt. Canuto is a member of the Armed Forces of the
services (Estate of Sydney Carter vs. Commissioner, Philippines. Aside from his pay as captain, the government
453 F. 2d 61 (2dCir. 1971 ). gives him free uniforms, free living quarters in whatever
military camp he is assigned, and free meals inside the camp.
Exclusions & Inclusions; Benefits on Account of Injury Are these benefits income to Capt. Canuto? Explain.
(2005)
R was a passenger of an airline that crashed. He survived SUGGESTED ANSWER:
the accident but sustained serious physical injuries which No, the free uniforms, free living quarters and the free
required hospitalization for 3 months. Following meals inside the camp are not income to Capt. Canute
negotiations with the airline and its insurer, an agreement because these are facilities or privileges furnished by the
employer for the employer's convenience which are Exclusions & Inclusions; ITR; 13th month pay and
necessary incidents to proper performance of the military de minimis benefits (2005)
personnel's duties. State with reasons the tax treatment of the following in the
preparation of annual income tax returns: 13th month pay
Exclusions & Inclusions; Gifts over and above the and de minimis benefits;
Retirement Pay (1995) SUGGESTED ANSWER:
Mr. Quiroz worked as chief accountant of a hospital for The 13th month pay not exceeding P30,000.00 shall not
forty-five years. When he retired at 65 he received be reported in the income tax return because it is excluded
retirement pay equivalent to two months' salary for every from gross income (Sec. 32[B][7], [e], NIRC) The amount
ear of service as provided in the hospital BIR approved of the 13th month pay in excess of P30,000.00 shall be
retirement plan. The Board of Directors of the hospital felt reported in the annual income tax return.
that the hospital should give Quiroz more than what was
provided for in the hospital's retirement plan in view of his De minimis benefits which do not exceed the ceilings are
loyalty and invaluable services for forty-five years; hence, it excluded from gross income, and not to be considered for
resolved to pay him a gratuity of P1 Million over and above determining the P30,000.00 ceiling hence not reportable in
his retirement pay. the annual income tax return. (Sec. 2.78.1[A][3], R.R. 2-98 as
amended by Sec. 2.33 [C] and further amended by R.R. No. 8-2000)
The Commissioner of Internal Revenue taxed the P1 Mil-
lion as part of the gross compensation income of Quiroz
who protested that it was excluded from income because Exclusions & Inclusions; ITR; Dividends received by a
(a) it was a retirement pay, and (b) it was a gift. domestic corporation (2005)
1) Is Mr. Quiroz correct in claiming that the additional State with reasons the tax treatment of the following in the
P1 Million was retirement pay and therefore preparation of annual income tax returns: Dividends
excluded from income? Explain. received by a domestic corporation from (i) another
2) Is Mr. Quiroz correct in claiming that the domestic corporation; and (ii) a foreign corporation;
additional P1 Million was gift and therefore excluded from SUGGESTED ANSWER:
income? Explain.
(i) Dividends received by a domestic corporation from a
SUGGESTED ANSWERS:
1) No. The additional P1 million is not a retirement pay domestic corporation shall not be subject to tax (Sec.
but a part of the gross compensation income of Mr. Quiroz. 27[D][4], NIRC), hence, excluded from the income tax
This is not a retirement benefit received in accordance with return.
a reasonable private benefit plan maintained by the employer (ii) Dividends received by a domestic corporation from a
as it was not paid out of the retirement plan. Accordingly, foreign corporation form part of the gross income and are
the amount received in excess of the retirement benefits that accordingly subject to net income tax, hence included in
he
planis would
entitled toqualify
not receiveasunder the BIR-approved
an exclusion retirement
from gross income. the annual
included inITR (Sec. 42[A][2][b],
the income tax return.NIRC), hence, must be
2) No. The amount received was in consideration of his

loyalty and invaluable services to the company which is
clearly a compensation income received on account of
employment. Under the employer's 'motivation test,'
emphasis should be placed on the value of Mr. Quiroz
services to the company as the compelling reason for giving
him the gratuity, hence it should constitute a taxable
income. The payment would only qualify as a gift if there is
nothing but 'good will, esteem and kindness' which
motivated the employer to give the gratuity. (Stonton vs.
U.S., 186 F. Supp. 393). Such is not the case in the herein
problem.
ALTERNATIVE ANSWER:
Yes. The 1 million is not compensation income subject to
income tax but a gift from his employer. There was no
evidence presented to show that he was not fully compen-
sated for his 45 years of service. If his services contributed
in a large measure to the success of the hospital, it did not
give rise to a recoverable debt. The P1 million is purely a
gratuity from the company. It is a taxable gift to the
transferor. Under the Tax Code, gifts are excluded from
gross income therefore exempt from income tax. (Sec.
28{b)(3), NIRC; Pirovano vs. Commissioner)
Exclusions & Inclusions; ITR; Income realized from sale
(2005)
State with reasons the tax treatment of the following in the
preparation of annual income tax returns: Income realized
from sale of: (i) capital assets; and (ii) ordinary assets.
SUGGESTED ANSWER:
(i) Income realized from sale of capital assets is subject to
the final withholding tax at source and therefore excluded
from the Income Tax Return (Sec. 24[C] and [D], NIRC);
(ii) Income realized from sale of ordinary assets is part of

Gross Income, included in the Income Tax Return. (Sec.
32[A][3], NIRC)
Exclusions & Inclusions; ITR; Interest on deposits (2005)

State with reasons the tax treatment of the following in the
preparation of annual income tax returns: Interest on
deposits with: (i) BPI Family Bank; and (ii) a local offshore
banking unit of a foreign bank;
SUGGESTED ANSWER:
Both items are excluded from the income tax return:
(i) Interest income from any currency bank deposit is
considered passive income from sources within the
Philippines and subject to final tax. Since it is subject to
final tax it is not to be included in the annual ITR. (Sec. exclusively used for religious, charitable or educational
24[B][1], NIRC) (u) Same as No. (j). purposes shall be exempt from taxation. a) To what kind
of tax does this exemption apply? (2%)
Exclusions & Inclusions; ITR; Proceeds of life insurance SUGGESTED ANSWER:
(2005) This exemption applies only to property taxes. What is
State with reasons the tax treatment of the following in the exempted is not the institution itself but the lands, buildings
preparation of annual income tax returns: Proceeds of life and improvements actually, directly and exclusively used for
insurance received by a child as irrevocable beneficiary; religious, charitable and educational purposes.
(Commissioner of Internal Revenue v. Court of Appeals, et al,
SUGGESTED ANSWER: G.R. No. 124043, October 14, 1998).
Not to be reported in the annual income tax returns
because the proceeds of the life insurance are excluded b) Is proof of actual use necessary for tax exemption
from gross income. Proceeds of Life insurance policies paid purposes under the Constitution? (3%)
to the heirs or beneficiaries upon the death of the insured is SUGGESTED ANSWER:
an exclusion from gross income. (Sec.32[B][l],NIRC) Yes, because tax exemptions are strictly construed against
the taxpayer. There must be evidence to show that the
taxpayer has complied with the requirements for exemption.
Exclusions & Inclusions; Life Insurance Policy (2003) Furthermore, real property taxation is based on use and not
On 30 June 2000, X took out a life insurance policy on his on ownership, hence the same rule must also be applied for
own life in the amount of P2,000,000.00. He designated his real property tax exemptions.
wife, Y, as irrevocable beneficiary to P1,000,000.00 and his
son, Z, to the balance of P1,000,000.00 but, in the latter Exemptions: Charitable Institutions; Churches (1996)
designation, reserving his right to substitute him for The Constitution exempts from taxation charitable in-
another. On 01 September 2003, X died and his wife and stitutions, churches, parsonages or convents appurtenant
son went to the insurer to collect the proceeds of X's life thereto, mosques arid non-profit cemeteries and lands,
insurance policy. (8%) buildings and improvements actually, directly and exclu-
(a) Are the proceeds of the insurance subject to sively used for religious, charitable and educational
income tax on the part of Y and Z for their respective purposes. Mercy Hospital is a 100-bed hospital organized
shares? Explain. for charity patients. Can said hospital claim exemption from
(b) Are the proceeds of the insurance to form part of taxation under the above-quoted constitutional provision?
the gross estate of X? Explain. Explain.
SUGGESTED ANSWERS: SUGGESTED ANSWER:
(a) No. The law explicitly provides that proceeds of life Yes. Mercy Hospital can claim exemption from taxation
insurance policies paid to the heirs or beneficiaries upon the under the provision of the Constitution, but only with
respect to real property taxes provided that such real
death
exemptoffrom
the insured areThe
taxation. excluded from
proceeds of gross income and is
life insurance properties are used actually, directly and exclusively for
received upon the death of the insured constitute a charitable purposes.
compensation for the loss of life, hence a return of capital,
which is beyond the scope of income taxation. (Section Exemptions: Educational institution (2004)
32(B)(1) 1997 Tax Code) Suppose that XYZ Colleges is a proprietary educational
institution owned by the Archbishop's family, rather than
(b) Only the proceeds of P1,000,000.00 given to the son, Z, the Archdiocese, which of those above cited income and
shall form part of the Gross Estate of X. Under the Tax donation would be exempt from taxation? Explain briefly.
Code, proceeds of life insurance shall form part of the gross (5%)
estate of the decedent to the extent of the amount SUGGESTED ANSWER:
receivable by the beneficiary designated in the policy of the If XYZ Colleges is a proprietary educational institution, all
insurance except when it is expressly stipulated that the of its income from school related and non-school related
designation of the beneficiary is irrevocable. As stated in the activities will be subject to the income tax based on its
problem, only the designation of Y is irrevocable while the aggregate net income derived from both activities (Section
insured/decedent reserved the right to substitute Z as 27(B), NMC). Accordingly, all of the income enumerated in
beneficiary for another person. Accordingly, the proceeds the problem will be taxable.
received by Y shall be excluded while the proceeds received
by Z shall be included in the gross estate of X. (Sect/on The donation of lot and building will likewise be subject to
85(E), 1997 Tax Code) the donor's tax because a donation to an educational
institution is exempt only if the school is incorporated as a
Exemptions: Charitable Institutions (2000) non-stock entity paying no dividends.
Article VI, Section 28 (3) of the 1987 Philippine Constitution
provides that charitable institutions, churches and personages Since the donee is a proprietary educational institution, the
or covenants appurtenant thereto, mosques, non-profit donation is taxable (Section 101(AX3), NJRC).
cemeteries and all lands, buildings and improvements
actually, directly and Exemptions: Gifts & Donations (1994)
In 1991, Imelda gave her parents a Christmas gift of P
100,000.00 and a donation of P50,000.00 to her parish
church. She also donated a parcel of land for the Under Article XTV, Section 4 (3) of the 1987 Philippine
construction of a building to the PUP Alumni Association, a Constitution, all revenues and assets of non-stock, nonprofit
non-stock, non-profit organization. Portions of the building educational institutions, used actually, directly and
shall be leased to generate income for the association. 1) Is exclusively for educational purposes, are exempt from taxes
the Christmas gift of P 100,000.00 to Imelda's parents and duties. Are income derived from dormitories, canteens
subject to tax? 2) How about the donation to the parish and bookstores as well as interest income on bank deposits
church? 3) How about the donation to the P.U.P, Alumni and yields from deposit substitutes automatically exempt
Association? from taxation? Explain. (5%)
SUGGESTED ANSWER:
SUGGESTED ANSWER: No. The interest income on bank deposits and yields from
deposit substitutes are not automatically exempt from
taxation. There must be a showing that the incomes are
1 The Christmas gift of P100,000.00 given by Imelda
included in the school's annual information return and duly
) to her parents is taxable up to P50,000.00 because
audited financial statements together with:
under the law (Sec.
not exceeding 92 (a)are
P50,000.00 of the Tax Code), net gifts
exempt. 1 Certifications from depository banks as to the
amount of interest income earned from passive investments
2 The donation of P50,000.00 to the parish church not subject to the 20% final withholding tax;
) even assuming that it is exclusively for religious 2 Certification of actual, direct and exclusive
purposes is not tax-exempt because the exemption utilization of said income for educational purposes;
granted under Article VI, Sec. 28(3) of the 3 Board resolution on proposed project to be
Constitution applies only to real estate taxes (Lladoc funded out of the money deposited in banks or placed in
v. Commissioner, 14SCRA292). money market placements (Finance Department Order No.
149-95 issued November 24, 1995), which must be used
3 The donation to the P.U.P. Alumni Association actually, directly and exclusively for educational purposes.
) does not also qualify for exemption both under the
Constitution and the aforecited law because it is not
an educational or research organization,
ALTERNATIVE ANSWER: The income derived from dormitories, canteens and
corporation, institution, foundation or trust.
Donation to the P.U.P. Alumni Association is exempt from bookstores are not also automatically exempt from taxation.
donor's tax if it is proven that the association is a nonstock, There is still the requirement for evidence to show actual,
non-profit charitable association, paying no dividends, direct and exclusive use for educational purposes. It is to be
governed by trustees who receive no compensation, and noted that the 1987 Philippine Constitution does not
devoting all its income to the accomplishment and distinguish with respect to the source or srcin of the
promotion of the purposes enumerated in its articles of
incorporation. Not more than 30% of the gift should be income. Theactual,
should be distinction
directis and
with exclusive
respect tofor
the educational
use which
used for administration purposes by the donee. purposes.
Consequently, the provisions of Sec. 30 of the NIRC of

Exemptions: Head of the Family: 1997, that a non-stock and nonprofit educational institution
(1998)
Arnold, who is single, cohabits with Vilma, who is legally is exempt from taxation only "in respect to income received
married to Zachary. Arnold and Vilma have six minor by them as such" could not affect the constitutional tax
children who live and depend upon Arnold for their chief exemption. Where the Constitution does not distinguish
support. The children are not married and not gainfully with respect to source or srcin, the Tax Code should not
employed. 1) For income tax purposes, may Arnold be make distinctions.
considered
as "head of a family?" [3%] Exemptions: Non-Profit Entity; Ancillary Activity &
2) Is Arnold entitled to deduct from his gross Incidental Operations (1994)
income, an additional exemption for each of his illegitimate The University of Bigaa, a non-stock, non-profit entity,
child? [2%] operates a canteen for its students and a bookstore inside
SUGGESTED ANSWER:
the campus. It also operates two dormitories for its
1) Yes. An unmarried man who has illegitimate
students, one of which is in the campus. Is the University
minor children who live with him and depend upon him
liable to pay income taxes for the operation of the: 1)
for their chief support is considered as "head of the family"
canteen? 2) bookstore? 3) two dormitories?
(RR No. 2-98 implementing Section 35, NIRC). SUGGESTED ANSWER:
2) No. Arnold is only entitled to deduct additional 1) For the operation of the canteen inside the campus, the
personal exemption for four (4) out of the six (6) income thereon being incidental to the operations of the
illegitimate children. The maximum number of dependents University as a school, is exempt (Art. XIV (4) (3),
for purposes of the additional personal exemption is four. Constitution; DECS Regulations No. 137-87, Dec. 16, 1987).
(Sec. 35, NIRC).
2) For the same reasons, the University of Bigaa is not liable
Exemptions: Non-Profit Educational Institutions (2000) to pay income taxes for the operation of the
bookstore, since this is an ancillary activity the conduct o are income from its activities conducted for profit which are
which is carried out within the school premises. subject to tax. The income tax attaches irrespective of the
disposition of these incomes. ( Sec. 30, NIRC; CIR v.
3) The University of Bigaa shall not be liable to pay income YMCA, GR No. 124043, 1998).
taxes for the operation of the dormitory located in the
campus, for same reasons as the foregoing. However, the Exemptions: Prize of Peace Poster Contest (2000)
latter shall be liable for income taxes on income from ose Miranda, a young artist and designer, received a prize
operations of the dormitory located outside the school of P100,000.00 for winning in the on-the-spot peace poster
premises. contest sponsored by a local Lions Club. Shall the reward
be included in the gross income of the recipient for tax
Exemptions: Non-Stock/ Non-Profit Association (2002) purposes? Explain. (3%)
XYZ Foundation is a non-stock, non-profit association duly SUGGESTED ANSWER:
organized for religious, charitable and social welfare No. It is not includable in the gross income of the recipient
purposes. Last January 3, 2000 it sold a portion of its lot because the same is subject to a final tax of 20%, the
used for religious purposes and utilized the entire proceeds amount thereof being in excess of P10.000 (Sec. 24(B){1),
for the construction of a building to house its free Day and NIRC of 1997). The prize constitutes a taxable income
Night Care Center for children of single parents. In order to because it was made primarily in recognition of artistic
subsidize the expenses of the Day and Night Care Center achievement which he won due to an action on his part to
and to support its religious, charitable and social welfare enter the contest. [Sec. 32 (B) (7) (c), NIRC of 1997] Since it
projects, the Foundation leased the 300square meter area of is an on-the-spot contest, it is evident that he must have
the second and third floors of the building for use as a joined the contest in order to earn the prize or award.
boarding house. The Foundation also operates a canteen
and a gift shop within the premises, all the income from
which is used actually, directly, and exclusively for the Exemptions: Prizes & Awards; Athletes (1996)
purposes for which the Foundation was organized. Onyoc, an amateur boxer, won in a boxing competition
sponsored by the Gold Cup Boxing Council, a sports
association duly accredited by the Philippine Boxing
A. Considering the constitutional provision granting Association. Onyoc received the amount of P500,000 as his
tax exemption to non-stock corporations such as those prize which was donated by Ayala Land Corporation. The
formed exclusively for religious, charitable or social welfare BIR tried to collect income tax on the amount received by
purposes, explain the meaning of the last paragraph of said Onyoc and donor's tax from Ayala Land Corporation, which
Sec. 30 of the 1997 Tax Code which states that Income o taxes, Onyoc and Ayala Land Corporation refuse to pay.
whatever kind and character of the foregoing organizations from any o Decide.
their properties, real or personal, or from any of their activities SUGGESTED ANSWER:
conducted for profit regardless of the disposition made of such income The prize
hence will not
the BIR constitute
is not correct aintaxable income
imposing to Onyoc,
the income tax.
shall be subject to tax imposed under this Code." (5%)
R.A. No. 7549 explicitly provides that 'All prizes and
SUGGESTED ANSWER: awards granted to athletes in local and international sports
A. The exemption contemplated in the Constitution covers tournaments and competitions held in the Philippines or
real estate tax on real properties actually, directly and abroad and sanctioned by their respective national sports
exclusively used for religious, charitable or social welfare associations shall be exempt from income tax".
purposes. It does not cover exemption from the imposition
of the income tax which is within the context of Section 30 Neither is the BIR correct in collecting the donor's tax
of the Tax Code. As a rule, non-stock nonprofit from Ayala Land Corporation. The law is clear when it
corporations organized for religious, charitable or social categorically stated "That the donor's of said prizes and
welfare purposes are exempt from income tax on their awards shall be exempt from the payment of the donor's
income received by them as such. However, if these tax."
religious, charitable or social welfare corporations derive
income from their properties or any of their activities Exemptions: Retirement Benefits: Work Separation (1999)
conducted for profit, the income tax shall be imposed on A Co., a Philippine corporation, has two divisions
said items of income irrespective of their disposition. ( Sec. manufacturing and construction. Due to the economic
30, NIRC; CIR v, YMCA, GR No. 124043, 1998 ). situation, it had to close its construction division and layoff
the employees in that division. A Co. has a retirement plan
B. Is the income derived by XYZ Foundation from approved by the BIR, which requires a minimum of 50
the sale of a portion of its lot, rentals from its boarding ears of age and 10 years of service in the same employer at
house and the operation of its canteen and gift shop the time of retirement. There are 2 groups of employees to
subject to tax? Explain. (5%) be laid off: 1) Employees who are at least 50 years of age
SUGGESTED ANSWER: and has
B. Yes. The income derived from the sale of lot and at 10 years of service at the time of termination of
rentals from its boarding house are considered as income employment. 2) Employees who do no meet either the age
from properties which are subject to tax. Likewise, the or length
income from the operation of the canteen and gift shop of service A Co. plans to give the following:
For category (A) employees - the benefits under
the BIR approved plan plus an ex gratia payment of one SUGGESTED ANSWER:
month of every year of service. 1) The separation pay given to Reyes is subject to income
For category (B) employees - one month for tax as compensation income because it arises from a service
rendered pursuant to an employer-employee relationship. It
every year of service. For both categories, the cash is not considered an exclusion from gross income because
equivalent of unused vacation and sick leave the rule in taxation is tax construed in strictissimi juris or the
credits. rule on strict Interpretation of tax exemptions.
A Co. seeks your advice as to whether or not it will subject

any of these payments to WT. Explain your advice. (5%) 2) The separation pay received by Cruz is not subject to
income tax because his separation from the company was
SUGGESTED ANSWER: involuntary (Sec. 28 b (7), Tax Code).
For category A employees, all the benefits received on
account of their separation are not subject to income tax, 3) The separation pay received by Bautista is likewise not
hence no withholding tax shall be imposed. The benefits subject to tax. His separation is due to disability, hence
received under the BIR-approved plan upon meeting the involuntary. Under the law, separation pay received through
service requirement and age requirement are explicitly involuntary causes are exempt from taxation.
excluded from gross income. The ex gratia payment also
qualifies as an exclusion from gross income being in the Exemptions: Separation Pay (1995)
nature of benefit received on account of separation due to Mr. Jacobo worked for a manufacturing firm. Due to
causes beyond the employees' control. (Section 32(B), business reverses the firm offered voluntary redundancy
NIRC). The cash equivalent of unused vacation and sick program in order to reduce overhead expenses. Under the
leave credits qualifies as part of separation benefits excluded program an employee who offered to resign would be given
from gross income (CIR v. Court of Appeals, GR No. separation pay equivalent to his three month's basic salary
96O16, October 17, 1991). for every year of service. Mr. Jacobo accepted the offer and
received P400.000.00 as separation pay under the program.
For category B employees, all the benefits received by them
will also be exempt from income tax, hence not subject to
withholding tax. These are benefits received on account of After all the employees who accepted the offer were paid, the
separation due to causes beyond the employees' control, firm found its overhead still excessive. Hence it adopted
which are specifically excluded from gross income. (Section another redundancy program. Various unprofitable
32(B), NIRC). departments were closed. As a result, Mr. Kintanar was
ALTERNATIVE ANSWER; separated from the service. He also received P400.000.00 as
All of the
should notpayments are nottosubject
also be subject to income
withholding tax and
tax. The separation
received hispay. 1) Didpay?
separation Mr. Jacobo
Explain.derive
2) Didincome when he
Mr. Kintanar
employees were laid off, hence separated for a cause beyond derive income when he received his separation pay? Explain.
their control. Consequently, the amounts to be paid by
reason of such involuntary separation are excluded from
gross income, irrespective of whether the employee at the SUGGESTED ANSWER:
time of separation has rendered less than ten years of 1) Yes, Mr. Jacobo derived a taxable income when he
service and/or is below fifty years of age. received his separation pay because his separation from
(Section 32(B), NIRC). employment was voluntary on his part in view of his offer
to resign. What is excluded from gross income is any
Exemptions: Separation Pay (1994) amount received by an official or employee as a
Pedro Reyes, an official of Corporation X, asked for an consequence of separation of such official or employee
"earlier retirement" because he was emigrating to from the service of the employer for any cause beyond the
Australia. He was paid P2.000.000.00 as separation pay in control of the said official or employee (Sec 28, NIRC).
recognition of his valuable services to the corporation. ALTERNATIVE ANSWER:
No, Mr. Jacobo did not derive any taxable income because
uan Cruz, another official of the same company, was the separation pay was due to a retrenchment policy
separated for occupying a redundant position. He was given adopted by the company so that any employee terminated
P1,000.000.00 as separation pay. by virtue thereof is considered to have been separated due
to causes beyond the employee's control. The voluntary
ose Bautista was separated due to his failing eyesight. He redundancy program requiring employees to make an offer
was given P500.000.00 as separation pay. All the three (3) to resign is only considered as a tool to expedite the lay-off
were not qualified to retire under the BIR-approved of excess manpower whose services are no longer needed
pension plan of the corporation. 1) Is the separation pay by the employer, but is not the main reason or cause for the
given to Reyes subject to income tax? 2) How about the termination
separation pay received by Cruz? 3) How about the
separation pay received by Bautista? SUGGESTED ANSWER:
2) No, Mr. Kintanar did not derive any income when he
received his separation pay because his separation from
employment is due to causes beyond his control. The A, an employee of the Court of Appeals, retired upon
separation was involuntary as it was a consequence of the reaching the compulsory age of 65 years. Upon compulsory
closure of various unprofitable departments pursuant to the retirement, A received the money value of his accumulated
redundancy program. leave credits in the amount of P500.000.00. Is said amount
subject to tax? Explain.
Exemptions: Separation Pay (2005) SUGGESTED ANSWER:
Company A decides to close its operations due to No. The commutation of leave credits, more commonly
continuing losses and to terminate the services of its known as terminal leave pay, i.e., the cash equivalent of
employees. Under the Labor Code, employees who are accumulated vacation and sick leave credits given to an
separated from service for such cause are entitled to a officer or employee who retires, or separated from the
minimum of one-half month pay for every year of service. service through no fault of his own, is exempt from income
Company A paid the equivalent of one month pay for every tax. (BIR Ruling 238-91 dated November 8, 1991;
ear of service and the cash equivalent of unused vacation Commissioner v. CA and Efren Castaneda, GR No. 96016,
and sick leaves as separation benefits. Are such benefits October 17, 1991).
taxable and subject to withholding tax under the Tax Code?
Decide with reasons. (5%) Exemptions; Charitable Institutions (2006)
SUGGESTED ANSWER: The Constitution provides "charitable institutions, churches,
All of the benefits are not taxable, hence they are not personages or convents appurtenant thereto, mosques, and
subject to withholding tax under the Tax Code. Benefits non-profit cemeteries and all lands, buildings, and
received as a consequence of separation for any cause improvements actually directly and exclusively used for
beyond the control of the employees such as closure of religious, charitable or educational purposes shall be exempt
business are excluded from gross income . (Sec. 32[B][6][b], from taxation." This provision exempts charitable
NIRC in relation to Sec. 2[b][2], R.R. 2-98) institutions and religious institutions from what kind of
taxes? Choose the best answer. Explain. (5%)
Exemptions: Stock Dividends (2003)
On 03 January 1998, X, a Filipino citizen residing in the from all kinds of taxes, i.e., income, VAT,
Philippines, purchased one hundred (100) shares in the customs duties, local taxes and real property tax
capital stock of Y Corporation, a domestic company. On 03 from local tax only
anuary 2000, Y Corporation declared, out of the profits of from value-added tax
the company earned after 01 January 1998, a hundred from real property tax only
percent (100%) stock dividends on all stockholders of record from capital gains tax only
as of 31 December 1999 as a result of which X holding in Y SUGGESTED ANSWER:
The provision exemptions charitable institutions and
Corporation became two hundred (200) shares. Are the
religious institutions from (d) REAL PROPERTY TAXES
stock dividends received by X subject to income tax?
only. The exemption is only for taxes assessed as property
Explain.
SUGGESTED (8%) ANSWER: taxes, as distinguished from excise taxes (CIR v. CA, CTA &
No. Stock dividends are not realized income. Accordingly, MCA, G.R. No. 124043, October 14, 1998;
the different provisions of the Tax Code imposing a tax on Lladoc v. Commissioner of Internal Revenue, L-19201, June
dividend income only includes within its purview cash and 16,1965).
property dividends making stock dividends exempt from
Exemptions; Educational institution (2004)
income tax. However, if the distribution of stock dividends
XYZ Colleges is a non-stock, non-profit educational
is the equivalent of cash or property, as when the
institution run by the Archdiocese of BP City. It collected
distribution results in a change of ownership interest of the
and received the following:
shareholders, the stock dividends will be subject to income
(a) Tuition fees
tax. (Section 24(B)(2); Section 25(A)&(B); Section 28(B)(5)(b),
(b) Dormitory fees
1997 Tax Code) (c) Rentals from canteen concessionaires
(d) Interest from money-market placements of the tuition
Exemptions: Strictly Construed (1996) fees
Why are tax exemptions strictly construed against the (e) Donation of a lot and building by school alumni Which
taxpayer? of these above cited income and donation would not be
SUGGESTED ANSWER: exempt from taxation? Explain briefly. (5%)
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 they being
contrary to the life-blood theory which is the underlying
basis for taxes.
Exemptions: Terminal Leave Pay (1996)

SUGGESTED ANSWER:
A. All of the income derived by the non-stock, nonprofit
educational
provided theyinstitution will bedirectly
are used actually, exempt
and from taxation
exclusively for
educational purposes. The Constitution provides that all
revenues and assets of non-stock, non-profit educational
institution which are actually, directly and exclusively used
for educational purposes are exempt from taxation (Section 4
ar. 3, Article XIV, 1987 Constitution).
The donation is, likewise, exempt from the donor's tax if legislature and no service or duty or other remunerative
actually, directly and exclusively used for educational conditions have been imposed on the taxpayers receiving
purposes, provided not more than 30% of the donation is the exemption, it may be revoked at will by the legislature
used by the donee for administration purposes. The donee, (Christ Church v. Philadelphia, 24 How. 300 [1860] ).
being a non-stock, non-profit educational institution, is a What constitutes an impairment of the obligation of
qualified entity to receive an exempt donation subject to contracts is the revocation of an exemption which is
conditions prescribed by law (Section 4 par. 4, Art. XIV, 1987 founded on a valuable consideration because it takes the
Constitution, in relation to Section 101(AX3), NJRC). form and essence of a contract (Casanovas v. Hord, 8
Phil. 125 [1907]; Manila Railroad Company v. Insular
Collector of Customs, 12 Phil. 146 [1915])
Accordingly, none of the cited income and donation
collected and received by the non-stock, non-profit Exemptions; Govt Bonus, Gifts, & Allowances (1994)
educational institution would not be exempt from taxation. In December 1993, the Sangguniang Bayan authorized a
Christmas bonus of P3,000.00, a cash gift of P5,000.00 and
ALTERNATIVE ANSWER: transportation and representation allowance of P6,000.00
The following receipts by the non-stock, nonprofit for each of the municipal employees. 1) Is the Christmas
educational institution are not exempt from taxation, viz: bonus subject to any tax? 2) How about the cash gift? 3)
(c) Rentals from Canteen Concessionaires. Rental How about the transportation and representation
income is considered as unrelated to the school operations;
hence, taxable (DOF Order No. 137-87, Dec. 16, 1987) allowances?
SUGGESTED ANSWER:
1) The CHRISTMAS BONUS given by the
(d) Interest from money-market placements of the Sangguniang Bayan to the municipal employees is taxable as
tuition fees. The interest on the placement is taxable (DOF additional compensation (Sec. 21 (a). Tax Code).
Order No. 137-87). If however, the said interest is used
actually, directly and exclusively for educational purposes as
proven by substantial evidence, the same will be exempt 2) The cash gift per employee of P5.000.00 being
from taxation (CIR v. CA, 298 SCRA 83 11998]}. substantial may be considered taxable also. They partake the
nature of additional compensation income as it is highly
The other items of income which were all derived from doubtful if municipal governments are authorized to make
school-related activities will be exempt from taxation in the gifts in substantial sums such as this. They are not further-
hands of the recipient if used actually, directly and more gifts of "small value" which employers might give to
exclusively for educational purposes (Section 4 par. 3, their employees on special occasions like Christmas - items
Article XTV, 1987 Constitution). which could be exempt under BIR Revenue Audit Memo
The donation to a non-stock, non-profit educational No. 1-87.

institution will be exempt from the donor's tax if used
actually, directly and exclusively for educational purposes 3) The transportation and representation allowances
and provided, that, not more than 30% of the donation is are actually reimbursements for expenses incurred by the
used for administration purposes (Section 4, par. 4, Art. employee for the employer. Said allowances spent by the
XJV, 1987 Constitution, in relation to Section 101(AM3), employee for the employer are designed to enhance the
NJRC). quality of the service that the employer is supposed to
perform for its clientele like the people of the municipality.
Exemptions; Exemptions are Unilateral in Nature (2004)
A law was passed granting tax exemption to certain
industries and investments for a period of five years. But Exemptions; Personal & Additional Exemption (2006)
three years later, the law was repealed. With the repeal, the Charlie, a widower, has two sons by his previous marriage.
exemptions were considered revoked by the BIR, which Charlie lives with Jane who is legally married to Mario.
assessed the investing companies for unpaid taxes effective They have a child named Jill. The children are all minors
on the date of the repeal of the law. and not gainfully employed.
1. How much personal exemption can Charlie claim?
NPC and KTR companies questioned the assessments on Explain. (2.5%)
the ground that, having made their investments in full SUGGESTED ANSWER:
reliance with the period of exemption granted by the law, its Charlie can claim the personal exemption of a Head of a
repeal violated their constitutional right against the Family or P25,000.00 provided that, at least one of his
impairment of the obligations and contracts. Is the minor and not gainfully employed children is unmarried
contention of the companies tenable or not? Reason briefly. and living with and dependent upon him for chief support
(5%) (Tax Reform Act, RA 8424, Chapter VII, Section 35[A]; BIR
SUGGESTED ANSWER: Revenue Regulation 02-98).
The contention is not tenable. The exemption granted is in
the nature of a unilateral tax exemption. Since the 2. How much additional exemption can Charlie claim?
exemption given is spontaneous on the part of the Explain. (2.5%)
SUGGESTED ANSWER: inventory of the taxpayer if on hand at
His children from his previous marriage who are legitimate the close of the taxable year;
children and his illegitimate child with Jane will all entitle
him to additional personal exemption of P8,000.00 for each (2) property held by the taxpayer primarily for sale
dependent, if apart from being minor and not gainfully to customers in the ordinary course of trade or business;
employed, they are unmarried, living with and dependent
upon Charlie for their chief support (Tax Reform Act,
RA8424, Chapter VH, Section 35(A); BIR Revenue Regulation (3) property used in the trade or business of a
02-98). character which is subject to the allowance for
depreciation provided in Section 34 (F) of the Tax Code;
Exemptions; Roman Catholic Church; Limitations (2005) or
The Roman Catholic Church owns a 2-hectare lot, in a town
in Tarlac province. The southern side and middle part are (4) real property used in trade or business of the
occupied by the Church and a convent, the eastern side by a taxpayer.
school run by the Church itself, the southeastern side by
some commercial establishments, while the rest of the The statutory definition of "capital assets" practically
property, in particular the northwestern side, is idle or excludes from its scope, it will be noted, all property held
unoccupied. May the Church claim tax exemption on the by the taxpayer if used in connection with his trade or
entire land? Decide with reasons. business.
SUGGESTED ANSWER: Capital Gain Tax; Nature (2001)

No. The Church cannot claim tax exemption on the entire A, a doctor by profession, sold in the year 2000 a parcel of
land. Only the southern side and middle part that are land which he bought as a form of investment in 1990 for
occupied by the Church and a convent and the eastern side Php 1 million. The land was sold to B, his colleague, at a
occupied by a school run by the Church itself are exempt, time when the real estate prices had gone down and so the
because such parts of the 2-hectare lot are actually, directly land was sold only for Php 800,000 which was then the fair
and exclusively used for religious and educational purposes. market value of the land. He used the proceeds to finance
(Sec. 28[3], Art. VI, 1987 Constitution; Sec. 234, Local his trip to the United States. He claims that he should not
Government Code) be made to pay the 6% final tax because he did not have
any actual gain on the sale. Is his contention correct? Why?
The southeastern side occupied by some commercial (5%)
establishment is not tax exempt. If real property is used for SUGGESTED ANSWER:
one or more commercial purposes, it is not exclusively used No. The 6% capital gains tax on sale of a real property held
for the exempted purpose but is subject to taxation. 'Solely' as capital asset is imposed on the income presumed to have
is synonymous
Philippines with City,
v. Quezon 'exclusively.'
G.R. No.(Lung
144104, Center
June 29,of2004)
the been
sellingrealized from thewhichever
price thereof, sale which isis higher.
the fair (Section
market value or
24(D),
The property must be exclusively (solely) used for religious NIRC). Actual gain is not required for the imposition of the
or educational purposes. tax but it is the gain by fiction of law which is taxable.
Of course, it is apparent that the northwestern side, which is
idle or unoccupied is not "actually, directly and exclusively" Ordinary Sale of a Capital Asset (1994)
used for religious or educational purposes, hence not Noel Langit and his brother, Jovy, bought a parcel of land
exempt from taxation. which they registered in their names as pro-indiviso owners
(Parcel A). Subsequently, they formed a partnership, duly
CAPITAL GAIN TAX registered with Securities and Exchange Commission, which
Capital Asset vs. Ordinary Asset (2003) bought another parcel of land (Parcel B). Both parcels of
Distinguish a "capital asset" from an "ordinary asset". land were sold, realizing a net profit of P1,000,000.00 for
SUGGESTED ANSWER: parcel A and P500.000.00 for parcel B.
(a) The term "capital asset" regards all properties not
specifically excluded in the statutory definition of capital The BIR claims that the sale of parcel A should be taxed as
assets, the profits or loss on the sale or the exchange of a sale by an unregistered partnership. Is the BIR correct?
which are treated as capital gains or capital losses.
Conversely, all those properties specifically excluded are SUGGESTED ANSWER:
considered as ordinary assets and the profits or losses The BIR is not correct, since there is no showing that the
realized must have to be treated as ordinary gains or acquisition of the property by Noel and Jovy Langit as pro
ordinary losses. Accordingly, " Capital Assets" includes indiviso owners, and prior to the formation of the
property held by the taxpayer whether or not connected partnership, was used, intended for use, or bears any
with his trade or business, but the term does not include any relation whatsoever to the pursuit or conduct of the
of the following, which are consequently considered partnership business. The sale of parcel A shall therefore
"ordinary assets": not be treated as a sale by an unregistered partnership, but
(1) stock in trade of the taxpayer or other property an ordinary sale of a capital asset, and hence will be subject
of a kind which would properly be included in the to the 5% capital gains tax and documentary
stamp tax on transfers of real property, said taxes to be the seller from the sale. For this reason, any of the
borne equally by the co-owners. foregoing suggested answers should be given full
ALTERNATIVE ANSWER: credit).
The BIR is correct in treating the gain from the sale of
parcel of land by Noel and Jovy Langit at a profit of Tax Basis: Capital Gains: Merger of Corporations (1994)
P1,000,000.00. In the case of Pascual and Dragon v. In a qualified merger under Section 34 (c) (2) of the Tax
Commissioner, G.R. No. 78133, October 18, 1988 , the Code, what is the tax basis for computing the capital gains
Supreme Court ruled that the sharing of returns does not in on: (a) the sale of the assets received by the surviving
itself establish a partnership, whether or not the persons corporation from the absorbed corporation; and (b) the
sharing therein have a joint or common right or interest in sale of the shares of stock received by the stockholders
the property. The decision in said case cannot be applied from the surviving corporation?
here because clearly the parties organized a partnership duly SUGGESTED ANSWER:
registered with the Securities and Exchange Commission. In a qualified merger under Section 34 (c) (2) of the Tax
They pooled their resources together with the purpose of Code, the tax basis for computing the capital gains on:
dividing the profit between them.
(a) thefrom
corporation sale of
thethe assets received
absorbed by the
corporation surviving
shall be the
Sales of Share of Stocks: Capital Gains Tax Return (1999) srcinal/historical cost of the assets when still in the hands
HK Co. is a Hong Kong corporation not doing business in of the absorbed
(b) the salecorporation.
of the shares of stock received by the
the Philippines. It holds 40% of the shares of A Co., a stockholders from the surviving corporation shall be the
Philippine company, while the 60% is owned by P Co., a acquisition/historical cost of assets transferred to the
Filipino-owned Philippine corporation. HK Co. also owns surviving corporation.
100% of the shares of B Co., an Indonesian company which
has a duly licensed Philippine branch. Due to worldwide Tax Basis: Capital Gains: Tax-Free Exchange of Property
restructuring of the HK Co. group, HK Co. decided to sell (1994)
all its shares in A and B Cos. The negotiations for the In a qualified tax-free exchange of property for shares
buy-out and the signing of the Agreement of Sale were all under Section 34 (c) (2) of the Tax Code, what is the tax
done in the Philippines. The Agreement provides that the basis for computing the capital gains on: (a) the sale of the
purchase price will be paid to HK Co's bank account in the assets received by the Corporation; and (b) the sale of the
U. S. and that little to A and B Cos. Shares will pass from shares received by the stockholders in exchange of the
HK Co. to P Co. in HK where the stock certificates will be assets?
SUGGESTED ANSWER:
delivered. P Co. seeks your advice as to whether or not it
In a qualified tax free exchange of property for shares
will subject the payments of purchase price to Withholding
under Section 34 (c) (2) of the Tax Code, the tax basis for
Tax. Explain your advice. (10%)
computing the gain on the:
SUGGESTED ANSWER:
P Co. should not subject the payments of the purchase price
to withholding tax. While the seller is a non-resident foreign
corporation which is not normally required to file returns in
the Philippines, therefore, ordinarily all its income earned
from Philippine sources is taxed via the withholding tax
system, this is not the procedure availing with respect to
sales of shares of stock. The capital gains tax on the sale of
shares of stock of a domestic corporation is always required
to be paid through a capital gains tax return filed. The sale
of the shares of stock of the Indonesian Corporation is not
subject to income tax under our jurisdiction because the
income derived there from is considered as a
foreign-sourced income.
ALTERNATIVE ANSWER:
Yes, but only on the shares of stocks of A Co. and only on
the portion of the purchase price, which constitutes capital
gains. Under the Tax Code of 1997, the capital gains tax
imposed under Section 28(B)(5)(c) is collectible via the
withholding of tax at source pursuant to Section 57 of the
same Code.
(Note: The bar candidate might have relied on the
provision of the Tax Code of 1997 which provides
that the capital gains tax is imposed as withholding
taxes (Section 57, NIRC). This procedure is
impractical and, therefore, not followed in practice
because the buyer/ withholding agent will not be in a
position to determine how much income is realized by
(a) sale of the assets received by the corporation shall
be the srcinal/historical cost (purchase price plus expenses
of acquisition) of the property/ assets given in exchange of
the shares of stock.
(b) sale of the shares of stock received by the
stockholders in exchange of the assets shall be the
srcinal/historical cost of the property given in exchange of
the shares of stock.
ALTERNATIVE ANSWER:
The basis in computing capital gains tax in a qualified
tax-free exchange under Sec. 34 (c) (2) is:
(a) With respect to the asset received by the
corporation the same as it would be in the hands of the
transferor increased by the amount of the gain recognized
to the transferor on the transfer.
(b) With respect to the shares received by the
stockholders in exchange of the assets - the same as the
basis of the property, stock or securities exchanged,
decreased by the money received and the fair market value
of the other property received, and increased by the amount
treated as dividend of the shareholder and the amount of
any gain that was recognized on the exchange.
CORPORATION & PARTNERSHIP

Bad Debts; Factors; Elements thereof (2004)
PQR Corp. claimed as a deduction in its tax returns the
amount of P1,000,000 as bad debts. The corporation was There being no monetary consideration, neither is the
assessed by the Commissioner of Internal Revenue for conveyance subject to the creditable withholding tax im-
deficiency taxes on the ground that the debts cannot be posed under Revenue Regulations 1-90, as amended.
considered as "worthless," hence they do not qualify as bad
debts. The company asks for your advice on "What factors The second conveyance was actually no conveyance at all
will held in determining whether or not the debts are bad because when the units were sold to the various buyers, the
debts?" Answer and explain briefly. (5%) common areas were already part and parcel of the sale of
SUGGESTED ANSWER: said units pursuant to the Condominium Act. However, the
In order that debts be considered as bad debts because they Deed of Conveyance is subject to documentary stamp tax.
have become worthless, the taxpayer should establish that
during the year for which the deduction is sought, a
situation developed as a result of which it became evident in N.B. Documentary stamps tax and Condominium Law are
the exercise of sound, objective business judgment that excluded from the coverage of the Bar Examinations.
there remained no practical, but only vaguely theoretical,
prospect that the debt would ever be paid (Collector of Corporation; Sale; Creditable Withholding Tax (1994)
Internal Revenue v. Goodrich International Rubber Co., 21 Noel Langit and his brother, Jovy, bought a parcel of land
SCRA 1336 [1967]). "Worthless" is not determined by an which they registered in their names as pro-indiviso owners
inflexible formula or slide rule calculation, but upon the (Parcel A). Subsequently, they formed a partnership, duly
exercise of sound business judgment. The factors to be registered with Securities and Exchange Commission, which
considered include, but are not limited to, the following: bought another parcel of land (Parcel B). Both parcels of
1 The debtor has no property nor visible income; land were sold, realizing a net profit of P1,000,000.00 for
2 The debtor has been adjudged bankrupt or insolvent; parcel A and P500.000.00 for parcel B.
3 Collateral shares have become worthless; and
4 There are numerous debtors with small amounts of debtsThe BIR also claims that the sale of parcel B should be
and further action on the accounts would entail expenses taxed as a sale by a corporation. Is the BIR correct?
exceeding the amounts sought to be collected. SUGGESTED ANSWER:
The BIR is correct, since a "corporation" as defined under
Section 20 (a) of the Tax Code includes partnerships, no
ALTERNATIVE ANSWER: matter how created or organized, except general profes-
The following are the factors to be considered in sional partnerships. The business partnership, in the instant
determining whether or not the debts are bad debts: case, shall therefore be taxed in the same manner as a
1 The debt must be valid and subsisting; corporation on the sale of parcel B. The sale shall thus be
2 The debt is connected with the taxpayer's trade or subject to the creditable withholding tax under Revenue
business, and is not between related parties;
3 There is an actual ascertainment that the debt is Regulations 1-90, as amended
B, and the partnership by 12-94,
shall report theon therealized
gain sale of parcel
from
worthless; and the sale when it files its income tax return.
4 The debt is charged-off within the taxable year. Dividends: Withholding Tax (1999)
(PRC v. CA, 256 SCRA 667 [1996]; Revenue Regs. No. HK Co., is a Hong Kong company, which has a duly
5-99). licensed Philippine branch, engaged in trading activities in
the Philippines. HK Co. also invested directly in 40% of the
Condominium Corp.; Sale of Common Areas (1994) shares of stock of A Co., a Philippine corporation. These
X-land Condominium Corporation was organized by the shares are booked in the Head Office of HK Co. and are
owners of units in X-land Building in accordance with the not reflected as assets of the Philippine branch. In 1998, A
Master Deed with Declaration of Restrictions. The X-land Co. declared dividends to its stockholders. Before remitting
Building Corporation, the developer of the building, the dividends to HK Co., A Co. seeks your advice as to
conveyed the common areas in favor of the X-land whether it will subject the remittance to WT. No need to
Condominium Corporation. Is the conveyance subject to discuss WT rates, if applicable. Focus your discussion on
any tax? what is the issue. (10%)
The conveyance is not subject to any tax. The same is I will advise A Co. to withhold and remit the withholding
without consideration, and not in connection with a sale tax on the dividends. While the general rule is that a foreign
made to X-land Condominium Corporation, and the corporation is the same juridical entity as its branch office in
purpose of the conveyance to the latter is for the the Philippines, when, however, the corporation transacts
management
of of the common areas for the common benefit
the unit owners. business in the Philippines directly and independently of its
branch, the taxpayer would be the foreign corporation itself
and subject to the dividend tax similarly imposed on
The same is not subject to income tax since no income was non-resident foreign corporation. The dividends attributable
realized as a result of the conveyance, which was made to the Home Office would not qualify as dividends earned
pursuant to the Condominium Act (R.A. No. 4626, and the by a resident foreign corporation, which is exempt from tax.
purpose of which was merely to vest title to the common (Marubeni Corporation v. Commissioner, GR No. 76573,
areas in favor of the Land Condominium Corporation. September
14, 1989).
special tax rates. So is with PEZA enterprises,
Effect: Dissolution; Corporate Existence (2004) CDA enterprises etc.
For failure to comply with certain corporate requirements,
the stockholders of ABC Corp. were notified by the [Note: If what is meant by regular income tax is the 32%
Securities and Exchange Commission that the corporation tax rate imposed on taxable income of corporations, the
answer would be in the affirmative, because domestic
would be subject to involuntary dissolution. The
corporations and resident foreign corporations are either
stockholders did not do anything to comply with the liable for the 2% of gross income (MCIT) or 32% of net
requirements, and the corporation was dissolved. Can the income (the normal corporate income tax) whichever is
stockholders be held personally liable for the unpaid taxes of higher.]
the dissolved corporation? Explain briefly. (5%)
SUGGESTED ANSWER: ALTERNATIVE ANSWER:
No. As a general rule, stockholders cannot be held No. A corporation which is exempted from the minimum
personally liable for the unpaid taxes of a dissolved corporate income tax is not automatically exempted from the
corporation. The rule prevailing under our jurisdiction is regular corporate income tax. The reason for this is that
that a corporation is vested by law with a personality that is MCIT is imposed only beginning on the fourth taxable year
separate and distinct from those of the persons composing immediately following the year in which such corporation
it (Sunio v. NLRC, 127 SCRA 390{1984]}. commenced its business operations. Thus, a corporation may
NOTE: additional point should be given to the be exempt from MCIT because it is only on its third year of
examinee if he answers in the following that: operations following its commencement of business
However, stockholders may be held liable for the operations.
unpaid taxes of a dissolved corporation if it
appears that the corporate assets have passed
into their hands (Tan Tiong Bio v. CFR, 4 SCRA ESTATE & DONORS TAXES
986 [1962]). Likewise, when stockholders have Donors Tax: Election Contributions (1998)
unpaid subscriptions to the capital of the Are contributions to a candidate in an election subject to
corporation they can be made liable for unpaid donor's tax? On the part of the contributor, is it allowable
taxes of the corporation to the extent of their as a deduction from gross income? [5%J
SUGGESTED ANSWER:
unpaid subscriptions.
1) No, provided the recipient candidate had complied
with the requirement for filing of returns of contributions
Minimum Corporate Income Tax (2001) with the Commission on Elections as required under the
What is the rationale of the law in imposing what is known Omnibus Election Code.
as the Minimum Corporate Income tax on Domestic
Corporations? (3%) 2) The contributor is not allowed to deduct the
SUGGESTED ANSWER:
The imposition of the Minimum Corporate Income Tax contributions
attributable to,because the said expense
the development, is notoperation
management, directly
(MCIT) is designed to forestall the prevailing practice of
and/or conduct of a trade, business or profession {Sec.
corporations of over claiming deductions in order to reduce
34[AJ(l)(a), NIRC). Furthermore, if the candidate is an
their income tax payments. The filing of income tax returns
incumbent government official or employee, it may even be
showing a tax loss every year goes against the business
considered as a bribe or a kickback (Sec. 34[AJ(l)(c), NIRC).
motive which impelled the stockholders to form the
corporation. This is the reason why domestic corporations
(and resident foreign corporations) after the recovery COMMENT: It is suggested that full credit should be
period of four years from the time they commence business given for any answer to the first question because the
operations, they become liable to the MCIT whenever this answer requires an interpretation of the Election Code.
tax imposed at 2% of gross income exceeds the normal Pursuant to the provisions of Section 99(C) of the NIRC,
corporate income tax imposed on net income. the taxability of this type of contributions/donations is
(Sponsorship Speech, Chairman of Senate Ways and Means governed by the Election Code.
Committee).
Minimum Corporate Income Tax; Exemption (2001) Donors Tax; Basis for Determining Gain (1995)
Is a corporation which is exempted from the minimum (1) Kenneth Yusoph owns a commercial lot which he
corporate income tax automatically exempted from the bought many years ago for P1 Million. It is now worth P20
regular corporate income tax? Explain your answer. (2%) Million although the zonal value is only P15 Million. He
SUGGESTED ANSWER:
No. The minimum corporate income tax is a proxy for the donatesonone-half
Dino pro-indiviso
31 December interest
1994, and inthe
the other
land toone-half
his son
normal corporate income tax, not the regular corporate pro-indiviso interest to the same son on 2 January 1995.
income tax paid by a corporation. For instance, a
proprietary educational institution may be subject to a How much is the value of the gifts in 1994 and 1995 for
regular corporate income tax of 10% (depending on its purposes of computing the gift tax? Explain.
dominant income), but it is exempt from the imposition of SUGGESTED ANSWER:
MCIT because the latter is not intended to substitute 1) The value of the gifts for purposes of computing the gift
tax shall be P7.5million in 1994 and P7.5million in
1995. In valuing a real property for gift tax purposes the An insolvent company had an outstanding obligation of P
property should be appraised at the higher of two values as l00,000.00 from a creditor. Since it could not pay the debt,
of the time of donation which are (a) the fair market value the creditor agreed to accept payment through dacion en
as determined by the Commissioner (which is the zonal pago a property which had a market value of P30.000.00.
value fixed pursuant to Section 16(e) of the Tax Code), or In the dacion en pago document, the balance of the debt
(b) the fair market value as shown in the schedule of values was condoned.
fixed by the Provincial and City Assessors. The fact that the A. What is the tax effect on the discharge of the
property is worth P20 million as of the time of donation is unpaid balance of the obligation on the debtor
immaterial unless it can be shown that this value is one of B. Insofar as the creditor is concerned, how is he
corporation?
the two values mentioned as provided under Section 81 of effected tax-wise as a consequence of the transaction?
the Tax Code. SUGGESTED ANSWERS:
(2) The Revenue District Officer questions the (a) The condonation of the unpaid balance of the obligation
splitting of the donations into 1994 and 1995. He says that has the effect of a donation made on the part of the creditor.
since there were only two (2) days separating the two It is obvious that the creditor merely desires to benefit the
donations they should be treated as one, having been made debtor and without any consideration therefore cancels the
within one year. Is he correct? Explain. debt, the amount of the debt cancelled is a gift from the
SUGGESTED ANSWER: creditor to the debtor and need not be included in the latter's
2) The Revenue District Officer is not correct because the gross income (Sec. 50, RR No. 2);
computation of the gift tax is cumulative but only insofar as
gifts made within the same calendar year. Therefore, there is (b) For the difference of P70,000 the creditor shall be
no legal justification for treating two gifts effected in two subject to donor's tax at the applicable rates provided for
separate calendar years as one gift. under the National Internal Revenue Code.
(3) Dino subsequently sold the land to a buyer for P 20 ALTERNATIVE ANSWER:
Million. How much did Dino gain on the sale? Explain. (a) If the discharge was prompted by the insolvency of the
debtor company, then it is a clear case of a write-off of a
SUGGESTED ANSWER: bad debts which has no tax consequence to the debtor.
3) Dino gained an income of 19 million from the sale. Dino
acquires a carry-over basis which is the basis of the (b) The write-off of the bad debt will entitle the creditor to
property in the hands of the donor or P1 million. The gain claim the same as a deduction from its gross income.
from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or Donors Tax; Donation to a Sibling (2001)
adjusted basis for determining gain (Sec. 34(a), NIRC). Your bachelor client, a Filipino residing in Quezon City,
Since the property

determining gain shallwas acquired
be the by ifgift,
same as the basis
it would for
be in the wants to givefor
our advice, hispurposes
sister a gift of Php 200,000.00.
of reducing He seeks
if not eliminating the
hands of the donor or the last preceding owner by whom donor's tax on the gift, on whether it is better for him to
the property was not acquired by gift. Hence, the gain is give all of the Php 200,000.00 on Christmas 2001 or to give
computed by deducting the basis of P1 million from the Php 100,000.00 on Christmas2001 and the other Php
amount realized which is P20 million. 100,000.00 on January 1, 2002. Please explain your advice.
(5%)
(4) Suppose, instead of receiving the lot by way of donation, SUGGESTED ANSWER:
Dino received it by inheritance. What would be his gain on I would advice him to split the donation. Giving the
the sale of the lot for P20 Million? Explain. Php200,000 as a one-time donation would mean that it will
be subject to a higher tax bracket under the graduated tax
SUGGESTED ANSWER: structure thereby necessitating the payment of donor's tax.
4) If the commercial lot was received by inheritance the gain On the other hand, splitting the donation into two equal
from the sale for P20 million is P5 million because the basis amounts of Php 100,000 given on two different years will
is the fair market value as of the date of acquisition. The totally relieve the donor from the donors tax because the
stepped-up basis of P15 million which is the value for estate first Phpl00.000 donation in the graduated brackets is
tax purposes is the basis for determining the gain (Sec. exempt. (Section 99, NIRC). While the donors tax is
34(b)(2), NIRC). computed on the cumulative donations, the aggregation of
ALTERNATIVE ANSWER: all donations made by a donor is allowed only over one
If Dino held on to the property as a capital asset in that it is calendar year.
neither for sale in the ordinary course of business nor used
in Dino's business, then upon sale thereof there is Donors Tax; Donation to Non -Stock, Non-Profit Private
presumed to be realized an income of P20 million which is Educational Institutions (2000)
the gross selling price of the property. (Sec. 21(e), NIRC). What conditions must occur in order that all grants,
The same would be subject to the 5% capital gains tax. donations and contributions to non-stock, non-profit
private educational institutions may be exempt from the
donor's tax under Section 101 (a) of the Tax Code? (3%)
Donors Tax; Dacion en Pago; Effect: Taxation (1997) SUGGESTED ANSWER:
The following are the conditions:
1 Not more than thirty percent (30%) of said gifts shall be stake in its business. Explain if the above
used by such donee for administration purposes; transactions are subject to donor's tax. (5%)
2 The educational institution is incorporated as a non-stockSUGGESTED ANSWER:
entity, The first transaction where a lot was sold by A to his
3 paying no dividends, brother-in-law for a price below its fair market value will
4 governed by trustees who receive no compensation, and not be subject to donor's tax if the lot qualifies as a capital
5 devoting all its income, whether students' fees or gifts, asset. The transfer for less than adequate and full consideration, which
donations, subsidies or other forms of philanthropy, to the ives rise to a deemed gift, does not apply to a sale of property subject to
accomplishment and promotion of the purposes enumerated in itscapital gains tax. (Section 100, NIRC). However, if the lot
Articles of Incorporation. (Sec. 101 (A) (3), NIRC of 1997] sold is an ordinary asset, the excess of the fair market value
over the consideration received shall be considered as a gift
subject to the donor's tax.
The sale of shares of stock below the fair market value

Donors Tax; Donation to Political Candidate (2003) thereof is subject to the donor's tax pursuant to the
X is a friend of Y, the chairman of Political Party Z, who provisions of Section 100 of the Tax Code. The excess of
wants to run for President in the 2004 elections. Knowing the fair market value over the selling price is a deemed gift.
that Y needs funds for posters and streamers, X is thinking
of donating to Y P150,000.00 for his campaign. He asks ALTERNATIVE ANSWER:
The sale of shares of stock below the fair market value will
ou whether his intended donation to Y will be subject to
the donor's tax. What would your answer be? Will your not give rise to the imposition of the donor's tax. In
answer be the same if he were to donate to Political Party Z determining the gain from the transfer, the selling price of
the shares of stocks shall be the fair market value of the
instead of to Y directly? (8%)
SUGGESTED ANSWER: shares of stocks transferred. (Section 6, RR No. 2-82). In
The donation to Y, once he becomes a candidate for an which case, the reason for the imposition of the donor's tax
elective post, is not subject to donor's tax provided that he on sales for inadequate consideration does not exist.
complies with the requirement of filing returns of
contributions with the Commission on Elections as required Estate Tax: Comprehensive Agrarian Reform Law (1994)
under the Omnibus Election Code. ose Ortiz owns 100 hectares of agricultural land planted to
coconut trees. He died on May 30, 1994. Prior to his death,
The answer would be the same if X had donated the the government, by operation of law, acquired under the
amount to Political Party Z instead of to Y directly because Comprehensive Agrarian Reform Law all his agricultural
the law places in equal footing any contribution to any lands except five (5) hectares. Upon the death of Ortiz, his
candidate, political party or coalition of parties for widow asked you how she will consider the 100 hectares of
campaign purposes. (Section 99(C) of the 1997 Tax Code). agricultural

What adviceland
will in
youthe preparation
give her? of the estate tax return.
Donors Tax; Donee or Beneficiary; Stranger (2000) SUGGESTED ANSWER:
When the donee or beneficiary is a stranger, the tax payable The 100 hectares of land that Jose Ortiz owned but which
by the donor shall be 30% of the net gifts. For purposes of prior to his death on May 30, 1994 were acquired by the
this tax, who is a stranger? (2%) government under CARP are no longer part of his taxable
SUGGESTED ANSWER: gross estate, with the exception of the remaining five (5)
A STRANGER is a person who is not a: hectares which under Sec. 78{a) of the Tax Code still forms
A. Brother, sister (whether by whole or half-blood), part of "decedent's interest".
spouse, ancestor and lineal descendant; or
B. Relative by consanguinity in the collateral line Estate Tax: Donation Mortis Causa (2001)
within the fourth degree of relationship." [Sec. 98 (B), A, aged 90 years and suffering from incurable cancer, on
NIRC of 1997] August 1, 2001 wrote a will and, on the same day, made
several inter-vivos gifts to his children. Ten days later, he
Donors Tax; Sale of shares of Stock & Sale of Real died. In your opinion, are the inter-vivos gifts considered
Property (1999) transfers in contemplation of death for purposes of
A, an individual, sold to B, his brother-in-law, his lot with a determining properties to be included in his gross estate?
market value of P1,000,000 for P600.000. A's cost in the Explain your answer. (5%)
lot is P100.000. B is financially capable of buying the lot. SUGGESTED ANSWER:
Yes. When the donor makes his will within a short time of,
A also owns X Co., which has a fast growing business. A or simultaneously with, the making of gifts, the gifts are
considered as having been made in contemplation of death.
sold some of his shares of stock in X Co. to his key
(Roces v. Posadas, 58 Phil. 108 ). Obviously, the intention
executives in X Co. These executives are not related to A.
of the donor in making the inter-vivos gifts is to avoid the
The selling price is P3,000,000, which is the book value of
the shares sold but with a market value of P5,000,000. A's imposition of the estate tax and since the donees are
cost in the shares sold is P1,000,000. The purpose of A in likewise his forced heirs who are called upon to inherit, it
selling the shares is to enable his key executives to acquire a will create a presumption juris tantum that said donations
propriety interest in the business and have a personal were made mortis causa, hence, the properties donated shall
be included as part of A's gross estate.
The gross estate shall be determined by including the value
Estate Tax: Donation Mortis Causa vs. Inter Vivos (1994) at the time of his deathall of the properties mentioned , to
Are donations inter vivos and donations mortis causa the extent of the interest he had at the time of his death
subject to estate taxes? because he is a Filipino citizen. [Sec. 85 (A), NIRC of 1997]
SUGGESTED ANSWER:
Donations inter vivos are subject to donor's gift tax (Sec.
91 (a). Tax Code) while donations mortis causa are subject With respect to the life insurance proceeds , the amount
to estate tax (Sec. 77, Tax Code). However, donations inter includible in the gross estate for Philippine tax purposes
vivos, actually constituting taxable lifetime like transfers in would be to the extent of the amount receivable by the
contemplation of death or revocable transfers (Sec. 78 (b) estate of the deceased, his executor, or administrator, under
and (c), Tax Code) may be taxed for estate tax purposes, policies taken out by decedent upon his own life,
the theory being that the transferor's control thereon irrespective of whether or not the insured retained the
extends up to the time of his death. power of revocation, or to the extent of the amount
ALTERNATIVE ANSWER: receivable by any beneficiary designated in the policy of
Donations inter vivos are not subject to estate taxes insurance, except when it is expressly stipulated that the
because the transfer of the property take effect during the designation of the beneficiary is irrevocable. [Sec. 85 (E)
lifetime of the donor. The transfer is therefore subject to NIRC of 1997]
the donor's tax.
The DEDUCTIONS that may be claimed by the estate
On the other hand, donations mortis causa are subject to are: 1) The actual funeral expenses or in an amount equal
estate taxes since the transfer of the properties takes effect to
after the death of the decedent. Such donated properties, five percent (5%) of the gross estate, whichever is
real or personal, tangible or intangible, shall form part of lower, but in no case to exceed two hundred thousand
the gross estate. pesos (P200.000.00). [Sec. 86 (A) (1) (a). NIRC of 1997]
Estate Tax: Gross Estate: Allowable Deduction (2001)

On the first anniversary of the death of Y, his heirs hosted a 2) The judicial expenses in the testate or intestate
sumptuous dinner for his doctors, nurses, and others who proceedings.(Sec. 86(A)(1)
attended to Y during his last illness. The cost of the dinner
amounted to Php 50,000.00. Compared to his gross estate, 3) The value of the decedent's family home located in
the Php 50,000.00 did not exceed five percent of the estate. Valle Verde, Pasig City in an amount not exceeding one
Is the said cost of the dinner to commemorate his one year million pesos (P1,000,000.00), and upon presentation of a
death anniversary deductible from his gross estate? Explain certification of the barangay captain of the locality that the
our answer. (5%) same have been the decedent's family home. [Sec. 86 (A) (4),
SUGGESTED ANSWER: Ibid]
No. This expense will not fall under any of the allowable
deductions from gross estate. Whether viewed in the 4) The standard deduction of P1,000,000. (Sec. 86(A)(5)
context of either funeral expenses or medical expenses, the
same will not qualify as a deduction. Funeral expenses may 5) Medical expenses incurred within one year from
include medical expenses of the last illness but not expenses death in an amount not exceeding P500,000.(Sec. 86(A)(6)
incurred after burial nor expenses incurred to
commemorate the death anniversary. (De Guzman V. De
Guzman, 83 SCRA 256). Medical expenses, on the other The ESTATE TAX RETURN shall be filed within six
hand, are allowed only if incurred by the decedent within (6) months from the decedent's death (Sec. 90 (B), NIRC of
one year prior to his death. (Section 86(A)(6), NIRC). 1997], provided that the Commissioner of Internal Revenue
shall have authority to grant in meritorious cases, a
Estate Tax: Gross Estate: Deductions (2000) reasonable extension not exceeding thirty (30) days for
Mr. Felix de la Cruz, a bachelor resident citizen, suffered filing the return (Sec. 90 (c), Ibid]
from a heart attack while on a business trip to the USA. He
died intestate on June 15, 2000 in New York City, leaving Except in cases where the Commissioner of Internal
behind real properties situated in New York; his family Revenue otherwise permits, the estate tax return shall be
home in Valle Verde, Pasig City; an office condominium in filed with an authorized agent bank, or Revenue District
Makati City; shares of stocks in San Miguel Corporation; Officer, Collection Officer, or duly authorized Treasurer of
cash ininsured
heavily bank; with
and Insular
personalLife.
belongings.
He had noThe decedent
known debts atis Pasigdomiciled
was City, the atCity
the intime
which thedeath.
of his decedent
[Sec.Mr. de laNIRC
90 (D). Cruz
the time of his death. As the sole heir and appointed of 1997]
Administrator, how would you determine the gross estate of
the decedent? What deductions may be claimed by the estate Estate Tax: Inclusion: Resident Alien (1994)
and when and where shall the return be filed and estate tax Cliff Robertson, an American citizen, was a permanent
paid? (3%) resident of the Philippines. He died in Miami, Florida. He
SUGGESTED ANSWER: left 10,000 shares of Meralco, a condominium unit at the
Twin Towers Building at Pasig, Metro Manila and a house SUGGESTED ANSWER:
and lot in Los Angeles, California. What assets shall be Vanishing deductions or property previously taxed in estate
included in the Estate Tax Return to be filed with the BIR? taxation refers to the diminishing deducibility/ exemption,
at the rate of 20% over a period of five (5) years until it is
SUGGESTED ANSWER: lost after the fifth year, of any property (situated in the
All of Mr. Robertson's assets consisting of 10,000 shares in Philippines) forming part of the gross estate, acquired by
the Meralco, a condominium unit in Pasig, and his house the decedent from a prior decedent who died within a
and lot in Los Angeles, California are taxable. The period of five (5) years from the decedent's death.
properties of a resident alien decedent like Mr. Robertson
are taxable wherever situated (Sees. 77, 78 and 98, Tax
Code). Estate Tax; Payment vs. Probate Proceedings (2005)
Is the approval of the court, sitting as probate or estate
Estate Tax: Payment vs. Probate Proceedings (2004) settlement court, required in the enforcement and collection
VCC is the administrator of the estate of his father NGC, in of estate tax? Explain.
the estate proceedings pending before the MM Regional SUGGESTED ANSWER:
Trial Court. Last year, he received from the Commissioner No, the approval of the court, sitting in probate, or as a
of Internal Revenue a deficiency tax assessment for the settlement tribunal over the deceased is not a mandatory
estate in the amount of P1,000,000. But he ignored the requirement in the collection of estate taxes. There is nothing
notice. Last month, the BIR effected a levy on the real in the Tax Code, and in the pertinent remedial laws that
properties of the estate to pay the delinquent tax. VCC filed implies the necessity of the probate or estate settlement court's
a motion with the probate court to stop the enforcement approval of the state's claim for estate taxes, before the same
and collection of the tax on the ground that the BIR should can be enforced and collected.
have secured first the approval of the probate court, which (Marcos v. Court of Appeals, G.R. No. 120880, June 5, 1997)
had jurisdiction over the estate, before levying on its real
properties. Is VCC's contention correct? (5%) BUSINESS TAXES
SUGGGESTED ANSWER: VAT: Basis of VAT (1996)
No. VCC's contention is not correct. The approval of the
What is the basis of the Value-Added Tax on taxable
probate court is not necessary. Payment of estate taxes is a
sales of real property?
condition precedent for the distribution of the properties of SUGGESTED ANSWER:
the decedent and the collection of estate taxes is executive The basis of the Value-Added Tax on taxable sale of real
in nature for which the court is devoid of any jurisdiction. property is "GROSS SELLING PRICE" which is either
Hence, the approval of the court, sitting in probate, or as a selling price stated in the sale document or the "Zonal
settlement tribunal is not a mandatory requirement in the Value", whichever is higher. In the absence of zonal values,
collection of estate taxes ( Marcos H v. Court of Appeals, 273 the gross selling price shall refer to the market value as
SCRA 47 [1997]). shown in the latest tax declaration or the consideration,
whichever is higher.
Estate Tax: Situs of Taxation: Non-Resident Decedent
(2000) VAT: Characteristics of VAT (1996)
Discuss the rule on situs of taxation with respect to the What are the characteristics of the Value-Added Tax?
imposition of the estate tax on property left behind by a SUGGESTED ANSWER:
non-resident decedent. (2%) The value-added tax is an indirect tax and the amount of
SUGGESTED ANSWER: tax may be shifted or passed on to the buyer, transferee or
The value of the gross estate of a non-resident decedent lessee of the goods, properties or services.
who is a Filipino citizen at the time of his death shall be ALTERNATIVE ANSWER:
determined by including the value at the time of his death The value-added tax has the following characteristics: 1) It
of all property, real or personal, tangible or intangible, is an indirect tax where tax shifting is always
wherever situated to the extent of the interest therein of the presumed: 2) It is consumption-based; 3) It is imposed on
decedent at the time of his death [Sec. 85 (A), NIRC of the value-added in each stage of
1997). These properties shall have a situs of taxation in the
Philippines hence subject to Philippine estate taxes. distribution; 4) It is a credit-invoice method
value-added tax; and 5) It is not a cascading tax.
On the other hand, in the case of a non-resident decedent
who at the time of his death was not a citizen of the
Philippines, only that part of the entire gross estate which is situated VAT: Exempted Transactions (1996)
in the Philippines to the extent of the interest therein of the decedent at Give at least three (3) real estate transactions which are not
the time of his death shall be included in his taxable estate. subject to the Value-Added Tax.
Provided, that, with respect to intangible personal property, SUGGESTED ANSWER:
we apply the rule of reciprocity. (Ibid) Real estate transactions which are exempt from the
value-added tax are:
Estate Tax: Vanishing Deductions (1994) (a) Sale of real property not primarily held for sale
Vanishing deductions in estate-taxation? or lease in the ordinary course of trade or business;
(b) Sale of real property utilized for socialized housing State whether the following transactions are a)
under RA. No. 7279; VAT Exempt, b) subject to VAT at 10%; or c) subject to
(c) Sale of real property utilized under the low-cost VAT at 0%:
housing under BP Big. 220. 1) Sale of fresh vegetables by Aling Ining at the
Pamilihang Bayan ng Trece Martirez. [1%]
Note: The other real estate transactions which are exempt 2) Services rendered by Jake's Construction
from the value-added tax which may be cited by the bar Company, a contractor to the World Health Organization
candidates are as follows: in the renovation of its offices in Manila. [1%]
(a) Transfer of real property to a trustee if the 3) Sale of tractors and other agricultural implements
property is to be held merely in trust for the trustor. by Bungkal Incorporated to local farmers. [1%]
(b) Transfer of real property to a corporation in exchange 4) Sale of RTW by Cely's Boutique, a Filipino dress
for its shares of stock under Section 34(c)(2) and (6)(2) of designer, in her dress shop and other outlets. [1%]
the Tax Code. 5) Fees for lodging paid by students to
(c) Advance payment by the lessee in a lease Bahay-Bahayan Dormitory, a private entity operating a
contract, when the same is actually a loan to the lessor student dormitory (monthly fee PI,500). [1%]
from the lessee. SUGGESTED ANSWER:
(d) Security deposits for lease arrangements to insure 1) VAT exempt. Sale of agricultural products, such
the faithful performance of certain obligations of the as fresh vegetables, in their srcinal state, of a kind generally
lessee to the lessor. used as, or producing foods for human consumption is
(e) Lease of residential units, boarding houses, exempt from VAT. (Section 109(c), NIRC).
dormitories, rooms and bed spaces offered for rent by
their owners at a monthly rental not exceeding P3,950.00
per unit. 2) VAT at 0%. Since Jake's Construction Company
has rendered services to the World Health Organization,
VAT: Liable for Payment (1996) which is an entity exempted from taxation under
Who are liable for the payment of Value-Added Tax? international agreements to which the Philippines is a
SUGGESTED ANSWER: signatory, the supply of services is subject to zero percent
The persons liable for the value-added tax are: (0%) rate. (Sec. 108[B1(3), NIRC).
Sellers of goods and properties in the course of trade or
business; 3) VAT at 10%. Tractors and other agricultural
Sellers of services in the course of trade or business, implements fall under the definition of goods which include
including lessors of goods and properties; all tangible objects which are capable of pecuniary
Importers of taxable goods, whether in the course of estimation (Sec. 106[A1(1), NIRC, the sales of which are
business or not subject to VAT at 10%.
VAT: Transactions "Deemed Sales (1997)

Under the Value Added tax (VAT), the tax is imposed on
sales, barter, or exchange of goods and services. The VAT
is also imposed on certain transactions "deemed-sales".
What are these so-called transactions "deemed sales'?
SUGGESTED ANSWER:
The following transactions shall be deemed sale:
a) Transfer, use, or consumption not in the course
of business of goods srcinally intended for sale or for
use in the course of business;
b) Distribution or transfer to:

(1) Shareholders or investors as share in the
profits of VAT-registered persons; or
(2) Creditors in payment of debt;
c) Consignment of goods if actual sale is not made

within 60 days following the date such goods were
consigned; and
d) Retirement from or cessation of business, with

respect to inventories of taxable goods existing as of such
retirement or cessation.
VAT; Covered Transactions (1998)

4) This is subject to VAT at 10%. This transaction
also falls under the definition of goods which include all
tangible objects which are capable of pecuniary estimation
(Sec. 106[A1(1), NIRC, the sales of which are subject to
VAT at 10%.
5) VAT Exempt. The monthly fee paid by each

student falls under the lease of residential units with a
monthly rental per unit not exceeding Php 8,000, which Is
exempt from VAT regardless of the amount of aggregate
rentals received by the lessor during the year. (Sec. 109(x),
NIRC). The term unit shall mean per person in the case of
dormitories, boarding houses and bed spaces (Sec. 4.103-1,
RRNo. 7-95).
COMMENT: The problems do not call for a yes or no answer.

Accordingly, a bar candidate who answered only VAT exempt.
VAT at 10% or VAT at 0%. as called for in the problem without
further reasons, should be given full credit.
VAT; Exemption: Constitutionality (2004)

A law was passed exempting doctors and lawyers from the
operation of the value added tax. Other professionals
complained and filed a suit questioning the law for being
discriminatory and violative of the equal protection clause
of the Constitution since complainants were not given the
same exemption. Is the suit meritorious or not? Reason unapplied/unused Input VAT (Tax Reform Act,
briefly. (5%) Section 112[A] [1997]).
SUGGESTED ANSWER: ALTERNATIVE ANSWER:
B. Yes, the suit is meritorious. The VAT is designed for No. The exemption of Lily's Fashion, Inc. is only for taxes
economic efficiency; hence, should be neutral to those who for which it is directly liable. Hence, it can not claim
belong to the same class. Professionals are a class of exemption for a tax shifted to it, which is not at all
taxpayers by themselves who, in compliance with the rule of considered a tax to the buyer but a part of the purchase
equality of taxation, must be treated alike for tax purposes. price. Lily's fashion is not the taxpayer in so far as the
Exempting lawyers and doctors from a burden to which passed-on tax is concerned and therefore, it can not claim
other professionals are subjected will make the law for a refund of a tax merely shifted to it (Phil. Acetylene
discriminatory and violative of the equal protection clause of Co., Inc. v. CIR, L-19707,Aug. 17, 1987).
the Constitution. While singling out a class for taxation (NOTA BENE: This concept pertains to the VAT law which
purposes will not infringe upon this constitutional limitation is excluded from the Bar coverage, Guidelines for 2006 Bar
(Shell v. Vano, 94 Phil. 389 [1954] ), singling out a taxpayer Examinations, June 15, 2006)
from a class will no doubt transgress the constitutional
limitation (Ormoc Sugar Co. Inc., v. Treasurer of Ormoc
City, 22 SCRA 603 [1968 ]). Treating doctors and lawyers as
REMEDIES IN INTERNAL
a different class of professionals will not comply with the
REVENUE TAXES
BIR: Assessment: Unregistered Partnership (1997)
requirements of a reasonable, hence valid classification,
Mr. Santos died intestate in 1989 leaving his spouse and five
because the classification is not based upon substantial
children as the only heirs. The estate consisted of a family
distinction which makes real differences. The classification
home and a four-door apartment which was being rented to
does not comply with the requirement that it should be
tenants. Within the year, an extrajudicial settlement of the
germane to the purpose of the law either. ( Pepsi-Cola
estate was executed from the heirs, each of them receiving
Bottling Co., Inc. v. City of Butuan, 24 SCRA 789
his/her due share. The surviving spouse assumed
[1968]).
ANOTHER ANSWER: administration of the property. Each year, the net income
No. The suit is not meritorious. The equal protection clause from the rental property was distributed to all,
of the Constitution merely requires that all persons proportionately, on which they paid respectively, the
subjected to legislation shall be treated alike, under like corresponding income tax.
circumstances and conditions, both in the privileges
conferred and in the liabilities imposed. The equality in In 1994, the income tax returns of the heirs were examined
taxation rule is not violated if classifications or distinctions and deficiency income tax assessments were issued against
are made as long as the same are based on reasonable and each of them for the years 1989 to 1993, inclusive, as having
substantial differences. {Pepsi-Cola Bottling Co., Inc. entered into an unregistered partnership. Were the
v. City of Butuan, 24 SCRA 789 [1968 assessments justified?
]). SUGGESTED ANSWER:
In the instant case, the professions of doctors and lawyers Yes, the assessments were justified because for income tax
are not principally aimed at earning money but for the purposes, the co-ownership of inherited property is
service of the people. The exemption granted to doctors automatically converted into an unregistered partnership
and lawyers from the operation of the VAT is justified, as it from the moment the said properties are used as a common
is not discriminatory against the other professionals fund with intent to produce profits for the heirs in
because they have reasonable and substantial differences in proportion to their shares in the inheritance.
the conduct of their professions.
From the moment of such partition, the heirs are entitled
VAT; Non-VAT taxpayer; Claim for Refund (2006)
already to their respective definite shares of the estate and
the income thereof, for each of them to manage and
Lily's Fashion, Inc. is a garment manufacturer located and
dispose of as exclusively his own without the intervention
registered as a Subic Bay Freeport Enterprise under
Republic Act No. 7227 and a non-VAT taxpayer. As such, it of the other heirs, and, accordingly, he becomes liable
is exempt from payment of all local and national internal individually for all taxes in connection therewith. If after
revenue taxes. During its operations, it purchased various such partition, he allows his shares to be held in common
with his co-heir under a single management to be used with
supplies and materials necessary in the conduct of its
the intent of making profit thereby in proportion to his
manufacturing business. The suppliers of these goods
share, there can be no doubt that, even if no document or
shifted to Lily's Fashion, Inc. the 10% VAT on the
purchased items amounting to P 500,000.00. Lily's Fashion, instrument were executed for the purpose, for tax
Inc. filed with the BIR a claim for refund for the input tax purposes, at least, an unregistered partnership is formed
(Lorenzo Ona, et al v. CIR, 45 SCRA 74 ).
shifted to it by the suppliers. If you were the Commissioner ALTERNATIVE ANSWER:
of Internal Revenue, will you allow the refund? (5%) No, the assessments are not justified. The mere sharing of
income does not of itself establish a partnership absent any
ALTERNATIVE ANSWER:
clear intention of the co-owners who are only awaiting
No, I will not allow the refund. Only VAT-Registered
liquidation of the estate.
taxpayers are entitled to a refund of their
BIR: Collection of Tax Deficiency (1999)
A died, survived by his wife and three children. The estate final assessments issued against large taxpayers wherein the
tax was properly paid and the estate settled and divided and Commissioner cannot compromise for less than fifty
distributed among the four heirs. Later, the BIR found out percent (50%). Any compromise involving large taxpayers
that the estate failed to report the income received by the lower than fifty percent (50%) shall be subject to the
estate during administration. The BIR issued a deficiency approval of the Secretary of Finance.
income tax assessment plus interest, surcharges and
penalties. Since the 3 children are residing abroad, the BIR All criminal violations except those involving fraud, can be
sought to collect the full tax deficiency only against the compromised by the Commissioner but only prior to the
widow. Is the BIR correct? (10%) filing of the information with the Court. The Commissioner
SUGGESTED ANSWER: may also abate or cancel a tax liability when
Yes, the BIR is correct. In a case where the estate has been
distributed to the heirs, the collection remedies available to 1 the tax or any portion thereof appears to have
the BIR in collecting tax liabilities of an estate may either (1) been unjustly or excessively assessed; or
sue all the heirs and collect from each of them the amount 2 the administrative and collection costs involved
of tax proportionate to the inheritance received or (2) by do not Justify collection of the amount due. (Sec. 204,
virtue of the lien created under Section 219, sue only one NIRC)
heir and subject the property he received from the estate to
the payment of the estate tax. The BIR, therefore, is correct BIR: Compromise; Withholding Agent (1998)
in pursuing the second remedy although this will give rise to May the Commissioner of the Internal Revenue compro-
the right of the heir who pays to seek reimbursement from mise the payment of withholding tax (tax deducted and
the other heirs. (CIR v. Pineda, 21 SCRA 105). In no case, withheld at source) where the financial position of the taxpayer
however, can the BIR enforce the tax liability in excess of demonstrates a clear inability to pay the assessed tax? [5%1
the share of the widow in the inheritance.
SUGGESTED ANSWER:
No. A taxpayer who is constituted as withholding agent
BIR: Compromise; Conditions (2000) who has deducted and withheld at source the tax on the
Under what conditions may the Commissioner of Internal income payment made by him holds the taxes as trust
Revenue be authorized to: funds for the government (Sec. 58[D]) and is obligated to
A. Compromise the payment of any internal revenue remit them to the BIR. The subsequent inability of the
tax? (2%) withholding agent to pay/remit the tax withheld is not a
SUGGESTED ANSWER: ground for compromise because the withholding tax is not
The Commissioner of Internal Revenue may be authorized a tax upon the withholding agent but it is only a procedure
to compromise the payment of any internal revenue tax for the collection of a tax.
where: 1) A reasonable doubt as to the validity of the claim
against the taxpayer exists; or 2) the financial position of BIR: Corporation:

On March Distraint
15, 2000, the BIR& Levy
issued(2002)
a deficiency income tax
the taxpayer demonstrates a assessment for the taxable year 1997 against the Valera
clear inability to pay the assessed tax. Group of Companies (Valera) in the amount of P10 million.
Counsel for Valera protested the assessment and requested a
B. Abate or cancel a tax liability? (3%) reinvestigation of the case. During the investigation, it was
SUGGESTED ANSWER: shown that Valera had been transferring its properties to
The Commissioner of Internal Revenue may abate or other persons. As no additional evidence to dispute the
cancel a tax liability when: 1) The tax or any portion thereof
assessment had been presented, the BIR issued on June 16,
appears to be unjustly
2000 warrants of distraint and levy on the properties and
or excessively assessed; or 2) The administration and ordered the filing of an action in the Regional Trial Court
collection costs involved do for the collection of the tax. Counsel for Valera filed an
not justify the collection of the amount due. [Sec. injunctive suit in the Regional Trial Court to compel the
204 (B), NIRC of 1997]
BIR to hold the collection of the tax in abeyance until the
decision on the protest was rendered.
BIR: Compromise; Extent of Authority (1996)
Explain the extent of the authority of the Commissioner of A. Can the BIR file the civil action for collection,
Internal Revenue to compromise and abate taxes? pending decision on the administrative protest? Explain.
SUGGESTED ANSWER:
(3%)
The authority of the Commissioner to compromise
SUGGESTED ANSWER:
encompasses both civil and criminal liabilities of the tax- A. Yes, because there is no prohibition for this procedure
payer. The civil compromise is allowed only in cases 12) considering that the filing of a civil action for collection
where the tax assessment is of doubtful validity, or 13) when during the pendency of an administrative protest constitutes
the financial position of the taxpayer the final decision of the Commissioner on the protest ( CIR
demonstrates a clear inability to pay the tax. v. Union Shipping Corp., 85 SCRA 548 [1990]).
The compromise of the tax liability is possible at any stage
of litigation and the amount of compromise is left to the
discretion of the Commissioner except with respect to
B. As counsel for Valera, what action would you take criminal prosecution ( CIR v. Fortune Tobacco
in order to protect the interest of your client? Explain your Corp., GR No. 119322, June 4, 1996).
answer. (2%)
SUGGESTED ANSWER: BIR: Extinction; Criminal Liability of the Taxpayer (2002)
B. I will wait for the filing of the civil action for collection Mr. Chan, a manufacturer of garments, was investigated for
and consider the same as an appealable decision. I will not failure to file tax returns and to pay taxes for the taxable year
file an injunctive suit because it is not an available remedy. I 1997. Despite the subpoena duces tecum issued to him, he
would then appeal the case to the Court of Tax Appeals and refused to present and submit his books of accounts and
move for the dismissal of the collection case with the RTC. allied records. Investigators, therefore, raided his factory and
Once the appeal to the CTA is filed on time, the CTA has seized several bundles of manufactured garments, supplies
exclusive jurisdiction over the case. Hence, the collection and unpaid imported textile materials. After his
case in the RTC should be dismissed ( Tabes v. Flojo, 115 apprehension and based on the testimony of a former
SCRA 278 [1982]). employee, deficiency income and business taxes were
assessed against Mr. Chan on April 15, 2000. It was then
BIR: Court of Tax Appeals: Collection of Taxes; Grounds that he paid the taxes. Criminal action was nonetheless
for Compromise (1996) instituted against him in the Regional Trial Court for
1. May the Court of Tax Appeals issue an injunction violation of the Tax Code. Mr. Chan moved to dismiss the
to enjoin the collection of taxes by the Bureau of Internal criminal case on the ground that he had already paid the
Revenue? Explain. taxes assessed against him. He also demanded the return of
SUGGESTED ANSWER: the garments and materials seized from his factory. How will
Yes. When a decision of the Commissioner on a tax protest ou resolve Mr. Chan's motion? (5%)
is appealed to the CTA pursuant to Sec. 11 of RA. No. 1125
(law creating the CTA) in relation to Sec. 229 of the NIRC , such SUGGESTED ANSWER:
appeal does not suspend the payment, levy, distraint and/or The motion to dismiss should be denied. The satisfaction of
sale of any of the taxpayer's property for the satisfaction of the civil liability is not one of the grounds for the extinction
his tax liability. However, when in the opinion of the CTA of criminal action (People v. Ildefonso Tierra, 12 SCRA
the collection of the tax may jeopardize the interest of the 666 [1964]). Likewise, the payment of the tax due after
Government and/or the taxpayer, the Court at any stage of apprehension shall not constitute a valid defense in any
the proceedings may suspend or restrain the collection of prosecution for violation of any provision of the Tax Code
the tax and require the taxpayer either to deposit the (Sec. 253[a], NIRC). However, the garments and materials
amount claimed or to file a surety bond for not more than seized from the factory should be ordered returned because
double the amount with the Court. the payment of the tax had released them from any lien that
the Government has over them.
2. May during
compromised the the
tax pendency
liability ofof a taxpayer
an appeal? Explain.be Customs; Jurisdiction; Assessment; Unpaid
SUGGESTED ANSWER: CustomsDuties/Taxes (2006)
Yes. During the pendency of the appeal, the taxpayer may The Collector of Customs issued an assessment for unpaid
still enter into a compromise settlement of his tax liability customs duties and taxes on the importation of your client
for as long as any of the grounds for a compromise i.e.; in the amount of P980,000.00. Where will you file your
doubtful validity of assessment and financial incapacity of taxpayer, is case to protect your client's right? Choose the correct
present. A compromise of a tax liability is possible at any courts/ agencies, observing their proper hierarchy. (5%)
stage of litigation, even during appeal, although legal 1. Court of Tax Appeals
propriety demands that prior leave of court should be 2. Collector of Customs
obtained (Pasudeco vs. CIR L-39387, June 29, 1982). 3. Commissioner of Customs
4. Regional Trial Court
BIR: Criminal Prosecution: Tax Evasion (1998) 5. Metropolitan Trial Court
Is assessment necessary before a taxpayer may be 6. Court of Appeals
prosecuted for willfully attempting in any manner to evade 7. Supreme Court
or defeat any tax imposed by the Internal Revenue Code?
[5%)
SUGGESTED ANSWER:
No. Assessment is not necessary before a taxpayer maybe
prosecuted if there is a prima facie showing of a willful
attempt to evade taxes as in the taxpayer's failure to declare
a specific item of taxable income in his income tax returns
(Ungab v. Cusi 97 SCRA 877 ). On the contrary, if the
taxes alleged to have been evaded is computed based on
reports approved by the BIR there is a presumption of
regularity of the previous payment of taxes, so that unless
and until the BIR has made a final determination of what is
supposed to be the correct taxes, the taxpayer should not be
placed in the crucible of
SUGGESTED ANSWER:
1. Protest with the Collector of Customs (Sec. 2308,
TCC)
2. Appeal to the Commissioner of Customs (Sec. 2313,
TCC).
3. Appeal to the CTA (RA 9282)
4. Petition for Review on Certiorari Supreme Court
(Rule 45 of the 1997 Rules of Civil Procedure (RA 9282).
Taxpayer; Prescriptive Period; Assessment;
DeficiencyIncome Tax (2006)
The Commissioner of Internal Revenue issued an assess-
ment for deficiency income tax for taxable year 2000 last
uly 31, 2006 in the amount of P 10 Million inclusive of
surcharge and interests. If the delinquent taxpayer is your Royal Mining is a VAT-registered domestic mining entity.
client, what steps will you take? What is your defense? One of its products is silver being sold to the Bangko
(10%) Sentral ng Pilipinas. It filed a claim with the BIR for tax
ALTERNATIVE ANSWER: refund on the ground that under Section 106 of the Tax
As Counsel, I shall move to cancel the Assessment because Code, sales of precious metals to the Bangko Sentral ng
of prescription. The three (3) year period of assessment for Pilipinas are considered export sales subject to zero-rated
the Income Tax Returns of 2000 starts on April 15, 2001 VAT. Is Royal Mining's claim meritorious? Explain. (5%)
and ends on April 16, 2004. The assessment of July 31, 2006
is beyond the three (3) year prescriptive period and can no SUGGESTED ANSWER:
longer have any legal, binding effect (Tax Reform Act, Title No, Royal Mining's claim is not meritorious because it is
VIII, Chapter I, Section 203 [1997]). the sale to the Bangko Sentral ng Pilipinas of gold and not
silver which is considered export sales at Zero-rated VAT
ALTERNATIVE ANSWER: (Tax Reform Act, Title IV, Section 106[2][a][4]). (NOTA
Since my client has lost his right to protest, I will advise BENE: EVAT is excluded from the Bar coverage, Guidelines for 2006
him to wait for a collection action by the Commissioner. Bar Examinations, June 15, 2006)
Then, I will file a petition for review with the CTA to
question the collection. Since the assessment was issued BIR: Fraudulent Return; Prima Facie Evidence (1998)
beyond the prescriptive period to assess, the action to What constitutes prima facie evidence of a false or
collect an invalid assessment is not warranted (Phil. Jour- fraudulent return? [2%]
nalists, Inc. v. CIR, G.R. No. 162852, December 16, 2004). SUGGESTED ANSWER:
There is prima facie evidence of a false or fraudulent return
Taxpayer; Assessment; Deficiency Tax (2006) when the taxpayer has willfully and knowingly filed it with
On June 1, 2003, Global Bank received a final notice of the intent to evade a part or all of the tax legally due from
assessment from the BIR for deficiency documentary stamp him (Ungab v. Cusi,, 97 SCRA 877 ). There must appear a
tax in the amount of P5 Million. On June 30, 2003, Global design to mislead or deceive on the part of the taxpayer, or
Bank filed a request for reconsideration with the at least culpable negligence. A mistake not culpable in
Commissioner of Internal Revenue. The Commissioner respect of its value would not constitute a false return.
denied the request for reconsideration only on May 30, (Words and Phrases, Vol. 16, page 173).
2006, at the same time serving on Global Bank a warrant of
distraint to collect the deficiency tax. If you were its BIR: Fraudulent Return; Prima Facie Evidence (2002)
counsel, what will be your advice to the bank? Explain. What constitutes prima facie evidence of a false or fraudulent
(5%) return to justify the imposition of a 50% surcharge on the
ALTERNATIVE ANSWER: deficiency tax due from a taxpayer? Explain. (5%)
The denial for the request for reconsideration is the final
decision of the CIR.. I would advise Global Bank to appeal SUGGESTED ANSWER:
the denial to the Court of Tax Appeals (CTA) within 30 There is a prima facie evidence of false or fraudulent return
days from receipt. I will further advise the bank to file a when the taxpayer SUBSTANTIALLY UNDER-
motion for injunction with the Court of Tax Appeals to DECLARED his taxable sales, receipts or income, or
enjoin the Commissioner from enforcing the assessment SUBSTANTIALLY OVERSTATED his deductions, the
pending resolution of the appeal. While an appeal to the taxpayer's failure to report sales, receipts or income in an
CTA will not suspend the payment, levy, distraint, and/or amount exceeding 30% of that declared per return, and a
sale of any property of the taxpayer for the satisfaction of its claim of deduction in an amount exceeding 30% of actual
tax liability, the CTA is authorized to give injunctive relief if deduction shall render the taxpayer liable for substantial
the enforcement would jeopardize the interest of the underdeclaration and overdeclaration, respectively, and will
taxpayer, as in this case, where the assessment has not justify the imposition of the 50% surcharge on the
become final (Lascona Land Co. v, CIR, CTA Case No. 5777, deficiency tax due from the taxpayer. (Sec. 248, NIRC).
anuary 4, 2000; See also Revised
CTA Rules, approved by the Supreme Court on December BIR: Garnishment: Bank Account of a Taxpayer (1998)
15, 2005). Is the BIR authorized to issue a warrant of garnishment
ALTERNATIVE ANSWER: against the bank account of a taxpayer despite the pendency
I will advice the Bank to promptly pay the deficiency of his protest against the assessment with the BIR or appeal
documentary stamp tax and the interest charges to avoid with the Court of Tax Appeals? [5%]
any further increase in the tax liability. The Bank should SUGGESTED ANSWER:
have appealed to the Court of Tax Appeals when the BIR The BIR is authorized to issue a warrant of garnishment
failed to decide on its Request for Reconsideration within
thirty (30) days after the inaction of the BIR for one against
of the (Yabes
protest bank account of 15
v. Flojo, a taxpayer
SCRA 278 despite the pendency
). Nowhere in the
hundred eighty (180) days or on December 31, 2003. The Tax Code is the Commissioner required to rule first on the
Tax Assessment has already become final, executory and protest before he can institute collection proceedings on the
unappealable at that point (BPI v. CIR, G.R. No. 139736, tax assessed. The legislative policy is to give the
October 17, 2005). Commissioner much latitude in the speedy and prompt
collection of taxes because it is in taxation that the
Taxpayer; VAT-registered; Claim for Tax Refund (2006) Government depends to obtain the
means to carry on its operations ( Republic u. Tim Tian refused to pay the modified assessment. Consequently, the
Teng Sons, Inc., 16 SCRA 584). BIR brought an action for collection in the Regional Trial
ALTERNATIVE ANSWER: Court on September 15, 2000. Adamson moved to dismiss
No, because the assessment has not yet become final, the action on the ground that the government's right to
executory and demandable. The basic consideration in the collect the tax by judicial action has prescribed. Decide the
collection of taxes is whether the assessment is final and case. (5%)
unappealable or the decision of the Commissioner is final, SUGGESTED ANSWER:
executory and demandable, the BIR has legal basis to The right of the Government to collect by judicial action has
collect the tax liability by either administrative or judicial not prescribed. The filing of the request for reconsideration
action. suspended the running of the prescriptive period and
commenced to run again when a decision on the protest was
BIR: Pre-Assessment Notice not Necessary (2002) made on August 5, 1999. It must be noted that in all cases
In the investigation of the withholding tax returns of AZ covered by an assessment, the period to collect shall be five
Medina Security Agency (AZ Medina) for the taxable years (5) years from the date of the assessment but this period is
1997 and 1998, a discrepancy between the taxes withheld suspended by the filing of a request for reconsideration
from its employees and the amounts actually remitted to the which was acted upon by the Commissioner of Internal
government was found. Accordingly, before the period of Revenue (CIR v. Wyeth Suaco Laboratories, Inc., 202 SCRA
prescription commenced to run, the BIR issued an 125 [1991]).
assessment and a demand letter calling for the immediate
payment of the deficiency withholding taxes in the total BIR: Prescriptive Period; Assessment & Collection (1999)
amount of P250,000.00. Counsel for AZ Medina protested A Co., a Philippine Corporation, filed its 1995 Income Tax
the assessment for being null and void on the ground that Return (ITR) on April 15, 1996 showing a net loss. On
no pre-assessment notice had been issued. However, the November 10, 1996, it amended its 1995 ITR to show
protest was denied. Counsel then filed a petition for more losses. After a tax investigation, the BIR disallowed
prohibition with the Court of Tax Appeals to restrain the certain deductions claimed by A Co., putting A Co. in a net
collection of the tax. income position. As a result, on August 5, 1999, the BIR
A. Is the contention of the counsel tenable? Explain issued a deficiency income assessment against A Co. A Co.
(2%) protested the assessment on the ground that it has
SUGGESTED ANSWER: prescribed: Decide. (5%)
A. No, the contention of the counsel is untenable. Section SUGGESTED ANSWER:
228 of the Tax Code expressly provides that no The right of the BIR to assess the tax has not prescribed.
pre-assessment notice is required when a discrepancy has The rule is that internal revenue taxes shall be assessed within three
been determined between the tax withheld and the amount ears after the last day prescribed by law for the filing of the return.
actually remitted by the withholding agent. Since the (Section 203, NIRC ), However, if the return srcinally filed is
amended substantially, the counting of the three-year
amount assessed
BIR is correct in relates
issuingtothe
deficiency withholding
assessment taxes,
and demand the
letter period starts from the date the amended return was filed.
calling for the immediate payment of the deficiency (CIR v. Phoenix Assurance Co., Ltd., 14 SCRA 52 ). There is
withholding taxes. (Sec. 228, NIRC). a substantial amendment in this case because a new return
was filed declaring more losses, which can only be done
B. Will the special civil action for prohibition either (1) in reducing gross income or (2) in increasing the
brought before the CTA under Sec. 11 of R.A, No. 1125 items of deductions, claimed.
prosper? Discuss your answer. (3%)
BIR: Prescriptive Period; Criminal Action (2002)
SUGGESTED ANSWER: TY Corporation filed its final adjusted income tax return for
B. The special civil action for prohibition will not prosper, 1993 on April 12, 1994 showing a net loss from operations.
because the CTA has no jurisdiction to entertain the same. After investigation, the BIR issued a pre-assessment notice
The power to issue writ of injunction provided for under on March 30, 1996. A final notice and demand letter dated
Section 11 of RA 1125 is only ancillary to its appellate April 15, 1997 was issued, personally delivered to and
jurisdiction. The CTA is not vested with srcinal jurisdiction received by the company's chief accountant. For willful
to issue writs of prohibition or injunction independently of refusal and failure of TY Corporation to pay the tax,
and apart from an appealed case. The remedy is to appeal warrants of distraint and levy on its properties were issued
the decision of the BIR. ( Collector v. Yuseco, 3 SCRA 313 and served upon it. On January 10, 2002, a criminal charge
[1961]). for violation of the Tax Code was instituted in the Regional
Trial Court with the approval of the Commissioner.
BIR: Prescriptive Period: Civil Action (2002)
On August 5, 1997, Adamson Co., Inc. (Adamson) filed a
request for reconsideration of the deficiency withholding tax The company moved to dismiss the criminal complaint on
assessment on July 10, 1997, covering the taxable year 1994. the ground that an act for violation of any provision of the
After administrative hearings, the srcinal assessment of Tax Code prescribes after five (5) years and, in this case,
P150,000.00 was reduced to P75.000.00 and a modified the period commenced to run on March 30, 1996 when the
assessment was thereafter issued on August 05, 1999. pre-assessment was issued. How will you resolve the
Despite repeated demands, Adamson failed and motion? Explain your answer. (5%)
P2.0 Million as the selling price. Discuss the tax
SUGGESTED ANSWER: implications and consequences of the action. (5%)
The motion to dismiss should not be granted. It is only ALTERNATIVE ANSWER:
when the assessment has become final and unappealable The action of the parties constitutes tax evasion and
that the 5-year period to file a criminal action commences to exposes Josel to:
run (Tupaz v. Ulop, 316 SCRA 118 [1999]). The
pre-assessment notice issued on March 30, 1996 is not a (1) DEFICIENCY FINAL INCOME TAX on the
final assessment which is enforceable by the BIR. It is the sale of real property in the Philippines classified as a capital
issuance of the final notice and demand letter dated April asset. Under Sec. 24(D) of the NIRC, the final tax of six
15, 1997 and the failure of the taxpayer to protest within 30 percent (6%) shall be based on the gross selling price of
days from receipt thereof that made the assessment final and P2.5 Million or zonal value of P2.0 Million, whichever is
unappealable. The earliest date that the assessment has higher, i.e.,
(2) FRAUD
P2.5 Million;
PENALTY amounting to 50%
become final is May 16, 1997 and since the criminal charge surcharge on the amount evaded (Sec. 248[B] NIRC); and
was instituted on January 10, 2002, the same was timely (3) DEFICIENCY INTEREST of 20% per annum
filed. on the deficiency. (Sec. 249[A][B], NIRC)
ALTERNATIVE ANSWER:
BIR: Secrecy of Bank Deposits Law (1998) There is tax evasion because of the concurrence of the following
Can the Commissioner of Internal Revenue inquire into the factors: 1) The payment of less than that known by the taxpayer to
bank deposits of a taxpayer? If so, does this power of the be legally due, or the non-payment of tax when it is shown that a tax
Commissioner conflict with R.A. 1405 (Secrecy of Bank is due. It is evident that the parties that the tax d ue should be
Deposits Law) [5%] computed based on the valuation of P2.5 million and not P2.0
SUGGESTED ANSWER: million; 2) An accompanying state of mind which is described
The Commissioner of Internal Revenue is authorized to as being "evil" on "bad faith," "willful," or "deliberate and not
inquire into the bank deposits of: 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
1 a decedent to determine his gross estate; preparation of the two d eeds of sale which showed di fferent values.
)
2 any taxpayer who has filed an application for
) compromise of his tax liability by means of
financial incapacity to pay his tax liability (Sec. 6(F).
(Commissioner of Internal Revenue v. The Estate ofBenigno
NIRC).
P, Tbda, Jr., G.R. No. 147188, September 14, 2004)
3 Where the taxpayer has signed a waiver authorizing
) the Commissioner or his duly authorized
representatives to Inquire into the bank deposits. The tax evasion committed should result to the imposition
(Note: This answer was not part of the answers enumerated of a 50% fraud surcharge on the amount evaded (Sec. 248[B],
in the UP Law Answers to the Bar in this but was later NIRC) payment of the Deficiency Tax, and interest of 20%
added in the recent UP Law Answers to the Bar as a result per annum on the deficiency. (Sec. 249[A][B], NIRC) The
The limited power parties may likewise be subject to criminal prosecution for
of AMLA Lawofof the Commissioner does not conflict
2001) willfully failing to pay the tax, as well as for filing a false and
with R.A. No. 1405 because the provisions of the Tax
Code granting this power is an exception to the Secrecy of fraudulent return.
Bank Deposits Law as embodied in a later legislation. (Sees. 254, 255 and 257, NIRC)
Furthermore, in case a taxpayer applies for an application to BIR: Summary Remedy: Estate Tax Deficiencies (1998)
compromise the payment of his tax liabilities on his claim Is the BIR authorized to collect estate tax deficiencies by
that his financial position demonstrates a clear inability to the summary remedy of levy upon and sale of real
pay the tax assessed, his application shall not be considered properties of the decedent without first securing the
unless and until he waives in writing his privilege under authority of the court sitting in probate over the supposed
R.A. No. 1405, and such waiver shall constitute the will of the decedent?
SUGGESTED ANSWER:
authority of the Commissioner to inquire into the bank
Yes. The BIR is authorized to collect estate tax deficiency
deposits of the taxpayer.
through the summary remedy of levying upon and sale of
real properties of a decedent, without the cognition and
BIR; Consequence; Taxpayer guilty of Tax Evasion (2005)
authority of the court sitting in probate over the supposed
osel agreed to sell his condominium unit to Jess for P2.5
Million. At the time of the sale, the property had a zonal will of theindeceased,
executive because
character. As suchthe
thecollection
estate taxofisestate tax is
exempted
value of P2.0 Million. Upon the advice of a tax consultant,
from the application of the statute of non-claims, and this is
the parties agreed to execute two deeds of sale, one
justified by the necessity of government funding,
indicating the zonal value of P2.0 Million as the selling price
immortalized in the maxim that taxes are the lifeblood of
and the other showing the true selling price of P2.5 Million.
the government ( Marcos v. CIR, G.R. No. 120880, June
The tax consultant filed the capital gains tax return using
5, 1997).
the deed of sale showing the zonal value of ALTERNATIVE ANSWER:
Yes, if the tax assessment has already become final, assessment so long as there is a prima facie showing of
executory and enforceable. The approval of the court sitting violation of the provisions of the Tax Code. After all, a
in probate over the supposed will of the deceased is not a criminal charge is instituted not to demand payment, but to
mandatory requirement for the collection of the estate tax. penalize the tax payer for violation of the Tax Code.
The probate court is determining issues which are not (Commissioner of Internal Revenue v. Pascor Realty and
against the property of the decedent, or a claim against the Development Corporation, G.R. No. 128315, June 29, 1999 )
estate as such, but is against the interest or property right Furthermore, there is nothing in the problem that shows
which the heir, legatee, devisee, etc. has in the property that the BIR in filing the case is also interested in collecting
formerly held by the decedent. ( Marcos v. CIR, G.R, No. the tax deficiency.
120880, June 5, 1997).
However, it is in error when it ruled that the joint affidavit of
BIR: Unpaid Taxes vs. Claims for Unpaid Wages (1995) the BIR examiners may be considered as an assessment of the
For failure of Oceanic Company, Inc. (OCEANIC), to pay tax liability of the corporation. The joint affidavit showing the
deficiency taxes of P20 Million, the Commissioner of computation of the tax liabilities of the erring taxpayer is not a
Internal Revenue issued warrants of distraint on tax assessment because it was not sent to the taxpayer, and
OCEANIC's personal properties and levied on its real does not demand payment of the tax within a certain period of
properties. Meanwhile, the Department of Labor through time. An assessment is deemed made only when the BIR
the Labor Arbiter rendered a decision ordering OCEANIC releases, mails or sends such notice to the taxpayer.
to pay unpaid wages and other benefits to its employees. (Commissioner of Internal Revenue
Four barges belonging to OCEANIC were levied upon by v. Pascor Realty and Development Corporation, G.R. No.
the sheriff and later sold at public auction. 128315, June 29, 1999) Notes and Comments: A plea is made for
liberality in correcting the examinees answers because the examination is very
The Commissioner of Internal Revenue filed a motion with long.
the Labor Arbiter to annul the sale and enjoin the sheriff
from disposing the proceeds thereof. The employees of BIR; Authority; Refund or Credit of Taxes (2005)
OCEANIC opposed the motion contending that Art. 110 of State the conditions required by the Tax Code before the
the Labor Code gives first preference to claims for unpaid Commissioner of Internal Revenue could authorize the
wages. Resolve the motion. Explain. refund or credit of taxes erroneously or illegally received.
SUGGESTED ANSWER:
SUGGESTED ANSWER: Under Sec. 204(C), NIRC, the following conditions must
The motion filed by the Commissioner should be granted be met:
because the claim of the government for unpaid taxes are 1. There must be a written claim for refund filed by the
generally preferred over the claims of laborers for unpaid taxpayer with the Commissioner.
wages. The provision of Article 110 of the Labor Code, 2. The claim for refund must be a categorical demand
which
case of gives laborers'
bankruptcy claims for of
or liquidation preference appliesbusiness.
the employer's only in for reimbursement.
3. The claim for refund must be filed within two (2) years
In the instant case, Oceanic is not under bankruptcy or from date of payment of the tax or penalty regardless of any
liquidation at the time the warrants of distraint and levy supervening cause.
were issued hence, the opposition of the employees is
unwarranted. (CIR vs. NLRC et al G.R. No. 74965, BIR; Compromise (2004)
November 9, 1994). After the tax assessment had become final and unappealable,
the Commissioner of Internal Revenue initiated the filing of
BIR; Assessment; Criminal Complaint (2005)
a civil action to collect the tax due from NX. After several
In 1995, the BIR filed before the Department of Justice
ears, a decision was rendered by the court ordering NX to
(DOJ) a criminal complaint against a corporation and its
pay the tax due plus penalties and surcharges. The judgment
officers for alleged evasion of taxes. The complaint was
became final and executory, but attempts to execute the
supported by a sworn statement of the BIR examiners
judgment award were futile.
showing the computation of the tax liabilities of the erring
taxpayer. The corporation filed a motion to dismiss the
criminal complaint on the ground that there has been, as
Subsequently, NX offered the Commissioner a compromise
et, no assessment of its tax liability; hence, the criminal
settlement of 50% of the judgment award, representing that
complaint was premature. The DOJ denied the motion on
this amount is all he could really afford. Does the
the ground that an assessment of the tax deficiency of the
Commissioner have the power to accept the compromise
corporation is not a precondition to the filing of a criminal
complaint and that in any event, the joint affidavit of the offer? Is it legal and ethical? Explain briefly. (5%)
BIR examiners may be considered as an assessment of the SUGGESTED ANSWER:
tax liability of the corporation. Is the ruling of the DOJ Yes. The Commissioner has the power to accept the offer
correct? Explain. (5%) of compromise if the financial position of the taxpayer
SUGGESTED ANSWER:
clearly demonstrates a clear inability to pay the tax (Section
The DOJ is correct in ruling that an assessment of the tax
204, NIRC).
deficiency of the corporation is not a precondition to the
filing of a criminal complaint. There is no need for an
As represented by NX in his offer, only 50% of the
judgment award is all he could really afford. This is an offer BIR; Deficiency Tax Assessment vs. Tax Refund / Tax
for compromise based on financial incapacity which the Credit (2005)
Commissioner shall not accept unless accompanied by a Is a deficiency tax assessment a bar to a claim for tax
waiver of the secrecy of bank deposits (Section 6[F}, refund or tax credit? Explain.
NIRC). The waiver will enable the Commissioner to SUGGESTED ANSWER:
ascertain the financial position of the taxpayer, although the Yes, the deficiency tax assessment is a bar to a tax refund or
inquiry need not be limited only to the bank deposits of the credit. The Taxpayer cannot be entitled to a refund and at the
taxpayer but also as to his financial position as reflected in same time liable for a tax deficiency assessment for the same
his financial statements or other records upon which his year. The deficiency assessment creates a doubt as to the truth
property holdings can be ascertained. and accuracy of the Tax Return. Said Return cannot therefore
be the basis of the refund
If indeed, the financial position of NX as determined by (Commissioner of Internal Revenue v. Alltel [2002], citing
the Commissioner demonstrates a clear inability to pay the Commissioner of Internal Revenue v. Court of Appeals, City
tax, the acceptance of the offer is legal and ethical because rust Banking Corporation and Court of Tax Appeals,
the ground upon which the compromise was anchored is G.R. No. 106611, July 21, 1994)
within the context of the law and the rate of compromise is
BIR; Distraint; Prescription of the Action (2002)
well within and far exceeds the minimum prescribed by law
Mr. Sebastian is a Filipino seaman employed by a
which is only 10% of the basic tax assessed.
Norwegian company which is engaged exclusively in
international shipping. He and his wife, who manages their
BIR; Compromise (2005)
business, filed a joint income tax return for 1997 on March
State and discuss briefly whether the following cases may
15, 1998. After an audit of the return, the BIR issued on
be compromised or may not be compromised: a)
April 20, 2001 a deficiency income tax assessment for the
Delinquent accounts; b) Cases under administrative
sum of P250.000.00, inclusive of interest and penalty. For
protest, after issuance of
failure of Mr. and Mrs. Sebastian to pay the tax within the
the final assessment notice to the taxpayer, which are
period stated in the notice of assessment, the BIR issued on
still pending; c) Criminal tax fraud cases; d) Criminal
August 19, 2001 warrants of distraint and levy to enforce
violations already filed in court; e) Cases where final reports
collection of the tax.
of reinvestigation or
A. What is the rule of income taxation with respect to
Mr. Sebastian's income in 1997 as a seaman on board the
reconsideration have been issued resulting in the
Norwegian vessel engaged in international shipping? Explain
reduction of the srcinal assessment agreed to by the
our answer. (2%)
taxpayer when he signed the required agreement SUGGESTED ANSWER:
form. (5%) A. The income of Mr. Sebastian as a seaman is considered
SUGGESTED ANSWERS: as income of a non-resident citizen derived from without
The following cases may still be compromised (R.R. 30-02
the Philippines. The total gross income, in US dollars (or if
[2002]) because of the taxpayer's financial incapacity to pay
in other foreign currency, its dollar equivalent) from
the tax due or the assessment's doubtful validity: a)
without shall be declared by him for income tax purposes
DELINQUENT ACCOUNTS may be compromised because
using a separate income tax return which will not include
there is no showing that there is a duly-approved schedule of
his income from business derived within (to be covered by
installment payments; and b) Cases under administrative
another return). He is entitled to deduct from his dollar
protest, after issuance of the final assessment notice to the
gross income a personal exemption of $4,500 and foreign
taxpayer, which are still pending.
national income taxes paid to arrive at his adjusted income
during the year. His adjusted income will be subject to the
graduated tax rates of 1% to 3%. (Sec. 21 (b), Tax Code o
The following cases MAY NO LONGER BE
1986[PD 1158], as amended by PD 1994).
COMPROMISED (R.R. 30-02 [2002]) because the taxpayer
has not paid his taxes for reasons other than his financial [Note: The bar candidates are not expected to be familiar with tax
incapacity or the doubtful validity of the assessment: a) history. Considering that this is already the fourth year of
CRIMINAL TAX FRAUD cases as may be determined by implementation of the Tax Code of 1997, bar candidates were
the Commissioner or his authorized agents may not be taught and prepared to answer questions based on the present
compromised; b) CRIMINAL VIOLATIONS law. It is therefore requested that the examiner be more lenient in
ALREADY FILED IN COURT so that the taxpayer will checking the answers to this question. Perhaps, an answer based
not profit from his fraud which would encourage tax on the present law be given full credit.]
evasion; and c) Cases where final reports of
reinvestigation or reconsideration have been issued B. If you are the lawyer of Mr. and Mrs. Sebastian,
resulting in the reduction of the srcinal assessment agreed to what possible defense or defenses will you raise in behalf of
by the taxpayer when he signed the required agreement form. our clients against the action of the BIR in enforcing
The taxpayer is estopped from applying for a compromise. collection of the tax by the summary remedies of warrants
of distraints and levy? Explain your answer. (3%)
SUGGESTED ANSWER:
B. I will raise the defense of prescription. The right of the properties left by his father with intent to evade payment of
BIR to assess prescribes after three years counted from the the correct tax. As a result, a deficiency estate tax
last day prescribed by law for the filing of the income tax assessment for P1,250,000.00, inclusive of 50% surcharge
returns when the said return is filed on time. (Section 203, for fraud, interest and penalty, was issued against him on
NIRC). The last day for filing the 1997 income tax return is anuary 10, 2001. Mr. Castro protested the assessment on
April 15, 1998. Since the assessment was issued only on the ground of prescription.
April 20, 2001, the BIR's right to assess has already A. Decide Mr. Castro's protest. (2%)
prescribed. SUGGESTED ANSWER:
A. The protest should be resolved against Mr. Castro. What
BIR; False vs. Fraudulent Return (1996) was filed is a fraudulent return making the prescriptive
Distinguish a false return from a fraudulent return. period for assessment ten (10) years from discovery of the
SUGGESTED ANSWER: fraud (Section 222, NIRC). Accordingly, the assessment was
The distinction between a false return and a fraudulent issued within that prescriptive period to make an assessment
return is that the first merely implies a deviation from the based on a fraudulent return.
truth or fact whether intentional or not, whereas the second
is intentional and deceitful with the sole aim of evading the B. What legal requirement/s must Mr. Santos
correct tax due (Aznar us. Commissioner, L-20569, comply with so that he can claim his reward? Explain. (3%)
August 23, 1974). SUGGESTED ANSWER:
ALTERNATIVE ANSWER: The legal requirements that must be complied by Mr.
A false return contains deviations from the truth which may Santos to entitle him to reward are as follows: 1) He should
be due to mistakes, carelessness or ignorance of the person voluntarily file a confidential information
preparing the return. A fraudulent return contains an under oath with the Law Division of the Bureau of
intentional wrongdoing with the sole object of avoiding the Internal Revenue alleging therein the specific
tax and it may consist in the intentional underdeclaration of violations constituting fraud; 2) The information must not
income, intentional overdeclaration of deductions or the et be in the possession of
recurrence of both. A false return is not necessarily tainted the Bureau of Internal Revenue, or refer to a case
with fraud because the fraud contemplated by law is actual already pending or previously investigated by the
and not constructive. Any deviation from the truth on the Bureau of Internal Revenue; 3) Mr. Santos should not be a
other hand, whether intentional or not, constitutes falsity. government employee or
(Aznar vs. Commissioner, L-20569, August 23, 1974) a relative of a government employee within the sixth
degree of consanguinity; and 4) The information must result
to collections of
BIR; Jurisdiction; Review Rulings of the Commissioner revenues and/or fines and penalties. (Sec. 282,
(2006) NIRC)
Mr.
beenAbraham Eugenio,
required by a pawnshop
the Revenue Districtoperator, after
Officer to payhaving
value BIR; Prescriptive Period; Criminal Action (2006)
added tax pursuant to a Revenue Memorandum Order Gerry was being prosecuted by the BIR for failure to pay
(RMO) of the Commissioner of Internal Revenue, filed his income tax liability for Calendar Year 1999 despite
with the Regional Trial Court an action questioning the several demands by the BIR in 2002. The Information was
validity of the RMO. If you were the judge, will you dismiss filed with the RTC only last June 2006. Gerry filed a motion
the case? (5%) to quash the Information on the ground of prescription, the
SUGGESTED ANSWER: Information having been filed beyond the 5-year
Yes. The RMO is in reality a ruling of the Commissioner in reglementary period. If you were the judge, will you dismiss
implementing the provisions of the Tax Code on the the Information? Why? (5%)
taxability of pawnshops. Jurisdiction to review rulings of the SUGGESTED ANSWER:
Commissioner is lodged with the Court of Tax Appeals and No. The trial court can exercise jurisdiction. Prescription of
not with the Regional Trial Court (CIR v. Josefina Leal, G.R. a criminal action begins to run from the day of the violation
No. 113459, November 18, 2002; Tax of the law. The crime was committed when Gerry willfully
Reform Act, RA 8424, Title I, Sec. 4 [1997]). refused to pay despite repeated demands in 2002. Since the
(NOTA BENE: This concept pertains to the VAT law information was filed in June 2006, the criminal case was
which is excluded from the bar coverage, Guidelines for 2006 instituted within the five-year period required by law
Bar Examinations, June 15, 2006)
(Tupaz v. Ulep, G.R. No. 127777, October 1, 1999; Section
281, NIRC).
BIR; Prescriptive Period; Assessment; Fraudulent Return
(2002)
Mr. Castro inherited from his father, who died on June 10, BIR; Taxpayer: Civil Action & Criminal Action (2002)
Minolta Philippines, Inc. (Minolta) is an EPZA-registered
1994, several pieces of real property in Metro Manila. The enterprise enjoying preferential tax treatment under a
estate tax return was filed and the estate tax due in the special law. After investigation of its withholding tax returns
amount of P250.000.00 was paid on December 06, 1994. for the taxable year 1997, the BIR issued a deficiency
The Tax Fraud Division of the BIR investigated the case on withholding tax assessment in the amount of P150.000.00.
the basis of confidential information given by Mr. Santos On May 15, 1999, because of financial difficulty, the
on January 06, 1998 that the return filed by Mr. Castro was deficiency tax remained unpaid, as a result of which the
fraudulent and that he failed to declare all assessment became final and executory. The
BIR also found that, in violation of the provisions of the with the Collector of Customs. The Bureau of Customs
National Internal Revenue Code, Minolta did not file its moved to dismiss the case for lack of jurisdiction of the
final corporate income tax return for the taxable year 1998, Court of Tax Appeals.
because it allegedly incurred net loss from its operations.
On May 17, 2002, the BIR filed with the Regional Trial A. Does the Court of Tax Appeals have jurisdiction
Court an action for collection of the deficiency withholding over the petition for review and writ of prohibition?
tax for 1997. Explain (3%)
A. Will the BIR's action for collection prosper? As SUGGESTED ANSWER:
counsel of Minolta, what action will you take? Explain your A. No, because there is no decision as yet by the
answer. (5%) Commissioner of Customs which can be appealed to the
SUGGESTED ANSWER: CTA. Neither the remedy of prohibition would lie because
A. Yes, BIR's action for collection will prosper because the CTA has not acquired any appellate jurisdiction over the
the assessment is already final and executory, it can already seizure case. The writ of prohibition being merely ancillary to
be enforced through judicial action. the appellate jurisdiction, the CTA has no jurisdiction over it
until it has acquired jurisdiction on the petition for review.
As counsel of Minolta, I will introduce evidence that the Since there is no appealable decision, the CTA has no
income payment was reported by the payee and the income jurisdiction over the petition for review and writ of
tax was paid thereon in 1997 so that my client may only be prohibition. (Commissioner of Customs v. Alikpala, 36
allowed to pay the civil penalties for non-withholding SCRA 208 [1970]).
pursuant to RMO No. 38-83.
[Note: It is not clear whet her this is a case o
non-withholding/ underwithholding or non-rem ittance of ta B. Will an appeal to the CTA for tax refund be
withheld. As such, the tax cou nsel may be open to othe possible? Explain (2%)
remedies against the assessment .] SUGGESTED ANSWER:
B. No, because the Commissioner of Customs has not yet
B. May criminal violations of the Tax Code be rendered a decision on the claim for refund. The
compromised? If Minolta makes a voluntary offer to jurisdiction of the Commissioner and the CTA are not
compromise the criminal violations for non-filing and concurrent in so far as claims for refund are concerned.
non-payment of taxes for the year 1998, may the The only exception is when the Collector has not acted on
Commissioner accept the offer? Explain (5%) the protested payment for a long time, the continued
inaction of the Collector or Commissioner should not be
SUGGESTED ANSWER: allowed to prejudice the taxpayer. (Nestle Phils., Inc. v.
B. All criminal violations of the Tax Code may be Court of Appeals, GR No. 134114, July 6, 2001).
compromised except those already filed in court or those
Customs; Basis; Automatic Review (2002)
involving fraud
Minolta makes (Section offer
a voluntary 204,to NIRC).
compromise Accordingly,
the criminalif Whenever the decision of the Collector of Customs is
violations for non-filing and non-payment of taxes for the adverse to the government, it is automatically elevated to
ear 1998, the Commissioner may accept the offer which is the Commissioner for review and, if it is affirmed by him, it
allowed by law. However, if it can be established that a tax is automatically elevated to the Secretary of Finance for
has not been paid as a consequence of non-filing of the review. What is the basis of the automatic review procedure
return, the civil liability for taxes may be dealt with in the Bureau of Customs? Explain your answer. (5%)
independently of the criminal violations. The compromise
settlement of the criminal violations will not relieve the SUGGESTED ANSWER:
taxpayer from its civil liability. But the civil liability for taxes Automatic review is intended to protect the interest of the
may also be compromised if the financial position of the Government in the collection of taxes and customs duties in
taxpayer demonstrates a clear inability to pay the tax. seizure and protest cases. Without such automatic review,
neither the Commissioner of Customs nor the Secretary of
Finance would know about the decision laid down by the
Custom: Violation of Tax & Custom Duties (2002) Collector favoring the taxpayer. The power to decide seizure
The Collector of Customs of the Port of Cebu issued and protest cases may be abused if no checks are instituted.
warrants of seizure and detention against the importation of Automatic review is necessary because nobody is expected
machineries and equipment by LLD Import and Export Co. to appeal the decision of the Collector which is favorable to
(LLD) for alleged nonpayment of tax and customs duties in the taxpayer and adverse to the Government. This is the
violation of customs laws. LLD was notified of the seizure, reason why whenever the decision of the Collector is
but, before it could be heard, the Collector of Customs adverse to the Government, the said decision is
issued a notice of sale of the articles. In order to restrain the automatically elevated to the Commissioner for review; and
Collector from carrying out the order to sell, LLD filed with if such decision is affirmed by the Commissioner, the same
the Court of Tax Appeals a petition for review with shall be automatically elevated to and be finally reviewed by
application for the issuance of a writ of prohibition. It also the Secretary of Finance (Yaokasin v. Commissioner of
filed with the CTA an appeal for refund of overpaid taxes Customs, 180 SCRA 591 [1989]).
on its other importations of raw materials which has been
pending
Delinquent Tax Return (1998) functions It has been Instituted to perform. ( Jao, et al,
When is a revenue tax considered delinquent? [3%) Court of Appeals, et al, and companion case, 249 SCRA
SUGGESTED ANSWER: 35, 43)
A revenue tax is considered delinquent when it is unpaid
after the lapse of the last day prescribed by law for its LGU: Collection of Taxes, Fees & Charges (1997)
payment. Likewise, it could also be considered as delinquent Give the remedies available to local government units to
where an assessment for deficiency tax has become final and enforce the collection of taxes, fees, and charges?
the taxpayer has not paid it within the period given in the SUGGESTED ANSWER:
notice of assessment. The remedies available to the local government units to
enforce collection of taxes, fees, and charges are: 1)
Jurisdiction: Customs vs. CTA ADMINISTRATIVE REMEDIES of distraint of
(2000)
a) On the basis of a warrant of seizure and detention issued personal property of whatever kind whether tangible
by the Collector of Customs for the purpose of enforcing or intangible, and levy of real property and interest
the Tariff and Customs Laws, assorted brands of cigarettes therein; and 2) JUDICIAL REMEDY by institution of an
said to have been illegally imported into the Philippines ordinary
were seized from a store where they were openly offered for civil action for collection with the regular courts of
sale. Dissatisfied with the decision rendered after hearing by proper jurisdiction.
the Collector of Customs on the confiscation of the articles,
the importer filed a petition for review with the Court of Tax Amnesty vs. Tax Exemption (2001)
Tax Appeals. The Collector moved to dismiss the petition Distinguish a tax amnesty from a tax exemption. (3%)
for lack of Jurisdiction. Rule on the motion. (2%) SUGGESTED ANSWER:
Tax amnesty is an immunity from all criminal, civil and
administrative liabilities arising from nonpayment of taxes.
SUGGESTED ANSWER: It is a general pardon given to all taxpayers. It applies only
Motion granted. The Court of Tax Appeals has jurisdiction to past tax periods, hence of retroactive application.
only over decisions of the Commissioner of Customs in (People v. Costonedo, G.R. No. L-46881, 1988).
cases involving seizures, detention or release of property
affected. (Sec. 7, R.A. No. 1125). There is no decision yet of Tax exemption is an immunity from the civil liability only. It
the Commissioner which is subject to review by the Court is an immunity or privilege, a freedom from a charge or
of Tax Appeals. burden to which others are subjected. ( Florer v. Sheridan,
ALTERNATIVE ANSWER: 137 Ind. 28, 36 ME 365 ). It is generally prospective in
Motion granted. The Court of Tax Appeals has no application.
jurisdiction because there is no decision rendered by the
Commissioner of Customs on the seizure and forfeiture Taxpayer: Administrative & Judicial Remedies (2000)
case. The taxpayer should have appealed the decision
rendered by the Collector within fifteen (15) days from Describe
under the separately the procedures
Tax Code available on the legal
to an aggrieved remedies
taxpayer both
receipt of the decision to the Commissioner of Customs. at the administrative and judicial levels. (5%)
The Commissioners adverse decision would then be the SUGGESTED ANSWER:
subject of an appeal to the Court of Tax Appeals. The legal remedies of an aggrieved taxpayer under the Tax
Code, both at the administrative and judicial levels, may be
classified into those for assessment, collection and
b) Under the same facts, could the importer file an action in refund.
the Regional Trial Court for replevin on the ground that the
articles are being wrongfully detained by the Collector of The procedures for the ADMINISTRATIVE
Customs since the importation was not illegal and therefore REMEDIES for ASSESSMENT are as follows:
exempt from seizure? Explain. (3%) a. After receipt of the Pre-Assessment Notice, he
must within fifteen (15) days from receipt explain why no
SUGGESTED ANSWER: additional taxes should be assessed against him.
No. The legislators intended to divest the Regional Trial
Courts of the jurisdiction to replevin a property which is a b. If the Commissioner of Internal Revenue issues
subject of seizure and forfeiture proceedings for violation of an assessment notice, the taxpayer must administratively
the Tariff and Customs Code otherwise, actions for protest or dispute the assessment by filing a motion for
forfeiture of property for violation of the Customs laws reconsideration or reinvestigation within thirty
could easily be undermined by the simple device of replevin. (30) days from receipt of the notice of assessment.
(De la Fuente v. De Veyra, et. al, 120 SCRA 455 ) (4th par.. Sec. 228, NIRC of 1997)
c. Within sixty (60) days from filing of the protest, the

There should be no unnecessary hindrance on the taxpayer shall submit all relevant supporting documents.
government's drive to prevent smuggling and other frauds
upon the Customs. Furthermore, the Regional Trial Court
do not have Jurisdiction in order to render effective and The JUDICIAL REMEDIES of an aggrieved taxpayer
efficient the collection of Import and export duties due the relative to an ASSESSMENT NOTICE are as follows:
State, which enables the government to carry out the
the refund of the surcharge, interest and compromise
penalty. The CTA took cognizance of the case and ordered
a Where the Commissioner of Internal Revenue has
the Commissioner to make a refund. The Commissioner
.
filed a Petition for Review with the Court of Appeals
assailing the jurisdiction of the CTA and the Order to make
not acted on the taxpayer's protest within a period
refund to the Estate on the ground that no claim for refund
of
was filed with the BIR.
one hundred eighty (180) days from submission of
A. Is the stand of the Commissioner correct?
all
Reason. (2%)
relevant documents, then the taxpayer has a period SUGGESTED ANSWER:
of Yes. There was no claim for refund or credit that has been
thirty (30) days from the lapse of said 180 days duly filed with the Commissioner of Internal Revenue
within which is required before a suit or proceeding can be filed in
which to interpose a petition for review with the any court (Sec. 229. NIRC of 1997). The denial of the claim
In both cases the taxpayer must apply with the
CourtCourt
of of Tax Appeals
Tax Appeals. for the Issuance of an by the Commissioner is the one which will vest the Court
Injunctive writ to enjoin the Bureau of Internal of Tax Appeals jurisdiction over the refund case should the
Revenue from collecting the disputed tax during the taxpayer decide to appeal on time.
pendency of the proceedings.
NOTE: A 2004 Amendment - The decision of the division B. Why is the filing of an administrative claim with
of CTA is in turn appeallable within fifteen (15) days to the the BIR necessary? (3%)
CTA en banc. The decision of the CTA en banc is directly SUGGESTED ANSWER:
appeallable to the Supreme Court on question of law on The filing of an administrative claim for refund with the
certiorari. BIR is necessary in order: 1) To afford the Commissioner
an opportunity to
The employment by the Bureau of Internal Revenue of any consider the claim and to have a chance to correct
of the Administrative Remedies for the collection of the the errors of subordinate officers ( Gonzales v.
tax like distraint, levy, etc. may be administratively appealed CTA, et al, 14 SCRA 79); and 2) To notify the
by the taxpayer to the Commissioner whose decision is Government that such taxes have
appealable to the Court of Tax Appeals under other matter been questioned and the notice should be borne in
arising under the provisions of the National Internal mind in estimating the revenue available for
Revenue Code. expenditures. (Bermejo v. Collector, G.R. No. L
3028. July 29, 1950)
The judicial appeals starts with the Court of Tax Appeals,
and continues in the same manner as shown above. Taxpayer: Assessment; Injunction (2004)
RR disputed
of an adverseadecision
deficiency
by tax
theassessment and of
Commissioner upon receipt
Internal
Should the Bureau of Internal Revenue decide to utilize its
udicial tax remedies for collecting the taxes by means of an Revenue, filed an appeal with the Court of Tax Appeals.
ordinary suit filed with the regular courts for the collection While the appeal is pending, the BIR served a warrant of
of a sum of money, the taxpayer could oppose the same levy on the real properties of RR to enforce the collection
going up the ladder of judicial processes from the Municipal of the disputed tax. Granting arguendo that the BIR can
Trial Court (as the case may be) to the Regional Trial Court, legally levy on the properties, what could RR do to stop the
to the Court of Appeals, thence to the Supreme Court. process? Explain briefly. (5%)
SUGGESTED ANSWER:
RR should file a motion for injunction with the Court of Tax
Appeals to stop the administrative collection process. An
The remedies of an aggrieved taxpayer on a claim for refund
appeal to the CTA shall not suspend the enforcement of the
is to appeal the adverse decision of the Commissioner to the
tax liability, unless a motion to that effect shall have been
CTA in the same manner outlined above.
presented in court and granted by it on the basis that such
collection will jeopardize the interest of the taxpayer or the
Government (Pirovano v. CIR, 14 SCRA 832 [1965]).
Taxpayer: Assessment: Protest: Claims for refund (2000)
On June 16, 1997, the Bureau of Internal Revenue (BIR)
issued against the Estate of Jose de la Cruz a notice of
The CTA is empowered to suspend the collection of
deficiency estate tax assessment, inclusive of surcharge,
internal revenue taxes and customs duties in cases pending
interestofand
Estate Josecompromise penalty. The
de la Cruz (Executor) filedExecutor of the
a timely protest appeal only when: (1) in the opinion of the court the
collection by the BIR will jeopardize the interest of the
against the assessment and requested for waiver of the Government and/or the taxpayer; and (2) the taxpayer is
surcharge, interest and penalty. The protest was denied by willing to deposit the amount being collected or to file a
the Commissioner of Internal Revenue (Commissioner) surety bond for not more than double the amount of the
with finality on September 13, 1997. Consequently, the tax to be fixed by the court (Section 11, JR.A. No. 1125).
Executor was made to pay the deficiency assessment on
October 10, 1997. The following day, the Executor filed a Taxpayer: BIR Audit or Investigation (1999)
Petition with the Court of Tax Appeals (CTA) praying for
A Co., a Philippine corporation, is a big manufacturer of 1 The claim filed must state a categorical demand for
consumer goods and has several suppliers of raw materials. reimbursement (Bermejo v. Collector, 87 Phil. 96 [1950]).
The BIR suspects that some of the suppliers are not 2 The suit or proceeding for recovery must be
properly reporting their income on their sales to A Co. The commenced in court within two years from date of payment
CIR therefore: 1) Issued an access letter to A Co. to furnish of the tax or penalty regardless of any supervening event
the BIR that will arise after payment (Sec. 229, NIRC).
information on sales and payments to its suppliers. 2)
Issued an access letter to a bank (CX Bank) to
furnish the BIR on deposits of some suppliers of A
Co. on the alleged ground that the suppliers are
committing tax evasion. [Note: If the answer given is only number 1, it is suggested that the same
shall be given full credit considering that this is the only requirement for
A Co., X Bank and the suppliers have not been issued by the Commissioner to acquire jurisdiction over the claim.]
the BIR letter of authority to examine. A Co. and X Bank
believe that the BIR is on a "fishing expedition" and come
to you for counsel. What is your advice? (10%) B. Can the
without Commissioner
a written claim forgrant a refund or tax credit even
it? (2%)
SUGGESTED ANSWER:
SUGGESTED ANSWER:
I will advise A Co. and B Co. that the BIR is justified only in
B. Yes. When the taxpayer files a return which on its face
getting information from the former but not from the latter.
shows an overpayment of the tax and the option to refund/
The BIR is authorized to obtain information from other
claim a tax credit was chosen by the taxpayer, the
persons other than those whose internal revenue tax liability
Commissioner shall grant the refund or tax credit without the
is subject to audit or investigation. However, this power shall
need for a written claim. This is so, because a return filed
not be construed as granting the Commissioner the authority
showing an overpayment shall be considered as a written
to inquire into bank deposits.
claim for credit or refund. (Sees. 76 and 204, NIRC ).
(Section 5. NIRC).
Moreover, the law provides that the Commissioner may, even
without a written claim therefor, refund or credit any tax
Taxpayer: City Board of Assessment Decision; Where to
where on the face of the return upon which payment was
appeal (1999)
made, such payment appears clearly to have been erroneously
A Co., a Philippine corporation, is the owner of machinery,
paid. (Sec. 229, NIRC ).
equipment and fixtures located at its plant in Muntinlupa
City. The City Assessor characterized all these properties as
Taxpayer: Deficiency Income Tax (1995)
real properties subject to the real property tax. A Co.
Businessman Stephen Yang filed an income tax return for
appealed the matter to the Muntinlupa Board of Assessment
1993 showing business net income of P350,000.00 on
Appeals. The Board ruled in favor of the City. In
which he paid an income tax of P61,000.00. After filing the
accordance
Appeals). Awith
Co.RA 1125 (An
brought Act creating
a petition the Court
for review of Tax
before the return he realized that he forgot to include an item of
business income in 1993 for P50.000.00. Being an honest
CTA to appeal the decision of the City Board of
taxpayer, he included this income in his return for 1994 and
Assessment Appeals. Is the Petition for Review proper? paid the corresponding income tax thereon. In the
Explain. (5%) examination of his 1993 return the BIR examiner found
SUGGESTED ANSWER:
No. The CTAs devoid of jurisdiction to entertain appeals that Stephen Yang failed to report this item of P50.000.00
from the decision of the City Board of Assessment Appeals. and assessed him a deficiency income tax on this item, plus
Said decision is instead appealable to the Central Board of a 50% fraud surcharge. 1) Is the examiner correct? Explain.
Assessment Appeals, which under the Local Government 2) If you were the lawyer of Stephen Yang, what would
Code, has appellate jurisdiction over decisions of Local
Board of Assessment Appeals. (Caltex Phils, foe. v. Central ou have advised your client before he included in his
Board of Assessment Appeals, L50466, May 31, 1982 ). 1994 return the amount of P50.000.00 as 1993
income to avoid the fraud surcharge? Explain.
3) Considering that Stephen Yang had already been
Taxpayer: Claim for Refund; Procedure (2002) assessed a deficiency income tax for 1993 for his failure to
A. What must a taxpayer do in order to claim a refund of, report the P50.000.00 income, what would you advise him
or tax credit for, taxes and penalties which he alleges to to do to avoid the penalties for tax delinquency? Explain.
have been erroneously, illegally or excessively assessed or
collected? (3%) 4) What would you advise Stephen Yang to do with
SUGGESTED ANSWER: regard to the income tax he paid for the P50.000.00 in his
The taxpayer must comply with the following procedures in 1994 return? In case your remedy fails, what is your other
claiming a refund of, or tax credit for, taxes and penalties recourse? Explain.
which he alleges to have been erroneously, illegally or SUGGESTED ANSWERS:
excessively assessed or collected: 1) The examiner is correct in assessing a deficiency income
2. He should file a written claim for refund with the tax for taxable year 1993 but not in imposing the 50% fraud
Commissioner within two years after the date of payment surcharge. The amount of all items of gross income must be
of the tax or penalty (Sec. 204, NIRC); included in gross income during the year in which received
or realized (Sec. 38, NIRC). The 50%
fraud surcharge attaches only if a false or fraudulent return Commissioner on cases involving claim for tax refunds are
is willfully made by Mr. Yang (Sec.248, NIRC). The fact within the exclusive and primary jurisdiction of the Court
that Mr. Yang included the income in his 1994 return belies of Tax Appeals (Section 7.RA1125).
any claim of willfulness but is rather indicative of an honest
mistake which was sought to be rectified by a subsequent Taxpayer: Failure to Withheld & Remit Tax (2000)
act, that is the filing of the 1994 return. A domestic corporation failed to withhold and remit the tax
on income received from Philippine sources by a non-
2) Mr. Yang should have amended his 1993 Income tax resident foreign corporation. In addition to the civil
return to allow for the inclusion of the P50.000 income penalties provided for under the Tax Code, a compromise
during the taxable period it was realized. penalty was imposed for violation of the withholding tax
provisions. May the Commissioner of Internal Revenue
3) Mr. Yang should file a protest questioning the 50% legally enforce the collection of compromise penalty? (5%)
surcharge and ask for the abatement thereof.
ALTERNATIVE ANSWER: SUGGESTED ANSWER:
Mr. Yang should pay the deficiency income tax on or No. There is no showing that the compromise penalty was
before the day prescribed for its payment per notice of imposed by the Commissioner of Internal Revenue with the
demand. After payment and within two years thereafter, he agreement and conformity of the taxpayer. ( Wonder
should file a claim for refund of taxes erroneously paid to Mechanical Engineering Corporation u. Court of Tax
recover the excessive surcharge imposed. Appeals, et. al., 64 SCRA 555).
Taxpayer: NIRC vs. TCC Remedies (1996)

4) Mr. Yang should file a written claim for refund with the Compare the taxpayer's remedies under the National
Commissioner of Internal Revenue of the taxes paid on the Internal Revenue Code and the Tariff and Customs Code.
P50.000 income included in 1994 within two years from SUGGESTED ANSWER:
payment pursuant to Section 204(3) of the Tax Code. The taxpayer's remedies under the NATIONAL
Should this remedy fail in the administrative level, a judicial INTERNAL REVENUE CODE may be categorized into
claim for refund can be instituted before the expiration of remedies before payment and remedies after payment. The
the two year period. remedy BEFORE PAYMENT consists of
Taxpayer: Exhaustion of Administrative Remedies (1997) (a) Administrative Remedy which is the filing of
(a) A taxpayer received, on 15 January 1996 an as- protest within 30 days from receipt of assessment, and
sessment for an internal revenue tax deficiency. On 10 (b) Judicial Remedy which is the appeal of the
February 1996, the taxpayer forthwith filed a petition for adverse decision of the Commissioner on the protest with
review with the Court of Tax Appeals. Could the Tax the Court of Tax Appeals, and finally with the Supreme
Court entertain the petition? Court.

(b) Under the above factual setting, the taxpayer, The remedy AFTER PAYMENT is availed of
instead of questioning the assessment he received on 15 (c) by paying the assessed tax within 30 days from
anuary 1996 paid, on 01 March 1996 the "deficiency tax" receipt of assessment and
assessed. The taxpayer requested a refund from the (d) the filing of a claim for refund or tax credit of
Commissioner by submitting a written claim on 01 March these taxes on grounds that they are erroneously paid within
1997. It was denied. The taxpayer, on 15 March 1997, filed two years from date of payment.
a petition for review with the Court of Appeals. Could the
petition still be entertained?
SUGGESTED ANSWER:
(a) No. Before taxpayer can avail of Judicial remedy he
must first exhaust administrative remedies by filing a protest
within 30 days from receipt of the assessment. It is the
Commissioner's decision on the protest that give the Tax
Court jurisdiction over the case provided that the appeal is
filed within 30 days from receipt of the Commissioner's
decision. An assessment by the BIR is not the
Commissioner's decision from which a petition for review
may be filed with the Court of Tax Appeals. Rather, it is the
action taken by the Commissioner in response to the
taxpayer's protest on the assessment that would constitute
the appealable decision (Section 7, RA 1125).
(b) No, the petition for review can not be entertained by the
Court of Appeals, since decisions of the
(e) If there is a denial of the claim , appeal to the CTA
shall be made within 30 days from denial but within two
ears from date of payment. If the Commissioner fails
to act on the claim for
refund or tax credit and the two-year period is
about to expire, the taxpayer should consider the
continuous inaction of the Commissioner as a
denial and elevate the case to the CTA before the
expiration of the two-year period.
Under the Tariff and Customs Code, taxpayer's remedies

arise only after payment of duties. 4) The administrative
remedies consist of filing a claim
for refund which may take the form of abatement or
drawback.
5) The taxpayer can also file a protest within 15 days
from payment if he disagrees with the ruling or decision of
the Collector of Customs regarding the legality or
correctness of the assessment of customs duties.
6) If the decision of the Collector is adverse to the December 15, 1995 up to December 8, 1998.
taxpayer, he can notify the Collector within 15 days (Sec. 223 in relation to Sec. 203, both of the NIRC of 1997)
from receipt of said decision of his desire to have his
case reviewed by the Commissioner. Taxpayer: Prescriptive Period; Claim for Refund (1997)
The decision of the Collector on the taxpayer's A corporation files its income tax return on a calendar year
protest, if adverse to the Government, is basis. For the first quarter of 1993, it paid on 30 May 1993
automatically elevated to the Commissioner for its quarterly income tax in the amount of P3.0 million. On
review; and if such decision is affirmed by the 20 August 1993, it paid the second quarterly income tax of
Commissioner, the same shall be automatically P0.5 million. The third quarter resulted in a net loss, and no
elevated to and finally reviewed by the Secretary tax was paid. For the fourth and final return for 1993, the
of Finance. company reported a net loss for the year, and the taxpayer
indicated in the income tax return that it opted to claim a
Resort to judicial relief can be had by the refund of the quarterly income tax payments. On 10
taxpayer by appealing the decision of the anuary 1994, the corporation filed with the Bureau of
Commissioner or of the Secretary of Finance (for cases Internal Revenue a written claim for the refund of P3.5
subject to automatic review) within 30 days from the million.
promulgation of the adverse decision to the CTA.
BIR failed to act on the claim for refund; hence, on 02
March 1996, the corporation filed a petition for review with
Taxpayer: Overwitholding Claim for Refund (1999) the Court of Tax Appeals on its claim for refund of the
A Co. is the wholly owned subsidiary of B Co., a non- overpayment of its 1993 quarterly income tax. BIR, in its
resident German company. A Co. has a trademark licensing answer to the petition, alleged that the claim for refund was
agreement with B Co. On Feb. 10, 1995, A Co. remitted to filed beyond the reglementary period. Did the claim for
B Co. royalties of P 10,000,000, which A Co. subjected to a refund prescribe?
withholding tax of 25% or P2,500,000. Upon advice of SUGGESTED ANSWER:
counsel, A Co. realized that the proper withholding tax rate The claim for refund has prescribed. The counting of the
is 10%. On March 20, 1996, A Co. filed a claim for refund two-year prescriptive period for filing a claim for refund
of P2.500.000 with the BIR. The BIR denied the claim on is counted not from the date when the quarterly income
Nov. 15, 1996. On Nov. 28, 1996, A Co. filed a petition for taxes were paid but on the date when the final adjustment
review with the CTA. The BIR attacked the capacity of A return or annual income tax return was filed (CIR v. TMX
Co., as agent, to bring the refund case. Decide the issue. Sales Inc., G.R. No. 83736, January 15, 1992; CIR v. Phi/Am
(5%) Life Insurance Co., Inc., G.R. No. 105208, May 29, 1995). It is
SUGGESTED ANSWER: obvious that the annual income tax return was filed before
A Co., the withholding agent of the non-resident foreign anuary 10, 1994 because the written claim for refund was
corporation is entitled to claim the refund of excess filed with the BIR on January 10, 1994. Since the two-year
withholding tax paid on the income of said corporation in prescriptive period is not only a limitation of action in the
the Philippines. Being a withholding agent, it is the one held administrative stage but also a limitation of action for
liable for any violation of the withholding tax law should bringing the case to the judicial stage, the petition for review
such a violation occur. In the same vein, it should be filed with the CTA on March 02, 1996 is beyond the
allowed to claim a refund in case of overwitholding. (CIR v. reglementary period.
Wander Phils. Inc., GR No. 68378, April 15, 1988, 160 SCRA
573; CIR v. Procter & Gamble PMC, 2O4 SCRA 377). Taxpayer: Prescriptive Period; Claims for Refund (1994)
XCEL Corporation filed its quarterly income tax return for
the first quarter of 1985 and paid an income tax of
Taxpayer: Prescriptive Period: Suspended (2000) P500.000.00 on May 15, 1985. In the subsequent quarters,
Mr. Reyes, a Filipino citizen engaged in the real estate XCEL suffered losses so that on April 15, 1986 it declared
business, filed his 1994 income tax return on March 20, a net loss of P1,000,000.00 in its annual income tax return.
1995. On December 15, 1995, he left the Philippines as an After failing to get a refund, XCEL filed on March 1, 1988
immigrant to join his family in Canada. After the a case with the Court of Tax Appeals to recover the
investigation of said return/the BIR issued a notice of P500.000.00 in taxes paid on May 15, 1985. Is the action to
deficiency income tax assessment on April 15, 1998. Mr. recover the taxes filed timely?
Reyes returned to the Philippines as a balikbayan on SUGGESTED ANSWER:
December 8, 1998. Finding his name to be in the list of The action for refund was filed in the Court of Tax Appeals
delinquent taxpayers, he filed a protest against the on time. In the case of Commissioner v. TMX Sales, Inc.,
assessment on the ground that he did not receive the notice 205 SCRA 184, which is similar to this case, the Supreme
of assessment and that the assessment had prescribed. Will Court ruled that in the case of overpaid quarterly corporate
the protest prosper? Explain. (5%) income tax, the two-year period for filing claims for refund
SUGGESTED ANSWER: in the BIR as well as in the institution of an action for
No. Prescription has not set in because the period of refund in the CTA, the two-year prescriptive period for tax
limitations for the Bureau of Internal Revenue to issue an refunds (Sec. 230, Tax Code) is counted from the filing of
assessment was SUSPENDED during the time that Mr. the final, adjustment return under Sec. 67 of the Tax Code,
Reyes was out of the Philippines or from the period and not from the filing of the
quarterly return and payment of the quarterly tax. The CTA subject of appeal to the Court of Tax Appeals ( Yobes u.
action on March 1, 1988 was clearly within the Flojo, 15 SCRA 278). The CTA may, however, remand the
reglementary two-year period from the filing of the final case to the BIR and require the Commissioner to
adjustment return of the corporation on April 15, 1986. specifically rule on the protest. The decision of the
Commissioner, if adverse to my client, would then
Taxpayer: Prescriptive Period; Claims for Refund (2004) constitute an appealable decision.
On March 12, 2001, REN paid his taxes. Ten months later,
he realized that he had overpaid and so he immediately filed Taxpayer: Protest against Assessment (1999)
a claim for refund with the Commissioner of Internal A Co., a Philippine corporation, received an income tax
Revenue. deficiency assessment from the BIR on May 5, 1995. On
May 31, 1995, A Co. filed its protest with the BIR. On July
On February 27, 2003, he received the decision of the 30, 1995, A Co. submitted to the BIR all relevant
Commissioner denying REN's claim for refund. On March supporting documents. The CIR did not formally rule on
24, 2003, REN filed an appeal with the Court of Tax the protest but on January 25, 1996, A Co. was served a
Appeals. Was his appeal filed on time or not? Reason. (5%) summons and a copy of the complaint for collection of the
tax deficiency filed by the BIR with the Regional Trial
SUGGESTED ANSWER: Court (RTC). On February 20, 1996, A Co. brought a
The appeal was not filed on time. The two-year period of Petition for Review before the CTA. The BIR contended
limitation for filing a claim for refund is not only a that the Petition is premature since there was no formal
limitation for pursuing the claim at the administrative level denial of the protest of A Co. and should therefore be
but also a limitation for appealing the case to the Court of dismissed.
Tax Appeals. The law provides that "no suit or proceeding 1. Has the CTA jurisdiction over the case?
shall be filed after the expiration of two years from the date SUGGESTED ANSWER;
of the payment of the tax or penalty regardless of any Yes, the CTA has jurisdiction over the case because this
supervening cause that may arise after payment (Section qualifies as an appeal from the Commissioner's decision on
229, JVZRCJ. Since the appeal was only made on March 24, disputed assessment. When the Commissioner decided to
2003, more than two years had already elapsed from the collect the tax assessed without first deciding on the
time the taxes were paid on March 12, 2003. Accordingly, taxpayer's protest, the effect of the Commissioners action
REN had lost his judicial remedy because of prescription. of filing a judicial action for collection is a decision of denial
of the protest, in which event the taxpayer may file an appeal
with the CTA. (Republic v. Lim Tian Teng & Sons, Inc.,
Taxpayer: Protest against Assessment (1998) 16 SCRA 584; Dayrit v. Cruz, L-39910, Sept. 26, 1988).
CFB Corporation, a domestic corporation engaged in food
processing and other allied activities, received a letter from
the
filedBIR assessing
a letter it for One
of protest. delinquency
month income
after, a taxes. CFB
warrant of 2. Has
filed by the the Explain.
BIR? RTC jurisdiction over the collection case
distraint and levy was served on CFB Corporation. If you SUGGESTED ANSWER;
were the lawyer engaged by CFB Corporation to contest the The RTC has no jurisdiction over the collection case filed
assessment made by the BIR, what steps will you take to by the BIR. The filing of an appeal with the CTA has the
protect your client? (5%) effect of divesting the RTC of jurisdiction over the
SUGGESTED ANSWER: collection case. At the moment the taxpayer appeals the case
I shall immediately file a motion for reconsideration of the to the Court of Tax Appeals in view of the Commissioner's
issuance of the warrant of distraint and levy and seek from filing of the collection case with the RTC which was
the BIR Commissioner a denial of the protest "in clear and considered as a decision of denial, it gives a justifiable basis
unequivocal language." This is so because the issuance of a for the taxpayer to move for dismissal in the RTC of the
warrant of distraint and levy is not considered as a denial Government's action to collect the tax liability under
by the BIR of the protest filed by CFB Corporation ( CIR dispute. (Yabes v. Flojo, 15 SCRA 278; San Juan v. Vasquez, 3
v. Union Shipping Corp., 185 SCRA 547). SCRA 92). There is no final, executory and demandable
assessment which can be enforced by the BIR, once a timely
Within thirty (30) days from receipt of such denial "in clear appeal is filed.
and unequivocal language," I shall then file a petition for
review with the Court of Tax Appeals. Taxpayer: Protest against Assessment (1999)
ALTERNATIVE ANSWER: A Co., a Philippine corporation, received an income tax
Within thirty (30) days from receipt of the warrant of deficiency assessment from the BIR on November 25,
distraint and levy, I shall file a petition for review with the 1996. On December 10, 1996, A Co. filed its protest with
Court of Tax Appeals with an application for issuance of a the BIR On May 20, 1997, the BIR issued a warrant of
writ of preliminary injunction to enjoin the Bureau of distraint to enforce the assessment. This warrant was served
Internal Revenue from enforcing the warrant. on A Co. on May 25, 1997. In a letter dated June 4, 1997
and received by A Co. 5 days later, the CIR formally denied
This is the action I shall take because I shall consider the A Co.'s protest stating that it constitutes his final decision
issuance of the warrant as a final decision of the on the matter. On July 6, 1997, A Co. filed a Petition for
Commissioner of Internal Revenue which could be the Review with the CTA. The BIR moved to
dismiss the Petition on the ground that the CTA has no
jurisdiction over the case. Decide. (10%) Taxpayer; Claim for Tax Credits (2006)
SUGGESTED ANSWER: Congress enacts a law granting grade school and high
The CTA has jurisdiction over the case. The appealable school students a 10% discount on all school-prescribed
decision is the one which categorically stated that the textbooks purchased from any bookstore. The law allows
Commissioner's action on the disputed assessment is final bookstores to claim in full the discount as a tax credit.
and, therefore, the reckoning of the 30-day period to appeal 1. If in a taxable year a bookstore has no tax due on which
was on June 9, 1999. The filing of the petition for review to apply the tax credits, can the bookstore claim from the
with the CTA was timely made. The Supreme Court has BIR a tax refund in lieu of tax credit? Explain. (2.5%)
ruled that the CIR must categorically state that his action on
a disputed assessment is final; otherwise, the period to SUGGESTED ANSWER:
appeal will not commence to run. That final action cannot No, the bookstore cannot claim from the BIR a tax refund
be implied from the mere issuance of a warrant "of distraint in lieu of tax credit. There is nothing in the law that grants a
and levy. (CIR v. Union Shipping Corporation, 185 refund when the bookstore has no tax liability against which
SCRA 547). the tax credit can be used (CIR v. Central Luzon Drug, G.R.
No 159647, April 15, 2005). A tax credit is in the nature of a
Taxpayer: Protest; Claim of Refund (1996) tax exemption and in case of doubt, the doubt should be
Is protest at the time of payment of taxes and duties a resolved in strictissimi juris against the claimant.
requirement to preserve the taxpayers' right to claim a
refund? Explain.
SUGGESTED ANSWER: 2. Can the BIR require the bookstores to deduct the
For TAXES imposed under the NIRC, protest at the time amount of the discount from their gross income? Explain.
of payment is not required to preserve the taxpayers' right (2.5%)
to claim refund. This is clear under Section 230 of the NIRC SUGGESTED ANSWER:
which provides that a suit or proceeding maybe maintained No. Tax credit which reduces the tax liability is different
for the recovery of national internal revenue tax or penalty from a tax deduction which merely reduces the tax base.
alleged to have been erroneously assessed or collected, Since the law allowed the bookstores to claim in full the
whether such tax or penalty has been paid under protest or discount as a tax credit, the BIR is not allowed to expand or
not. contract the legislative mandate (CIR v. Bicolandia Drug
Corp., G.R. No. 148083, July 21, 2006; CIR v. Central
For DUTIES imposed under the Tariff and Customs Luzon Drug Corp., G.R. No. 159647, April 15, 2005).
Code, a protest at the time of payment is required to
preserve the taxpayers' claim for refund. The procedure 3. If a bookstore closes its business due to losses without
under the TCC is to the effect that when a ruling or being able to recoup the discount, can it claim
reimbursement of the discount from the government on the
decision of duties
liability for the Collector of Customs
is determined, is made
the party whereby
adversely affected ground that without such reimbursement, the law
may protest such ruling or decision by presenting to the constitutes taking of private property for public use without
Collector, at the time when payment is made, or within 15 just compensation? Explain. (5%)
days thereafter, a written protest setting forth his objections SUGGESTED ANSWER:
to the ruling or decision in question (Sec. 2308. TCC). A bookstore, closing its business due to losses, cannot claim
reimbursement of the discount from the government. If the
business continues to operate at a loss and no other taxes are
Taxpayer; Appeal to the Court of Tax Appeals (2005) due, thus compelling it to close shop, the credit can never be
A taxpayer received a tax deficiency assessment of P1.2 applied and will be lost altogether (CIR v. Central Luzon
Million from the BIR demanding payment within 10 days, Drug, G.R. No. 159647, April 15, 2005). The grant of the
otherwise, it would collect through summary remedies. The discount to the taxpayer is a mere privilege and can be
taxpayer requested for a reconsideration stating the grounds revoked anytime.
therefor. Instead of resolving the request for
reconsideration, the BIR sent a Final Notice before Seizure Taxpayer; Compromise after Criminal Action (1998)
to the taxpayer. May this action of the Commissioner of An information was filed in court for willful non-payment
Internal Revenue be deemed a denial of the request for of income tax the assessment of which has become final.
reconsideration of the taxpayer to entitle him to appeal to The accused, through counsel, presented a motion that he
the Court of Tax Appeals? Decide with reasons. (5%) be allowed to compromise his tax liability subject of the
information. The prosecutor indicated his conformity to
SUGGESTED ANSWER: the motion. Is this procedure correct? [5%]
Yes, the final notice before seizure was in effect a denial of SUGGESTED ANSWER:
the taxpayer's request for reconsideration, not only was the No. Criminal violations, if already filed in court, may not be
notice the only response received, its nature, content and compromised (Sec. 204[B], NIRC). Furthermore, the
tenor supports the theory that it was the BIR's final act payment of the tax due after apprehension shall not
regarding the request for reconsideration. (CIR v. Isabela constitute a valid defense in any prosecution for violation of
Cultural Corporation, G.R. No. 135210, July 11, any provisions of the Tax Code (Sec. 247(a), NIRC). Finally,
2001) there is no showing that the prosecutor in the problem is a
legal officer of the Bureau of Internal
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics)
[email protected]
of 73 LOCAL & REAL PROPERTY
Revenue to whom the conduct of criminal actions are
lodged by the Tax Code. TAXES
ALTERNATIVE ANSWER:
No. If the compromise referred to is the civil aspect, the
procedure followed is not correct. Compromise for the Local Taxation: Actual Use of Property (2002)
payment of any internal revenue tax shall be made only by The real property of Mr. and Mrs Angeles, situated in a
the Commissioner of Internal Revenue or in a proper case commercial area in front of the public market, was declared
the Evaluation Board of the BIR (Sec. 204, NIRC). in their Tax Declaration as residential because it had been
Applying the law to the case at bar, compromise settlement used by them as their family residence from the time of its
can only be effected by leave of Court. construction in 1990. However, since January 1997, when
the spouses left for the United States to stay there
Taxpayer; Protest against Assessment; Donors Tax (1995) permanently with their children, the property has been
rented to a single proprietor engaged in the sale of
Mr. Rodrigo, an 80-year old retired businessman, fell in love appliances and agri-products. The Provincial Assessor
with 20-year old Tetchie Sonora, a night club hospitality girl. reclassified the property as commercial for tax purposes
Although she refused to marry him she agreed to be his starting January 1998. Mr. and Mrs. Angeles appealed to the
"live-in" partner. In gratitude, Mr. Rodrigo transferred to Local Board of Assessment Appeals, contending that the
her a condominium unit, where they both live, under a deed Tax Declaration previously classifying their property as
of sale for P10 Million. Mr. Rodrigo paid the capital gains residential is binding. How should the appeal be decided?
tax of 5% of P10 Million. (5%)
SUGGESTED ANSWER:
The Commissioner of Internal Revenue found that the The appeal should be decided against Mr. and Mrs. Angeles.
property was transferred to Tetchie Sonora by Mr. Rodrigo The law focuses on the actual use of the property for
because of the companionship she was providing him. classification, valuation and assessment purposes regardless
Accordingly, the Commissioner made a determination that of ownership. Section 217 of the Local Government Code
Sonora had compensation income of P10 Million in the year provides that "real property shall be classified, valued, and
the condominium unit was transferred to her and issued a assessed on the basis of its actual use regardless of where
deficiency income tax assessment. located, whoever owns it, and whoever uses it".
Tetchie Sonora protests the assessment and claims that the Local Taxation: Coverage (2002)
transfer of the condominium unit was a gift and therefore Aside from the basic real estate tax, give three (3) other
excluded from income. How will you rule on the protest of taxes which may be imposed by provincial and city
Tetchie Sonora? Explain. governments as well as by municipalities in the Metro
SUGGESTED ANSWER:
I will grant the protest and cancel the assessment. The Manila area. (3%)
SUGGESTED ANSWER:
transfer of the property by Mr. Rodrigo to Ms. Sonora was The following real property taxes aside from the basic real
gratuitous. The deed of sale indicating a P10 million property tax may be imposed by provincial and city
consideration was simulated because Mr. Rodrigo did not governments as well as by municipalities in the Metro
receive anything from the sale. The problem categorically Manila area:
states that the transfer was made in gratitude to Ms. 1 Additional levy on real property for the Special
Sonora's companionship. The transfer being gratuitous is Education Fund (Sec. 235, LGC);
subject to donor's tax. Mr. Rodrigo should be assessed 2 Additional Ad-valorem tax on Idle lands (Sec. 23,
deficiency donor's tax and a 50% surcharge imposed for LGC); and
fraudulently simulating a contract of sale to evade donor's 3 Special levy (Sec. 240).
tax. (Sec. 91(b), NIRC).
[Note: The question is susceptible to dual interpretation
Taxpayer; Withholding Agent; Claim of Tax Refund (2005) because it is asking for three other taxes and not three other
Does a withholding agent have the right to file an real property taxes. Accordingly, an alternative answer
application for tax refund? Explain. should be considered and given full credit]
SUGGESTED ANSWER: A. The following taxes, aside from basic real estate tax,
Yes. A taxpayer is "any person subject to tax." Since, the may be imposed by:
withholding tax agent who is "required to deduct and 1. Provincial Government
withheld any tax" is made "personally liable for such tax" Printer's or publisher's
should the amount of the tax withheld be finally found to be tax
less than that required to be withheld by law, then he is a Franchise Tax
taxpayer. Thus, he has sufficient legal interest to file an Professional tax
application for refund, of the amount he believes was
illegally collected from him. (Commissioner of Internal
Revenue v. Procter & Gamble, G.R. No. 66838, December
2, 1991)
2. City Government - may levy taxes which the province or
municipality are authorized to levy (Sec. 151, LGC)
Printer's or publisher's
tax
Franchise tax
Professional tax
3. Municipalities in the Metro Manila Area - may levy Local Taxation: Legality/ Constitutionality; Tax
taxes at rates which shall not exceed by 50% the maximum Ordinance (2003)
rates prescribed in the Local Government Code. X, a taxpayer who believes that an ordinance passed by the
City Council of Pasay is unconstitutional for being
Annual fixed tax on manufacturers, assemblers, discriminatory against him, want to know from you, his tax
repackers, processors, brewers, distillers, rectifiers and lawyer, whether or not he can file an appeal. In the
compounders of liquors, distilled spirits, and wines or affirmative, he asks you where such appeal should be made:
manufacture of any article of commerce of whatever kind or the Secretary of Finance, or the Secretary of Justice, or the
nature; Court of Tax Appeals, or the regular courts. What would
Annual fixed tax on wholesalers, distributors, or our advice be to your client, X? (8%)
dealers in any article of commerce of whatever kind or nature; SUGGESTED ANSWER:
Percentage tax on retailers The appeal should be made with the Secretary of Justice. Any
question on the constitutionality or legality of a tax ordinance
may be raised on appeal with the Secretary of Justice within 30
[Note: Other taxes may comprise the enumeration because many days from the effectivity thereof. (Sec. 187, LGC; Hagonoy
other taxes are authorized to be imposed by LGUs.] Market Vendor Association v.
Municipality of Hagonoy, 376 SCRA 376 [2002]) .
Local Taxation: Exemption; Real Property Taxes (2002)
Under the Local Government Code, what properties are Local Taxation: Legality; Imposition of Real Property Tax
exempt from real property taxes? (5%) Rate (2002)
SUGGESTED ANSWER: An Ordinance was passed by the Provincial Board of a
The following properties are exempt from real property Province in the North, increasing the rate of basic real
taxes: (Sec. 234, LGC). property tax from 0.006% to 1 % of the assessed value of
1 Real property owned by the Republic of the Philippines the real property effective January 1, 2000. Residents of the
or any of its political subdivisions except when the beneficial use municipalities of the said province protested the Ordinance
thereof has been granted, for consideration or otherwise, to a on the ground that no public hearing was conducted and,
taxable person; therefore, any increase in the rate of real property tax is
2 All lands, buildings and improvements actually, directly, void. Is there merit in the protest? Explain your answer.
and exclusively used for religious, charitable or educational (2%)
purposes by charitable institutions, churches, parsonages or SUGGESTED ANSWER:
convents appurtenant thereto, mosques, nonprofit or religious The protest is devoid of merit. No public hearing is
cemeteries; required before the enactment of a local tax ordinance
3 All machineries and equipment that are actually, directly levying the basic real property tax (Art. 324, LGC
and exclusively used by local water districts and Regulations).
ALTERNATIVE ANSWER:
government-owned
supply and distributionor controlled corporations
of water and/or engaged
generation and in the Yes, there is merit in the protest provided that sufficient
transmission of electric power; proof could be introduced for the non-observance of public
4 All real property owned by duly registered hearing. By implication, the Supreme Court recognized that
cooperatives as provided for under R.A. No. 6938; and public hearings are required to be conducted prior to the
5 Machinery and equipment used for pollution control andenactment of an ordinance imposing real property taxes.
environmental protection. Although it was concluded by the highest tribunal that
presumption of validity of a tax ordinance can not be
overcome by bare assertions of procedural defects on its
enactment, it would seem that if the taxpayer had presented
evidence to support the allegation that no public hearing was
conducted, the Court should have ruled that the tax
ordinance is invalid. (Belen Figuerres v. Court of
Appeals, GRNo. 119172, March 25, 1999).
Local Taxation: Imposition of Ad Valorem Tax (2000)
May local governments impose an annual realty tax in
addition to the basic real property tax on idle or vacant lots Local Taxation: Power to Impose (2003)
located in residential subdivisions within their respective In order to raise revenue for the repair and maintenance of
territorial jurisdictions? (3%) the newly constructed City Hall of Makati, the City Mayor
SUGGESTED ANSWER: ordered the collection of P1.00, called "elevator tax", every
Not all local government units may do so. Only provinces, time a person rides any of the high-tech elevators in the city
cities, and municipalities within the Metro Manila area (Sec. hall during the hours of 8:00 a.m. to
232, Local Government Code) may impose an ad valorem tax 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the "elevator tax"
not exceeding five percent (5%) of the assessed value (Sec. a valid imposition? Explain. (8%)
236, Ibid.) of idle or vacant residential lots in a subdivision, SUGGESTED ANSWER:
duly approved by proper authorities regardless of area. No. The imposition of a tax, fee or charge or the generation
(Sec.237, Ibid.) of revenue under the Local Government Code, shall be
exercised by the SANGUNIAN of the local government
unit concerned through an appropriate
ordinance (Section 132 of the Local Government Code). The city two professions. He has his main office in Makati City and
mayor alone could not order the collection of the tax; as maintains a branch office in Pasig City. Mr. Fermin pays his
such, the "elevator tax" is an invalid imposition. professional tax as a CPA in Makati City and his
professional tax as a lawyer in Pasig City. (5%) a) May
Local Taxation: Remission/Condonation of Taxes (2004) Makati City, where he has his main office, require him to
RC is a law-abiding citizen who pays his real estate taxes pay his professional tax as a lawyer? Explain.
promptly. Due to a series of typhoons and adverse
economic conditions, an ordinance is passed by MM City SUGGESTED ANSWER:
granting a 50% discount for payment of unpaid real estate No. Makati City where Mr. Fermin has his main office may
taxes for the preceding year and the condonation of all not require him to pay his professional tax as a lawyer. Mr.
penalties on fines resulting from the late payment. Arguing Fermin has the option of paying his professional tax as a
that the ordinance rewards delinquent taxpayers and lawyer in Pasig City where he practices law or in Makati City
discriminates against prompt ones, RC demands that he be where he maintains his principal office. (Sec. 139[b], Loca
refunded an amount equivalent to one-half of the real taxes Government Code)
he paid. The municipal attorney rendered an opinion that
RC cannot be reimbursed because the ordinance did not b) May Quezon City, where he has his residence and where
provide for such reimbursement. RC files suit to declare the he also practices his two professions, go after him for the
ordinance void on the ground that it is a class legislation. payment of his professional tax as a CPA and a lawyer?
Will his suit prosper? Explain your answer briefly. (5%) Explain.
SUGGESTED ANSWER:
SUGGESTED ANSWER: No, the situs of the professional tax is the city where the
The suit will not prosper. The remission or condonation of professional practices his profession or where he maintains
taxes due and payable to the exclusion of taxes already his principal office in case he practices his profession in
collected does not constitute unfair discrimination. Each set several places. The local government of Quezon City has no
of taxes is a class by itself and the law would be open to right to collect the professional tax from Mr. Fermin as the
attack as class legislation only if all taxpayers belonging to place of residence of the taxpayer is not the proper situs in
one class were not treated alike (Juan Luna Subdivision, the collection of the professional tax.
Inc., v. Sarmiento, 91 Phil. 371 [1952]).
Local Taxation: Rule of Uniformity and Equality (2003) Local Taxation; Special Levy on Idle Lands (2005)
The City of Makati, in order to solve the traffic problem in A city outside of Metro Manila plans to enact an ordinance
its business districts, decided to impose a tax, to be paid by that will impose a special levy on idle lands located in
the driver, on all private cars entering the city during peak residential subdivisions within its territorial jurisdiction in
hours from 8:00 a.m. to 9:00 a.m. from Mondays to addition to the basic real property tax. If the lot owners of a
Fridays, butexcluding
occupants, exempts the
thosedriver.
cars carrying more thanvalid?
Is the ordinance two subdivision located
the matter, what in the
would said
your city seek
advice your legal(5%)
be? Discuss. advice on
Explain. (8%)
The ordinance is in violation of the Rule of Uniformity and I would advise the lot owners that a city, even if it is
Equality, which requires that all subjects or objects of outside Metro Manila, may levy an annual tax on idle lands
taxation, similarly situated must be treated alike in equal at the rate not exceeding five percent (5%) of the assessed
footing and must not classify the subjects in an arbitrary value of the property which shall be in addition to the basic
manner. In the case at bar, the ordinance exempts cars real property tax. (Sec. 236, Local Government Code) I would
carrying more than two occupants from coverage of the likewise advise them that the levy may apply to residential
said ordinance. Furthermore, the ordinance only imposes lots, regardless of land area, in subdivisions duly approved
the tax on private cars and exempts public vehicles from by proper authorities, the ownership of which has been
the imposition of the tax, although both contribute to the transferred to individual owners who shall be liable for the
traffic problem. There exists no substantial standard used additional tax. (Last par., Sec. 237)
in the classification by the City of Makati.
The term "Idle Lands" means, land not devoted directly to
Another issue is the fact that the tax is imposed on the any crop or to any definite purpose for at least one year
driver of the vehicle and not on the registered owner of the prior to the notice of expropriation, except for reasons
same. The tax does not only violate the requirement of other than force majeure or any fortuitous event, but used to
uniformity, but the same is also unjust because it places the be devoted or is suitable to such crop or is contiguous to
burden on someone who has no control over the route of land devoted directly to any crop and does not include land
the vehicle. The ordinance is, therefore, invalid for violating devoted permanently or regularly to other essential and
the rule of uniformity and equality as well as for being more productive purpose . (Philippine Legal Encyclopedia, by
unjust. Sibal, 1986 Ed.)
Local Taxation; Situs of Professional Taxes (2005) Finally, I would advise them to construct or place
Mr. Fermin, a resident of Quezon City, is a Certified Public improvements on their idle lands by making valuable
Accountant-Lawyer engaged in the practice of his additions to the property or ameliorations in the land's
conditions so the lands would not be considered as idle.
(Sec. 199[m]) In this manner their properties would not be 2. Assuming Joachin is a registered owner, will your
subject to the ad valorem tax on idle lands. answer be the same? (2.5%)
SUGGESTED ANSWER:
Real Property Tax: Underground Gasoline Tanks (2003) Yes. The law requires that a notice of the auction sale must
Under Article 415 of the Civil Code, in order for machinery be properly sent to Joachin and not merely through
and equipment to be considered real property, the pieces publication (Tan v. Bantegui, G.R. No, 154027, October
must be placed by the owner of the land and, in addition, 24,2005; Estate of Mercedes Jacob v. CA, G.R. No. 120435,
must tend to directly meet the needs of the industry or Dec. 22, 1997).
works carried on by the owner. Oil companies install
Real Property Taxation: Capital Asset vs. Ordinary Asset
underground tanks in the gasoline stations located on land
leased by the oil companies from the owners of the land (1995)
where the gasoline stations [are] located. Are those In 1990, Mr. Naval bought a lot for P1,000,000.00 In a
underground tanks, which were not placed there by the subdivision with the intention of building his residence on
owner of the land but which were instead placed there by it. In 1994, he abandoned his plan to build his residence on
the lessee of the land, considered real property for purposes it because the surrounding area became a depressed area
of real property taxation under the local Government Code? and land values in the subdivision went down; instead, he
sold it for P800.000.00. At the time of the sale, the zonal
Explain. (8%)
SUGGESTED ANSWER: value was P500.000.00. 1) Is the land a capital asset or an
Yes. The properties are considered as necessary fixtures of the ordinary asset? Explain. 2) Is there any income tax due on
gasoline station, without which the gasoline station would be the sale? Explain.
useless. Machinery and equipment installed by the lessee of SUGGESTED ANSWERS:
leased land is not real property for purposes of execution of a 1) The land is a capital asset because it is neither for sale in
final judgment only. They are considered as real property for the ordinary course of business nor a property used in the
real property tax purposes as "other improvements to affixed trade or business of the taxpayer. (Sec. 33. NIRC).
or attached real property under the Assessment Law and the
Real Property Tax Code. 2) Yes, Mr. Naval is liable to the 5% capital gains tax
imposed under Section 21(e) of the Tax Code based on the
gross selling price of P800.000.00 which is an amount
(Caltex v. Central Board of Assessment Appeals, 114 SCRA
higher than the zonal value.
296 [1982]).
Real Property Tax; Requirements; Auction Sales of Real Property Taxation: Capital Gains vs. Ordinary
Property for Tax Delinquency (2006) Gains(1998)
Quezon City published on January 30, 2006 a list of What is the difference between capital gains and ordinary
gains? [3%]
delinquent real property
general circulation taxpayers
and posted in 2main
this in the newspapers of
lobby of the SUGGESTED ANSWER:
City Hall. The notice requires all owners of real properties CAPITAL GAINS are gains realized from the sale or
in the list to pay the real property tax due within 30 days exchange of capital assets, while ORDINARY GAINS
from the date of publication, otherwise the properties listed refer to gains realized from the sale or disposition of
shall be sold at public auction. ordinary assets.
oachin is one of those named in the list. He purchased a Real Property Taxation: Coverage of Ordinary
real property in 1996 but failed to register the document of Income(1998)
sale with the register of Deeds and secure a new real What does the term "ordinary income" include? [2%]
SUGGESTED ANSWER:
property tax declaration in his name. He alleged that the
The term ordinary income includes any gain from the sale
auction sale of his property is void for lack of due process
or exchange of property which is not a capital asset. These
considering that the City Treasurer did not send him
are the gains derived from the sale or exchange of property
personal notice. For his part, the City Treasurer maintains
such as stock in trade of the taxpayer or other property of a
that the publication and posting of notice are sufficient
kind which would properly be included in the inventory of
compliance with the requirements of the law.
the taxpayer if on hand at the close of the taxable year, or
1. If you were the judge, how will you resolve this issue?
property held by the taxpayer primarily for sale to
(2.5%)
SUGGESTED ANSWER:
customers in the course of his trade or business, or property
I will resolve the issue in favor of Joachin. In auction sales used in trade or business of a character which is subject to
of property for tax delinquency, notice to delinquent the allowance for depreciation, or real property used in
landowners and to the public in general is an essential and trade or business of the taxpayer. (Sec. 22 [Z] in relation to Sec.
indispensable requirement of law, the non-fulfillment of 39[A](1), both of the NIRC).
ALTERNATIVE ANSWER:
which vitiates the same (Tiongco v. Phil. Veterans Bank,
The term ordinary income includes income from
G.R. No. 82782, Aug. 5, 1992). The failure to give notice to
performance of services, whether professional or personal,
the right person i.e., the real owner, will render an auction
gains accruing from business, and profit arising from the
sale void (Tan v. Bantegui, G.R. No, 154027, October 24,
sale or exchange of ordinary assets.
2005; City Treasurer of Q.C. v. CA, G.R. No. 120974, Dec.
22, 1997).
Real Property Taxation: Exchange of Lot; Capital Gain Tax hence the value of the land may be deductible in full from
(1997) the gross income of Ace Tobacco Corporation if in
A corporation, engaged in real estate' development, accordance to a National Priority Plan determined by the
executed deeds of sale on various subdivided lots. One National Economic Development Authority. (Sec.
buyer, after going around the subdivision, bought a corner 34{H](2)(a), NIRC). If the u tilization is not in accordance to
lot with a good view of the surrounding terrain. He paid a National Priority Plan determined by the National
P1.2 million, and the title to the property was issued. A year Economic Development Authority, then Ace Tobacco
later, the value of the lot appreciated to a market value of Corporation may deduct the value of the land donated only
P1.6 million, and the buyer decided to build his house to the extent of five (5%) percent of its taxable income
thereon. Upon inspection, however, he discovered that a derived from trade or business as computed without the
huge tower antennae had been erected on the lot frontage benefit of the donation. (Sec. 34[H](2)(a) in relation to Sec.
totally blocking his view. When he complained, the realty 34[H](1), NIRC).
company exchanged his lot with another corner lot with an
equal area but affording a better view. Is the buyer liable for The Municipality of Pateros is not subject to any donor's
capital gains tax on the exchange of the lots? tax on the value of land it subsequently donated, it being
exempt from taxes as a political subdivision of the National
SUGGESTED ANSWER: Government.
Yes, the buyer is subject to capital gains tax on the
exchange of lots on the basis of prevailing fair market value The occupants/beneficiaries are subject to real property
of the property transferred at the time of the exchange or taxes because they now own the land.
the fair market value of the property received, whichever is
higher (Section 21(e), NIRC). Real property transactions ALTERNATIVE ANSWERon Taxability of Municipality and Awardees:
subject to capital gains tax are not limited to sales but also
exchanges of property unless exempted by a specific The awarding by the Municipal Government of lots to
provision of law. specific awardees or donees is likewise exempt from the
ALTERNATIVE ANSWER: donor's tax because it is only an implementation of the
No. The exchange is not subject to capital gains tax because purpose for which the property was given by Ace Tobacco
it is merely done to comply with the intentions of the Corporation. The purpose of the first donation is to devote
parties to the previous contract regarding the sale and the land as a relocation site for the less fortunate
acquisition of a property with a good view. This is a simple constituents. If later on the Municipality gives out
substitution of the object of sale and since the previous Certificates of Award over specific lots occupied by the
transaction was already subjected to tax, no new tax should qualified occupants/beneficiaries, this is intended to
be imposed on the exchange (BIR Ruling No. 21(e) 053-89 perpetuate the purpose of the previous donor, the Mu-
008-95). nicipality acting merely as a conduit and not the true donor.
Real Property Taxation: Exemption/Deductions; Donors This

not inissubstance.
simply a donation by the Municipality in form but
Tax (1998)
Ace Tobacco Corporation bought a parcel of land situated The receipt by the occupant beneficiaries of their respective
at Pateros and donated it to the Municipal Government of lots through the Certificate of Award has no tax
Pateros for the sole purpose of devoting the said land as a implications. They are, however, liable for real property
relocation site for the less fortunate constituents of said taxes.
municipality. In accordance therewith, the Municipal Gov-
ernment of Pateros issued to the occupants/beneficiaries Real Property Taxation: Exemption: Acquiring New
Certificates of Award giving to them the respective areas Principal Residence (2000)
where their houses are erected. Through Ordinance No. 2, Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their
Series of 1998, the said municipal government ordained that principal residence situated in Tandang Sora, Quezon City
the lots awarded to the awardees/donees be finally for Ten Million Pesos (P10,000,000.00) with the intention
transferred and donated to them. Determine the tax of using the proceeds to acquire or construct a new
consequence of the foregoing dispositions with respect to principal residence in Aurora Hills, Baguio City. What
Ace Tobacco Corporation, the Municipal Government of conditions must be met in order that the capital gains
Pateros, and the occupants/beneficiaries. [5%] presumed to have been realized from such sale may not be
SUGGESTED ANSWER: subject to capital gains tax? (5%)
The donation by Ace Tobacco Corporation is exempt SUGGESTED ANSWER:
from the donor's tax because it qualifies as a gift to or for The conditions are:
the use of any political subdivision of the National 1. The proceeds are fully utilized in acquiring or
Government (Section 101(2), NIRC). The conveyance is constructing a new principal residence within eighteen (18)
likewise exempt from documentary stamp tax because it is a calendar months from the sale or disposition of the principal
transfer without consideration. residence or eighteen (18) months from July 12, 2000.
Since the donation is to be used as a relocation site for the

less fortunate constituents of the municipality. It may be
considered as an undertaking for human settlements,
1 The historical cost or adjusted basis of the real property Real Property Taxation: Property Sold is an
sold or disposed shall be carried over to the new principal Ordinary Asset (1998)
residence built or acquired. An individual taxpayer who owns a ten (10) door apart-
2 The Commissioner of Internal Revenue must have been ment with a monthly rental of P10,000 each residential
informed by Mr. & Mrs. Peter Camacho within thirty (30) days unit, sold this property to another individual taxpayer. Is
from the date of sale or disposition on July 12, 2000 through a the seller liable to pay the capital gains tax? [5%]
prescribed return of their intention to avail of the tax exemption. SUGGESTED ANSWER:
3 That the said exemption can only be availed of once No. The seller is not liable to pay the capital gains tax
every ten (10) years. because the property sold is an ordinary asset, i.e. real
4 If there is no full utilization of the proceeds of sale or property used in trade or business. It is apparent that the
disposition, the portion of the gain presumed to have been taxpayer is engaged in the real estate business, regularly
realized from the sale or disposition shall be subject to capital renting out the ten (10) door apartment.
gains tax [Sec. 24 (D) (2), NIRC of 1997]
Real Property Taxation: Underground Gasoline Tanks
(2001)
Under Article 415 of the Civil Code, in order for machinery
and equipment to be considered real property, they must be
placed by the owner of the land and, in addition, must tend
to directly meet the needs of the industry or works carried
Real Property Taxation: Fundamental Principles (1997) on by the owner. Oil companies, such as Caltex and Shell,
State the fundamental principles underlying real property install underground tanks in the gasoline stations located on
taxation in the Philippines. land leased by the oil companies from others. Are those
SUGGESTED ANSWER: underground tanks which were not placed there by the
The following are the fundamental principles governing owner of the land but which were instead placed there by
real property taxation: 1) Real property shall be appraised at the lessee of the land, considered real property for purposes
its current and of real property taxation under the Local Government
fair market value; 2) Real property shall be classified for Code? Explain your answer. (5%)
assessment purposes on the basis of its actual use:
SUGGESTED ANSWER:
3) Real property shall be assessed on the basis of a Yes. The underground tanks although installed by the lessee,
uniform classification within each local government unit; Shell and Caltex, are considered as real property for
purposes of the imposition of real property taxes. It is only
4) The appraisal, assessment, levy, and collection of for purposes of executing a final judgment that these
real property tax shall not be let to any private person; and machinery and equipment, installed by the lessee on a leased
5) The appraisal and assessment of real property land, wouldofnot

imposition thebereal
considered
property as
tax,real
theproperty. But intanks
underground the
shall be equitable. are taxable as necessary fixtures of the gasoline station
without which the gasoline station would not be operational.
Real Property Taxation: Principles & Limitations: LGU (Caltex Phils., Inc v. CBAA, 114 SCRA. 296 ).
(2000)
Give at least two (2) fundamental principles governing real
property taxation, which are limitations on the taxing power Real Property Taxation; Exempted Properties (2006)
of local governments insofar as the levying of the realty tax What properties are exempt from the real property tax?
is concerned. (2%) (5%)
Two (2) fundamental principles governing real property The following properties are exempt from the real property
taxation are: 1) The appraisal must be at the current and tax (Section 234, Local Government Code):
fair market
value; and 2) Classification for assessment must be on the
basis of actual use. (Sec. 198, Local Government Code)
ALTERNATIVE ANSWER:
The examinee should be given credit if he chooses the
above two (2) or any two (2) of those enumerated below: 1)
Assessment must be on the basis of uniform classification;
2) Appraisal, assessment, levy and collection shall not be let
to private persons; and 3) Appraisal and assessment must
be equitable. (Sec. 198, Local Government Code)
(1) Real property owned by the REPUBLIC OF THE
PHILIPPINES or any of its political subdivisions except
when the beneficial use thereof has been granted for
consideration or otherwise to a taxable person;
(2) CHARITABLE INSTITUTIONS, churches,

parsonages or convents appurtenant thereto, mosques,
non-profit or religious cemeteries, and all lands, buildings, and
improvements actually, directly and exclusively used for
religious, charitable or educational purposes;
(3) All machineries and equipment that are actually,

directly and exclusively used by LOCAL WATER
UTILITIES and government-owned or controlled
corporations engaged in the supply and distribution
of water and/or generation and transmission of electric payment of the customs duties or with legal permit to
power; withdraw (Viduya vs. Berdiago, 73 SCRA 553).
(4) All real property owned by duly REGISTERED
COOPERATIVES as provided for under R.A. 6938; and
Customs: Jurisdiction; Seizure & Forfeiture Proceedings
(5) Machinery and equipment used for (1996)
POLLUTION CONTROL and ENVIRONMENTAL On January 1, 1996, armed with warrants of seizure and
PROTECTION. detention issued by the Bureau of Customs, members of the
customs enforcement and security services coordinated with
the Quezon City police to search the premises owned by a
TARIFF AND CUSTOMS DUTIES certain Mr. Ho along Kalayaan Avenue, Quezon City, which
allegedly contained untaxed vehicles and parts. While inside
Customs: Flexible Tariff Clause (2001) the premises, the member of the customs enforcement and
What do you understand by the term "flexible tariff clause" security services noted articles which were not included in the
list contained in the warrant. Hence, on January 15, 1996, an
as used in the Tariff
SUGGESTED and Customs
ANSWER: The term Code? (5%) tariff
"flexible amended warrant and seizure was issued.
clause "refers to the authority given to the President to
adjust tariff rates under Section 401 of the Tariff and
On January 25, 1996, the customs personnel started hauling
Customs Code, which is the enabling law that made
the articles pursuant to the amended warrant. This
effective the delegation of the taxing power to the President
prompted Mr. Ho to file a case for injunction and damages
under the Constitution.
[Note: It is suggested that if the examinee cites the entire with a prayer for a restraining order before the Regional
rovision of Sec. 401 of the Tariff &, Customs Code, he Trial Court of Quezon City against the Bureau of Customs
should also be given full credit .] on January 27, 1996. On the same date, the Trial Court
issued a temporary restraining order.
Customs: Administrative vs. Judicial Remedies
(1997)
The Tariff and Customs Code allows the Bureau of A motion to dismiss was filed by the Bureau of Customs on
Customs to resort to the administrative remedy of seizure, the ground that the Regional Trial Court has no jurisdiction
such as by enforcing the tax lien on the imported article, over the subject matter of the complaint claiming that it
and to the judicial remedy of filing an action in court. When was the Bureau of Customs that has exclusive jurisdiction
does the Bureau of Customs normally avail itself; over it. Decide.
SUGGESTED ANSWER:
(a) of the administrative, instead of the judicial The motion to dismiss should be granted. Seizure and
remedy, or forfeiture proceedings are within the exclusive jurisdiction of
(b) of the latter, instead of the former,
remedy?
SUGGESTED ANSWER: the Collector
Regional TrialofCourts
Customsaretodevoid
the exclusion of regular to
of competence Courts.
pass
(a) The Bureau of Customs normally avails itself of the
ADMINISTRATIVE REMEDY of seizure, such as by upon the validity or regularity of seizure and forfeiture
enforcing the tax lien on the imported articles, instead of proceedings conducted by the Bureau of Customs and to
the judicial remedy when the goods to which the tax lien enjoin or otherwise interfere with these proceedings
attaches, regardless of ownership, is still in the custody or (Republic vs. CFI of Manila [Branch XXII], G.R. No.
control of the Government. In the case, however, of 43747, September 2, 1992; Jao vs. CA,
G.R. No. 104604, October 6, 1995 ).
importations which are prohibited or undeclared, the
remedy of seizure and forfeiture may still be exercised by
Customs: Kinds of Custom Duties (1995)
the Bureau of Customs even if the goods are no longer in
its custody. Under the Tariff and Customs Code, what are
a) dumping duties b) countervailing duties c)
(b) On the other hand, when the goods are properly marking duties d) discriminatory duties?
released and thus beyond the reach of tax lien, the govern-
ment can seek payment of the tax liability through judicial
action since the tax liability of the importer constitutes a
SUGGESTED ANSWER:
personal debt to the government, therefore, enforceable by
action. In this case judicial remedy is normally availed of
instead of the administrative remedy.
Customs: Importation (1995)

When does importation begin and when does it end?
SUGGESTED ANSWER:
IMPORTATION begins from the time the carrying vessel
or aircraft enters Philippine territorial jurisdiction with the
intention to unload therein and ends at the time the goods
are released or withdrawn from the customhouse upon
6) Dumping duties are special duties imposed by
the Secretary of Finance upon recommendation of the
Tariff Commission when it is found that the price of the
imported articles is deliberately or continually fixed at less
than the fair market value or cost of production, and the
importation would cause or likely cause an injury to local
industries engaged in the manufacture or production of the
same or similar articles or prevent their establishment.
7) Countervailing duties are special duties imposed SUGGESTED ANSWER:
by the Secretary of Finance upon prior investigation and During the pendency of seizure proceedings the importer
report of the Tariff Commission to offset an excise or inland may secure the release of the imported property for
revenue tax upon articles of the same class manufactured at legitimate use by posting a bond in an amount to be fixed
home or subsidies to foreign producers or manufacturers by by the Collector, conditioned for the payment of the
their respective governments. appraised value of the article and/or any fine, expenses and
costs which may be adjudged in the case; provided, that articles
the importation of which is prohibited by law shall not be released
8) Marking duties are special duties equivalent to under bond.
5% ad valorem imposed on articles not properly marked.
These are collected by the Commissioner of Customs except The importer may also offer to pay to the collector a fine
when the improperly marked articles are exported or imposed by him upon the property to secure its release or in
destroyed under customs supervision and prior to final case of forfeiture, the importer shall offer to pay for the
liquidation of the corresponding entry. These duties are domestic market value of the seized article, which offer
designed to prevent possible deception of the customers. subject to the approval of the Commissioner may be
accepted by the Collector in settlement of the seizure case,
except when there is fraud. Upon payment of the fine or
9) Discriminatory duties are special duties collected domestic market value, the property shall be forthwith
in an amount not exceeding 100% ad valorem, imposed by released and all liabilities which may or might attach to the
the President of the Philippines against goods of a foreign property by virtue of the offense which was the occasion of
country which discriminates against Philippine commerce or the seizure and all liability which might have been incurred
against goods coming from the Philippines and shipped to a under any bond given by the importer in respect to such
foreign country. property shall thereupon be deemed to be discharged.
Customs: Kinds of Custom Duties (1997) Customs: Returning Residents: Tourist/Travelers (2003)
Explain briefly each of the special customs duties authorized X and his wife, Y, Filipinos living in the Philippines, went
under the Tariff and Customs Code. on a three-month pleasure trip around the world during the
SUGGESTED ANSWER: months of June, July and August 2002. In the course of
The following are the Special Duties imposed under the their trip, they accumulated some personal effects which
Tariff and Customs Code: were necessary, appropriate and normally used in leisure
(a) Dumping Duty - This is a duty levied on trips, as well as souvenirs in non-commercial quantities. Are
imported goods where it appears that a specific kind or they "returning residents" for purposes of Section 105 of
class of foreign article is being imported into or sold or is the Tariff and Customs Code? Explain. (8%)
likely
value;to be sold in the Philippines at a price less than its fair SUGGESTED ANSWER:
No. The term "returning residents" refers to nationals who
(b) Countervailing Duty - This is a duty equal to the have stayed in a foreign country for a period of at least six
ascertained or estimated amount of the subsidy or bounty (6) months. (Section 105(f) of the Tariff and Customs Code). Due
or subvention granted by the foreign country on the to their limited duration of stay abroad X and Y are not
production, manufacture, or exportation into the considered as "returning residents" but they are merely
Philippines of any article likely to injure an industry in the considered as travelers or tourists who enjoy the benefit of
Philippines or retard or considerable retard the conditionally free importation.
establishment of such industry; [Note: Credit must likewise be given if the candidate answered in
the affirmative, considering that travelers or tourists are given the
(c) Marking Duty - This is a duty on an ad valorem same tax treatment as that of returning residents, treating their
ersonal effects, not in commercial quantities, as conditionally free
basis imposed for improperly marked articles. The law
importation.]
requires that foreign importations must be marked in any
official language of the Philippines the name of the country Customs: Seizure & Forfeiture: Effects (1994)
of srcin of the article; In smuggling a shipment of garlic, the smugglers used an
eight-wheeler truck which they hired for the purpose of
(d) Discriminatory or Retaliatory Duty - This is a taking out the shipment from the customs zone. Danny, the
duty imposed on imported goods whenever it is found as a truck owner, did not have a certificate of public
fact that the country of srcin discriminates against the
commerce of the Philippines in such a manner as to place convenience
not know thattothe
operate his trucking
shipment of garlicbusiness. Danny
was illegally did
imported.
the commerce of the Philippines at a disadvantage Can the Collector of Customs of the port seize and forfeit
compared with the commerce of any foreign country. the truck as an instrument in the smuggling?
SUGGESTED ANSWER:
Customs: Remedies of an Importer (1996) Yes, the Collector of Customs of the port can seize and
Discuss briefly the remedies of an importer during the forfeit the truck as an instrument in the smuggling activity,
pendency of seizure proceedings. since the same was used unlawfully in the importation of
smuggled articles. The mere carrying of such articles on similar goods (Sec. 201[C Deductive value (Sec. II.E.1,
board the truck (in commercial quantities) shall subject the CA.O. No. 4-2004); Computed value (Sec., II.F.l, C.A.O.
truck to forfeiture, since it was not being used as a duly No. 1-20040 ) and Fallback value. (Sec. 201[F])
authorized common carrier, which was chartered or leased
as such. (Sec. 2530 [a], TCC) ALTERNATIVE ANSWER:
The basis of dutiable value of an imported article subject to
Moreover, although forfeiture of the vehicle will not be an ad valorem tax under the Tariff and Customs Code is its
effected if it is established that the owner thereof had no transaction value, which shall be the price actually paid or
knowledge of or participation in the unlawful act, there payable for the goods when sold for export to the
arises a prima facie presumption or knowledge or Philippines, adjusted by adding certain cost elements to the
participation if the owner is not in the business for which extent that they are incurred by the buyer but are not
the conveyance is generally used. Thus, not having a included in the price actually paid or payable for the
certificate of public convenience to operate a trucking imported goods. (Sec. 201[A], Tariff and Customs Code, as
business, he is legally deemed not to have been engaged in amended by R.A. 9135)
the trucking business. (Sec. 2531, Tariff and Customs Code)
If such value could not be determined, then the following
Customs: Steps involving Protest Cases (1994) values are to be utilized in their sequence: Transaction value
The Collector of Customs instituted seizure proceedings of identical goods (Sec. 201[B Transaction value of
against a shipment of motor vehicles for having been similar goods (Sec. 201[C Deductive value (Sec. II.E.1,
misdeclared as second-hand vehicles. State the procedure CA.O. No. 4-2004); Computed value (Sec. II.F.l,
for the review of the decision up to the Supreme Court of C.A.O. No. 1-20040) and Fallback value. (Sec. 201[F])
the Collector of Customs adverse to the importer.
SUGGESTED ANSWER: Customs; Countervailing Duty vs. Dumping Duty (2005)
The procedure in seizure cases may be summarized as Distinguish countervailing duty from dumping duty. (5%)
follows: SUGGESTED ANSWER:
(a) The collector issues a warrant for the detention or The distinctions between countervailing duty and dumping
forfeiture of the imported articles; (Sec. 2301, Tariff and duty are the following:
Customs Code) (1) Basis: The countervailing duty is imposed whenever
(b) The Collector gives the importer a written notice there is granted upon the imported article by the country of
of the seizure and fixes a hearing date to give the importer srcin a specific subsidy upon its production, manufacture
an opportunity to be heard; (Sec. 2303, TCC) or exportation and this results or threatens injury to local
industry while the basis for the imposition of dumping duty
(c) A formal hearing is conducted; (Sec. 2312, is the importation and sale of imported items at below their
(d)
TCC) The Collector renders a declaration of forfeiture; normal value causing or likely to cause injury to local
(Sec.
(e) 2312,TheTCC)
Importer aggrieved by the action of the industry.
(2) Amount: The countervailing duty imposed is equivalent
Collector in any case of seizure may appeal to the to the value of the specific subsidy while the dumping duty
Commissioner for his review within fifteen (15) days from is equivalent to the margin of dumping which is equal to the
written notice of the Collector's decision; (Sec. 2313, TCC) difference between the export price to the Philippines and
the normal value of the imported article.
(f) The importer aggrieved by the action or ruling of
the Commissioner in any case of seizure may appeal to the
Court of Tax Appeals; (Sec. 2402, TCC)
(g) The importer adversely affected by the decision of
the Court of Tax Appeals (Division) may appeal to the
Court of Tax Appeals (en banc) within fifteen
(15) days which may be extended for another fifteen
(15) days or such period as the Court of Tax Appeals
may decide.
Customs; Basis of Dutiable Value; Imported Article (2005)

State and explain the basis of dutiable value of an imported
article subject to an ad valorem tax under the Tariff and
Customs Code.
ALTERNATIVE ANSWER:
The basis of dutiable value of an imported article subject to
an ad valorem tax under the Tariff and Customs Code is its
TRANSACTION VALUE. (Sec. 201[A], Tariff and Customs
Code, as amended by R.A. No. 9135) If such value could not be
determined, then the following values are to be utilized in
their sequence: Transaction value of identical goods (Sec.
201[B Transaction value of
Customs; Taxability; Personal Effects (2005)
acob, after serving a 5-year tour of duty as military attache
in Jakarta, returned to the Philippines bringing with him his
personal effects including a personal computer and a car.
Would Jacob be liable for taxes on these items? Discuss
fully. (5%)
SUGGESTED ANSWER:
No, Jacob is not liable for taxes on his personal computer
and the car because he is tax-exempt by law. He has met
the following requirements for exemption under P.D. No.
922 (1976): a) He was a military attache assigned to Jakarta;
b) He has served abroad for not less than two (2) years;
c) He is returning to the Philippines after serving his
tour of duty; and d) He has not availed of the tax
exemption for the past four (4) years.
He is entitled to tax exemption on his personal and

household effects including a car; provided,
a) The car must have been ordered or purchased c) Where the taxpayer has signed a waiver
prior to the receipt by the Philippine mission or consulate authorizing the Commissioner or his duly
in Jakarta of Jacob's recall order; authorized representatives to Inquire into the bank
b) the car is registered in Jacob's name; c) the exemption deposits.
shall apply to the value of the car; d) the exemption shall
apply to the aggregate value of BIR: Secrecy of Bank Deposit Law (2003)
his personal and household effects (including the X dies in year 2000 leaving a bank deposit of P2,000,000.00
personal computer) not exceeding thirty per centum under joint account with his associates in a law office.
(30%) of the total amount received by Jacob as salary Learning of X's death from the newspapers, the
and allowances during his assignment in Jakarta, but Commissioner of Internal Revenue wrote to every bank in
not to exceed four (4) years; the country asking them to disclose to him the amount of
e) Jacob must not have availed of the exemption deposits that might be outstanding in his name or jointly
more oftener than one every four years. (Last par., Sec. 105, with others at the date of his death. May the bank holding
Tariff and Customs Code) the deposit refuse to comply on the ground of the Secrecy
of Bank Deposit Law? Explain. (8%)
OTHER RELATED MATTERS SUGGESTED ANSWER:
No. The Commissioner of Internal Revenue has the
BIR: Bank Deposits Secrecy Violation (2000)
authority to inquire into bank deposit accounts of a
A taxpayer is suspected not to have declared his correct decedent to determine his gross estate notwithstanding the
gross income in his return filed for 1997. The examiner
provisions of the Bank Secrecy Law. Hence, the banks
requested the Commissioner to authorize him to inquire
holding the deposits in question may not refuse to disclose
into the bank deposits of the taxpayer so that he could
the amount of deposits on the ground of secrecy of bank
proceed with the net worth method of investigation to
deposits. (Section 6(F) of the 1997 Tax Code). The fact that
establish fraud. May the examiner be allowed to look into
the deposit is a joint account will not preclude the
the taxpayer's bank deposits? In what cases may the
Commissioner from inquiring thereon because the law
Commissioner or his duly authorized representative be
mandates that if a bank has knowledge of the death of a
allowed to inquire or look into the bank deposits of a
person, who maintained a bank deposit account alone, or
taxpayer? (5%)
jointly with another, it shall not allow any withdrawal from
SUGGESTED ANSWER:
No. as this would be violative of Republic Act No. 1405, the said deposit account, unless the Commissioner has
the Bank Deposits Secrecy Law. The Commissioner of certified that the taxes imposed thereon have been paid.
Internal Revenue or his duly authorized representative may (Section 97 of the 1997 Tax Code). Hence, to be able to give
be allowed to inquire or look into the bank deposits of a the required certification, the inclusion of the deposit is
taxpayer in the following cases: a) For the purpose of imperative, which may be made possible only through the
determining the gross estate of a inquiry made by the Commissioner.
decedent;
b) Where the taxpayer has filed an application for
compromise of his tax liability by reason of financial
incapacity to pay such tax liability. (Sec. 6 (F), NIRC of
1997]

Taxation Bar Q&A 1994-2006

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Taxation Bar Q&A 1994-2006

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) sirdondee@gmail.

Edited and Arranged by:

From the ANSWERS TO BAR EXAMINATION QUESTIONS

ADVISABLE to protect the interest of the ORIGINAL SOURCES/REFERENCES of this

Detailed Table of Contents

Return (2005) .............................................................................................. 20 Partnership:

Causa (2001) ................................................................................................................ 43 Estate Tax: Donation

DIRECT TAXES are demanded from the very person

(c) Local Government Code - Local taxes, fees, the fundamental

power to tax and

Tax Pyramiding; Definition & Legality (2006) Exemptions.

working and deriving income from abroad as an overseas

NOTE: The bar candidate may give a different figure depending

free lodging is required to be accepted by X as condition for Mr. Osorio,

Effect; Condonation of Loan in Taxation (1995)

Fringe Benefit Tax: Employer required to Pay (2003)

Interest: Delinquency Interest: define (1995)

d) Recovery of BAD DEBTS previously charged off; The conditions

1 It depends. If the prize is considered as winnings

No. The alleged

Deductions: Ordinary Business Expenses

Deductions: Capital Losses; Prohibitions (2003) paving

Exclusion & Inclusion; Gross Receipts (2006)

2) No. The amount received was in consideration of his

(ii) Income realized from sale of ordinary assets is part of

Exclusions & Inclusions; ITR; Interest on deposits (2005)

Consequently, the provisions of Sec. 30 of the NIRC of

A Co. seeks your advice as to whether or not it will subject

Exemptions: Terminal Leave Pay (1996)

The donation to a non-stock, non-profit educational No. 1-87.

SUGGESTED ANSWER: Capital Gain Tax; Nature (2001)

CORPORATION & PARTNERSHIP

Since the property

The sale of shares of stock below the fair market value

campaign purposes. (Section 99(C) of the 1997 Tax Code). agricultural

Estate Tax: Gross Estate: Allowable Deduction (2001)

VAT: Transactions "Deemed Sales (1997)

b) Distribution or transfer to:

c) Consignment of goods if actual sale is not made

d) Retirement from or cessation of business, with

VAT; Covered Transactions (1998)

5) VAT Exempt. The monthly fee paid by each

COMMENT: The problems do not call for a yes or no answer.

VAT; Exemption: Constitutionality (2004)

against the taxpayer exists; or 2) the financial position of BIR: Corporation:

c. Within sixty (60) days from filing of the protest, the

Taxpayer: NIRC vs. TCC Remedies (1996)

Court entertain the petition? Court.

Under the Tariff and Customs Code, taxpayer's remedies

Real Property Taxation: Exemption/Deductions; Donors This

Since the donation is to be used as a relocation site for the

5) The appraisal and assessment of real property land, wouldofnot

(2) CHARITABLE INSTITUTIONS, churches,

(3) All machineries and equipment that are actually,

Customs: Importation (1995)

Customs; Basis of Dutiable Value; Imported Article (2005)

He is entitled to tax exemption on his personal and

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