2010-2015 Taxation Law Bar Exam

A. Definition and concept of taxation

B. Nature of taxation

1. Congress passed a sin tax law that increased the tax rates on cigarettes by 1,000%.
The law was thought to be sufficient to drive many cigarette companies out of business,
and was questioned in court by a cigarette company that would go out of business
because it would not be able to pay the increased tax.

The cigarette company is __________ (1%)(2013 Bar

Question)

(A) wrong because taxes are the lifeblood of the government

(B) wrong because the law recognizes that the power to tax is the power
to destroy

(C) correct because no government can deprive a person of his livelihood

(D) correct because Congress, in this case, exceeded its power to tax

SUGGESTED
ANSWER:

(B) wrong because the law recognizes that the power to tax is the power
to destroy

2. In McCulloch v. Maryland,1Chief Justice Marshall declared that the power to tax involves
the power to destroy. This maxim only means that the power to tax includes the power to
regulate even to the extent of prohibition or destruction of businesses. The reason is that the
legislature has the inherent power to determine who to tax, what to tax and how much tax is
to be imposed. Pursuant to the regulatory purpose of taxation, the legislature may impose tax
in order to discourage or prohibit things or enterprises inimical to the public welfare. 2

In the given problem, the legislature’s imposition of prohibitive sin tax on cigarettes is
congruent with its purpose of discouraging the public form smoking cigarettes which are
hazardous to health.

C. Characteristics of
taxation

3. XYZ Corporation manufactures glass panels and is almost at the point of insolvency. It
has no more cash and all it has are unsold glass panels. It received an assessment from
the BIR for deficiency income taxes. It wants to pay but due to lack of cash, it seeks
permission to pay in kind with glass panels.

Should the BIR grant the requested permission? (1%)(2013 Bar

Question)

(A) It should grant permission to make payment convenient to taxpayers.

 (B) It should not grant permission because a tax is generally a pecuniary burden.

(C) It should grant permission; otherwise, XYZ Corporation would not be able to pay.

(D) It should not grant permission because the government does not have the storage
facilities for glass panels.

SUGGESTED
ANSWER:

(B) It should not grant permission because a tax is generally a pecuniary

burden.

3. This principle is one of the attributes or

characteristics of tax.3

D. Power of taxation compared with other

powers
1. Police power 2. Power
of eminent domain

E. Purpose of
taxation
1. Revenue-raising 2. Non-
revenue/special or regulatory

Money collected from taxation shall not be paid to any religious dignitary EXCEPT when:
(2011 Bar Question)

(A) the religious dignitary is assigned to the Philippine

Army (B) it is paid by a local government unit (C) the
payment is passed in audit by the COA (D) it is part of
a lawmaker’s pork barrel

SUGGESTED
ANSWER:

(A) the religious dignitary is assigned to the Philippine

Army

F. Principles of sound tax

system
1. Fiscal adequacy 2.
Administrative
feasibility 3. Theoretical
justice
 Anne Lapada, a student activist, wants to impugn the validity of a tax on text messages.
Aside from claiming that the law adversely affects her since she sends messages by text,
what may she allege that would strengthen her claim to the right to file a taxpayer’s suit?
(2011 Bar Question)

(A) That she is entitled to the return of the taxes collected from her in case the court
nullifies the tax measure. (B) That tax money is being extracted and spent in violation of
the constitutionally guaranteed right to freedom of communication. (C) That she is filing
the case in behalf of a substantial number of taxpayers. (D) That text messages are an
important part of the lives of the people she represents.

SUGGESTED
ANSWER:

(B) That tax money is being extracted and spent in violation of the constitutionally
guaranteed right to freedom of communication.

Real property taxes should not disregard increases in the value of real property
occurring over a long period of time. To do otherwise would violate the canon of a sound
tax system referred to as: (2011 Bar Question)

(A) theoretical justice.

(B) fiscal adequacy.

(C) administrative feasibility.

(D) symbiotic relationship.

SUGGESTED
ANSWER:

(B) fiscal
adequacy

Explain the principles of a sound tax system.

SUGGESTED
ANSWER:

The principles of a sound tax system are the

following:
a. Fiscal adequacy which means that the sources of revenue should be sufficient to
meet the
demands of public expenditures;
b. Equality or theoretical justice which means that the tax burden should be proportionate to
the taxpayer’s ability to pay (this is the so-called ability to pay principle); and
c. Administrative feasibility which means that the tax law should be capable of
convenience, just and effective administration.

G. Theory and basis of

taxation
1. Lifeblood
theory

Which statement below expresses the lifeblood theory? (2012 Bar

Question)

a) The assessed taxes must be enforced by the government. b) The underlying basis of
taxation is government necessity, for without taxation, a government can neither exist
nor endure; c) Taxation is an arbitrary method of exaction by those who are in the seat
of power; d) The power of taxation is an inherent power of the sovereign to impose
burdens upon subjects and objects within its jurisdiction for the purpose of raising
revenues.

SUGGESTED
ANSWER:

b) The underlying basis of taxation is government necessity, for without taxation,

a government can neither exist nor endure

Taxes are the lifeblood of the government, for without taxes, the government can neither
exist nor endure. A principal attribute of sovereignty, the exercise of taxing power
derives its source from the very existence of the state whose social contract with its
citizens obliges it to promote public interest and common good. The theory behind the
exercise of the power to tax emanates from necessity; without taxes, government cannot
fulfill its mandate of promoting the general welfare and well-being of the people.
(National Power Corporation vs. City of Cabanatuan)

2. Necessity theory 3. Benefits-protection

theory (Symbiotic relationship) 4. Jurisdiction
over subject and objects

Which theory in taxation states that without taxes, a government would be paralyzed for
lack of power to activate and operate it, resulting in its destruction? (2011 Bar Question)

(A) Power to destroy

theory

(B) Lifeblood theory

(C) Sumptuary theory

(D) Symbiotic doctrine
SUGGESTED
ANSWER:

(B) Lifeblood
theory

The power to tax is the power to destroy. Is this always so? (2011 Bar
Question)

(A) No. The Executive Branch may decide not to enforce a tax law which it believes to
be confiscatory.

(B) Yes. The tax collectors should enforce a tax law even if it results to the destruction of
the property rights of a taxpayer.

(C) Yes. Tax laws should always be enforced because without taxes the very existence
of the State is endangered.

(D) No. The Supreme Court may nullify a tax law, hence, property rights are not
affected.

SUGGESTED
ANSWER:

(D) No. The Supreme Court may nullify a tax law, hence, property rights are not
affected.

H. Doctrines in
taxation
1. Prospectivity of tax
laws
2. Imprescriptibility
3. Double taxation

Choose the correct answer. Double Taxation -

(1%)
(A) is one of direct duplicate taxations wherein two (2) taxes must be imposed on
the same subject matter, by the same taxing authority, within the same
jurisdiction, during the same period, with the same kind or character of tax, even if
the purposes of imposing the same are different. (B) is forbidden by law; and
therefore, it is a valid defense against the validity of a tax measure. (C) means
taxing the same property twice when it should be taxed only once; it is
tantamount to taxing the same person twice by the same jurisdiction for the same
thing. (D) exists when a corporation is assessed with local business tax as a
manufacturer, and at the same time, value-added tax as a person selling goods in
the course of trade or business. (2014 Bar Question)
SUGGESTED ANSWER
:

A. Double taxation is one of direct duplicate taxations wherein two (2) taxes must be
imposed on the same subject matter, by the same taxing authority, within the same
jurisdiction, during the same period, with the same kind of character of tax, even if
the purposes of imposing the same are different.

a) Strict sense

Differentiate between double taxation in the strict sense and in a broad sense and give
an example of each. (2015 Bar Question)

SUGGESTED
ANSWER:

Double taxation in the strict sense pertains to the direct double taxation. This means that
the taxpayer is taxed twice by the same taxing authority, within the same taxing jurisdiction, for
the same property and same purpose.

On the other hand, double taxation in broad sense pertains to indirect double taxation.
This extends to all cases in which there is a burden of two or more impositions. It is the double
taxation other than those covered by direct double taxation.

b) Broad sense

c) Constitutionality of double
taxation

d) Modes of eliminating double

taxation

In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based
corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The
dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-
resident alien like Caruso.

a. What will be your advice to Caruso in order to lessen the impact of possible double
taxation
on the same income?
 b. Would your answer in A. be the same if Caruso became a U.S. immigrant in 2008
and had become a non-resident Filipino citizen? Explain the difference in treatment
for Philippine income tax purposes.(2010 Bar Question)

SUGGESTED
ANSWER:

a. Caruso has the option either to claim the amount of the income tax withheld in US as
a
deduction from his gross income in the Philippines or to claim it as a tax credit. b. No. The
income from abroad of a non-resident citizen is exempt from the Philippine income
tax. There is no international double taxation on the said
income.

Bank A deposit money with Bank B which earns interest that is subjected to the 20% final
withholding tax. At the same time, Bank A is subjected to the 5% gross receipts tax on its
interest income on loan transactions to customers. Which statement below
INCORRECTLY describes the transaction? (2012 Bar Question)

a) There is double taxation because two taxes – income tax and gross receipts tax are
imposed on the interest incomes described above and double taxation is prohibited
under the 1987 Constitution

b) There is no double taxation because the first tax is income tax, while the second tax is
business tax;

c) There is no double taxation because the income tax is on the interest income of Bank
A on its deposits with Bank B (passive income), while the gross receipts tax is on the
interest income received by Bank A from loans to its debtor-customers (active income);

d) Income tax on interest income of deposits of Bank A is a direct tax, while GRT on
interest income on loan transaction is and tax.

SUGGESTED
ANSWER:

a) There is double taxation because two taxes – income tax and gross receipts tax
are imposed on the interest incomes described above and double taxation is
prohibited under the 1987 Constitution

There is no double taxation if the law imposes two different taxes on the same income,
business or property. First, the taxes herein are imposed on two different subject
matters. The subject matter of the FWT [Final Withholding Tax] is the passive income
generated in the form of interest on deposits and yield on deposit substitutes, while the
subject matter of the GRT [Gross Receipts Tax] is the privilege of engaging in the
business of banking. Second, although both taxes are national in scope because they
 are imposed by the same taxing authority - the national government under the Tax Code
- and operate within the same Philippine jurisdiction for the same purpose of raising
revenues, the taxing periods they affect are different. The FWT is deducted and withheld
as soon as the income is earned, and is paid after every calendar quarter in which it is
earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only
after every taxable quarter in which it is earned. (Commissioner of Internal Revenue vs.
BPI, G.R. No. 147375)

Double taxation in its general sense means taxing the same subject twice during the
same taxing period. In this sense, double taxation: (2011 Bar Question)

(A) violates substantive due process. (B)

does not violate substantive due process.
(C) violates the right to equal protection. (D)
does not violate the right to equal
protection.

SUGGESTED
ANSWER:

(C) violates the right to equal

protection.

Mr. Alas sells shoes in Makati through a retail store. He pays the VAT on his gross sales
to the BIR and the municipal license tax based on the same gross sales to the City of
Makati. He comes to you for advice because he thinks he is being subjected to double
taxation.

What advice will you give him? (1%)(2013 Bar

Question)

(A) Yes, there is double taxation and it is oppressive.

(B) The City of Makati does not have this power.

(C) Yes, there is double taxation and this is illegal m

the Philippines.

(D) Double taxation is allowed where one tax is

imposed by the national government and the other by
the local government.

SUGGESTED
ANSWER:

(D) Double taxation is allowed where one tax is imposed by the national
government and the other by the local government.

There is double taxation when one tax is imposed by the national government and the
other is imposed by a local government unit.4 However, the 1987 Constitution does not
 forbid double taxation. In Pepsi-Cola Bottling Company of the Philippines, Inc. v.
Municipality of Tanauan (G.R. No. L-31156, February 27, 1976), the Supreme Court
declared that double taxation does not violate the uniformity rule nor does it infringe the
equal protection guarantee just because one tax is imposed by the national government
and the other tax is levied by a local government unit.

4. Escape from
taxation
a) Shifting of tax
burden
(i) Ways of shifting the tax burden (ii) Taxes that can be
shifted (iii) Meaning of impact and incidence of
taxation b) Tax avoidance

Choose the correct answer. Tax

Avoidance -
(A) is a scheme used outside of those lawful means and, when availed of, it
usually subjects the taxpayer to further or additional civil or criminal liabilities. (B)
is a tax saving device within the means sanctioned by law. (C) is employed by a
corporation, the organization of which is prompted more on the mitigation of tax
liabilities than for legitimate business purpose. (D) is any form of tax deduction
scheme, regardless if the same is legal or not. (2014 Bar Question)

SUGGESTED ANSWER
:

B. Tax avoidance is a tax-saving device within the means sanctioned

by law.

c) Tax
evasion

You are the retained tax counsel of ABC Corp. Your client informed you that they have
been directly approached with a proposal by a BIR insider (i.e., a middle rank BIR official)
on the tax matter they have referred to you for handling. The BIR insider's proposal is to
settle the matter by significantly reducing the assessment, but he will get 50% of the
savings arising from the reduced assessment.

What tax, criminal and ethical considerations will you take into account in giving your
advice? Explain the relevance of each of these considerations. (2013 Bar Question)

SUGGESTED
ANSWER:

As a lawyer, I have the responsibility to give only a lawful advice. Canon I of the Code of
Professional Responsibility mandates me to “uphold the Constitution, obey the laws of the land
and promote respect for law and legal processes. Rule 1.01 states that “a lawyer shall not
engage in unlawful, dishonest, immoral or deceitful conduct.” Rule 1.02 provides that “a lawyer
shall not counsel or abet activities aimed at defiance of the law or at lessening confidence in the
legal system.”

Therefore, I will advise my client not to agree with the proposal of the BIR officer.
Agreeing with the proposal will result in criminal prosecution under the following laws:

Under the NIRC, the officers of the board who authorized the tax evasion will be liable
under Section 253(C), while the corporation shall be liable under Section 256.

The BIR official is liable under Section 269 which provides for the violations committed
by government enforcement officers. Paragraph (d) of Section 269 provides that one of these
violations is “offering or undertaking to accomplish, file or submit a report or assessment on a
taxpayer without the appropriate examination of the books of accounts or tax liability, or offering
or undertaking to submit a report or assessment less than the amount due the Government for
any consideration or compensation, or conspiring or colluding with another or others to defraud
the revenues or otherwise violate the provisions of this Code.”

Under the Revised Penal Code, the officers of the corporation shall be liable under
Article 212 for corruption of public officials while the BIR official is liable for direct bribery.

Both my client and the BIR official will also be liable under Republic Act No. 3019 or the
Anti- Graft and Corrupt Practices Act.

On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Ms.
Pares, sold a 16-storey commercial building known as Haeltown Building to Mr. Belly for
P100 million. Mr. Belly, in turn, sold the same property on the same day to Bell Gates,
Inc. (BGI) for P200 million. These two (2) transactions were evidenced by two (2) separate
Deeds of Absolute Sale notarized on the same day by the same notary public.

Investigations by the Bureau of Internal Revenue (BIR)

showed that:

(1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale
between HC and Mr. Belly; (2) as early as May 17, 2014, HC received P40 million from
BGI, and not from Mr. Belly; (3) the said payment of P40 million was recorded by BGI in
its books as of June 30, 2014 as investment in Haeltown Building; and (4) the substantial
portion of P40 million was withdrawn by Ms. Pares through the declaration of cash
dividends to all its stockholders.

Based on the foregoing, the BIR sent Haeltown Corporation a Notice of Assessment for
deficiency income tax arising from an alleged simulated sale of the aforesaid commercial
building to escape the higher corporate income tax rate of thirty percent (30%). What is
the liability of Haeltown Corporation, if any? (2014 Bar Question)
SUGGESTED ANSWER

The tax planning scheme adopted by Haeltown Corporation constitutes tax evasion.
According to CIR v. Estate of Benigno Toda (G.R. No. 147188, September 14, 2004), a
transaction where a taxpayer made it appear that there were two sales of the property was
considered “tainted with fraud.” The sole purpose of acquiring and transferring title of the
property on the same day was to create a tax shelter. The sale to Mr. Belly (which is subject to
individual capital gains tax) was to mislead the BIR and avoid the higher corporate income tax.

5. Exemption from
taxation
a) Meaning of exemption from
taxation b) Nature of tax exemption
c) Kinds of tax exemption
(i) Express (ii) Implied (iii)
Contractual d)
Rationale/grounds for
exemption e) Revocation of tax
exemption

6. Compensation and
set-off 7. Compromise

8. Tax
amnesty
a) Definition b) Distinguished
from tax exemption

Which of the following are NOT usually imposed when there is a tax amnesty? (2011 Bar
Question)

(A) Civil, criminal, and administrative

penalties (B) Civil and criminal penalties
(C) Civil and administrative penalties (D)
Criminal and administrative penalties

SUGGESTED
ANSWER:

(A) Civil, criminal, and administrative

penalties

9. Construction and interpretation

of:
a) Tax
laws
 (i) General rule (ii) Exception
b) Tax exemption and
exclusion
(i) General rule (ii)
Exception c) Tax rules
and regulations
(i) General rule only d) Penal provisions of tax
laws e) Non-retroactive application to
taxpayers
(i)
Exceptions

Which of the following statement is NOT correct? (2012 Bar

Question)

a) In case of doubt, statutes levying taxes are constructed strictly the government; b)
The construction of a statute made by his predecessors is not binding upon the
successor, if thereafter he becomes satisfied that a different construction should be
given; c) The reversal of a ruling shall not generally be given retroactive application, if
said reversal will be prejudicial to the taxpayer; d) A memorandum circular promulgated
by the CIR that imposes penalty for violations of certain rules need not be published in a
newspaper of general circulation or official gazette because it has the force and effect of
law.

SUGGESTED
ANSWER:

d) A memorandum circular promulgated by the CIR that imposes penalty for

violations of certain rules need not be published in a newspaper of general
circulation or official gazette because it has the force and effect of law.

A revenue memorandum circular shall not begin to be operative until after due
notice thereof maybe fairly presumed. (Commissioner of Internal Revenue vs.
Philippine Airlines, G.R. No. 180066, July 8, 2009)

The BIR, through the Commissioner, instituted a system requiring taxpayers to submit to
the BIR a summary list of their sales and purchases during the year, indicating the name
of the seller or the buyer and the amount. Based on these lists, the BIR discovered that in
2004 ABC Corp. purchased from XYZ Corp. goods worthP5,000,000. XYZ Corp. did not
declare these for income tax purposes as its reported gross sales for 2004was only
Pl,000,000. Which of the following defenses may XYZ Corp. interpose in an assessment
against it by the BIR? (1%)(2013 Bar Question)

(A) The BIR has no authority to obtain third party information to assess taxpayers. (B)
The third party information is inadmissible as hearsay evidence. (C) The system of
requiring taxpayers to submit third party information is illegal for violating the right to
privacy. (D) None of the above.
SUGGESTED
ANSWER:

(D) None of the

above.

Section 6(B) of the NIRC authorizes the Commissioner to assess the property tax due
from a taxpayer when he believes that the report the taxpayer submitted is false,
incomplete, or erroneous. The same provision authorizes the Commissioner to amend
the return from his own knowledge and from such information he can obtain through
testimony or otherwise, which is deemed prima facie correct and sufficient for all legal
purposes.

I. Scope and limitation of

taxation

1. Inherent limitations a)
Public purpose b)
Inherently legislative (i)
General rule (ii)
Exceptions

(a) Delegation to local governments (b) Delegation

to the President (c) Delegation to administrative
agencies

Which statement is WRONG? (2012 Bar

Question)

a) The power of taxation may be exercised by the government, its political subdivisions,
and public utilities; b) Generally, there is no limit on the amount of tax that may be
imposed; c) The money contributed as tax becomes part of the public funds; d) The
power of tax is subject to certain constitutional limitations.

SUGGESTED
ANSWER:

a) The power of taxation may be exercised by the government, its political

subdivisions, and public utilities

Inherent Powers of the

State.

c)
Territorial
(i) Situs of
taxation
 (a)
Meaning

Which among the following concepts of taxation is the basis for the situs of income
taxation? (2011 Bar Question)

(A) Lifeblood doctrine of taxation

(B) Symbiotic relation in taxation
(C) Compensatory purpose of
taxation (D) Sumptuary purpose of
taxation

SUGGESTED
ANSWER:

(B) Symbiotic relation in

taxation

(b) Situs of income

tax
(1) From sources within the
Philippines

Guidant Resources Corporation, a corporation registered in Norway, has a 50 MW

electric power plant in San Jose, Batangas. Aside from Guidant's income from its power
plant, which among the following is considered as part of its income from sources within
the Philippines? (2011 Bar Question) (A) Gains from the sale to an Ilocos Norte power plant of generators bought from the
United
States. (B) Interests earned on its dollar deposits in a Philippine bank under the
Expanded Foreign Currency Deposit System. (C) Dividends from a two-year old
Norwegian subsidiary with operations in Zambia but derives 60% of its gross income
from the Philippines. (D) Royalties from the use in Brazil of generator sets designed in
the Philippines by its engineers.

SUGGESTED
ANSWER:

(A) Gains from the sale to an Ilocos Norte power plant of generators bought from
the United States.

(2) From sources without the

Philippines

Triple Star, a domestic corporation, entered into a Management Service Contract with
Single Star, a non-resident foreign corporation with no property in the Philippines. Under
the contract, Single Star shall provide managerial services for Triple Star’s Hongkong
branch. All said services shall be performed in Hongkong.

Is the compensation for the services of Single Star taxable as income from sources
within the Philippines? Explain. (2014 Bar Question)

SUGGESTED ANSWER
:

No. Pursuant to the case of Commissioner of Internal Revenue v. Baier-Nickel (G.R. No.
153793, August 29, 2006), the factor which determines the source of income for personal
services is the place where the services were actually rendered. Since Single Star, a non-
resident foreign corporation, will perform all the managerial services for Triple Star’s branch in
Hong Kong, all compensation income arising from the performance of such services will be
considered income from sources outside the Philippines, and therefore not subject to Philippine
income tax.

(3) Income partly within and partly without the

Philippines

(c) Situs of property

taxes
(1) Taxes on real property
(2) Taxes on personal
property

(d) Situs of excise

tax
(1) Estate tax
(2) Donor’s
tax

(e) Situs of business

tax
(1) Sale of real property
(2) Sale of personal
property (3) Value-Added
Tax (VAT)

d) International
comity

e) Exemption of government entities, agencies, and

instrumentalities

2. Constitutional
limitations
 a) Provisions directly affecting
taxation
(i) Prohibition against imprisonment for non-payment of
poll tax (ii) Uniformity and equality of taxation

VII. The municipality of San Isidro passed an ordinance imposing a tax on installation
managers. At that time, there was only one installation manager in the municipality; thus,
only he would be liable for the tax.

Is the law constitutional? (1%)(2013 Bar

Question)
(A) It is unconstitutional because it clearly discriminates against this
person. (B) It is unconstitutional for lack of legal basis. (C) It is
constitutional as it applies to all persons in that class. (D) It is
constitutional because the power to tax is the power to destroy.

SUGGESTED
ANSWER:

(C) It is constitutional as it applies to all persons in

that class.

The ordinance imposing tax on installation managers does not violate the equal
protection clause under Section 1, Article III of the Constitution and the uniformity rule
under Section 28, Article VI of the Constitution. The equal protection clause simply
means that all persons subject to legislation shall be treated alike under like
circumstances and conditions both in privileges conferred and liabilities imposed. On the
other hand, the uniformity rule states that a tax is uniform when it operates with the
same force and effect in every place where the subject of it is found. It does not signify
an intrinsic but simply a geographical uniformity. (See: British American Tobacco v.
Camacho, G.R. No. 163583, April 15, 2009)

In the given problem, the ordinance applies to all installation manager. In other words,
the ordinance does not specifically identify who among the installation managers shall
be liable for tax. The fact that there is only one installation manager in the municipality
does not mean that the taxing authority singled him out as the only taxable person.

Choose the correct answer. Tax laws -

(1%)
(A) may be enacted for the promotion of private enterprise or business for as long
as it gives incidental advantage to the public or the State (B) are inherently
legislative; therefore, may not be delegated (C) are territorial in nature; hence,
they do not recognize the generally-accepted tenets of international law (D)
adhere to uniformity and equality when all taxable articles or kinds of property of
the same class are taxable at the same rate (2014 Bar Question)
SUGGESTED ANSWER
:

D. Tax laws adhere to uniformity and equality when all taxable articles or kinds of
property of the same class are taxable at the same rate.

(iii) Grant by Congress of authority to the president to impose tariff rates (iv)
Prohibition against taxation of religious, charitable entities, and educational
entities

What is the rule on the taxability of income that a government educational institution
derives from its school operations? Such income is: (2011 Bar Question)

(A) subject to 10% tax on its net taxable income as if it is a proprietary educational
institution.

(B) Exempt from income taxation if it is actually, directly, and exclusively used for
educational purposes. (C) subject to the ordinary income tax rates with respect to
incomes derived from educational activities. (D) Exempt from income taxation in the
same manner as government-owned and controlled corporations.

SUGGESTED
ANSWER:

(B) Exempt from income taxation if it is actually, directly, and exclusively used for
educational purposes.

(v) Prohibition against taxation of non-stock, non-profit

institutions

A group of philanthropists organized a non-stock, non-profit hospital for charitable

purposes to provide medical services to the poor. The hospital also accepted paying
patients although none of its income accrued to any private individual; all income were
plowed back for the hospital's use and not more than 30% of its funds were used for
administrative purposes.

Is the hospital subject to tax on its income? If it is, at what rate? (2013 Bar
Question)

SUGGESTED
ANSWER:

The non-stock, non-profit hospital’s income from paying patients is subject to a

preferential income tax of 10%.

In Commissioner of Internal Revenue v. St. Luke’s Medical Center, the Supreme Court
laid down the rules on the treatment of icome tax of non-profit hospitals. Pursuant to Sec. 30(E)
and (G) of the NIRC, these hospitals are exempt from income tax with respect to their activities
conducted exclusively for charitable or social welfare purposes. However, they are subject to a
preferential income tax rate of 10% under charitable or social welfare purposes.

(vi) Majority vote of Congress for grant of tax exemption (vii) Prohibition on
use of tax levied for special purpose (viii) President’s veto power on
appropriation, revenue, tariff bills (ix) Non-impairment of jurisdiction of the
Supreme Court (x) Grant of power to the local government units to create its
own sources of revenue (xi) Flexible tariff clause (xii) Exemption from real
property taxes

Mr. Amado leased a piece of land owned by the Municipality of Pinagsabitan and built a
warehouse on the property for his business operations. The Municipal Assessor
assessed Mr. Amado for real property taxes on the land and the warehouse. Mr. Amado
objected to the assessment, contending that he should not be asked to pay realty taxes
on the land since it is municipal property.

Was the assessment proper? (2013 Bar

Question)

SUGGESTED
ANSWER:

The assessment was

proper.

Under Section 217 of the LGC, real property shall be classified, valued and assessed on
the basis of its actual use regardless of where located, whoever owns it, and whoever uses it. A
related and complementary provision is Section 234(a) of the LGC which provides that a real
property owned by the Republic of the Philippines or any of its political subdivisions is exempt
from realty taxes, except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.

In the given problem, Mr. Arnado, as lessee of the land owned by the Municipality, is the
actual user of the land and is liable for the realty taxes. Therefore, the assessment was proper.

LLL is a government instrumentality created by Executive Order to be primarily

responsible for integrating and directing all reclamation projects for the National
Government. It was not organized as a stock or a non-stock corporation, nor was it
intended to operate commercially and compete in the private market.

By virtue of its mandate, LLL reclaimed several portions of the foreshore and offshore
areas of the Manila Bay, some of which were within the territorial jurisdiction of Q City.
Certificates of title to the reclaimed properties in Q City were issued in the name of LLL
in 2008. In 2014, Q City issued Warrants of Levy on said reclaimed properties of LLL
based on the assessment for delinquent property taxes for the years 2010 to 2013.
 a. Are the reclaimed properties registered in the name of LLL subject to real
property
tax? b. Will your answer be the same in (a) if from 2010 to the present time, LLL is leasing
portions of the reclaimed properties for the establishment and use of popular
fastfood restaurants J Burgers, G Pizza, and K Chicken? (2015 Bar Question)

SUGGESTED
ANSWER:

a. The reclaimed properties are not subject to real property tax because LLL is a
government instrumentality. Instrumentality refers to any agency of the National Government,
not integrated within the department framework vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. Under the law, real property owned by the
Republic of the Philippines (Republic) is exempt from real property tax unless the beneficial use
thereof has been granted to a taxable person. When the title of the real property is transferred to
LLL, the Republic remains the owner of the real property. Thus, such arrangement does not
result in the loss of the tax exemption.

b. No. As a rule, properties owned by the Republic of the Philippines are exempt from
real property tax except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person. LLL leased out portions of the reclaimed properties to a taxable
entity, such as the popular fastfood restaurant, hence the reclaimed properties are subject to
real property tax.

(xiii) No appropriation or use of public money for religious

purposes

b) Provisions indirectly affecting

taxation
(i) Due process (ii)
Equal protection

What is the "rational basis" test? Explain briefly. (2010 Bar

Question)

SUGGESTED
ANSWER:

This test is applied to gauge the constitutionality of an assailed law in the face of an
equal protection challenge. It has been held that “in areas of social and economic policy, a
statutory classification that neither proceeds along suspect lines nor infringes constitutional
rights must be upheld against equal protection challenge if there is any reasonably conceivable
state of facts that could provide a rational basis for the classification”. Under the rational basis
test, it is sufficient that the legislative classification is rationally related to achieving some
legitimate State interest.
 (iii) Religious freedom (iv) Non-impairment
of obligations of contracts

J. Stages of
taxation

1. Levy 2. Assessment
and collection 3.
Payment

True or False. The Tax Code allows an individual taxpayer to pay in two equal
installments, the first installment to be paid at the time the return is filed, and the
second on or before July 15 of the same year, if his tax due exceeds P2,000. (2010
Bar Question)

SUGGESTED ANSWER: True. [Sec. 56(A)(A), NIRC]

4.
Refund

The actual effort exerted by the government to effect the exaction of what is due from the
taxpayer is known as: (2011 Bar Question)

(A)
assessment.
(B) levy. (C)
payment. (D)
collection.

SUGGESTED
ANSWER:

(D)
collection

Although the power of taxation is basically legislative in character, it is NOT the function
of Congress to: (2011 Bar Question)

(A) fix with certainty the amount of taxes.

(B) collect the tax levied under the law. (C)
identify who should collect the tax. (D)
determine who should be subject to the
tax.

SUGGESTED
ANSWER:

(B) collect the tax levied under the

law
K. Definition, nature, and characteristics of
taxes

L. Requisites of a valid
tax

M. Tax as distinguished from other forms of

exactions
1. Tariff 2. Toll 3.
License fee 4.
Special
assessment 5.
Debt

N. Kinds of
taxes
1. As to
object
a) Personal, capitation, or poll tax
b) Property tax c) Privilege tax 2.
As to burden or incidence
a) Direct b)
Indirect 3. As to
tax rates a)
Specific b) Ad
valorem c)
Mixed 4. As to
purposes
a) General or fiscal b) Special,
regulatory, or sumptuary 5. As to
scope or authority to impose
a) National – internal revenue taxes b)
Local – real property tax, municipal tax 6.
As to graduation a) Progressive b)
Regressive c) Proportionate

II. Income
Taxation

A. Income
taxation

1. Income tax
systems
a) Global tax system b) Schedular tax
system c) Semi-schedular or semi-
global tax system
The Philippines adopted the semi-global tax system, which means that: (2012 Bar
Question)

a) All taxable incomes, regardless of the nature of income, are added together to arrive
at gross income, and all allowable deductions are deducted from the gross income to
arrive at the taxable income;

b) All incomes subject to final withholding taxes liable to income tax under the schedular
tax system, while all ordinary income as well as income not subject to final withholding
tax under the global tax system;

c) All taxable incomes are subject to final withholding taxes under the schedular tax
system;

d) All taxable incomes from sources within and without the Philippines are liable to
income tax.

SUGGESTED
ANSWER:

b) All incomes subject to final withholding taxes liable to income tax under the
schedular tax system, while all ordinary income as well as income not subject to
final withholding tax under the global tax system

General Principles of
Taxation.

2. Features of the Philippine income

tax law
a) Direct tax
b)
Progressive

An example of a tax where the concept of progressivity finds application is the: (2011
Bar Question)

(A) income tax on individuals. (B)

excise tax on petroleum products. (C)
value-added tax on certain articles.
(D) amusement tax on boxing
exhibitions.

SUGGESTED
ANSWER:

(A) income tax on

individuals.
 c) Comprehensive d) Semi-schedular
or semi-global tax system

3. Criteria in imposing Philippine income

tax
a) Citizenship
principle b)
Residence principle
c) Source principle

Alain Descartes, a French citizen permanently residing in the Philippines, received

several items during the taxable year. Which among the following is NOT subject to
Philippine income taxation? (2011 Bar Question)

(A) Consultancy fees received for designing a computer program and installing the same in
the Shanghai facility of a Chinese firm. (B) Interests from his deposits in a local bank of
foreign currency earned abroad converted to Philippine pesos. (C) Dividends received from
an American corporation which derived 60% of its annual gross receipts from Philippine
sources for the past 7 years. (D) Gains derived from the sale of his condominium unit
located in The Fort, Taguig City to another resident alien.

SUGGESTED
ANSWER:

(A) Consultancy fees received for designing a computer program and installing the
same in the Shanghai facility of a Chinese firm.

Income from the performance of services is treated as income from within the
Philippines, if: (2012 Bar Question)

a) The payment of compensation for the service is made in the Philippines;

b) The contract calling for the performance of services is signed in the
Philippines; c) The service is actually performed in the Philippines; d) The
recipient of service income is a resident of the Philippines.

SUGGESTED
ANSWER:

c) The service is actually performed in the

Philippines

Section 42,
NIRC.

4. Types of Philippine income

tax 5. Taxable period
 a) Calendar
period b) Fiscal
period c) Short
period

An individual taxpayer can adopt either the calendar or fiscal period for purposes of
filing his income tax return. (2010 Bar Question)

SUGGESTED ANSWER: False. (Sec. 43, NIRC)

Which among the following taxpayers is required to use only the calendar year for tax
purposes? (2011 Bar Question)

(A) Partnership exclusively for the design of government infrastructure projects

considered as practice of civil engineering. (B) Joint-stock company formed for the
purpose of undertaking construction projects. (C) Business partnership engaged in
energy operations under a service contract with the government. (D) Joint account
(cuentas en participacion) engaged in the trading of mineral ores.

SUGGESTED
ANSWER:

(A) Partnership exclusively for the design of government infrastructure projects

considered as practice of civil engineering.

6. Kinds of
taxpayers
a) Individual
taxpayers
(i)
Citizens
(a) Resident citizens (b)
Non-resident citizens (ii)
Aliens
(a) Resident
aliens

(b) Non-resident
aliens
(1) Engaged in trade or
business

Pierre de Savigny, a Frenchman, arrived in the Philippines on January 1, 2010 and

continued to live and engage in business in the Philippines. He went on a tour of
Southeast Asia from August 1 to November 5, 2010. He returned to the Philippines on
November 6, 2010 and stayed until April 15, 2011 when he returned to France. He earned
during his stay in the Philippines a gross income of P3 million from his investments in
the country. For the year 2010, Pierre’s taxable status is that of: (2011 Bar Question)

(A) a non-resident alien not engaged in trade or business in the

Philippines. (B) a non-resident alien engaged in trade or business in
the Philippines. (C) a resident alien not engaged in trade or
business in the Philippines. (D) a resident alien engaged in trade or
business in the Philippines.

SUGGESTED
ANSWER:

(B) a non-resident alien engaged in trade or business in the

Philippines.

(2) Not engaged in trade or

business

(iii) Special class of individual

employees

(a) Minimum wage

earner

b)
Corporations
(i) Domestic
corporations (ii)
Foreign corporations
(a) Resident foreign
corporations

A resident corporation is one that is: (2012 Bar

Question)

a) Organized under the laws of the Philippines that does business in another country; b)
Organized under the laws of a foreign country that sets up a regional headquarter in the
Philippines doing product promotion and information dissemination; c) Organized under
the laws of the Philippines that engages business in a special economic zone; d)
Organized under the laws of a foreign country that engages in business in Makati City,
Philippines.

SUGGESTED
ANSWER:

d) Organized under the laws of a foreign country that engages in business in

Makati City, Philippines
 Section 22 (H),
NIRC.

(b) Non-resident foreign

corporations

Aplets Corporation is registered under the laws of the Virgin Islands. It has extensive
operations in Southeast Asia. In the Philippines, Its products are imported and sold at a
mark-up by its exclusive

distributor, Kim's Trading, Inc. The BIR compiled a record of all the imports of Kim from
Aplets and imposed a tax on Aplets net income derived from its exports to Kim. Is the
BIR correct? (2011 Bar Question)

(A) Yes. Aplets is a non-resident foreign corporation engaged in trade or business in the
Philippines. (B) No. The tax should have been computed on the basis of gross revenues
and not net income. (C) No. Aplets is a non-resident foreign corporation not engaged in
trade or business in the Philippines. (D) Yes. Aplets is doing business in the Philippines
through its exclusive distributor Kim's Trading. Inc.

SUGGESTED
ANSWER:

(C) No. Aplets is a non-resident foreign corporation not engaged in trade or

business in the Philippines.

(iii) Joint venture and

consortium

c) Partnerships d) General
professional partnerships

A general professional partnership (GPP) is one: (2012 Bar

Question)

a) That is registered as such with the Securities and Exchange Commission and the
Bureau of Internal Revenue; b) That is composed of individuals who exercise a common
profession; c) That exclusively derives income from the practice of the common
profession; d) That derives professional income and rental income from property owned
by it.

SUGGESTED
ANSWER:

c) That exclusively derives income from the practice of the common

profession
 Section 26,
NIRC.

[Note: The question is unfair because it gives an initial impression that the examiner is
asking the statement which best characterizes a GPP but the real question is found after
the enumeration of the choices which might not be not be noticed by the examinee.]

e) Estates and
trusts f) Co-
ownerships

7. Income
taxation
a) Definition b)
Nature c) General
principles

8.
Income
a)
Definition
b) Nature

c) When income is
taxable
(i) Existence of
income (ii) Realization
of income
(a) Tests of realization (b) Actual
vis-à-vis constructive receipt

Income is considered realized for tax purposes when: (2011 Bar

Question)

(A) it is recognized as revenue under accounting standards even if the law does
not do so. (B) the taxpayer retires from the business without approval from the
BIR. (C) the taxpayer has been paid and has received in cash or near cash the
taxable income. (D) the earning process is complete or virtually complete and an
exchange has taken place.

SUGGESTED
ANSWER:

(D) the earning process is complete or virtually complete and an exchange has
taken place.
Aleta sued Boboy for breach of promise to marry. Boboy lost the case and duly paid the
court's award that included, among others, Pl00,000 as moral damages for the mental
anguish Aleta suffered.

Did Aleta earn a taxable income? (1%)(2013 Bar

Question)

(A) She had a taxable income of P100,000 since income is income from
whatever source. (B) She had no taxable income because it was a donation. (C)
She had taxable income since she made a profit. (D) She had no taxable income
since moral damages are compensatory.

SUGGESTED
ANSWER:

(D) She had no taxable income since moral damages are

compensatory.

Exemplary and moral damages awarded to a party-litigant are not considered taxable
income (America N.A.-Manila Branch vs. Commissioner of Internal Revenue, CTA Case
No. 6144, March 14, 2005).

Hopeful Corporation obtained a loan from Generous Bank and executed a mortgage on
its real property to secure the loan. When Hopeful Corporation failed to pay the loan,
Generous Bank extrajudicially foreclosed the mortgage on the property and acquired the
same as the highest bidder. A month after the foreclosure, Hopeful Corporation
exercised its right of redemption and was able to redeem the property. Is Generous Bank
liable to pay capital gains tax as a result of the foreclosure sale? Explain. (2014 Bar
Question)

SUGGESTED ANSWER
:

No. Since Hopeful Corporation exercised its right to redeem the property, Generous
Bank is not liable to pay capital gains tax on the foreclosure sale. As stated in the analogous
case of Supreme Transliner, Inc., v. BPI Family Savings Bank, Inc. (G.R. No. 165617,
February 25, 2011, 644 SCRA 59), Rev. Regs. No. 4-99 expressly provides that if a mortgagor
exercises his right of redemption within one year from the issuance of the certificate of sale, no
capital gains tax shall be imposed because no sale or

transfer of real property was realized. It is only in case of non-redemption by Hopeful

Corporation that the obligation to pay capital gains tax arises, which shall be based on the bid
price of the highest bidder. The tax will be imposed only upon the expiration of the one-year
period of redemption. Furthermore, the obligation to pay the capital gains tax would primarily
fall on the mortgagor, Hopeful Corporation, and not on Generous Bank.

(iii) Recognition of
income
Mr. A was preparing his income tax return and had some doubt on whether a
commission he earned should be declared for the current year or for the succeeding
year. He sought the opinion of his lawyer who advised him to report the commission in
the succeeding year. He heeded his lawyer's advice and reported the commission in the
succeeding year. The lawyer's advice turned out to be wrong; in Mr. A's petition against
the BIR assessment, the court ruled against Mr. A.

Is Mr. A guilty of fraud? (1%)(2013 Bar

Question)

(A) Mr. A is not guilty of fraud as he simply followed the advice of his lawyer. (B) Mr. A is
guilty of fraud; he deliberately did not report the commission in the current year when he
should have done so. (C) Mr. A's lawyer should pay the tax for giving the wrong advice.
(D) Mr. A is guilty for failing to consult his accountant.

SUGGESTED
ANSWER:

(A) Mr. A is not guilty of fraud as he simply followed the advice of his
lawyer.

In Santos v. People of the Philippines and BIR, the Court of Tax Appeals (CTA)
acquitted Santos from the criminal case of tax evasion and ruled that failure to supply
correct and accurate information must be fully established as a positive act or state of
mind; it cannot be presumed nor attributed to mere inadvertent or negligent acts.
Moreover, the CTA reiterated the doctrine in Yulivo Sons hardware v. Court of Tax
Appeals (G.R. No. L- 13203), January 28, 1961, 1 SCRA 169) that mere understatement
of a tax is not itself proof of fraud for the purpose of tax evasion.

In the present case, Mr. A relied in good faith on the expertise of his lawyer in not
declaring his income for that year. Therefore, he is not guilty of fraud.

(iv) Methods of
accounting
(a) Cash method vis-à-vis accrual method (b) Installment payment vis-à-vis
deferred payment vis-à-vis percentage completion
(in long-term
contracts)

A corporation may change its taxable year to calendar or fiscal year in filing its annual
income tax return, provided: (2011 Bar Question)

(A) it seeks prior BIR approval of its proposed change in accounting period.
(B) it simultaneously seeks BIR approval of its new accounting period. (C) it
should change its accounting period two years prior to changing its taxable
year. (D) its constitution and by-laws authorizes the change.
SUGGESTED
ANSWER:

(A) it seeks prior BIR approval of its proposed change in

accounting period.

The appropriate method of accounting for a contractor on his long-term construction

contract (i.e., it takes more than a year to finish) is: (2012 Bar Question)

a) Cash method; b) Accrual

method; c) Installment sale
method; d) Percentage of
completion method.

SUGGESTED
ANSWER:

d) Percentage of completion
method

Section 127,
NIRC.

d) Tests in determining whether income is earned for tax

purposes
(i) Realization test (ii) Claim of right doctrine or doctrine of
ownership, command, or control (iii) Economic benefit test,
doctrine of proprietary interest (iv) Severance test (v) All events
test

What is the "all events test"? Explain briefly. (2010 Bar

Question)

SUGGESTED
ANSWER:

The “all events test” is a test applied in the realization of income and expense by an
accrual-basis taxpayer. The test requires (a) the fixing of a right to the income or liability to pay,
and (b) the availability of reasonably accurate determination of such income or deduction during
the taxable year.

The "all events test" refers to: (2012 Bar

Question)

a) A person who uses the cash method where all sales have been fully paid by the
buyers thereof; b) A person who uses the installment sales method, where the full
amount of consideration is paid in full by the buyer thereof within the year of sale; c) A
 person who uses the accrual method, whereby an expense is deductible for the taxable
year in which all the events had occurred which determined the fact of the liability and
the amount thereof could be determined with reasonable accuracy; d) A person who
uses the completed method, whereby the construction project has been completed
during the year the contract was signed.

SUGGESTED
ANSWER:

c) A person who uses the accrual method, whereby an expense is deductible for
the taxable year in which all the events had occurred which determined the fact of
the liability and the amount thereof could be determined with reasonable
accuracy.

The accrual of income and expense is permitted when the all-events test has been met.
This test requires: (1) fixing of a right to income or liability to pay; (2) the availability of
the reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy. However, the test does
not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all- events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year. “The amount of
liability does not have to be determined exactly; it must be determined with reasonable
accuracy.” (Commissioner of Internal Revenue vs. Isabela Cultural Corporation, G.R.
No. 172231, February 12, 2007)

9. Gross
income
a)
Definition

b) Concept of income from whatever source

derived

There is no taxable income until such income is recognized. Taxable income is

recognized when the: (2011 Bar Question)

(A) taxpayer fails to include the income in his income tax

return. (B) income has been actually received in money or
its equivalent. (C) income has been received, either
actually or constructively. (D) transaction that is the source
of the income is consummated.
SUGGESTED
ANSWER:

(C) income has been received, either actually or

constructively.

In 2010, Juliet Ulbod earned P500,000.00 as income from her beauty parlor and received
P250,000.00 as Christmas gift from her spinster aunt. She had no other receipts for the
year. She spent P150,000.00 for the operation of her beauty parlor. For tax purposes, her
gross income for 2010 is: (2011 Bar Question)

(A)
P750,000.00.
(B)
P500,000.00.
(C)
P350,000.00.
(D)
P600,000.00.

SUGGESTED
ANSWER:

(B)
P500,000.00.

In 2010, Mr. Platon sent his sister Helen $1 ,000 via a telegraphic transfer through the
Bank of PI. The bank's remittance clerk made a mistake and credited Helen with
$1,000,000 which she promptly withdrew. The bank demanded the return of the
mistakenly credited excess, but Helen refused. The BIR entered the picture and
investigated Helen.

Would the BIR be correct if it determines that Helen earned taxable income under these
facts? (1%)(2013 Bar Question)

(A) No, she had no income because she had no right to the mistakenly
credited funds. (B) Yes, income is income regardless of the source. (C) No, it
was not her fault that the funds in excess of $1,000 were credited to her. (D)
No, the funds in excess of$1,000 were in effect donated to her.

SUGGESTED
ANSWER:

(B) Yes, income is income regardless of the

source.

Section 32 of the NIRC defines gross income as all income derived from whatever
source. Consequently, the flow of wealth, without any distinction as to the lawfulness of
 its source, is subject to income tax. In other words, the phrase “income from whatever
source” discloses a legislative policy to include all income not expressly exempted within
the class of taxable income under the law.

c) Gross income vis-à-vis net income vis-à-vis taxable

income

d) Classification of income as to
source
(i) Gross income and taxable income from sources within the
Philippines (ii) Gross income and taxable income from sources
without the Philippines (iii) Income partly within or partly without
the Philippines

e) Sources of income subject

to tax (i) Compensation
income

Mr. Gipit borrowed from Mr. Maunawain P100,000.00, payable in five (5) equal monthly
installments. Before the first installment became due, Mr. Gipit rendered general cleaning
services in the entire office building of Mr. Maunawain, and as compensation therefor,
Mr. Maunawain cancelled the indebtedness of Mr. Gipit up to the amount of P75,000.00.
Mr. Gipit claims that the cancellation of his indebtedness cannot be considered as gain
on his part which must be subject to income tax, because according to him, he did not
actually receive payment from Mr. Maunawain for the general cleaning services. Is Mr.
Gipit correct? Explain. (2014 Bar Question)

SUGGESTED ANSWER
:

No. Section 50 of Rev. Regs. No. 2, otherwise known as Income Tax Regulations,
provides that if a debtor performs services for a creditor who cancels the debt in consideration
for such services, the debtor realizes income to that amount as compensation for his services.
In the given problem, the cancellation of Mr. Gipit’s indebtedness up to the amount of Php
75,000.00 gave rise to compensation income subject to income tax, since Mr. Maunawain
condoned such amount as consideration for the general cleaning services rendered by Mr.
Gipit.

(ii) Fringe
benefits
(a) Special treatment of fringe
benefits (b) Definition

(c) Taxable and non-taxable fringe

benefits
 PRT Corp. purchased a residential house and lot with a swimming pool in an upscale
subdivision and required the company president to stay there without paying rent; it
reasoned out that the company president must maintain a certain image and be able to
entertain guests at the house to promote the company's business. The company
president declared that because they are childless, he and his wife could very well live in
a smaller house.

Was there a taxable fringe benefit? (1%)(2013 Bar

Question)

(A) There was no taxable fringe benefit since it was for the convenience of the employer
and was necessary for its business. (B) There was a taxable fringe benefit since the stay
at the house was for free. (C) There was a taxable fringe benefit because the house was
very luxurious. (D) There was no taxable fringe benefit because the company president
was only required to stay there and did not demand free housing.

SUGGESTED
ANSWER:

(B) There was a taxable fringe benefit since the stay at the house
was for free.

First, the company president is not a rank-and-file employee. Thus, the housing benefit
is subject to fringe benefits tax pursuant to Section 33 of the NIRC and Section 2.33 (A)
of the RR No. 03- 98. Although the housing benefit to the President may be for the
convenience of the employer (PRT Corp.) or necessary to its business, still, it also
inured to the benefit of the President as his stay therein is for free. RR No. 03-98 also
provides for the guidelines and valuation of fringe benefits for purposes of computing the
portion which shall be subject to fringe benefits tax in cases where the fringe benefits
entail joint benefits to the employer and employee.

Thus, there was a taxable fringe

benefit.

(iii) Professional income (iv) Income from

business (v) Income from dealings in
property
(a) Types of
properties
(1) Ordinary
assets (2) Capital
assets

(b) Types of gains from dealings in

property

Income from dealings in property (real, personal, or mixed) is the gain or loss derived:
(2011 Bar Question) (A) only from the cash sales of property.
 (B) from cash and gratuitous receipts of
property. (C) from sale and lease of
property. (D) only from the sale of property.

SUGGESTED
ANSWER:

(D) only from the sale of

property.

(1) Ordinary income vis-à-vis capital

gain

An individual, who is a real estate dealer, sold a residential lot in Quezon City at a gain of
P100,000.00 (selling price of P900,000.00 and cost is P800,00.00). The sale is subject to
income tax as follows: (2012 Bar Question)

a) 6% capital gains tax on the gain; b) 6% capital gains tax on the gross selling
price of fair market value, whichever is higher; c) Ordinary income tax at the
graduated rates of 5% to 32% of net taxable income; d) 30% income tax on net
taxable income.

SUGGESTED
ANSWER:

c) Ordinary income tax at the graduated rates of 5% to 32% of net taxable

income

Section 24,
NIRC.

(2) Actual gain vis-à-vis presumed gain (3) Long

term capital gain vis-à-vis short-term capital gain (4)
Net capital gain, net capital loss (5) Computation of
the amount of gain or loss (6) Income tax treatment
of capital loss
(a) Capital loss limitation rule (applicable to both corporations and
individuals) (b) Net loss carry-over rule (applicable only to individuals)

In March 2009, Tonette, who is fond of jewelries, bought a diamond ring for P750,000.00,
a bracelet for P250,000.00, a necklace for P500,000.00, and a brooch for P500,000.00.
Tonette derives income from the exercise of her profession as a licensed CPA. In
October 2009, Tonette sold her diamond ring, bracelet, and necklace for only P1.25
million incurring a loss of P250,000.00. She used the P1.25 million to buy a solo diamond
ring in November 2009 which she sold for P1.5 million in September 2010. Tonette had no
other transaction in jewelry in 2010. Which among the following describes the tax
implications arising from the above transactions? (2011 Bar Question)
 (A) Tonette may deduct his 2009 loss only from her 2009 professional income. (B)
Tonette may carry over and deduct her 2009 loss only from her 2010 gain. (C) Tonette
may carry over and deduct her 2009 loss from her 2010 professional income as well as
from her gain. (D) Tonette may not deduct her 2009 loss from both her 2010
professional income and her gain.

SUGGESTED
ANSWER:

(B) Tonette may carry over and deduct her 2009 loss only from her
2010 gain.

(7) Dealings in real property situated in the

Philippines

(8) Dealings in shares of stock of Philippine

corporations
(a) Shares listed and traded in the stock
exchange (b) Shares not listed and traded in the
stock exchange

Federico, a Filipino citizen, migrated to the United States some six years ago and got a
permanent resident status or green card. He should pay his Philippine income taxes on:
(2011 Bar Question)

(A) the gains derived from the sale in California, U.S.A. of jewelry he purchased in the
Philippines. (B) the proceeds he received from a Philippine insurance company as the
sole beneficiary of life insurance taken by his father who died recently. (C) the gains
derived from the sale in the New York Stock Exchange of shares of stock in PLDT, a
Philippine corporation. (D) dividends received from a two year old foreign corporation
whose gross income was derived solely from Philippine sources.

SUGGESTED
ANSWER:

(C) the gains derived from the sale in the New York Stock Exchange of shares of
stock in PLDT, a Philippine corporation.

Keyrand, Inc., a Philippine corporation, sold through the local stock exchange 10,000
PLDT shares that it bought 2 years ago. Keyrand sold the shares for P2 million and
realized a net gain of P200,000.00. How shall it pay tax on the transaction? (2011 Bar
Question)

(A) It shall declare a P2 million gross income in its income tax return, deducting its cost
of acquisition as an expense. (B) It shall report the P200,000.00 in its corporate income
tax return adjusted by the holding period. (C) It shall pay 5% tax on the first P100,000.00
 of the P200,000.00 and 10% tax on the remaining P100,000.00. (D) It shall pay a tax of
one-half of 1% of the P2 million gross sales.

SUGGESTED
ANSWER:

(D) It shall pay a tax of one-half of 1% of the P2 million

gross sales.

In 2006, Mr. Vicente Tagle, a retiree, bought 10,000 CDA shares that are unlisted in the
local stock exchange for P10 per share. In 2010, the said shares had a book value per
share of P60 per share. In view of a car accident in 2010, Mr. Vicente Tagle had to sell his
CDA shares but he could sell the same only for P50 per share. The sale is subject to tax
as follows: (2012 Bar Question)

a) 5%/10% capital gains tax on the capital gain from sale of P40 per share (P50 selling
price less P10 cost); b) 5%/10% capital gains tax on the capital gain of P50 per share,
arrived at by deducting the cost (P10 per share) from the book value (P60 per share); c)
5%/10% capital gains tax on the capital gain from sale of P40 per share (P50 selling
price less P10 cost) plus donor’s tax on the excess of the fair market value of the shares
over the consideration; d) Graduated income tax rates of 5% to 32% on the net taxable
income from the sale of the shares.

SUGGESTED
ANSWER:

c) 5%/10% capital gains tax on the capital gain from sale of P40 per share (P50
selling price less P10 cost) plus donor’s tax on the excess of the fair market value
of the shares over the consideration

Section 24(C) in relation to Section 100, NIRC; RR No. 6-

2008.

(9) Sale of principal

residence

In 2000, Mr. Belen bought a residential house and lot for P1,000,000. He used the
property as his and his family's principal residence. It is now year 2013 and he is thinking
of selling the property to buy a new one. He seeks your advice on how much income tax
he would pay if he sells the property. The total zonal value of the property isP5,000,000
and the fair market value per the tax declaration is P2,500,000. He intends to sell it for
P6,000,000.

What material considerations will you take into account in computing the income tax?
Please explain the legal relevance of each of these considerations. (2013 Bar Question)
SUGGESTED
ANSWER:

In computing the capital gains tax, a final tax of six percent (6%) based on the gross
selling price or current fair market value, whichever is higher, shall be imposed. In this case, the
basis of the tax is P6,000,000.00, the gross selling price, being higher than P2,500,00.00, the
fair market value of the residential house.

Nevertheless, if within thirty (30) days from the date of sale or disposition, Mr. Belen
notifies the Commissioner that he intends to utilize the whole P6,000,000.00 in acquiring a new
house within eighteen (18) calendar months from the sale, the gross selling price shall be
exempt from the capital gains tax.

If Mr. Belen does not utilize the whole P6,000,000.00 in acquiring a new residence under
the conditions above, the portion of the gain presumed to have been realized from the sale or
disposition shall be subject to capital gains tax. For this purpose, P6,000,000.00 shall be
multiplied by a fraction which the unutilized amount bears to the gross selling price in order to
determine the taxable portion and the 6% capital gains tax shall be imposed thereon under
Section 24(D) of the NIRC.

Mr. H decided to sell the house and lot wherein he and his family have lived for the past
10 years, hoping to buy and move to a new house and lot closer to his children's school.
Concerned about the capital gains tax that will be due on the sale of their house, Mr. H
approaches you as a friend for advice if it is possible for the sale of their house to be
exempted from capital gains tax and the conditions they must comply with to avail
themselves of said exemption. How will you respond? (2015 Bar Question)

SUGGESTED
ANSWER:

Mr. H may avail the exemption from capital gains tax on sale of principal residence by
natural persons. Under the law, the following are the requisites: (1) proceeds of the sale of the
principal residence have been fully utilized in acquiring or constructing new principal residence
within eighteen (18) calendar months from the date of sale or disposition; (2) The historical cost
or adjusted basis of the real property sold or disposed will be carried over to the new principal
residence built or acquired; (3) The

Commissioner has been duly notified, through a prescribed return, within thirty (30) days from
the date of sale or disposition of the person’s intention to avail of the tax exemption; and (4)
Exemption was availed only once every ten (10) years.

(vi) Passive investment

income
(a) Interest
income

Interest income of a domestic commercial bank derived from a peso loan to a domestic
corporation in 2010 is: (2012 Bar Question)
 a) Subject to the 30% income tax based on its net taxable
income; b) Subject to the 20% final withholding tax; c)
Subject to the 7.5% final withholding tax; d) Subject to 10%
final withholding tax.

SUGGESTED
ANSWER:

a) Subject to the 30% income tax based on its net taxable

income

Section 27
(A).

(b) Dividend
income
(1) Cash dividend (2)
Stock dividend (3)
Property dividend (4)
Liquidating dividend

ABC Corp. was dissolved and liquidating dividends were declared and paid to the
stockholders.

What tax consequence follows? (1%) (2013 Bar

Question)

(A) ABC Corp. should deduct a final tax of 10% from the dividends. (B) The stockholders
should declare their gain from their investment and pay income tax at the ordinary rates.
(C) The dividends are exempt from tax. (D) ABC Corp. should withhold a 10% creditable
tax.

SUGGESTED
ANSWER:

(C) The dividends are exempt from

tax.

Liquidating dividends are not income and are thus not subject to
income tax.

In Wise & Co., Inc. v. Meer (G.R. No. 48231, June 30, 1947), the Supreme Court defined
liquidating dividends as the dissolving corporation’s payments to the stockholders for
their surrender and relinquishment of interest in the dissolving corporation. They are
generally a return of capital. Liquidating dividends are unlike cash and property
dividends which are portions of
 corporate profits that are set aside for distribution to the stockholders in proportion to
their subscription to the capital stock of the corporation.5

MGC Corp. secured an income tax holiday for 5 years as a pioneer industry. On the
fourth year of the tax holiday, MGC Corp. declared and paid cash dividends to its
stockholders, all of whom are individuals.

Are the dividends taxable? (1%)(2013 Bar

Question)

(A) The dividends are taxable; the tax exemption of MGC Corp. does not extend to its
stockholders. (B) The dividends are tax exempt because of MGC Corp.'s income tax
holiday. (C) The dividends are taxable if they exceed 50% of MGC Corp.'s retained
earnings. (D) The dividends are exempt if paid before the end of MGC Corp.'s fiscal
year.

SUGGESTED
ANSWER:

(A) The dividends are taxable; the tax exemption of MGC Corp. does not extend to
its stockholders.

MGC Corp. and its stockholders are separate tax entities under the NIRC.
Consequently, MGC Corp.’s tax exemption does not extend to its stockholders.

Under the NIRC, stockholders who receive dividends from a domestic corporation are
subject to the following scheduler income tax rates: 10% for Filipino citizens and
individual resident aliens6; 20% for non-resident aliens engaged in trade or business7;
and 15% for non-resident foreign corporations8. Thus, the stockholder’s claim for the tax
exemption is unmeritorious.

(c) Royalty
income (d)
Rental income
(1) Lease of personal
property (2) Lease of real
property (3) Tax treatment
of
(a) Leasehold improvements by
lessee (b) VAT added to rental/paid by
the lessee

In June 2013, DDD Corp., a domestic corporation engaged in the business of leasing real
properties in the Philippines, entered into a lease agreement of a residential house and
lot with EEE, Inc., a non-resident foreign corporation. The residential house and lot will
be used by officials of EEE, Inc. during their visit to the Philippines. The lease agreement
was signed by representatives from DDD Corp. and EEE, Inc. in Singapore. DDD Corp.
did not subject the said lease to VAT believing that it was not a domestic service
contract. Was DDD Corp. correct? Explain. (2015 Bar Question)
 SUGGESTED
ANSWER:

DDD Corp. is not correct. Any person who, in the ordinary course of trade or business,
leases

properties, whether personal or real, shall be subject to value-added tax (VAT), except for
unless the gross annual receipts of the lessor do not exceed P1,919,500.00 or that the monthly
rental does not exceed P12,800, for residential units. Based on the destination principle, goods
and services are taxed only in the country where they are consumed. Here , the services
rendered to the officials of EEE are within the Philippines. Hence, DDD Corp. is subject to VAT.

(c) Advance rental/long term lease (vii) Annuities, proceeds

from life insurance or other types of insurance (viii) Prizes and awards (ix)
Pensions, retirement benefit, or separation pay (x) Income from any source
whatever (a) Forgiveness of indebtedness (b) Recovery of accounts
previously written-off – when taxable/when not taxable (c) Receipt of tax
refunds or credit (d) Income from any source whatever (e) Source rules in
determining income from within and without
(1) Interests (2) Dividends (3)
Services

For income tax purposes, the source of the service income is important for the taxpayer,
who is a: (2012 Bar Question)

a) Filipino citizen residing in Makati City; b) Non-resident Filipino citizen working residing
in London, United Kingdom; c) Japanese citizen who is married to a Filipino citizen and
residing in their family home located Fort Bonifacio, Taguig City; d) Domestic
corporation.

SUGGESTED
ANSWER:

b) Non-resident Filipino citizen working residing in London, United

Kingdom

Section 23 in relation to Section 42,

NIRC.

(4)
Rentals

During the audit conducted by the BIR official, it was found that the rental income
claimed by the corporation was not subjected to expanded withholding tax. Accordingly,
the claimed rental expense: (2012 Bar Question)

a) Is deductible from the gross income of the corporation, despite non-withholding of

income tax by the corporation; b) Is deductible from the gross income of the corporation,
 provided that the 5% expanded withholding tax is paid by the corporation during the
audit; c) Is not deductible from gross income of the corporation due to non-withholding of
tax; d) Is deductible, if it can be shown that the lessor has correctly reported the rental
income in his tax return.

SUGGESTED
ANSWER:

c) Is not deductible from gross income of the corporation due to non-

withholding of tax;

Section 34(K), NIRC. [Note: Percentage tax

is outside of the coverage]

(5) Royalties (6) Sale of

real property (7) Sale of
personal property

Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a

nonresident citizen.

a) If the goods were produced from Ms. B's factory in the Philippines, is Ms. B's
income from the sale to Ms. C taxable in the Philippines? Explain.

b) If Ms. B is an alien individual and the goods were produced in her factory in
China, is Ms. B's income from the sale of the goods to Ms. C taxable in the
Philippines? Explain. (2015 Bar Question)

SUGGESTED
ANSWER:

a. Yes, the income of Ms. B from the sale of ready-to-wear goods to Ms. C is taxable. A
nonresident citizen is taxable only on income derived from sources within the Philippines. In line
with the source rule of income taxation, since the goods are produced and sold within the
Philippines, Ms. B’s Philippine-sourced income is taxable in the Philippines.

b. Yes, but only a proportionate part of the income. Gains, profits and income from the
sale of personal property produced by the taxpayer without and sold within the Philippines, shall
be treated as derived partly from sources within and partly without the Philippines.

(8) Shares of stock of domestic

corporation

(f) Situs of income taxation (see page 2 under inherent limitations,

territorial)
(g) Exclusions from gross
income

(1) Rationale for the exclusions (2) Taxpayers who

may avail of the exclusions (3) Exclusions
distinguished from deductions and tax credit (4)
Under the Constitution
(a) Income derived by the government or its political subdivisions from the
exercise of
any essential governmental function
(5) Under the Tax Code
(a) Proceeds of life insurance policies (b) Return of premium paid
(c) Amounts received under life insurance, endowment or annuity
contracts

True or
False.

Gains realized by the investor upon redemption of shares of stock in a mutual fund
company are exempt from income tax. (2010 Bar Question)

SUGGESTED ANSWER: TRUE.

The proceeds received under a life insurance endowment contract is NOT considered
part of gross income: (2011 Bar Question)

(A) if it is so stated in the life insurance endowment policy. (B) if the price
for the endowment policy was not fully paid. (C) where payment is made
as a result of the death of the insured. (D) where the beneficiary was not
the one who took out the endowment contract.

SUGGESTED
ANSWER:

(C) where payment is made as a result of the death of the

insured.

All the items below are excluded from gross income, except: (2012 Bar
Question)

a) Gain from sale of long-term bonds, debentures and indebtedness; b) Value of

property received by a person as donation or inheritance; c) Retirement benefits
received from the GSIS, SSS, or accredited retirement plan; d) Separation pay received
by a retiring employee under a voluntary retirement program of the corporate employer.
SUGGESTED
ANSWER:

d) Separation pay received by a retiring employee under a voluntary retirement

program of the corporate employer.

Section 32(B)(6),
NIRC.

(d) Value of property acquired by gift, bequest, devise or

descent (e) Amount received through accident or health
insurance (f) Income exempt under tax treaty (g) Retirement
benefits, pensions, gratuities, etc. (h) Winnings, prizes, and
awards, including those in sports competition

Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a professional

boxing match held in 2013, he won prize money in United States (US) dollars equivalent
to P300,000,000.

a) Is the prize money paid to and received by Mr. A in the US taxable in the
Philippines? Why? b) May Mr. A's prize money qualify as an exclusion from his
gross income? Why? c) The US already imposed and withheld income taxes from
Mr. A's prize money. How may Mr. A use or apply the income taxes he paid on his
prize money to the US when he computes his income tax liability in the
Philippines for 2013? (2015 Bar Question)

SUGGESTED
ANSWER:

a. Yes. Under the Tax Code, the income within and without of a resident citizen is taxable.
Since Mr. A is a resident Filipino citizen, his income worldwide is taxable in the Philippines.

b. No. Under the law, all prizes and awards granted to athletes in local and international
sports competitions whether held in the Philippines or abroad and sanctioned by their national
sports association are excluded from gross income. However, in this case, there is no showing
that the boxing match was sanctioned by the Philippine National Sports Commission. Therefore,
the prize money is not excluded.

c. Mr. A may avail of tax credit against his tax liability in the Philippines for taxes paid in
foreign countries. He has to signify in his income tax return his desire to avail the deduction.

(6) Under special

laws
(a) Personal Equity and Retirement
Account
 (h) Deductions from gross
income
(1) General
rules
(a) Deductions must be paid or incurred in connection with the taxpayer’s trade,
business
or profession (b) Deductions must be supported by adequate receipts or invoices (except
standard
deduction) (c) Additional requirement relating to
withholding

(2) Return of capital (cost of sales or

services)

(a) Sale of inventory of goods by manufacturers and dealers of

properties (b) Sale of stock in trade by a real estate dealer and
dealer in securities (c) Sale of services

(3) Itemized
deductions
(a)
Expenses
(1) Requisites for
deductibility
(a) Nature: ordinary and necessary
(b) Paid and incurred during taxable
year

(2) Salaries, wages and other forms of compensation for personal services
actually rendered, including the grossed-up monetary value of the fringe benefit
subjected to fringe benefit tax which tax should have been paid

(3) Travelling/transportation expenses (4) Cost of materials

(5) Rentals and/or other payments for use or possession of
property (6) Repairs and maintenance (7) Expenses under
lease agreements (8) Expenses for professionals (9)
Entertainment/Representation expenses (10) Political
campaign expenses

Political campaign contributions are NOT deductible from gross income: (2011 Bar
Question)

(A) if they are not reported to the Commission on

Elections.

(B) if the candidate supported wins the election because of possible

corruption. (C) since they do not help earn the income from which they are to
 be deducted. (D) since such amounts are not considered as income of the
candidate to whom given.

SUGGESTED
ANSWER:

(C) since they do not help earn the income from which they are to be
deducted.

(11) Training
expenses

(b)
Interest
(1) Requisites for deductibility
(2) Non-deductible interest
expense (3) Interest subject to
special rules
(a) Interest paid in advance (b) Interest periodically amortized (c) Interest
expense incurred to acquire property for use in trade/business/profession
(d) Reduction of interest expense/interest arbitrage

The interest expense of a domestic corporation on a bank loan in connection with the
purchase of a production equipment: (2012 Bar Question)

a) Is not deductible from gross income of the borrower-corporation; b) Is deductible from

the gross income of the borrower-corporation during the year or it may be capitalized as
part of cost of the equipment; c) Is deductible only for a period of five years from date of
purchase; d) Is deductible only if the taxpayer uses the cash method of accounting.

SUGGESTED
ANSWER:

b) Is deductible from the gross income of the borrower-corporation during the

year or it may be capitalized as part of cost of the equipment.

Section 34(B)(3),
NIRC.

(c)
Taxes
(1) Requisites for
deductibility

(2) Non-deductible taxes (3) Treatments of

surcharges/interests/fines for delinquency (4)
Treatment of special assessment (5) Tax credit vis-à-
vis deduction
 (d)
Losses

(1) Requisites for

deductibility

A is a travelling salesman working full time for Nu Skin Products. He receives a monthly
salary plus 3% commission on his sales in a Southern province where he is based. He
regularly uses his own car to maximize his visits even to far flung areas. One fine day a
group of militants seized his

car. He was notified the following day by the police that the marines and the militants had
a bloody encounter and his car was completely destroyed after a grenade hit it.

A wants to file a claim for casualty loss. Explain the legal basis of your tax advice. (2010
Bar Question)

SUGGESTED
ANSWER:

A is not entitled to claim a casualty loss because all of his income partake the nature of
compensation income. Taxpayers earning compensation income arising from personal services
under an employer-employee relationship are not allowed to claim deduction except those
allowed under Sec. 34(M) of the Tax Code referring only to Php 2,400 health and hospitalization
insurance premiums. Therefore, the claim of casualty loss has no legal basis.

(2) Other types of

losses
(a) Capital losses (b) Securities becoming
worthless (c) Losses on wash sales of
stocks or securities (d) Wagering losses
(e) Net Operating Loss Carry-Over
(NOLCO)

(e) Bad
debts
(1) Requisites for deductibility
(2) Effect of recovery of bad
debts

(f)
Depreciation
(1) Requisites for deductibility (2) Methods
of computing depreciation allowance
(a) Straight-line method (b) Declining-balance method
(c) Sum-of-the-years-digit method
 (g) Charitable and other
contributions
(1) Requisites for
deductibility

Dr. Taimtim is an alumnus of the College of Medicine of Universal University (UU), a

privately- owned center for learning which grants yearly dividends to its stockholders.

UU has a famous chapel located within the campus where the old folks used to say that
anyone who wanted to pass the medical board examinations should offer a dozen roses
on all the Sundays of October. This was what Dr. Taimtim did when he was still reviewing
for the board examinations. In his case, the folk saying proved to be true because he is
now a successful cardiologist. Wanting to give back to the chapel and help defray the
costs of its maintenance, Dr. Taimtim donated P50,000.00 to the caretakers of the chapel
which was evidenced by an acknowledgment receipt.

In computing his net taxable income, can Dr.Taimtim use his donation to the chapel as
an allowable deduction from his gross income under the National Internal Revenue Code
(NIRC)?

SUGGESTED ANSWER
:

No. the donation is not deductible. The chapel is owned by a privately-owned university
hence, the donation for the maintenance of the chapel is a donation to the university. The
donation to be deductible must comply with the requirement that the net income of the done
must not inure to the benefit of any private stockholder or individual. In the instant case, the
university is granting yearly dividends to its stock holders which is a clear violation of the law
appertaining to the so-called “private inurement doctrine” thereby making the donation non-
deductible (Section 34(H)(1), NIRC).

(2) Amount that may be

deducted

(h) Contributions to pension

trusts
(1) Requisites for
deductibility

(i) Deductions under special

laws

(4) Optional standard

deduction
(a) Individuals, except non-resident
aliens
In 2012, Dr. K decided to return to his hometown to start his own practice. At the end of
2012, Dr. K found that he earned gross professional income in the amount of
P1,000,000.00; while he incurred expenses amounting to P560,000.00 constituting mostly
of his office space rent, utilities, and miscellaneous expenses related to his medical
practice. However, to Dr. K's dismay, only P320,000.00 of his expenses were duly
covered by receipts. What are the options available for Dr. K so he could maximize the
deductions from his gross income? (2015 Bar Question)

SUGGESTED
ANSWER:

Dr. K may opt to use the optional standard deduction (OSD) in lieu of the itemized
deduction. OSD is a maximum of forty percent (40%) of gross receipts during the taxable year.
Proof of actual expenses is not required, but Dr. K shall keep such records pertaining to his
gross receipts.

(b) Corporations, except non-resident foreign

corporations

True or
False.

A corporation can claim the optional standard deduction equivalent to 40% of its
gross sales or receipts, as the case may be. (2010 Bar Question)

SUGGESTED
ANSWER:

FALSE. The OSD should not exceed 40% of its gross

income.

(c)
Partnerships

(5) Personal and additional exemption (R.A. No. 9504, Minimum Wage
Earner Law)
(a) Basic personal exemptions (b) Additional
exemptions for taxpayer with dependents

Dondon and Helena were legally separated. They had six minor children, all qualified to
be claimed as additional exemptions for income tax purposes. The court awarded
custody of two of the

children to Dondon and three to Helena, with Dondon directed to provide full financial
support for them as well. The court awarded the 6th child to Dondon's father with
Dondon also providing full financial support. Assuming that only Dondon is gainfully
employed while Helena is not, for how many children could Dondon claim additional
exemptions when he files his income tax return? (2011 Bar Question)

(A) Six children.

(B) Five children.
(C) Three
children. (D) Two
children.

SUGGESTED
ANSWER:

(D) Two
children.

Premium payment for health insurance of an individual who is an employee in an amount

of P2,500 per year may be deducted from gross income if his gross salary per year is not
more than P250,000.(2010 Bar Question)

SUGGESTED ANSWER: False. (Sec. 34(M), NIRC)

(c) Status-at-the-end-of-the-year rule (d)

Exemptions claimed by non-resident
aliens

True or
False.

A non-resident alien who stays in the Philippines for less than 180 days during the
calendar year shall be entitled to personal exemption not to exceed the amount
allowed to citizens of the Philippines by the country of which he is subject or citizen.
(2010 Bar Question)

SUGGESTED ANSWER: False. [Sec. 25(A)(1) in relation to Sec. 35,

NIRC]

(6) Items not

deductible
(a) General rules (b) Personal, living or family expenses (c) Amount paid for new
buildings or for permanent improvements (capital expenditures) (d) Amount
expended in restoring property (major repairs) (e) Premiums paid on life insurance
policy covering life or any other officer or employee
financially interested (f) Interest expense, bad debts, and losses from sales of
property between related parties (g) Losses from sales or exchange or property
 (h) Non-deductible interest (i) Non–deductible taxes (j) Non-deductible losses (k)
Losses from wash sales of stock or securities

(7) Exempt
corporations

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2010-2015 Taxation Law Bar
Examinations

(a) Propriety educational institutions and

hospitals

The head priest of the religious sect Tres Personas Solo Dios, as the corporation sole,
rented out a 5,000 sq. m. lot registered in its name for use as school site of a school
organized for profit. The sect used the rentals for the support and upkeep of its priests.
The rented lot is: (2011 Bar Question)

(A) not exempt from real property taxes because the user is organized for profit. (B)
exempt from real property taxes since it is actually, directly, and exclusively used for
religious purposes. (C) not exempt from real property taxes since it is the rents, not the
land, that is used for religious purposes. (D) exempt from real property taxes since it is
actually, directly, and exclusively used for educational purposes.

SUGGESTED
ANSWER:

(D) exempt from real property taxes since it is actually, directly, and exclusively
used for educational purposes.

(b) Government-owned or controlled

corporations (c) Others

10. Taxation of resident citizens, non-resident citizens, and

resident aliens

a) General rule that resident citizens are taxable on income from all sources within
and
without the
Philippines (i) Non-
resident citizens

b) Taxation on compensation
income
(i)
Inclusions
 (a) Monetary
compensation
(1) Regular salary/wage (2) Separation pay/retirement
benefit not otherwise exempt (3) Bonuses, 13th month pay,
and other benefits not exempt (4) Director’s fees (b) Non-
monetary compensation
(1) Fringe benefit not subject to
tax

(ii)
Exclusions
(a) Fringe benefit subject to
tax (b) De minimisbenefits

Which of the following is an exclusion from gross income? (2014 Bar

Question)
(A) Salaries and wages (B) Cash dividends (C)
Liquidating dividends after dissolution of a
corporation (D) De minimis benefits (E) Embezzled
money

SUGGESTED ANSWER
:

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2010-2015 Taxation Law Bar
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D. De minimis
benefits

What are de minimis benefits and how are these taxed? Give three (3) examples of de
minimis benefits. (2015 Bar Question)

SUGGESTED
ANSWER:

De minimis benefits are facilities, and privileges furnished or offered by an employer to

his employees, which are not considered as compensation subject to income tax and
consequently to withholding tax, if such facilities or privileges are of relatively small value and
are offered or furnished by the employer merely as means of promoting the health, goodwill,
contentment, or efficiency of his employees.

The excess over the de minimis limit prescribed shall be considered, along with the
“other benefits” under Section 32(B)(7)(e)(iv), NIRC, in determining whether or not the P82,000
threshold has been exceeded. Any excess over the de minimis ceiling may be exempt if it is
covered by the unused portion of the P82,000.00 non-taxable “other benefits”. Otherwise, any
amount in excess of the P82,000.00 threshold becomes subject to tax.

The following shall be considered as “de minimis”

benefits:

1. Monetized unused vacation leave credits of private employees not exceeding 10 days
during the
year; 2. Monetized unused vacation and sick leave credits paid to government officials and
employees,
regardless of the number of days; 3. Medical cash allowance to dependents of employees,
not exceeding P750 per employee per
semester or P125 per month; 4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per
month amounting to not more than
P1,500; 5. Uniform and clothing allowance not exceeding P5,000 per annum; 6. Actual
medical assistance not exceeding P10,000 per annum; 7. Laundry allowance not exceeding
P300 per month; 8. Employees achievement awards, e.g., for length of service or safety
achievement, which must be in the form of a tangible personal property other than cash or
gift certificate, with an annual monetary value not exceeding P10,000 received by the
employee under an established written plan which does not discriminate in favor of highly
paid employees; 9. Gifts given during Christmas and major anniversary celebrations not
exceeding P50,000 per
employee per annum; 10. Daily meal allowance for overtime work and night/graveyard shift
not exceeding 25% of the
basic minimum wage on a per region basis; 11. Benefits received by an employee by virtue
of a collective bargaining agreement (CBA) and productivity incentive schemes provided
that the total annual monetary value received from both CBA and productivity incentive
schemes combined do not exceed ten thousand pesos (P10,000.00) per employee per
taxable year

(c) 13th month pay and other benefits, and payments specifically excluded
from
taxable compensation
income

(iii)
Deductions
(a) Personal exemptions and additional
exemptions

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In January 2013, your friend got his first job as an office clerk. He is single and lives with
his family who depends upon him for financial support. His parents have long retired
from their work, and his two (2) siblings are still minors and studying in grade school. In
February 2014, he consulted you as he wanted to comply with all the rules pertaining to
the preparation and filing of his income tax return. He now asks you the following:
(A) Is he entitled to personal exemptions? If so, how much? (1%) (B) Is he entitled to
additional exemptions? If so, how much? (1%) (C) What is the effect of the taxes withheld
from his salaries on his taxable income? (2014 Bar Question)

SUGGESTED ANSWER
:

(A) Yes. The law allows a basic personal exemption of Php 50,000.00 for each individual
taxpayer (Section 35(A), NIRC).

(B) No. While his parents and minor sibling are living with and dependent upon him for
financial support, they are not qualified dependents for purposes of additional exemptions. The
term “dependent” for purposes of the additional personal exemption would include only
legitimate, illegitimate, or legally adopted children (Section 35(B), NIRC).

(C) The taxes withheld from his salaries will not affect his taxable income because they
are not allowed as tax deductions but as tax credits. Tax deductions reduce taxable income
while tax credits reduce the tax liability (Central Drug Corporation v. CIR).

Mr. E and Ms. F are both employees of AAA Corp. They got married on February 14,
2011. On December 29, 2011, the couple gave birth to triplets. On June 25, 2013, they
had twins. What were the personal exemptions/deductions which Mr. E and Ms. F could
claim in the following taxable years: (2015 Bar Question)

a) For
2010 b)
For 2011
c) For
2013

SUGGESTED
ANSWER:

a. Both Mr. E and Ms. F can claim for personal exemption up to

P50,000.00.

b. Either Mr. E or Ms. F can claim for additional exemption of P25,000.00 each for their
children. This is in addition to the personal exemption of P50,000.00 which they can respectively
claim. According to the Tax Code, only one of the spouses can claim for additional exemption
for every dependent.

c. Mr. E and Ms. F can claim for personal exemptions, respectively. In addition, any one of
them, exclusively, can claim for the additional exemptions in relation to their four dependents
 amounting to P25,000.00 each. Under the Tax Code, an individual may claim up to four
additional exemptions in connection with his/her dependents.

(b) Health and hospitalization insurance (c) Taxation of

compensation income of a minimum wage earner

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(1) Definition of statutory minimum wage (2) Definition of minimum wage

earner (3) Income also subject to tax exemption: holiday pay, overtime
pay, night-shift
differential, and hazard
pay

c) Taxation of business income/income from practice of

profession d) Taxation of passive income

Passive income includes income derived from an activity in which the earner does not
have any substantial participation. This type of income is: (2011 Bar Question)

(A) usually subject to a final tax.

(B) exempt from income taxation.
(C) taxable only if earned by a
citizen. (D) included in the income
tax return.

SUGGESTED
ANSWER:

(A) usually subject to a final

tax.

(i) Passive income subject to

final tax
(a) Interest
income
(i) Treatment of income from long-term deposits (b) Royalties

ABC, a domestic corporation, entered into a software license agreement with XYZ, a non-
resident foreign corporation based in the U.S. Under the agreement which the parties
forged in the U.S., XYZ granted ABC the right to use a computer system program and to
avail of technical know-how relative to such program. In consideration for such rights,
ABC agreed to pay 5% of the revenues it receives from customers who will use and apply
the program in the Philippines.

Discuss the tax implication of the transaction. (2010 Bar

Question)

SUGGESTED
ANSWER:

The amount payable under the agreement is in the nature of a royalty. The term royalty
is broad enough to include compensation for the use of an intellectual property and supply of
technical know-how as a means of enabling the application or enjoyment of any such property
or right. The royalties paid to the non-resident US Corporation, equivalent to 5% of the revenues
derived by ABCfor the use of the program in the Philippines, is subject to a 30% final
withholding tax, unless a lower tax rate is prescribed under an existing tax treaty.

(c) Dividends from domestic corporations

(d) Prizes and other winnings (ii) Passive
income not subject to final tax

e) Taxation of capital
gains
(i) Income from sale of shares of stock of a Philippine
corporation
(a) Shares traded and listed in the stock
exchange

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A resident Filipino citizen (not a dealer in securities) sold shares of stocks of a domestic
corporation that are listed and traded in the Philippine Stock Exchange. (2012 Bar
Question)

a) The sale is exempt from income tax but subject to the 1⁄2 of 1% stock transaction
tax; b) The sale is subject to income tax computed at the graduated income tax rates of
5% to 32% on net taxable income; c) The sale is subject to the stock transaction tax and
income tax; d) The sale is both exempt from the stock transaction tax and income tax.

SUGGESTED
ANSWER:

a) The sale is exempt from income tax but subject to the 1⁄2 of 1% stock
transaction tax
 Section 127,
NIRC.

(b) Shares not listed and traded in the stock

exchange

10. A dealer in securities sold unlisted shares of stocks of a domestic corporation in

2010 and derived a gain of P1 Million therefrom. The gain is: (2012 Bar Question)

a) Taxable at 30% regular corporate income tax based on net taxable income; b)
Taxable at 5%/10% capital gains tax based on net capital gain; c) Taxable at 1⁄2 of 1%
stock transaction tax based on the gross selling price or fair market value, whichever is
higher d) Exempt from income tax

SUGGESTED
ANSWER:

a) Taxable at 30% regular corporate income tax based on net taxable

income

Section 22 (U) in relation to Section 27,

NIRC.

(ii) Income from the sale of real property situated in the

Philippines

Which statement is correct? A non-stock, non-profit charitable association that sells its
idle agricultural property is: (2012 Bar Question)

a) Not required to file an income tax return nor pay income tax on the transaction to the
BIR, provided the sales proceeds are invested in another real estate during the year; b)
Required to pay the 6% capital gains tax on the gross selling price of fair market value,
whichever is higher; c) Mandated to pay the 30% regular corporate income tax on the
gain from sale; d) Required to withhold the applicable expanded withholding tax rate on
the transaction and remit the same to the BIR.

SUGGESTED
ANSWER:

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 b) Required to pay the 6% capital gains tax on the gross selling price of fair
market value, whichever is higher

Section 30,
NIRC.

(iii) Income from the sale, exchange, or other disposition of other

capital assets

11. Taxation of non-resident aliens engaged in trade or

business

a) General rules b) Cash and/or

property dividends c) Capital
gains

Exclude: non-resident aliens not engaged in trade or

business

12. Individual taxpayers exempt from income

tax
a) Senior citizens b) Minimum wage earners c)
Exemptions granted under international
agreements

13. Taxation of domestic

corporations

Prior to the VAT law, sales of cars were subject to a sales tax but the tax applied only to
the original or the first sale; the second and subsequent sales were not subject to tax.

Deltoid Motors, Inc. (Deltoid) hit on the idea of setting up a wholly-owned subsidiary,
Gonmad Motors, Inc. (Gonmad), and of selling its assembled cars to Gonmad at a low
price so it would pay a lower tax on the first sale. Gonmad would then sell the cars to the
public at a higher price without paying any sales tax on this subsequent sale.

Characterize the arrangement. (1%)(2013 Bar

Question)

(A) The plan is a legitimate exercise of tax planning and merely takes advantage of a
loophole in the law. (B) The plan is legal because the government collects taxes anyway.
(C) The plan is improper; the veil of corporate fiction can be pierced so that the second
sale will be considered the taxable sale. (D) The government must respect Gonmad's
separate juridical personality and Deltoid's taxable sale to it.

SUGGESTED
ANSWER:
 (C) The plan is improper; the veil of corporate fiction can be pierced so that the
second sale will be considered the taxable sale.

The given problem is similar to the case of Commissioner of Internal Revenue v. Norton
and Harrison Company (G.R. No. L-17618, August 31, 1964). The Supreme Court held
that “a taxpayer may gain advantage of doing business thru a corporation if he pleases,
but the revenue officers in proper cases, may disregard the separate corporate entity
where it serves but as a shield

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for tax evasion and treat the person who actually may take benefits of the transactions
as the person accordingly taxable.

To allow a taxpayer to deny tax liability on the ground that the sales were made through
another and distinct corporation when it is proved that the latter is virtually owned by the
former or that they are practically one and the same is to sanction a circumvention of our
tax laws.”

a) Tax payable
(i) Regular tax

ABS Corporation is a PEZA-registered export enterprise which manufactures cameras

and sells all its finished products abroad. Which statement is NOT correct? (2012 Bar
Question)

a) ABS Corporation is subject to the 5% final tax on gross income earned, in lieu of all
national and local taxes; b) ABS Corporation is exempt from the 30% corporate income
tax on net income, provided it pays value added tax; c) ABS Corporation is subject to the
30% corporate income tax on net income; d) ABS Corporation is exempt from all
national and local taxes, except real property tax.

SUGGESTED
ANSWER:

a) ABS Corporation is subject to the 5% final tax on gross income earned, in lieu
of all national and local taxes

Sections 23 & 24, RA

7916.

(ii) Minimum Corporate Income Tax

(MCIT)
 (a) Imposition of
MCIT

KKK Corp. secured its Certificate of Incorporation from the Securities and Exchange
Commission on June 3, 2013. It commenced business operations on August 12, 2013. In
April 2014, Ms. J, an employee of KKK Corp. in charge of preparing the annual income
tax return of the corporation for 2013, got confused on whether she should prepare
payment for the regular corporate income tax or the minimum corporate income tax.

a) As Ms. J's supervisor, what will be your advice? b) What are the distinctions between
regular corporate income tax and minimum corporate income tax? (2015 Bar Question)

SUGGESTED
ANSWER:

a. As Ms. J’s supervisor, I will advise that KKK Corp. should prepare payment for the
regular corporate income tax. Under the Tax Code, Minimum Corporate Income Tax (MCIT) is
applicable beginning on the fourth taxable year following the commencement of operation.
Thus, in this case, KKK Corp. will only apply MCIT starting taxable year 2017.

b. Distinction as to taxpayer: Regular corporate income tax applies to all corporate

taxpayers; while minimum corporate income tax applies to domestic corporations and resident
foreign corporations.

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Distinction as to rate: Regular income tax is 30%; while minimum corporate income
tax is 2%.

Distinction as to tax base: Regular corporate income tax is based on the net taxable
income, except nonresident foreign corporation which is based on gross income; while minimum
corporate income tax is based on gross income.

Distinction as to period of applicability: Regular corporate income tax is applicable once

the corporation commenced its operation, while MCIT is applicable beginning the fourth taxable
year following the commencement of operation.

(b) Carry forward of excess minimum tax (c) Relief from the MCIT under
certain conditions (d) Corporations exempt from the MCIT (e) Applicability of
the MCIT where a corporation is governed both under the
regular tax system and a special income tax
system
 b) Allowable
deductions

Which of the following should not be claimed as deductions from gross income? (2014
Bar Question)
(A) discounts given to senior citizens on certain goods and services. (B)
advertising expense to maintain some form of goodwill for the taxpayer’s
business. (C) salaries and bonuses paid to employees. (D) interest payment on
loans for the purchase of machinery and equipment used in business.

SUGGESTED ANSWER
:

B. Advertising expense to maintain some form of goodwill for the taxpayer’s

business.

Freezy Corporation, a domestic corporation engaged in the manufacture and sale of ice
cream, made payments to an officer of Frosty Corporation, a competitor in the ice cream
business, in exchange for said officer’s revelation of Frosty Corporation’s trade secrets.

May Freezy Corporation claim the payment to the officer as deduction from its gross
income? Explain. (2014 Bar Question)

SUGGESTED ANSWER
:

No. The payments made in exchange for the revelation of a competitors trade secrets is
considered an expense which is against law, morals, good customs, or public policy, which is
not deductible (3M Philippines, Inc. v. CIR, G.R. No. 82833, September 26, 1988). Also, the law
will not allow the deduction of bribes, kickback, and other similar payments. Applying the
principle of ejusdem generis, payment made by Freezy Corporation would fall under “other
similar payments” which are not allowed as deduction from gross income (Section 34(A)(1)(c),
NIRC).

(i) Itemized deductions (ii)

Optional standard deduction

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The excess of allowable deductions over gross income of the business in a taxable year
is known as: (2011 Bar Question)
 (A) net operating
loss. (B) ordinary
loss. (C) net
deductible loss. (D)
NOLCO.

SUGGESTED
ANSWER:

(A) net operating

loss.

c) Taxation of passive
income

(i) Passive income subject to

tax
(a) Interest from deposits and yield, or any other monetary benefit from
deposit
substitutes and from trust funds and similar arrangements and royalties (b) Capital gains
from the sale of shares of stock not traded in the stock exchange (c) Income derived
under the expanded foreign currency deposit system (d) Inter-corporate dividends
(e) Capital gains realized from the sale, exchange, or disposition of lands and/or
building
s

(ii) Passive income not subject to

tax

d) Taxation of capital
gains
(i) Income from sale of shares of stock (ii) Income from the sale of real
property situated in the Philippines (iii) Income from the sale,
exchange, or other disposition of other capital assets

Sale of residential house and lot by an official of a domestic corporation to another

official in the same corporation for a consideration of P2.5 Million in 2011 is: (2012 Bar
Question)

a) Exempt from VAT because the gross sales do not exceed P2.5 Million; b) Exempt
from VAT because the property sold is a capital asset, regardless of the gross selling
price; c) Exempt from VAT because the seller is not a person engaged in real estate
business; d) Taxable at 12% VAT output tax on the gross selling price of P2.5 Million.

SUGGESTED
ANSWER:

b) Exempt from VAT because the property sold is a capital asset, regardless of the
gross selling price
 Section 106,
NIRC.

e) Tax on proprietary educational institutions and

hospitals

Lualhati Educational Foundation, Inc., a stock educational institution organized for profit,
decided to lease for commercial use a 1,500 sq. m. portion of its school. The school
actually, directly, and

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exclusively used the rents for the maintenance of its school buildings, including payment
of janitorial services. Is the leased portion subject to real property tax? (2011 Bar
Question)

(A) Yes, since Lualhati is a stock and for profit educational institution. (B) No, since the
school actually, directly, and exclusively used the rents for educational purposes. (C) No,
but it may be subject to income taxation on the rents it receives. (D) Yes, since the leased
portion is not actually, directly, and exclusively used for educational purposes.

SUGGESTED
ANSWER:

(D) Yes, since the leased portion is not actually, directly, and exclusively used for
educational purposes.

f) Tax on government-owned or controlled corporations, agencies or

instrumentalities

14. Taxation of resident foreign

corporations
a) General rule b) With respect to their income from sources
within the Philippines

c) Minimum Corporate Income

Tax d) Tax on certain income

(i) Interest from deposits and yield, or any other monetary benefit from deposit
substitutes, trust funds and similar arrangements and royalties (ii) Income
derived under the expanded foreign currency deposit system (iii) Capital
gains from sale of shares of stock not traded in the stock exchange (iv)
Inter-corporate dividends
 Exclud
e:

(i) International carrier (ii) Offshore banking units (iii) Branch profits remittances
(iv) Regional or area headquarters and regional operating headquarters of
multinational
compani
es

15. Taxation of non-resident foreign

corporations

a) General rule b) Tax

on certain income
(i) Interest on foreign loans (ii) Inter-corporate dividends (iii) Capital
gains from sale of shares of stock not traded in the stock exchange

Zygomite Minerals, Inc., a corporation registered and holding office in Australia, not
operating in the Philippines, may be subject to Philippine income taxation on: (2011 Bar
Question)

(A) gains it derived from sale in Australia of an ore crusher it bought from the Philippines
with the proceeds converted to pesos.

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(B) gains it derived from sale in Australia of shares of stock of Philex Mining Corporation,
a Philippine corporation. (C) dividends earned from investment in a foreign corporation
that derived 40% of its gross income from Philippine sources. (D) interests derived from
its dollar deposits in a Philippine bank under the Expanded Foreign Currency Deposit
System.

SUGGESTED
ANSWER:

(B) gains it derived from sale in Australia of shares of stock of Philex Mining
Corporation, a Philippine corporation.

Exclud
e:
(i) Non-resident cinematographic film-owner, lessor or distributor (ii)
Non-resident owner or lessor of vessels chartered by Philippine
nationals (iii) Non-resident owner or lessor of aircraft machineries and
other equipment
16. Improperly accumulated earnings of
corporations

What is the "immediacy test"? Explain briefly. (2010 Bar

Question)

SUGGESTED
ANSWER:

This test is applied to determine whether the accumulation of after tax profits by a
domestic or resident foreign corporation is really for the reasonable needs of the business.
Under this test, the reasonable needs of the business are construed to mean the immediate
needs. The corporation should be able to prove an immediate need for the accumulation of
earnings and profits, or the direct correlation of anticipated needs to such accumulation of
profits to justify the said accumulation.

True or
False.

The capitalization rules may be resorted to by the BIR in order to compel corporate
taxpayers to declare dividends to their stockholders regularly. (2010 Bar Question)

SUGGESTED ANSWER: True. [Sec. 244, NIRC; Rev. Regulation No. 2-2001 implementing
Sec. 29 , NIRC)

In 2009, Spratz, Inc.’s net profit before tax was P35 million while its operating expenses
was P31 million. In 2010, its net profit before tax was P40 million and its operating
expenses was P38 million. It did not declare dividends for 2009 and 2010. And it has no
proposed capital expenditures for 2011 and the immediate future. May Spratz be subject
to the improperly accumulated tax on its retained profits for 2009 and 2010? (2011 Bar
Question)

(A) Yes, since the accumulated amounts are reasonable for operations in relation to
what it usually needed annually. (B) Yes, since the accumulation is not reasonably
necessary for the immediate needs of the business. (C) No, because there is no
showing that the taxpayer's 2009 and 2010 net profit before tax exceeded its paid-up
capital.

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(D) No, because the taxpayer is not shown to be a publicly-listed corporation, a bank, or
an insurance company.
SUGGESTED
ANSWER:

(B) Yes, since the accumulation is not reasonably necessary for the immediate
needs of the business.

17. Exemption from tax on

corporations

18. Taxation of
partnerships

19. Taxation of general professional

partnerships

Atty. Gambino is a partner in a general professional partnership. The partnership

computes its gross revenues, claims deductions allowed under the Tax Code, and
distributes the net income to the partners, including Atty. Gambino, in accordance
with its articles of partnership.

In filing his own income tax return, Atty. Gambino claimed deductions that the
partnership did not claim, such as purchase of law books, entertainment expenses, car
insurance and car depreciation. The BIR disallowed the deductions.

Was the BIR correct? (2013 Bar

Question)

SUGGESTED
ANSWER:

The BIR is wrong in disallowing the

deductions.

Under Section 26 of the NIRC, a genreal professional partnership is exempt from income
tax and, thus, cannot claim deductions. However, partners in a general professional partnership
are liable, in their separate and individual capacities, for the payment of income tax computed
on their distributive share of the general professional partnership’s profits. Consequently, these
partners may claim deductions under Section 34 of the NIRC from their gross income.

In the given problem, Atty. Gambino’s expenses for the purchase of law books and the
availment of car insurance are allowable deductions because they are ordinary and necessary
expenses in the exercise of his profession. Law books are directly attributable to Atty.
Gambino’s development and conduct as a lawyer pursuant to Section 34(A)(1)(a) of the NIRC.
Meanwhile, car insurance is an ordinary and necessary expense in the purchase of a car. It
should be noted that cars are ordinarily used by lawyers who travel from one place to another
for purposes of attending hearings, meeting clients, signing agreements, and the like. For these
same reasons, a reasonable allowance for the car’s depreciation is deductible under Section
(34)(F)(1) of the NIRC. A reasonable allowance for entertainment or representation expenses
can also be claimed as deduction from gross income, as these expenses are directly connected
or in the furtherance of the conduct of Atty. Gambino’s profession as a lawyer, applying Section
(34)(A)(1)(a)(iv) of the NIRC and Revenue Regulation No. 10-2002.

XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer,
received a query by e-mail from Gainsburg Corporation, a corporation organized under
the laws of Delaware, but the e-mail came from California where Gainsburg has an office.
Gainsburg has no office in the Philippines and does no business in the Philippines.

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XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the
opinion. Gainsburg remitted its payment through Citibank which converted the remitted
US$1 ,000 to pesos and deposited the converted amount in the XYZ Law Offices
account.

What are the tax implications of the payment to XYZ Law Offices in terms of VAT and
income taxes? (2013 Bar Question)

SUGGESTED
ANSWER:

Preliminarily, XYZ Law Offices is a general professional partnership which is defined

under Sec. 22(B) of the NIRC as a partnership formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging in
any trade or business. On the other hand, Gainsburg is considered as a nonresident foreign
corporation under Sec. 22(I) of the NIRC. The tax implications are as follows:

As to VAT: XYZ Law Offices, as a general professional partnership, is subject to VAT as

it rendered services to Gainsburg. Pursuant to Sec. 105 of the NIRC, any person who, in the
course of business, renders services shall be subject to VAT.

In the given problem, the XYZ Law Offices rendered services to a nonresident person
not engaged in business and which is outside the Philippines. The consideration for the services
was paid in an acceptable foreign currency. Therefore, the transaction in the given problem is
subject to zero percent (0%) rate of VAT provided under Sec. 108 (B)(2) of the NIRC.

As to income tax: XYZ Law Office is not subject thereto because it is a general
professional partnership. Sec. 26 of the NIRC expressly provides that a general professional
partnership shall not be subject to the income tax. Persons engaging in business as partners in
a general professional partnership shall be liable for income tax only in their separate and
individual capacities.

A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can
practice their profession as lawyers. For the year 2012, ABC Law Firm received earnings
and paid expenses, among which are as follows:
Earning
s:
(1) Professional/legal fees from various clients (2) Cash prize received from a
religious society in recognition of the exemplary service of ABC Law Firm (3)
Gains derived from sale of excess computers and laptops

Payment
s:
(1) Salaries of office staff (2) Rentals for office space (3) Representation expenses
incurred in meetings with clients (A) What are the items in the above mentioned
earnings which should be included in the computation of ABC Law Firm’s gross
income? Explain. (B) What are the items in the above-mentioned payments which
may be considered as deductions from the gross income of ABC Law Firm?
Explain. (C) If ABC Law Firm earns net income in 2012, what, if any, is the tax
consequence on the part of ABC Law Firm insofar as the payment of income tax is
concerned? What, if any, is the tax consequence on the part of A, B, and C as
individual partners, insofar as the payment of income tax is concerned? (2014 Bar
Question)

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SUGGESTED ANSWER
:

(A) The three (3) items of earnings should be included in the computation of ABC Law
Firm’s gross income. The professional/legal fees from various clients is included as part of gross
income being in the nature of compensation for services (Section 32(A)(1), NIRC). The cash
prize from a religious society in recognition of its exemplary services is also included there being
no law providing for its exclusion. This is not a prize in recognition of any of the achievements
enumerated under the law hence, should form part of gross income (Section 32(B)(7)(c), NIRC).
The gains from sale of excess computers and laptops should also be included as part of the
firm’s gross income because the term gross income specifically includes gains derived from
dealings in property (Section 32(A)(3), NIRC).

(B) The law firm being formed as general professional partnership is entitled to the same
deductions allowed to corporation (Section 26, NIRC). Hence, the three (3) items of deductions
mentioned in the problem are all deductible, they being in the nature of ordinary and necessary
expenses incurred in the practice of profession (Section 34(A), NIRC). However, the amount
deductible for representation expenses incurred by a taxpayer engaged in sale of services,
including a law firm, is subject to a ceiling of 1% of net revenue. (RR No. 10-2002)

(C) The net income having been earned by the law firm which is formed and qualifies as
a general professional partnership, is not subject to income tax because the earner is devoid of
any income tax personality. Each partner shall report as gross income his distributive shares,
actuality or constructively received, in the net income of the partnership. The partnership is
merely treated for income tax purposes as a pass-through entity so that its net income is not
taxable at the level of the partnership bur said net income should be attributed to the partners,
whether or not distributed to them, and they are liable to pay the income tax based on their
respective taxable income as individual taxpayers (Section 26, NIRC).

20. Withholding
tax

a) Concept
b) Kinds
(i) Withholding of final tax on certain
incomes

BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014. In June
2015, its Board of Directors approved the distribution of cash dividends to its
stockholders. BBB, Inc. has individual and corporate stockholders. What is the tax
treatment of the cash dividends received from BBB, Inc. by the following stockholders:
(2015 Bar Question)
a) A resident citizen b) Non-resident alien
engaged in trade or business c) Non-resident
alien not engaged in trade or business d)
Domestic corporation e) Non-resident foreign
corporation

SUGGESTED
ANSWER:

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a. A final withholding tax of ten percent (10%) shall be imposed upon the cash dividends
actually or constructively received by a resident citizen from BBB, Inc.

b. A final withholding tax of twenty percent (20%) shall be imposed upon the cash
dividends actually or constructively received by a nonresident alien engaged in trade or
business from BBB, Inc.

c. A final withholding tax equal to twenty-five percent (25%) of the entire income
received from all sources within the Philippines, including the cash dividends received from
BBB, Inc.
 d. Dividends received by a domestic corporation from another corporation, such as BBB,
Inc., shall not be subject to tax.

e. A final withholding tax of fifteen percent (15%) is imposed on the amount of cash
dividends received from BBB, Inc., subject to the tax sparing credit provision (Section
28(B)(5)(b), NIRC). The application of the tax sparing credit is that the country-domicile of the
recipient corporation allows a credit against the tax due from the non-resident foreign
corporation. Otherwise, the applicable tax rate is thirty percent (30%) of the gross income
received during each taxable year from all sources within the Philippines. (ii) Withholding of creditable tax
at source

c) Withholding of VAT d) Filing of return and

payment of taxes withheld

Indicate whether each of the following individuals is required or not required to file an
income tax return: (2015 Bar Question)
a) Filipino citizen residing outside the Philippines on his income from
sources outside the Philippines. b) Resident alien on income derived from
sources within the Philippines. c) Resident citizen earning purely
compensation income from two employers within the Philippines, whose
income taxes have been correctly withheld. d) Resident citizen who falls
under the classification of minimum wage earners. e) An individual whose
sole income has been subjected to final withholding tax.

SUGGESTED
ANSWER:

a. No, because a non-resident Filipino citizen is taxable only in income sourced within
the Philippines.

b. Yes because a resident alien is taxable for income derived from sources within the
Philippines.

c. Yes. A resident citizen who is earning purely compensation income from two
employers should file income tax return for not being qualified for substituted filing.

d. No. Under the law, all minimum wage earners in the private and public sector shall be
exempt from payment of income tax.

e. No. Under the law, an individual whose sole income has been subjected to final
withholding tax pursuant to Section 57(A) of the NIRC need not file a return.

(i) Return and payment in case of government

employees

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 (ii) Statements and
returns

e) Final withholding tax at

source

True or
False.

Informer’s reward is subject to a final withholding tax of 10%. (2010 Bar

Question)

SUGGESTED ANSWER: True. (Sec. 282, NIRC)

f) Creditable withholding
tax
(i) Expanded withholding tax (ii)
Withholding tax on compensation

g) Timing of
withholding

The payor of passive income subject to final tax is required to withhold the tax from the
payment due the recipient. The withholding of the tax has the effect of: (2011 Bar
Question)

(A) a final settlement of the tax liability on the

income. (B) a credit from the recipient's income tax
liability. (C) consummating the transaction resulting
in an income. (D) a deduction in the recipient's
income tax return.

SUGGESTED
ANSWER:

(A) a final settlement of the tax liability on the

income.

III. Estate
tax

Don Fortunato, a widower, died in May, 2011. In his will, he left his estate of P100 million
to his four children. He named his compadre, Don Epitacio, to be the administrator of the
estate. When the BIR sent a demand letter to Don Epitacio for the payment of the estate
tax, he refused to pay claiming that he did not benefit from the estate, he not being an
heir. Forthwith, he resigned as administrator. As a result of the resignation, who may be
held liable for the payment of the estate tax? (2011 Bar Question)

(A) Don Epitacio since the tax became due prior to his
resignation. (B) The eldest child who would be reimbursed by
the others. (C) All the four children, the tax to be divided
equally among them. (D) The person designated by the will
as the one liable.

SUGGESTED
ANSWER:

(C) All the four children, the tax to be divided equally among
them.

1. Basic
principles 2.
Definition

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3. Nature 4. Purpose or object 5. Time and

transfer of properties 6. Classification of
decedent 7. Gross estate vis-à-vis net
estate 8. Determination of gross estate and
net estate 9. Composition of gross estate
10. Items to be included in gross estate

Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died
intestate on November 15, 2009. He left the following properties and interests:

House and lot (family home) in Pasig P 800,000

Vacation house and lot in Florida, USA 1,500,000

Agricultural his father land in Naic, Cavite which he inherited from

2,000,000

Car which is being used by his brother in Cavite 500,000

Proceeds of life insurance where he named his estate as

irrevocable beneficiary 1,000,000

Household furnitures and appliances 1,000,000

 Claims against a cousin who has assets of P10,000 and
liabilities of P100,000 100,000

Shares of stock in ABC Corp, a domestic enterprise 100,000

The expenses and charges on the estate are as

follows:

Funeral Expenses P 250,000

Legal fees for the settlement of the estate 500,000

Medical expenses of last illness 600,000

Claims against the estate 300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the
settlement of his estate for which they have agreed to the above-stated professional fees.
Specifically, they request you to explain and discuss with them the following questions.
You oblige:

a. What are the properties and interests that should be included in the computation of
the
gross estate of the decedent? Explain. (2.5%) b. What is the net taxable estate of the
decedent? Explain. (2.5%) c. When is the due date for filing and payment of the
applicable tax return and tax? Are these
dates extendible? If so, under what conditions or requirements? (2.5%) d. If X, one of
the compulsory heirs, renounces his share in the inheritance in favor of the other co-
heirs, is there any tax implication of X’s renunciation? What about the other coheirs?
(2.5%) (2010 Bar Question)

SUGGESTED
ANSWER:

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a. All the properties and interest enumerated in the problem should be included in the gross
estate of the decedent. The decedent is a citizen of the Philippines and the law requires that
the composition in the gross estate of the decedent shall include all kinds of properties
wherever situated and to the extent of the interest that he has thereon at the time of his
death.

b. The net taxable estate of the decedent is Php 3.7M. From the gross estate of Php 7.0M,
the following deductions are allowed: (1) Funeral expenses of Php 200K which is the
maximum allowed by law, (2) legal fees amounting to Php 500K; (3) medical expenses not
to exceed Php 500K incurred one year prior to death and substantiated with receipts; (4)
 claims against the estate of Php 300K; (5) family home equivalent to its FMV (not to exceed
Php 1.0M) of Php 800K and (6) standard deduction of Php 1.0M or a total allowable
deduction of Php 3.3M.

The claim against the cousin amounting to Php 100K although includible in the gross
estate cannot be claimed as a deduction because the debtor is not yet declared
insolvent. Likewise, the inherited property cannot give rise to a vanishing deduction for
want of sufficient factual basis.

c. The tax return and the payment of the estate tax are both due within six (6) months from
death. The filing of the return is extendible for a maximum period of 30 days under
meritorious cases as maybe determined by the CIR. Whereas, the payment of the estate tax
may also be extended when the CIR finds that the payment thereof would impose undue
hardship upon the estate or any of the heirs. The period of extension to pay shall not exceed
5 years from death if the estate is settled through the courts or shall not exceed 2 years from
death if settled extra-judicially. The CIR may require the executor or administrator or the
beneficiary to furnish a bond in an amount not more than double the amount of the estate
tax due.

d. If the renunciation is a general renunciation (in favor of co-heirs in accordance with their
respective interest in the inheritance), the law on accretion applies and the property waived
is considered to pass through the other co-heirs by inheritance; hence, it has no tax
implication. There is no donation of property because the property had never become the
property of the donor. Such being the case, the renunciation is not subject to donor’s tax.

If it is not a general renunciation in favor of the other co-heirs, the heir renouncing his
right is considered to have made a donation and the renunciation is subject to donor’s
tax. In both cases, however, the renunciation has no tax implication to the other co-
heirs.

In the settlement of the estate of Mr. Barbera who died intestate, his wife renounced her
inheritance and her share of the conjugal property in favor of their children. The BIR
determined that there was a taxable gift and thus assessed Mrs. Barbera as a donor.

Was the BIR correct? (2013 Bar

Question)

SUGGESTED
ANSWER:

The BIR is not correct in imposing donor’s tax on the renounced inheritance of Mrs.
Barbera from Mr. Barbera. According to Section 11 of the RR No. 2-2003: “General renunciation
by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the
decedent is not subject to donor’s tax, unless specifically and categorically done in favor of
identified heir/s to the exclusion or disadvantage of other co-heirs in the hereditary estate.”
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On the other hand, the BIR is correct in imposing donor’s tax on the renounced conjugal
share of Mrs. Barbera. This is because Section 11 of RR No. 2-2003 provides that “renunciation
by the surviving spouse of his/her share in the conjugal partnership or absolute community after
the dissolution of the marriage in favor of the heirs of the deceased spouse or any other
person/s is subject to donor’s tax.” This proceeds from the rule that the share of the conjugal
property is the share of the surviving spouse. Thus, the surviving spouse is effectively donating
property when he or she makes a renunciation.

Tong Siok, a Chinese billionaire and a Canadian resident, died and left assets in China
valued at P80 billion and in the Philippines assets valued at P20 billion. For Philippine
estate tax purposes the allowable deductions for expenses, losses, indebtedness, and
taxes, property previously taxed, transfers for public use, and the share of his surviving
spouse in their conjugal partnership amounted to P15 billion. Tong's gross estate for
Philippine estate tax purposes is: (2011 Bar Question) (A) P20 billion. (B) P5 billion. (C) P100
billion. (D) P85 billion.

SUGGESTED
ANSWER:

(A) P20
billion

While he was traveling with friends, Mr. Jose Francisco, resident Filipino citizen, died on
January 20, 2011 in a California Hospital, USA, leaving personal and real properties with
market values as follows: House and Lot in Quezon City – P10 Million; Cash in bank in
California – US$10,000.00; Citibank in New York – US$5,000.00; Cash in BPI Makati – P4
Million; Car in Quezon City – P1 Million; Shares of stocks of Apple Corporation, US
corporation listed in NY Stock Exchange – US$1 = Php50. His gross estate for the
Philippine estate tax purposes shall be: (2012 Bar Question)

a) P13
Million; b)
P14 Million;
c) P15
Million; d)
P16 Million.

SUGGESTED
ANSWER:

b) P14
Million
 Section 85,
NIRC.

Mr. Mayuga donated his residential house and lot to his son and duly paid the donor's
tax. In the Deed of Donation, Mr. Mayuga expressly reserved for himself the usufruct over
the property for as long as he lived.

Describe the donated property from the taxation perspective. (1%) (2013 Bar
Question)

(A) The property will form part of Mr. Mayuga's gross estate when he dies. (B) The
property will not fom1 part of Mr. Mayuga's gross estate when he dies because he paid
the donor's tax.

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(C) The property will form part of Mr. Mayuga's gross estate because he died soon after
the donation. (D) The property will not form part of Mr. Mayuga's gross estate because it
is no longer his.

SUGGESTED
ANSWER:

(A) The property will form part of Mr. Mayuga's gross estate when
he dies.

Applying Section 85 (B)9 of the NIRC, the donated property will still form part of the gross
estate of the decedent when in the deed of donation, the donor “has retained for his life
or for any period which does not in fact end before his death 91) the possession or
enjoyment of, or the right to the income from the property.”

Therefore, the property will form part of Mr. Mayuga’s gross estate when he dies
because he donated the property in contemplation of death.

Mr. Agustin, 75 years old and suffering from an incurable disease, decided to sell for
valuable and sufficient consideration a house and lot to his son. He died one year later.

In the settlement of Mr. Agustin's estate, the BIR argued that the house and lot were
transferred in contemplation of death and should therefore form part of the gross estate
for estate tax purposes.

Is the BIR correct? (2013 Bar

Question)
SUGGESTED
ANSWER:

The BIR is not

correct.

Pursuant to Section 85(B) of the NIRC, properties that are transferred in contemplation
of death form part of the gross estate of the decedent. An exception to this is a bona fide sale
for an adequate and full consideration in money.

Therefore, the house and lot which Mr. Agustin sold to his son for a valuable and
sufficient consideration should not be considered as forming part of Mr. Agustin’s gross estate.

Mr. X, a Filipino residing in Alabama, U.S.A., died on January 2, 2013 after undergoing a
major heart surgery. He left behind to his wife and two (2) kids several properties, to wit:
(4%)
(1) Family home in Makati City; (2) Condominium unit in Las Piñas City; (3)
Proceeds of health insurance from Take Care, a health maintenance organization
in the Philippines; and (4) Land in Alabama, U.S.A.

9Section 85(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at
any time made a transfer,
by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after
death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained
for his life or for any period which does not in fact end before his death (1) the possession or enjoyment
of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any
person, to designate the person who shall possess or enjoy the property or the income therefrom; except
in case of a bona fide sale for an adequate and full consideration in money or money's worth.

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The following expenses were

paid:
(1) Funeral expenses; (2) Medical
expenses; and (3) Judicial expenses in
the testate proceedings.

(A) What are the items that must be considered as part of the gross estate income
of Mr. X? (B) What are the items that may be considered as deductions from the
gross estate? (2014 Bar Question)

SUGGESTED ANSWER
:
 (A) All the items of properties enumerated in the problem shall form part of the gross
estate of Mr. X. The composition of the gross estate of a decedent who is a Filipino citizen shall
include all of his properties, real or personal, tangible or intangible, wherever situated (Section
85, NIRC).

(B) All the items of expenses are deductible from his gross estate. However, the
allowable amount of funeral expenses shall be 5% of the gross estate or actual , whichever is
lower, but in no case shall the amount deductible go beyond Php 200,000.00. Likewise, the
deductible medical expenses must be limited to those incurred within one year prior to his death
but not to exceed Php 500,000.00 (Section 86, NIRC).

11. Deductions from

estate

Jose Ramos, single, died of a heart attack on October 10, 2011, leaving a residential
house and lot with a market value of P1.8 Million and cash of P100,000.00. Funeral
expenses paid amounted to P250,000.00. (2012 Bar Question)

a) His estate will be exempt from estate tax because the net estate is
zero; b) His estate will be subject to estate tax because net estate is
P1,650,000.00; c) His estate will be subject to estate tax because net
estate is P1,700,00.00; d) His estate will be subject to estate tax
because net estate is P800,000.00.

SUGGESTED
ANSWER:

a) His estate will be exempt from estate tax because the net
estate is zero

Section 85 & 86,

NIRC.

During his lifetime, Mr. Sakitin obtained a loan amounting to P10 million from Bangko
Uno for the purchase of a parcel of land located in Makati City, using such property as
collateral for the loan. The loan was evidenced by a duly notarized promissory note.
Subsequently, Mr. Sakitin died. At the time of his death, the unpaid balance of the loan
amounted to P2 million. The heirs of Mr. Sakitin deducted the amount of P2 million from
the gross estate, as part of the "Claims against the Estate." Such deduction was
disallowed by the Bureau of Internal Revenue (BIR) Examiner, claiming that the
mortgaged property was not included in the computation of the gross estate. Do you
agree with the BIR? Explain. (2014 Bar Question)

SUGGESTED ANSWER
:

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Yes. Unpaid mortgages upon, or any indebtedness with respect to property are
deductible from the gross estate only if the value of the decedent’s interest in said property,
undiminished by such mortgage or indebtedness, is included in the gross estate (Section
86(A)(1)(e)). In the instant case, the interest of the decedent in the property purchased from
the loan where the said property was used as the collateral, was not included in the gross
estate. Accordingly, the unpaid balance of the loan at the time of Mr. Sakitin’s death is not
deductible as “Claims against the Estate.”

12. Exclusions from

estate

Which among the following reduces the gross estate (not the net estate) of a citizen of
the Philippines for purposes of estate taxation? (2011 Bar Question)

(A) Transfers for public use (B)

Property previously taxed (C)
Standard deduction of P1 million
(D) Capital of the surviving
spouse

SUGGESTED
ANSWER:

(D) Capital of the surviving

spouse

State the conditions for allowing the following as deductions from the gross estate of a
citizen or resident alien for the purpose of imposing estate tax:

a. Claims against the estate b.

Medical expenses (2015 Bar
Question)

SUGGESTED
ANSWER:

a. In order that the claims against the estate may be deducted, the following are the
requisites:

1. The liability represents a personal obligation of the deceased existing at the time of
his death except unpaid obligations incurred incident to his death such as unpaid funeral
expenses and unpaid medical expenses; 2. The liability was contracted in good faith and
for adequate and full consideration in money or
money’s worth; 3. The claim must be a debt or claim which is valid in law and enforceable in
court; 4. The indebtedness must not have been condoned by the creditor or the action to
collect from
the decedent must not have
prescribed.

At the time the indebtedness was incurred, the debt instrument was duly notarized and if
the loan was contracted within three (3) years before the death of the decedent, the
administrator or executor shall submit a statement showing the disposition of the proceeds of
the loan.

b. All medical expenses incurred within one (1) year before the death of the decedent
which are duly substantiated with receipts, provided that the total amount thereof, whether paid
or unpaid, does not exceed Five Hundred Pesos (P500,000.00).

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13. Tax credit for estate taxes paid in a foreign

country 14. Exemption of certain acquisitions and
transmissions 15. Filing of notice of death

16. Estate tax

return

Gerardo died on July 31, 2011. His estate tax return should be filed within: (2011 Bar
Question)

(A) six months from filing of the notice of death. (B)

sixty days from the appointment of an
administrator. (C) six months from the time he died
on July 31, 2011. (D) sixty days from the time he
died on July 31, 2011.

SUGGESTED
ANSWER:

(C) six months from the time he died on July 31,

2011.

IV. Donor’s tax

1. Basic principles 2. Definition 3. Nature 4.

Purpose or object 5. Requisites of valid
donation 6. Transfers which may be
constituted as donation
a) Sale/exchange/transfer of property for insufficient consideration
b) Condonation/remission of debt 7. Transfer for less than
adequate and full consideration 8. Classification of donor 9.
Determination of gross gift

Mr. L owned several parcels of land and he donated a parcel each to his two children. Mr.
L acquired both parcels of land in 1975 for ll200,000.00. At the time of donation, the fair
market value of the two parcels of land, as determined by the CIR, was 112,300,000.00;
while the fair market value of the same properties as shown in the schedule of values
prepared by the City Assessors was 112,500,000.00. What is the proper valuation of Mr.
L's gifts to his children for purposes of computing donor's tax? (2015 Bar Question)

SUGGESTED
ANSWER:

The valuation of Mr. L’s gift to his children is the fair market value (FMV) of the property
at the time of donation. It is the higher of the FMV as determined by the Commissioner or the
FMV as shown in the schedule of values fixed by the provincial or city assessors. In this case,
for the purpose of computing donor’s tax, the proper valuation is the value prepared by the City
Assessors amounting to P2,500,00.00 because it is higher than the FMV determined by the
CIR.

10. Composition of gross

gift

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In May 2010, Mr. And Mrs. Melencio Antonio donated a house and lot with a fair market
value of P10 Million to their sob, Roberto, who is to be married during the same year to
Josefina Angeles. Which statement below is INCORRECT? (2012 Bar Question)

a) There are four (4) donations made – two (2) donations are made by Mr. Melencio
Antonio to Roberto and Josefina, and two (2) donations are made by Mrs. Antonio; b)
The four (4) donations are made by the Spouses Antonio to members of the family,
hence, subject to the graduated donor’s tax rates (2%-15%); c) Two (2) donations are
made by the spouses to members of the family, while two (2) other donations are made
to strangers; d) Two (2) donations made by the spouses to Roberto are entitled to
deduction from the gross gift as donation proper nuptias.
SUGGESTED
ANSWER:

d) Two (2) donations made by the spouses to Roberto are entitled to deduction
from the gross gift as donation proper nuptias.

Section 101, NIRC; Tang Ho v. Court of

Appeals.

11. Valuation of gifts made in

property

The spouses Helena and Federico wanted to donate a parcel of land to their son Dondon
who is getting married in December, 2011. The parcel of land has a zonal valuation of
P420,000.00. What is the most efficient mode of donating the property? (2011 Bar
Question)

(A) The spouses should first donate in 2011 a portion of the property valued at
P20,000.00 then spread the P400,000.00 equally for 2012, 2013, 2014 and 2015. (B)
Spread the donation over a period of 5 years by the spouses donating P100,000.00
each year from 2011 to 2015. (C) The spouses should each donate a P110,000.00
portion of the value of the property in 2011 then each should donate P100,000.00 in
2012. (D) The spouses should each donate a P100,000.00 portion of the value of the
property in 2011, and another P100,000.00 each in 2012. Then, in 2013, Helena should
donate the remaining P20,000.00.

SUGGESTED
ANSWER:

(C) The spouses should each donate a P110,000.00 portion of the value of the
property in 2011 then each should donate P100,000.00 in 2012.

12. Tax credit for donor’s taxes paid in a foreign

country

13. Exemptions of gifts from donor’s

tax

Exempted from donor’s taxation are gifts made: (2011 Bar

Question)

(A) for the use of the barangay. (B) in

consideration of marriage. (C) to a
school which is a stock corporation.

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(D) to a for-profit government

corporation.

SUGGESTED
ANSWER:

(A) for the use of the

barangay.

Levox Corporation wanted to donate P5 million as prize money for the world professional
billiard championship to be held in the Philippines. Since the Billiard Sports
Confederation of the Philippines does not recognize the event, it was held under the
auspices of the International Professional Billiards Association, Inc. Is Levox subject to
the donor's tax on its donation? (2011 Bar Question)

(A) No, so long as the donated money goes directly to the winners and not through the
association. (B) Yes, since the national sports association for billiards does not sanction
the event. (C) No, because it is donated as prize for an international competition under
the billiards association. (D) Yes, but only that part that exceeds the first P100,000.00 of
total Levox donations for the calendar year.

SUGGESTED
ANSWER:

(B) Yes, since the national sports association for billiards does not sanction
the event.

A non-stock, non-profit school always had cash flow problems, resulting in failure to
recruit well- trained administrative personnel to effectively manage the school. In 2010,
Don Leon donated P100 million pesos to the school, provided the money shall be used
solely for paying the salaries, wages, and benefits of administrative personnel. The
donation represents less than 10% of Don Leon's taxable income for the year. Is he
subject to donor's taxes? (2011 Bar Question)

(A) No, since the donation is actually, directly, and exclusively used for educational
purposes. (B) Yes, because the donation is to be wholly used for administration
purposes. (C) Yes, since he did not obtain the requisite NGO certification before he
made the donation. (D) No, because the donation does not exceed 10% of his
taxable income for 2010.

SUGGESTED
ANSWER:
 (B) Yes, because the donation is to be wholly used for administration
purposes.

On January 10, 2011, Maria Reyes, single-mother, donated cash in the amount of
P50,000.00 to her daughter Cristina, and on December 20, 2011, she donated another
P50,000.00 to Cristina. Which statement is correct? (2012 Bar Question)

a) Maria Reyes is subject to donor’s tax in 2011 because gross gift is

P100,000.00; b) Maria Reyes is exempt from donor’s tax in 2011 because
gross gift is P100,000.00; c) Maria Reyes is exempt from donor’s tax in 2011
only to the extent of P50,000.00; d) Maria Reyes is exempt from donor’s tax
in 2011 because the donee is minor.

SUGGESTED
ANSWER:

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b) Maria Reyes is exempt from donor’s tax in 2011 because gross gift is
P100,000.00

Section 99(A),
NIRC.

Mr. De Sarapen is a candidate in the upcoming Senatorial elections. Mr. De Almacen,

believing in the sincerity and ability of Mr. De Sarapen to introduce much needed reforms
in the country, contributed P500,000.00 in cash to the campaign chest of Mr. De Sarapen.
In addition, Mr. De Almacen purchased tarpaulins, t-shirts, umbrellas, caps and other
campaign materials that he also donated to Mr. De Sarapen for use in his campaign. Is
the contribution of cash and campaign materials subject to donor’s tax? (2014 Bar
Question)

SUGGESTED ANSWER
:

The answer must be qualified. Section 99(C) of the NIRC explicitly provides that any
contribution in cash or in kind to any candidate, political party or coalition of parties for campaign
purposes shall be governed by the Election Code, as amended. On the other hand, Section 13
of the Republic Act No. 7166 specifically states that any provision of law to the contrary
notwithstanding, any contribution in cash or kind to any candidate or political party or coalition of
parties for campaign purposes, duly reports to the Commission on Elections (COMELEC) shall
not be subject to the payment of any gift tax.

Thus, if Mr. De Almacen reported his campaign contributions of Php 500,000.00 in cash,
tarpaulins, t-shirts, umbrellas, caps, and other campaign materials to the COMELEC, then the
BIR cannot impose donor’s tax on such contributions. Conversely, if Mr. De Almacen failed to
report these campaign contributions to the COMELEC, such contributions would be subject to
donor’s tax.

14. Person
liable

The spouses Jun and Elvira Sandoval purchased a piece of land for P5,000,000 and
included their two (2) minor children as co-purchasers in the Deed of Absolute Sale. The
Commissioner of Internal Revenue (CIR) ruled that there was an implied donation and
assessed donors' taxes against the spouses.

Rule on the CIR's action. (1%)(2013 Bar

Question)

(A) The CIR is wrong; a donation must be express. (B) The CIR is wrong; financial
capacity is not a requirement for a valid sale. (C) The CIR is correct; the amount
involved is huge and ultimately ends up with the children. (D) The CIR is correct; there
was animus donandi since the children had no financial capacity to be co-purchasers.

SUGGESTED
ANSWER:

(D) The CIR is correct; there was animus donandi since the children had no
financial capacity to be co-purchasers.

The present case is similar to the case of Sps. Hordon H. Evono and Maribel C. Evono
v. CIR, et al., [CTA EB No. 705, (CTA Case No. 7573),June 4, 2012]. The CTA held that
the inclusion of the minor children’s names in the transfer of the titles/properties shall be
deemed a donation or

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gift from their parents. This is so because the minor children, at an early age, have no
source of income. There is a clear animus donandi. Therefore, the imposition of donor’s
tax is in accordance with Section 98 of the NIRC.

(Note:Although the cited case was only decided by the CTA, it provides an authoritative
insight on the answer to the given problem, considering that there is no exact applicable
law and jurisprudence on the matter.)

15. Tax
basis
Celia donated P110,000.00 to her friend Victoria who was getting married. Celia gave no
other gift during the calendar year. What is the donor's tax implication on Celia’s
donation? (2011 Bar Question) (A) The P100,000.00 portion of the donation is exempt since given in consideration of marriage.
(B) A P10,000.00 portion of the donation is exempt being a donation in consideration of
marriage. (C) Celia shall pay a 30% donor's tax on the P110,000.00 donation. (D) The
P100,000.00 portion of the donation is exempt under the rate schedule for donor's tax.

SUGGESTED
ANSWER:

(C) Celia shall pay a 30% donor's tax on the P110,000.00

donation.

V. Value-Added Tax (VAT)

VI. Concept VII. Characteristics/Elements of a VAT-

Taxable transaction VIII. Impact of tax IX. Incidence of
tax X. Tax credit method XI. Destination principle XII.
Persons liable

An importer of flowers from abroad in 2011: (2012 Bar

Question)

a) Is liable for VAT, if it registers as a VAT person; b) Is exempt from VAT, because the
goods are treated as agricultural products; c) Is exempt from VAT, provided that his total
importation of flowers does not exceed P1.5 Million; d) Is liable for VAT, despite the fact
that it did not register as a VAT person and its total annual sales of flowers do not
exceed P1.5 Million.

SUGGESTED
ANSWER:

d) Is liable for VAT, despite the fact that it did not register as a VAT person and its
total annual sales of flowers do not exceed P1.5 Million

Section 107,
NIRC.

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MBM Corporation is the owner-operator of movie houses in Cavite. During the year 2010,
it received a total gross receipts of P20 Million from the operation of movies. It did not
register as a VAT person. Which statement below is correct? (2012 Bar Question)
 a) MBM Corporation is exempt from the 12% VAT, but liable for the 20% amusement tax
on admissions under the Local Government Code; b) MBM Corporation is both liable for
the 12% VAT and 20% amusement tax on admissions; c) MBM Corporation is both
exempt from the 12% VAT and 20% amusement tax on admissions; d) MBM
Corporation is liable for the 12% VAT, but exempt from the 20% amusement tax on
admissions.

SUGGESTED
ANSWER:

a) MBM Corporation is exempt from the 12% VAT, but liable for the 20%
amusement tax on admissions under the Local Government Code

CIR v. SM Prime Holdings Inc., G.R. No. 183505, February 26,

2010.

The public market vendor below, who is not a VAT-registered person is liable to VAT in
2010, if: (2012 Bar Question)

a) She sells raw chicken and meats and her gross sales during the year is P2 Million; b)
She sells vegetables and fruits in her stall and her gross sales during the year is P1
Million; c) She sells canned goods, processed coconut oils, and cut flowers in her stall
and her gross sales during the year is P2.5 Million; d) She sells live fish, shrimps, and
crabs and her gross sales during the year is P5 Million.

SUGGESTED
ANSWER:

c) She sells canned goods, processed coconut oils, and cut flowers in her stall
and her gross sales during the year is P2.5 Million

Section 105 & 109,

NIRC.

XIII. VAT on sale of goods or properties

a. Requisites of taxability of sale of goods or
properties

Under the VAT system, there is no cascading because the tax itself is not again being
taxed. However, in determining the tax base on sale of taxable goods under the VAT
system: (2012 Bar Question) a) The professional tax paid by the professional is included in gross receipts;
b) The other percentage tax (e.g., gross receipts tax) paid by the taxpayer is included in
gross selling price; c) The excise tax paid by the taxpayer before withdrawal of the
goods from the place of production or from customs custody is included in the gross
selling price; d) The documentary stamp tax paid by the taxpayer is included in the gross
selling price or gross receipts.

SUGGESTED
ANSWER:
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c) The excise tax paid by the taxpayer before withdrawal of the goods from the
place of production or from customs custody is included in the gross selling
price

Section 106, NIRC; RR No. 16-

2005.

Which transaction below is subject to VAT? (2012 Bar

Question)

a) Sale of vegetables by a farmer in Baguio City to a vegetable dealer; b) Sale of

vegetables by a vegetable dealer in Baguio City to another vegetable dealer in Quezon
City; c) Sale of vegetables by the QC vegetable dealer to a restaurant in Manila; d) Sale
of vegetables by the restaurant operator to its customers.

SUGGESTED
ANSWER:

d) Sale of vegetables by the restaurant operator to its

customers

Section 109,
NIRC.

[Note: This is not absolutely true because a restaurant may sell the vegetables in their
original state which will be exempt from VAT under Section 109(A), irrespective of who is
the seller.]

Masarap Kumain, Inc. (MKI) is a Value-Added Tax (VAT)-registered company which has
been engaged in the catering business for the past 10 years. It has invested a substantial
portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and
delivery vans. MKI sold its first delivery van, already 10 years old and idle, to Magpapala
Gravel and Sand Corp. (MGSC), a corporation engaged in the business of buying and
selling gravel and sand. The selling price of the delivery van was way below its
acquisition cost. Is the sale of the delivery van by MKI to MGSC subject to VAT? (2014
Bar Question)

SUGGESTED ANSWER
:

Yes. The sale of the delivery van by MKI to MGSC was incidental to its trade or business,
and therefore subject to VAT. Pursuant to the case of Mindanao Geothermal Partnership II v.
Commissioner of Internal Revenue (G.R. No. 193301, 194637, March 11, 2013), an isolated
transaction may be considered a transaction incidental to the taxpayer’s.

XIV. Zero-rated sales of goods or properties, and effectively zero-rated sales of

goods or
properties

XV. Transactions deemed

sale
a. Transfer, use or consumption not in the course of business of
goods/properties
originally intended for sale or use in the course of business b. Distribution or transfer to
shareholders, investors or creditors c) Consignment of goods if actual sale not made
within 60 days from date of
consignment d) Retirement from or cessation of business with respect to
inventories on hand

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11. Change or cessation of status as VAT-registered

person

a) Subject to VAT
(i) Change of business activity from VAT taxable status to VAT-exempt status (ii)
Approval of request for cancellation of a registration due to reversion to exempt
status (iii) Approval of request for cancellation of registration due to desire to revert to
exempt
status after lapse of 3 consecutive
years

b) Not subject to
VAT

(i) Change of control of a corporation

(ii) Change in the trade or corporate
name (iii) Merger or consolidation of
corporations

12. VAT on importation of

goods
Which of the following transactions is subject to Value-Added Tax (VAT)? (2014 Bar
Question)
(A) Sale of shares of stock-listed and traded through the local stock exchange (B)
Importation of personal and household effects belonging to residents of the
Philippines returning from abroad subject to custom duties under the Tariff and
Customs Code (C) Services rendered by individuals pursuant to an
employeremployee relationship (D) Gross receipts from lending activities by
credit or multi-purpose cooperatives duly registered with the Cooperative
Development Authority

SUGGESTED ANSWER
:

B. Importation of personal and household effects belonging to residents of the Philippines

returning from abroad, subject to custom duties under the Tariff and Customs Code

a) Transfer of goods by tax exempt

persons

Which importation in 2011 is subject to VAT? (2012 Bar

Question)

a) Importation of fuels by a person engaged in international shipping worth P20 Million;

b) Importation of raw, unprocessed, refrigerated Kobe beef from Japan by a beef dealer
for sale to hotels in Makati City with a fair market value of P10 Million; c) Importation of
wines by a wine dealer with a fair market value of P2 million for sale to hotels in Makati
City; d) Importation of books worth P5 Million and school supplies worth P1.2 million.

SUGGESTED
ANSWER:

c) Importation of wines by a wine dealer with a fair market value of P2 million for
sale to hotels in Makati City

Sections 107 & 109,

NIRC.

[Note: d) may also be a correct choice because only importation of books is exempt from
VAT. The importation of school supplies is not exempt.]

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13. VAT on sale of service and use or lease of
properties
a) Requisites for
taxability

A VAT-registered contractor performed services for his customer in 2010 and billed him
P11.2 Million, broken down as follows: P10 Million – cost of services, plus P1.2 Million,
12% VAT. Of the contract price of P10 Million, only P8 Million plus VAT thereon was
received from the customer in 2010, and the balance of P4 Million plus VAT was received
by the contractor in 2011. How much is the taxable gross receipts of the contractor for
2010, for VAT purposes? (2012 Bar Question)

a) P10 Million, the total cost of services performed in 2010; b)

P8 Million, the amount received from the customer in 2010; c)
P8 Million plus VAT received from the customer in 2010; d)
P11.2 Million, the total cost of services performed plus 12%
VAT.

SUGGESTED
ANSWER:

b) P8 Million, the amount received from the customer

in 2010

Section 108,
NIRC.

A hotel operator that is a VAT-registered person and who leases luxury vehicles to its
hotel customers is: (2012 Bar Question)

a) Subject to the 3% common carriers tax and 12% VAT; b)

Subject to the 3% common carriers tax only; c) Subject to
the 12% VAT only; d) Exempt from both the 3% common
carriers tax and 12% VAT.

SUGGESTED
ANSWER:

c) Subject to the 12% VAT

only

Section 108,
NIRC.

A pawnshop shall now be treated, for business tax purposes: (2012 Bar
Question)

a) As a lending investor liable to the 12% VAT on its gross receipts from interest income
and from gross selling price from sale of unclaimed properties; b) Not as a lending
 investor, but liable to the 5% gross receipts tax imposed on a non-bank financial
intermediary under Title VI (Other Percentage Taxes); c) As exempt from 12% VAT and
5% gross receipts tax; d) As liable to the 12% VAT and 5% gross receipts tax.

SUGGESTED
ANSWER:

b) Not as a lending investor, but liable to the 5% gross receipts tax imposed on a
non-bank financial intermediary under Title VI (Other Percentage Taxes)

RR No. 10-2004; H. Tambunting Inc. v. CIR, G.R. No. 172394, October

13, 2010.

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The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No.
65-2012 imposing Value-Added Tax (VAT) on association dues and membership fees
collected by condominium corporations from its member condominium-unit owners. The
RMC’s validity is challenged before the Supreme Court (SC) by the condominium
corporations.

The Solicitor General, counsel for BIR, claims that association dues, membership fees,
and other assessment/charges collected by a condominium corporation are subject to
VAT since they constitute income payments or compensation for the beneficial services
it provides to its members and tenants.

On the other hand, the lawyer of the condominium corporations argues that such dues
and fees are merely held in trust by the condominium corporations exclusively for their
members and used solely for administrative expenses in implementing the condominium
corporations’ purposes. Accordingly, the condominium corporations do not actually
render services for a fee subject to VAT.

Whose argument is correct? Decide. (2014 Bar

Question)

SUGGESTED ANSWER
:

The argument of the condominium corporation is correct. The association dues should not
be subject to VAT because the condominium corporation does not realize any gain or profit.
They merely hold the fees in trust for administrative expenses. This, it does not form part of the
gross income of the corporation, and consequently, is not subject to VAT. (RTC Resolution SCA
No.12-1236 on RMC 65- 2012, Petition for Declaratory Relief).
14. Zero-rated sale of
services

Are the following transactions subject to VAT? If yes, what is the applicable rate
for each transaction. State the relevant authority/ies for your answer.

a. Construction by XYZ Construction Co. of concrete barriers for the Asian

Development Bank in Ortigas Center to prevent car bombs from ramming the
ADB gates along ADB Avenue in Mandaluyong City. b. Call Center operated by a
domestic enterprise in Makati that handles exclusively the
reservations of a hotel chain which are all located in North America. The services
are paid for in US$ and duly accounted for with the Bangko Sentral ng Pilipinas. c.
Sale of orchids by a flower shop which raises its flowers in Tagaytay. (2010 Bar
Question)

SUGGESTED
ANSWER:

a. The transaction is subject to VAT at the rate of zero-percent (0%). ADB is exempt
from direct
and indirect taxes by virtue of a special law, thereby making the sale of services to it by a
VAT- registered construction company, effectively zero-rated. b. The sale of services is
subject to VAT at zero percent (0%). This rate includes services rendered
to a person engaged in business outside the Philippines and the consideration is paid in
acceptable foreign currency duly accounted for by the BSP.

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c. The sale of orchids is subject to VAT at 12%. This is a sale of agricultural non-food
product in its
original state which is no longer one of the exempt
transactions.

15. VAT exempt

transactions
a) VAT exempt transactions, in
general b) Exempt transaction,
enumerated

Except for one transaction, the rest are exempt from value added tax. Which one is VAT
taxable? (2012 Bar Question)
 a) Sales of chicken by a restaurant owner who did not register as a VAT person and
whose gross annual sales is P1.2 Million; b) Sales of copra by a copra dealer to a
coconut oil manufacturer who did not register as a VAT person and whose gross annual
sales is P5 Million; c) Gross receipts of CPA during the year amounted to P1 Million; the
CPA registered as a VAT person in January 2011, before practicing his profession; d)
Sales of a book store during the year amounted to P10 Million; it did not register as a
VAT person with the BIR.

SUGGESTED
ANSWER:

c) Gross receipts of CPA during the year amounted to P1 Million; the CPA
registered as a VAT person in January 2011, before practicing his profession

Section 108,
NIRC.

A lessor or real property is exempt from value added tax in one of the transactions
below. Which one is it? (2012 Bar Question)

a) Lessor leases commercial stalls located in the Greenhills Commercial Center to VAT-
registered sellers of cell phones; lessor’s gross rental during the year amounted to P12
Million; b) Lessor leases residential apartment units to individual tenants for P10,000.00
per month per unit; his gross rental income during the year amounted to P2 Million; c)
Lessor leases commercial stalls at P10,000.00 per stall per month and residential units
at P15,000.00 per unit per month; his gross rental income during the year amounted to
P3 Million; d) Lessor leases two (2) residential houses and lots at P50,000.00 per month
per unit, but he registered as a VAT person.

SUGGESTED
ANSWER:

b) Lessor leases residential apartment units to individual tenants for P10,000.00

per month per unit; his gross rental income during the year amounted to P2
Million

Section 109(Q),
NIRC.

IBP Bank extended loans to debtors during the year, with real properties of the debtors
being used as collateral to secure the loans. When the debtors failed to pay the unpaid
principal and interests after several demand letters, the bank foreclosed the same and
entered into contracts of lease with tenants. The bank is subject to the tax as follows:
(2012 Bar Question)

a) 12% VAT on the rental income, but exempt from the 7% gross
receipts tax;
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b) 7% gross receipts tax on the rental income, but exempt

from VAT; c) Liable to both the 12% VAT and 7% gross
receipts tax; d) Exempt from both the 12% VAT and 7% gross
receipts tax.

SUGGESTED
ANSWER:

b) 7% gross receipts tax on the rental income, but exempt

from VAT

Section 121,
NIRC.

Which statement is correct? A bar review center owned and operated by lawyers is:
(2012 Bar Question) a) Exempt from VAT, regardless of its gross receipts during the year because it is an educational
center; b) Exempt from VAT, provided that its annual gross receipts do not exceed P1.5
Million in 2011; c) Subject to VAT, regardless of its gross receipts during the year; d)
Subject to VAT, if it is duly accredited by TESDA.

SUGGESTED
ANSWER:

b) Exempt from VAT, provided that its annual gross receipts do not exceed P1.5
Million in 2011

Section 109(V),
NIRC.

16. Input tax and output tax,

defined

17. Sources of input

tax

a) Purchase or importation of goods b) Purchase of real

properties for which a VAT has actually been paid c) Purchase
of services in which VAT has actually been paid d) Transactions
deemed sale e) Presumptive input f) Transitional input

18. Persons who can avail of input tax

credit
Claim for tax credit or refund of excess input tax is available only to: (2012 Bar
Question)

a) A VAT-registered person whose sales are made to embassies of foreign governments

and United Nations agencies located in the Philippines without the BIR approval of the
application for zero-rating; b) Any person who has excess input tax arising from local
purchases of taxable goods and services; c) A VAT-registered person whose sales are
made to clients in the Philippines; d) A VAT-registered person whose sales are made to
customers outside the Philippines and who issued VAT invoices or receipts with the
words "ZERO RATED SALES" imprinted on the sales invoices or receipts.

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SUGGESTED
ANSWER:

d) A VAT-registered person whose sales are made to customers outside the

Philippines and who issued VAT invoices or receipts with the words "ZERO
RATED SALES" imprinted on the sales invoices or receipts.

KepcoPhils. Corp. v. CIR, G.R. No. 179961, January 31,

2011.

19. Determination of output/input tax; VAT payable; excess input tax

credits

a) Determination of output tax b) Determination of input tax creditable c) Allocation

of input tax on mixed transactions d) Determination of the output tax and VAT
payable and computation of VAT payable or
excess tax
credits

20. Substantiation of input tax

credits

Input tax is available to a VAT-registered buyer, provided that: (2012 Bar

Question)

a) The seller is a VAT-registered person; b) The seller issues a VAT invoice or official
receipt, which separately indicates the VAT component; c) The goods or service is
subject to or exempt from VAT, but the sale is covered by a VAT invoice or receipt
issued by VAT-registered person; d) The name and TIN of the buyer is not stated or
shown in the VAT invoice or receipt Which statement shown above is NOT correct?
SUGGESTED
ANSWER:

b) The seller issues a VAT invoice or official receipt, which separately indicates
the VAT component

Section 113(B),
NIRC.

For 2012, input tax is not available as a credit against the output tax of the buyer of
taxable goods or services during the quarter, if:

a) The VAT invoice or receipt of the seller is registered with the BIR; b) The VAT invoice
or receipt of the seller does not separately indicate the gross selling price or gross
receipts and the VAT component therein; c) The VAT invoice or receipt is issued in the
name of the VAT-registered buyer and his TIN is shown in said invoice or receipt; d) The
VAT invoice or receipt issued by the seller shows the Taxpayer Identification Number
plus the word "VAT" or "VAT registered person".

SUGGESTED
ANSWER:

b) The VAT invoice or receipt of the seller does not separately indicate the gross
selling price or gross receipts and the VAT component therein

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Section 113,
NIRC.

21. Refund or tax credit of excess input

tax

a) Who may claim for refund/apply for issuance of tax credit

certificate b) Period to file claim/apply for issuance of tax credit
certificate

Gangwam Corporation (GC) filed its quarterly tax returns for the calendar year 2012 as
follows:

First quarter - April 25, 2012

Second quarter - July 23, 2012
Third quarter - October 25,
 2012 Fourth quarter - January
27, 2013

On December 22, 2013, GC filed with the Bureau of Internal Revenue (BIR) an
administrative claim for refund of its unutilized input Value-Added Tax (VAT) for the
calendar year 2012. After several months of inaction by the BIR on its claim for refund,
GC decided to elevate its claim directly to the Court of Tax Appeals (CTA) on April 22,
2014.

In due time, the CTA denied the tax refund relative to the input VAT of GC for the first
quarter of 2012, reasoning that the claim was filed beyond the two-year period prescribed
under Section 112(A) of the National Internal Revenue Code (NIRC).

(A) Is the CTA correct?

(3%)

(B) Assuming that GC filed its claim before the CTA on February 22, 2014, would your
answer be the same? (2014 Bar Question)

SUGGESTED ANSWER
:

(A) No. The CTA is not correct. The two-year period to file a claim for refund refers to the
administrative claim and does not refer to the period within which to elevate the claim to the
CTA. The filing of the administrative claim for refund was timely done because it is made within
two years from the end of the quarter when the zero-rated transaction took place (Section112
(A), NIRC). When GC decided to elevate its claim to the CTA on April 22, 2014, it was after the
lapse of 120 days from the filing of the claim for refund with the BIR, hence, the appeal is
seasonably filed. The rule on VAT refunds is two years to file the claim with the BIR, plus 120
for the Commissioner to act and inaction after 120 days is a deemed adverse decision on the
claim, appealable to the CTA within thirty (30) days from the lapse of the 120-day period. (CIR
v. Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010).

(B) Yes. The two-year prescriptive period to file a claim for refund refers to the
administrative claim with the BIR and not the period to elevate the claim to the CTA. Hence, the
CTA cannot deny the refund for reasons that the first quarter claim was filed beyond the two-
year period prescribed by law. However, when the claim is made before the CTA on February
24, there is definitely no appealable decision as yet because the 120-day period for the
Commissioner to act on the claim for refund has not yet lapsed. Hence, the act of the taxpayer
in elevation the claim to the CTA is premature and the CTA has no jurisdiction to rile thereon.
(CIR v. Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010).

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 For calendar year 2011, FFF, Inc., a VAT-registered corporation, reported unutilized
excess input VAT in the amount of Pl ,000,000.00 attributable to its zero-rated sales.
Hoping to impress his boss, Mr. G, the accountant of FFF, Inc., filed with the Bureau of
Internal Revenue (BIR) on January 31, 2013 a claim for tax refund/credit of the
Pl,000,000.00 unutilized excess input VAT of FFF, Inc. for 2011. Not having received any
communication from the BIR, Mr. G filed a Petition for Review with the CTA on March 15,
2013, praying for the tax refund/credit of the Pl,000,000.00 unutilized excess input VAT of
FFF, Inc. for 2011.

a) Did the CTA acquire jurisdiction over the Petition of FFF, Inc.? b) Discuss the proper
procedure and applicable time periods for administrative and judicial claims for
refund/credit of unutilized excess input VAT. (2015 Bar Question)

SUGGESTED
ANSWER:

a. The CTA has not acquired jurisdiction over the Petition of FFF, Inc. because the
juridical claim has been prematurely filed on March 15, 2013. The Supreme Court ruled that the
30-day period after the expiration of the 120-day period fixed by law for the Commissioner of
Internal Revenue to act on the claim for refund is jurisdictional and failure to comply would bar
the appeal and deprive the CTA of its jurisdiction to entertain the appeal.

In this case, Mr. G filed the administrative claim on January 31, 2013. The petition for
review should have been should have been filed on June 30, 2013. Filing the judicial claim on
March 15, 2013 is premature, thus the CTA did not acquire jurisdiction.

b. The administrative claim must be filed with the Commissioner of Internal Revenue
(CIR) within the two-year prescriptive period. The proper reckoning period date for the two-year
prescriptive period is the close of the taxable quarter when the relevant sales were made.
However, as an exception, are claims applied only from June 8, 2007 to September 12, 2008,
wherein the two-year prescriptive period for filing a claim for tax refund or credit of unutilized
input VAT payments should be counted from the date of filing of the VAT return and payment of
the tax.

The taxpayer can file a judicial claim in one of two ways: (1) file the judicial claim within
thirty days after the Commissioner of Internal Revenue denies the claim within the 120-day
period, or (2) file the judicial claim within 30 days from the expiration of the 120-day period if the
Commissioner does not act within the 120-day period.

As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. As
an exception, premature filing is allowed only if filed between December 10, 2003 and October
5, 2010, when the BIR Ruling No. DA-489-03 was still in force.

c) Manner of giving refund d) Destination

principle or cross-border doctrine

22. Invoicing
requirements
 a) Invoicing requirements in general b) Invoicing and recording
deemed sale transactions c) Consequences of issuing erroneous
VAT invoice or VAT official receipt

Which statement is FALSE under the VAT law? (2012 Bar

Question)

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a) A VAT-registered person will be subject to VAT for his taxable transactions,

regardless of his gross sales or receipts; b) A person engaged in trade or business
selling taxable goods or services must register as a VAT person, when his gross sales or
receipts for the year 2011 exceed P1.5 Million; c) A person who issued a VAT-registered
invoice or receipt for a VAT-exempt transaction is liable to the 12% VAT as a penalty for
the wrong issuance thereof; d) Once a doctor of medicine exercises his profession
during the year, he needs to register as a VAT person and to issue VAT receipts for
professional fees received.

SUGGESTED
ANSWER:

d) Once a doctor of medicine exercises his profession during the year, he needs
to register as a VAT person and to issue VAT receipts for professional fees
received

Section 236(G)(1)(b),
NIRC.

23. Filing of return and

payment

KaPedringMatibag, a sole proprietor, buys and sells "kumot at kulambo" both of which
are subject to value-added tax. Since he is using the calendar year as his taxable year,
his taxable quarters end on the last day of March, June, September, and December.
When should KaPedring file the VAT quarterly return for his gross sales or receipts for
the period of June 1 to September 30? (2011 Bar Question)

(A) Within 25 days from September

30 (B) Within 45 days from
September 30 (C) Within 15 days
from September 30 (D) Within 30
days from September 30
SUGGESTED
ANSWER:

(A) Within 25 days from

September 30

24. Withholding of final VAT on sales to

government

VI. Tax remedies under the

NIRC

1. Taxpayer’s
remedies

The Commissioner of Internal Revenue issued a BIR ruling to the effect that the
transaction is liable to income tax and value added tax. Upon receipt of the ruling, a
taxpayer does not agree thereto. What is his proper remedy? (2012 Bar Question)

a) File a petition for review with the Court of Tax Appeals within thirty (30) days from
receipt thereof; b) File a motion for reconsideration with the Commissioner of Internal
Revenue; c) File an appeal to the Secretary of Finance within thirty (30) days from
receipt thereof; d) File an appeal to the Secretary of Justice within thirty (30) days from
receipt thereof.

SUGGESTED
ANSWER:

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c) File an appeal to the Secretary of Finance within thirty (30) days from
receipt thereof

Section 4,
NIRC.

a)
Assessment

(i) Concept of
assessment
Mr. Alvarez is in the retail business. He received a deficiency tax assessment from the
BIR containing only the computation of the deficiency tax and the penalties, without any
explanation of the factual and legal bases for the assessment.

Is the assessment valid? (1%)(2013 Bar

Question)

(A) The assessment is valid; all that Mr. Alvarez has to know is the amount of the tax.
(B) The assessment is invalid; the law requires a statement of the facts and the law upon
which the assessment is based. (C) The assessment is valid but Mr. Alvarez can still
contest it. (D) The assessment is invalid because Mr. Alvarez has no way to determine if
the computation is erroneous.

SUGGESTED
ANSWER:

(B) The assessment is invalid; the law requires a statement of the facts and the
law upon which the assessment is based.

Section 228 of the NIRC provides that a preliminart assessment notice shall inform the
taxpayer in writing of the law and the facts on which the assessment is based as part of
due process; otherwise, the assessment shall be void. In relation to this provision,
Section 3 of RR No. 12-99 states that the preliminary assessment notice shall show in
detail the facts and the law, rules and regulations, or jurisprudence on which the
assessment is based. (See also: Commissioner of Internal Revenue v. Reyes, G.R. No.
159694, January 27, 2006)

(a) Requisites for valid assessment (b)

Constructive methods of income
determination (c) Inventory method for
income determination (d) Jeopardy
assessment

Jeopardy assessment is a valid ground to compromise a tax liability (2011 Bar

Question)

(A) involving deficiency income taxes only, but not for other
taxes. (B) because of doubt as to the validity of the
assessment. (C) if the compromise amount does not exceed
10% of the basic tax. (D) only when there is an approval of the
National Evaluation Board.

SUGGESTED
ANSWER:

(B) because of doubt as to the validity of the

assessment.
What should the BIR do when the prescriptive period for the assessment of a tax
deficiency is about to prescribe but the taxpayer has not yet complied with the BIR
requirements for the production of

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2010-2015 Taxation Law Bar
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books of accounts and other records to substantiate the claimed deductions, exemptions
or credits? (2011 Bar Question)

(A) Call the taxpayer to a conference to explain the delay. (B)

Immediately conduct an investigation of the taxpayer's activities.
(C) Issue a jeopardy assessment coupled with a letter of demand.
(D) Issue a notice of constructive distraint to protect government
interest.

SUGGESTED
ANSWER:

(C) Issue a jeopardy assessment coupled with a letter of

demand.

(e) Tax delinquency and tax

deficiency

In January 2011, the BIR issued a ruling that Clemen's vodka imports were not subject to
increased excise tax based on his claim that his net retail price was only P200 per 750
milliliter bottle. This ruling was applied to his imports for May, June, and July 2011. In
September 2011, the BIR revoked its ruling and assessed him for deficiency taxes
respecting his May, June and July 2011 vodka imports because it discovered that his net
retail price for the vodka was P250 per bottle from January to September 2011. Does the
retroactive application of the revocation violate Clemen's right to due process as a
taxpayer? (2011 Bar Question)

(A) Yes, since the presumption is that the BIR ascertained the facts before it made its
ruling. (B) No, because he acted in bad faith when he claimed a lower net retail price
than what he actually used. (C) No, since he could avail of remedies available for
disputing the assessment. (D) Yes, since he had already acquired a vested right in the
favorable BIR ruling.

SUGGESTED
ANSWER:

(B) No, because he acted in bad faith when he claimed a lower net retail price than
what he actually used.
Which among the following circumstances negates the prima facie presumption of
correctness of a BIR assessment? (2011 Bar Question)

(A) The BIR assessment was seasonably protested within 30 days from
receipt. (B) No preliminary assessment notice was issued prior to the
assessment notice. (C) Proof that the assessment is utterly without
foundation, arbitrary, and capricious. (D) The BIR did not include a formal
letter of demand to pay the alleged deficiency.

SUGGESTED
ANSWER:

(C) Proof that the assessment is utterly without foundation, arbitrary, and
capricious.

KaTato owns a parcel of land in San Jose, Batangas declared for real property taxation,
as agricultural. In 1990, he used the land for a poultry feed processing plant but
continued to declare the property as agricultural. In March 2011, the local tax assessor
discovered KaTato’s change of use of his land and informed the local treasurer who
demanded payment of deficiency real property taxes from 1990 to 2011. Has the action
prescribed? (2011 Bar Question)

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