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ANSWERS TO BAR
EXAMINATION QUESTIONS
IN
TAXATION LAW
* ARRANGED BY TOPIC *
(1994 – 2006)
June 3, 2007
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 2 of 73
FOREWARD
This work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may be
freely copied and distributed, nevertheless, PERMISSION TO COPY from the editors is
material…. It is primarily intended for all those who desire to have a deeper understanding of
the issues commonly touched by the Philippine Bar Examinations and its trend on specifically
on Taxation Laws. It is specifically intended for law students from the provinces who, very
often, are recipients of deliberately distorted notes from other unscrupulous law schools and
students.
I would like to seek the indulgence of the reader for some Bar Questions which are improperly
classified under a topic and for some topics which are improperly or ignorantly phrased, for
nd
the arranger is just a Bar Reviewee who has prepared this work while reviewing for the 2
time for the Bar Exams 2007 under time constraints and within his limited knowledge of the
law. I would like to seek the reader’s indulgence also for a number of typographical errors in
this work.
The Arranger
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 3 of 73
(c) It has retained MORE SCHEDULAR THAN Direct Tax vs. Indirect Tax (1994)
GLOBAL FEATURES with respect to individual Distinguish a direct from an indirect tax.
SUGGESTED ANSWER:
taxpayers but has maintained a more global treatment on
A DIRECT TAX is one in which the taxpayer who pays
corporations.
the tax is directly liable therefor, that is, the burden of
Note: The following might also be cited by the bar candidates as
paying the tax falls directly on the person paying the tax.
features of the income tax system:
Individual compensation income earners are taxed on
An INDIRECT TAX is one paid by a person who is not
modified Gross Income (Gross compensation income less
directly liable therefor, and who may therefore shift or pass
personal exemptions). Self-employed and professionals are taxed
on the tax to another person or entity, which ultimately
on net income with deductions limited to seven items or in lieu
assumes the tax burden. (Maceda v. Macaraig, 197 SCRA
thereof the forty percent (40%) maximum deduction plus the
771)
personal exemptions. Corporations are generally taxed on net
income except for non-resident foreign corporations which are Direct Tax vs. Indirect Tax (2000)
taxed on gross income. Among the taxes imposed by the Bureau of Internal
The income tax is generally imposed via the Revenue are income tax, estate and donor's tax, value-added
self-assessment system or pay-as-you-file concept of imposing the tax, excise tax, other percentage taxes, and documentary
tax although certain incomes. Including income of non-residents, stamp tax. Classify these taxes into direct and indirect taxes,
are taxed on the pay-asyou-earn concept or the so called and differentiate direct from Indirect taxes. (5%)
withholding tax.
The corporate income tax is a one-layer tax in that SUGGESTED ANSWER:
distribution of profits to stockholders (except to nonresidents) are not Income tax, estate and donor's tax are considered as direct
subject to income tax. taxes. On the other hand, value-added tax, excise tax, other
percentage taxes, and documentary stamp tax are indirect
taxes.
Rule on Set-Off or Compensation on Taxes (2005) Tax Exemptions: Nature & Coverage; Proper Party (2004)
Can an assessment for a local tax be the subject of set-off or As an incentive for investors, a law was passed giving newly
compensation against a final judgment for a sum of money established companies in certain economic zone exemption
obtained by the taxpayer against the local government that from all taxes, duties, fees, imposts and other charges for a
made the assessment? Explain. period of three years. ABC Corp. was organized and was
SUGGESTED ANSWER: granted such incentive. In the course of business, ABC
No, taxes cannot be the subject of set-off even when there is Corp. purchased mechanical equipment from XYZ Inc.
a final judgment for a sum of money against the local Normally, the sale is subject to a sales tax.
government making the assessment. The government and the
taxpayer are not the "mutual creditors and debtors" of each XYZ Inc. claims, however, that since it sold the equipment
other who can avail of the remedy of compensation which to ABC Corp. which is tax exempt, XYZ
Art. 1278 (Civil Code) is
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 14 of 73
should not be liable to pay the sales tax. Is this claim sale, thus, shifting the tax burden to the ultimate
tenable? (5%) consumer.
SUGGESTED ANSWER: (NOTABENE: This concept pertains to the VAT law which is excluded
A. No. Exemption from taxes is personal in nature and from the bar coverage, Guidelines for 2006 Bar Examinations, June 15,
covers only taxes for which the taxpayer-grantee is directly 2006)
liable. The sales tax is a tax on the seller who is not exempt
from taxes. Since XYZ Inc. is directly liable for the sales tax Taxpayer Suit; When Allowed (1996)
and no tax exemption privilege is ever given to him, When may a taxpayer's suit be allowed?
therefore, its claim that the sale is tax exempt is not tenable. SUGGESTED ANSWER:
A tax exemption is construed in strictissimi juris and it can not A taxpayer's suit may only be allowed when an act
be permitted to exist upon vague implications (Asiatic complained of, which may include a legislative enactment,
Petroleum Co., Ltd. V. Llanes, 49 Phil 466 [1926]). directly involves the illegal disbursement of public funds
derived from taxation (Pascual vs. Secretary of Public
Works, 110 Phil. 331).
Assume arguendo that XYZ had to and did pay the sales
tax. ABC Corp. later found out, however, that XYZ merely Uniformity in the Collection of Taxes (1998)
shifted or passed on to ABC the amount of the sales tax by Explain the requirement of uniformity as a limitation in the
increasing the purchase price. ABC Corp. now claims for a imposition and/or collection of taxes. (5%|
refund from the Bureau of Internal Revenue in an amount SUGGESTED ANSWER:
corresponding to the tax passed on to it since it is tax Uniformity in the imposition and/or collection of taxes means that
exempt. Is the claim of ABC Corp. meritorious? (5%) all taxable articles, or kinds of property of the same class shall be
taxed at the same rate. The requirement of uniformity is complied
SUGGESTED ANSWER; with when the tax operates with the same force and effect in every
B. No. The claim of ABC Corp. is not meritorious. place where the subject of it is found (Churchill & Tail v.
Although the tax was shifted to ABC Corp. by the seller, Conception, 34 Phil. 969). It does not mean that lands, chattels,
what is paid by it is not a tax but part of the cost it has securities, income, occupations, franchises, privileges, necessities
assumed. Hence, since ABC Corp. is not a taxpayer, it has and luxuries shall be assessed at the same rate. Different articles
no capacity to file a claim for refund. The taxpayer who can maybe taxed at different amounts provided that the rate is uniform
file a claim for refund is the person statutorily liable for the on the same class everywhere with all people at all times.
payment of the tax. Accordingly, singling out one particular class for taxation purposes
does not infringe the requirement of uniformity.
Tax Laws; BIR Ruling; Non-Retroactivity of Rulings (2004)
Due to an uncertainty whether or not a new tax law is
applicable to printing companies, DEF Printers submitted FIRST ALTERNATIVE ANSWER:
a legal query to the Bureau of Internal Revenue on that The criteria is met when the tax laws operate equally and
issue. The BIR issued a ruling that printing companies are uniformly on all persons under similar circumstances. All
not covered by the new law. Relying on this ruling, DEF persons are treated in the same manner, the conditions not
Printers did not pay said tax. being different, both in privileges conferred and liabilities
imposed. Uniformity in taxation also refers to geographical
Subsequently, however, the BIR reversed the ruling and uniformity. Favoritism and preference is not allowed.
issued a new one stating that the tax covers printing
companies. Could the BIR now assess DEF Printers for SECOND ALTERNATIVE ANSWER:
back taxes corresponding to the years before the new A tax is deemed to have satisfied the uniformity rule when it
ruling? Reason briefly. (5%) operates with the same force and effect in every place where
SUGGESTED ANSWER: the subject maybe found. (Phil. Trust & Co. v. Yatco, 69 Phil.
No. Reversal of a ruling shall not be given a retroactive 420).
application if said reversal will be prejudicial to the taxpayer.
Therefore, the BIR can not assess DEF printers for back
taxes because it would be violative of the principle of
non-retroactivity of rulings and doing so would result in
grave injustice to the taxpayer who relied on the first ruling
INCOME TAXATION
Basic: Allowable Deductions vs. Personal Exemptions
in good faith (Section 246, NIRC; CIR v. Burroughs, Inc.,
(2001)
142 SCRA 324[1986]).
Distinguish Allowable Deductions from Personal
Tax Pyramiding; Definition & Legality (2006) Exemptions. Give an example of an allowable deduction and
What is tax pyramiding? What is its basis in law? (5%) another example for personal exemption. (5%)
SUGGESTED ANSWER:
SUGGESTED ANSWER:
Tax Pyramiding is the imposition of a tax upon another tax. The distinction between allowable deductions and personal
It has no basis in fact or in law (People v. Sandiganbayan, exemptions are as follows:
G.R. No. 152532, August 16, 2005). There is also tax a. As to amount — Allowable deductions
pyramiding when sales taxes are incorrectly applied to goods generally refer to actual expenses incurred in the pursuit
several times from production to final of trade, business or practice of profession while
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 15 of 73
personal exemptions are arbitrary amounts allowed The facts given in the problem are sufficient to compute the
by law. annual depreciation either under the declining-balance method or
As to nature — Allowable deductions constitute sum-of-years-digit method. Any answer arrived at by using any of
business expenses while personal exemptions pertain to personalthe recognized methods should be given full credit. It is suggested
expenses. that no question requiring computation should be given in future
As to purpose — Deductions are allowed to enable bar examinations.
the taxpayer to recoup his cost of doing business while personalBasic: Sources of Income: Taxable Income (1998)
exemptions are allowed to cover personal, family and living From what sources of income are the following
expenses. persons/corporations taxable by the Philippine government?
As to claimants — Allowable deductions can be 2) Citizen of the Philippines residing therein; [1%] 3)
claimed by all taxpayers, corporate or otherwise, while personal Non-resident citizen; [1%1 4) An individual citizen of the
exemptions can be claimed only by individual taxpayers. Philippines who is
ITR; Domestic Corporate Taxation (2001) ITR; Personal Income; GSIS Pension (2000)
a) How often does a domestic corporation file income Mr. Javier is a non-resident senior citizen. He receives a
tax return for income earned during a single taxable monthly pension from the GSIS which he deposits with
year? Explain the process. (3%) the PNB-Makati Branch. Is he exempt from income tax
SUGGESTED ANSWER: and therefore not required to file an income tax return?
a) A domestic corporation is required to file income tax (5%)
returns four (4) times for income earned during a single SUGGESTED ANSWER:
taxable year. Quarterly returns are required to be filed for Mr. Javier is exempt from income tax on his monthly GSIS
the first three quarters where the corporation shall declare pension (Sec. 32(B)(6)(f), NIRC of 1997) but not on the
its quarterly summary of gross income and deductions on a interest income that might accrue on the pensions deposited
cumulative basis. (Section 75, NIRC). Then, a final with PNB which are subject to final withholding tax.
adjustment return is required to be filed covering the total Consequently, since Mr. Javier's sole taxable income would
taxable income for the entire year, calendar or fiscal. (Section have been subjected to a final withholding tax, he is not
76, NIRC). required anymore to file an income tax return. (Sec. 51 (A) (2)
(c). Ibid].
b) What is the reason for such procedure? (2%)
SUGGESTED ANSWER: ITR; Personal Income; Married Individual (2004)
b) The reason for this procedure is to ensure the timeliness RAM got married to LISA last January 2003. On November
of collection to meet the budgetary needs of the 30, 2003, LISA gave birth to twins. Unfortunately, however,
government. Likewise, it is designed to ease the burden on LISA died in the course of her delivery. Due to
the taxpayer by providing it with an installment payment complications, one of the twins also died on December 15,
scheme, rather than requiring the payment of the tax on a 2003.
lump-sum basis after the end of the year.
ALTERNATIVE ANSWER: In preparing his Income Tax Return (ITR) for the year
b) The reason for the quarterly filing of tax returns is to 2003, what should RAM indicate in the ITR as his civil
allow partial collection of the tax before the end of the status: (a) single; (b) married; (c) Head of the family; (d)
taxable year and also to improve the liquidity of government widower; (e) none of the above? Why? Reason. (5%)
SUGGESTED ANSWER:
RAM should indicate "(b) married" as his civil status in
ITR; Personal Income: Two Employment (2001) preparing his Income Tax Return for the year 2003. The
In the year 2000, X worked part time as a waitress in a death of his wife during the year will not change his status
restaurant in Mega Mall from 8:00 a.m. to 4:00 p.m. and because should the spouse die during the taxable year, the
then as a cashier in a 24-hour convenience store in her taxpayer may still claim the same exemptions (that of being
neighborhood. The total income of X for the year from the married) as if the spouse died at the close of such year
two employers does not exceed her total personal and (Section 35/Cj, NIRC).
additional exemptions for the year 2000. Was she required
to file an income tax return last April? Explain your answer. ITR; Taxpayer; Liabilities; Falsified Tax Return (2005)
(5%) Danilo, who is engaged in the trading business, entrusted to
SUGGESTED ANSWER: his accountant the preparation of his income tax return and
Yes. An individual deriving compensation concurrently the payment of the tax due. The accountant filed a falsified
from two or more employers at any time during the taxable tax return by underdeclaring the sales and overstating the
year shall file an income tax return (Sec. 51(A)(2)(b), NIRC.) expense deductions by Danilo. Is Danilo liable for the
deficiency tax and the penalties thereon? What is the
ALTERNATIVE ANSWER:
It depends. An individual with pure compensation income is liability, if any, of the accountant? Discuss. (5%)
not required to file an income tax returns when she meets
SUGGESTED ANSWER:
the following conditions; (1) the total gross compensation Danilo is liable for the deficiency tax as well as for the
income does not exceed Php60,000.00 and deficiency interest. He should not be held liable for the
(2) the income tax has been correctly withheld, meaning
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 21 of 73
fraud penalty because the accountant acted beyond the 2) No. Revenue Regulation No. 2-93 implementing RA No.
limits of his authority. There is no showing in the problem 7496 have indeed significantly reduced the items of
that Danilo signed the falsified return or that it was prepared deduction by limiting it to direct costs and expenses or the
under his direction. {On the other hand the accountant may 40% of gross receipts maximum deduction in cases where
be held criminally liable for violation of the Tax Code when the direct costs are difficult to determine. The allowance of
he falsified the tax return by underdeclaring the sale and limited deductions however, is still in consonance with the
overstating the expense deductions. If Danny's accountant is net income taxation scheme rather than the gross income
a Certified Public Accountant, his certificate as a CPA shall method. While it is true that not all the expenses of earning
automatically be revoked or cancelled upon conviction. the income might be allowed, this can well be justified by
the fact that deductions are not matters of right but are
matters of legislative grace.
Partnership: Income Tax (1995)
Five years ago Marquez, Peneyra, Jayme, Posadas and
Manguiat, all lawyers, formed a partnership which they Personal; Income Tax: Non-Resident Alien (2000)
named Marquez and Peneyra Law Offices. The Commis- Mr. Cortez is a non-resident alien based in Hong Kong.
sioner of Internal Revenue thereafter issued Revenue Regu- During the calendar year 1999, he came to the Philippines
lation No. 2-93 implementing RA. 7496 known as the Simplified several times and stayed in the country for an aggregated
Net Income Taxation Scheme (SNITS). Revenue Regulation period of more than 180 days. How will Mr. Cortez be
No. 2-93 provides in part: taxed on his income derived from sources within the
Sec. 6. General Professional Partnership. — Philippines and from abroad? (5%)
The general professional partnership and the SUGGESTED ANSWER:
partners are covered by R.A. 7496. Thus, in Mr. Cortez being a non-resident alien individual who has
determining profit of the partnership, only the stayed for an aggregated period of more than 180 days
direct costs mentioned in said law are to be during the calendar year 1999, shall for that taxable year be
deducted from partnership income. Also, the deemed to be a non-resident alien doing business in the
expenses paid or Incurred by partners in their Philippines.
individual capacities in the practice of their
profession which are not reimbursed or paid by Considering the above, Mr. Cortez shall be subject to an
the partnership but are not considered as direct income tax in the same manner as an individual citizen and a
costs are not deductible from his gross income. resident alien individual, on taxable income received from all
sources within the Philippines. [Sec. 25 (A) (1), NIRC of 1997]
1) Marquez and Peneyra Law Offices filed a taxpayer's Thus, he is allowed to avail of the itemized deductions
suit alleging that Revenue Regulation No. 2-93 violates the including the personal and additional exemptions but subject
principle of uniformity in taxation because general to the rule on reciprocity on the personal exemptions. (Sec.
professional partnerships are now subject to payment of 34 (A) to (J) and (M) in relation to Sec. 25 (A) (1), Ibid, Sec. 35
income tax and that there is a difference in the tax treatment (D), Ibid.]
between individuals engaged in the practice of their NOTE: It is suggested that full credit should be given if the
respective professions and partners in general professional examinee's answer only cover the first two paragraphs.
partnerships. Is this contention correct? Explain.
Personal; Income Tax: Non-Resident Citizen (1999)
SUGGESTED ANSWER: A Co., a Philippine corporation, has an executive (P) who is
1) The contention is not correct. General professional a Filipino citizen. A Co. has a subsidiary in Hong Kong
partnerships remain to be a non-taxable entity. What is (HK Co.) and will assign P for an indefinite period to work
taxable are the partners comprising the same and they are full time for HK Co. P will bring his family to reside in HK
obligated to report as income their share in the income of and will lease out his residence in the Philippines. The salary
the general professional partnership during the taxable year of P will be shouldered 50% by A Co. while the other 50%
whether distributed or not. The SNITS treat professionals as plus housing, cost of living and educational allowances of
one class of taxpayer so that they shall be treated alike P's dependents will be shouldered by HK Co. A Co. will
irrespective of whether they practice their profession alone credit the 50% of P's salary to P's Philippine bank account.
or in association with other professionals under a general P will sign the contract of employment in the Philippines. P
professional partnership. What are taxed differently are will also be receiving rental income for the lease of his
individuals and corporations. All individuals similarly Philippine residence. Are these salaries, allowances and
situated are taxed alike under the regulations, therefore, the rentals subject to the Philippine income tax? (5%)
principle of uniformity in taxation is not violated. On the
contrary, all the requirements of a valid classification have SUGGESTED ANSWER:
been complied with (Ton vs. Del Rosario et al G.R No. The salaries and allowances received by P are not subject to
Philippine income tax. P qualifies as a nonresident citizen
109289, Octobers, 1994).
because he leaves the Philippines for employment requiring
2) Is Revenue Regulation No. 2-93 now considered him to be physically present abroad most of the time during
as having adopted a gross income method instead of the taxable year. (Section 22(E), NIRC). A nonresident
retaining the net income taxation scheme? Explain. citizen is taxable only on income derived from Philippine
SUGGESTED ANSWER: sources. (Section 23, NIRC). The salaries and
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 22 of 73
allowances received from being employed abroad are will erect a building on the land which will become the
incomes from without because these are compensation for property of Mr. Domingo at the end of the lease without
services rendered outside of the Philippines. (Section 42, compensation or reimbursement whatsoever for the value
NIRC). of the building.
However, P is taxable on rental income for the lease of his Mr. Enriquez erects the building. Upon completion the
Philippine residence because this is an income derived from building had a fair market value of P1 Million. At the end
within, the leased property being located in the Philippines. of the lease the building is worth only P900.000.00 due to
(Section 42, NIRC). depreciation.
Personal; Income Tax: Tax-Free Exchange (1997) Will Mr. Domingo have income when the lease expires and
Three brothers inherited in 1992 a parcel of land valued for becomes the owner of the building with a fair market value
real estate tax purposes at P3.0 million which they held in of P900.000.00? How much income must he report on the
co-ownership. In 1995, they transferred the property to a building? Explain.
newly organized corporation as their equity which was SUGGESTED ANSWER:
placed at the zonal value of P6.0 million. In exchange for When a building is erected by a lessee in the leased
the property, the three brothers thus each received shares premises in pursuance of an agreement with the lessor that
of stock of the corporation with a total par value of P2.0 the building becomes the property of the lessor at the end
million or, altogether, a total of P6.0 million. No business of the lease, the lessor has the option to report income as
was done by the Corporation, and the property remained follows: 1) The lessor may report as income the market
idle. In the early part of 1997, one of the brothers, who was value of
in dire need of funds, sold his shares to the two brothers the building at the time when such building is
for P2.0 million. Is the transaction subject to any internal completed; or 2) The lessor may spread over the life of the
revenue tax (other than the documentary stamp tax)? lease the
estimated depreciated value of such building at the
SUGGESTED ANSWER: termination of the lease and report as income for
Yes. The exchange in 1995 is a tax-free exchange so that the each year of the lease an aliquot part thereof (Sec.
subsequent sale of one of the brothers of his shares to the 49, RR No. 2).
other two (2) brothers in 1997 will be subject to income tax.
This is so because the tax-free exchange merely deferred the Under the first option, the lessor will have no income when
recognition of income on the exchange transaction. The the lease expires and becomes the owner of the building.
gain subject to income tax in the sale is measured by the The second option will give rise to an income during the
difference between the selling price of the shares (P2 year of lease expiration of P90.000.00 or 1/10 of the
Million) and the basis of the real property in the hands of depreciated value of the building.
the transferor at the time of exchange which is the fair
market value of his share in the real property at the time of The availment of the first option will require Mr. Domingo
inheritance (Section 34(b)(2), NIRC). The net gain from the to report an income of P1.000,000.00 during the year when
sale of shares of stock is subject to the schedular capital the building was completed. A total of P900.000.00 income
gains tax of 10% for the first P100.000 and 20% for the will be reported under the second option but will be spread
excess thereof (Section 2l(d), NIRC). over the life of the lease or P90.000.00 per year.
ALTERNATIVE ANSWER:
The exchange effected in 1995 did not qualify as a tax-free ALTERNATIVE ANSWER:
exchange because there is no showing that the three Mr. Domingo will realize an income when the lease expires
brothers gained control of the corporation by acquiring at and becomes the owner of the building with a fair market
least 51% of the voting rights. Since the entire gain on the value of P900.000.00 because the condition for the lease is
exchange was previously subjected to income tax, then, the the transfer of the building at the expiration of the lease.
sale will also be taxable if a gain results therefrom. In the The income to be realized by Mr. Domingo at the time of
instant case, the sale will not be subject to any internal the expiration will consist of the value of the building which
revenue tax other than the documentary stamp tax, because is P900.000.00 and any rental income that has accrued as of
the seller did not realize any gain from the sale. The gain is said date.
measured by the difference between the amount realized
(selling price) and the basis of the property. Incidentally, the Personal; Income Tax; Married Individual (1997)
basis to him is his share in the value of the property Mar and Joy got married in 1990. A week before their
received at the time of exchange, which is P2 Million, an marriage. Joy received, by way of donation, a condominium
amount, just equal to the amount realized from the sale. unit worth P750.000.00 from her parents. After marriage,
some renovations were made at a cost of P150.000.00. The
spouses were both employed in 1991 by the same company.
Personal; Income Tax; Contract of Lease (1995) On 30 December 1992, their first child was born, and a
Mr. Domingo owns a vacant parcel of land. He leases the second child was born on 07 November 1993. In 1994, they
land to Mr. Enriquez for ten years at a rental of P12,000.00 sold the condominium unit and bought a new unit. Under
per year. The condition is that Mr. Enriquez the foregoing facts, what
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were the events in the life of the spouses that had income accordance with the schedular graduated rates of 1%, 2%
tax incidences? and 3%. based on the adjusted gross income derived by
SUGGESTED ANSWER: non-resident citizens from all sources without the
The events in the life of spouses. Mar and Joy, which have Philippines during each taxable year.
income tax incidences are the following: 1) Their marriage
in 1990 qualifies them to claim Taxable Income: Illegal Income (1995 Bar)
personal exemption for married individuals; 2) Their Mr. Lajojo is a big-time swindler. In one year he was able to
employment in 1991 by the same company earn P1 Million from his swindling activities. When the
will make them liable to the income tax imposed on Commissioner of Internal Revenue discovered his income
gross compensation income; 3) Birth of their first child in from swindling, the Commissioner assessed him a deficiency
December 1992 would income tax for such income. The lawyer of Mr. Lajojo
give rise to an additional exemption of P5,000 for protested the assessment on the following grounds: 1) The
taxable year 1992; 4) Birth of their second child in income tax applies only to legal income, not to
November 1993 would illegal income; 2) Mr. Lajojo's receipts from his swindling
likewise entitle them to claim additional exemption did not
of P5,000 raising their additional personal constitute income because he was under obligation
exemptions to P 10,000 for taxable year 1993; and 5) Sale to return the amount he had swindled, hence, his
of their condominium unit in 1994 shall make receipt from swindling was similar to a loan, which
the spouses liable to the 5% capital gains tax on the is not income, because for every peso borrowed he
gain presumed to have been realized from the sale. has a corresponding liability to pay one peso; and 3) If he
has to pay the deficiency income tax assess
Personal; Income Tax; Retiring Alien Employee (2005) ment, there will be hardly anything left to return to
An alien employee of the Asian Development Bank (ADB) the victims of the swindling. How will you rule on each of
who is retiring soon has offered to sell his car to you which the three grounds for the protest? Explain.
he imported tax-free for his personal use. The privilege of
exemption from tax is granted to qualified personal use SUGGESTED ANSWERS:
under the ADB Charter which is recognized by the tax 1) The contention that the income tax applies to legal
authorities. If you decide to purchase the car, is the sale income and not to illegal income is not correct. Section
subject to tax? Explain. (5%) 28(a) of the Tax Code includes within the purview of gross
SUGGESTED ANSWER: income all Income from whatever source derived. Hence,
The sales transaction is subject to value added tax (VAT) the illegality of the income will not preclude the imposition
under Sec. 107(B) of the NIRC, although this provision is of the income tax thereon.
expressly excluded from the coverage of the 2005 bar
exam. 2) The contention that the receipts from his swindling did
not constitute income because of his obligation to return
The proceeds from the sale are subject to income tax. The the amount swindled is likewise not correct. When a
car is considered a capital asset of the retiring alien taxpayer acquires earnings, lawfully or unlawfully, without
employee because he is not engaged in the business of the consensual recognition, express or implied, of an
buying and selling cars. He therefore derived income, which obligation to repay and without restriction as to their
should be reported in his income tax return. (Sees. 32 and disposition, he has received taxable income, even though it
39, NIRC) may still be claimed that he is not entitled to retain the
money, and even though he may still be adjudged to restore
Personal; Income Taxation: Non-Resident Citizen (1997) its equivalent (James vs. U.S.,366 U.S. 213, 1961). To treat the
Juan, a Filipino citizen, has immigrated to the United States embezzled funds not as taxable income would perpetuate
where he is now a permanent resident. He owns certain injustice by relieving embezzlers of the duty of paying
income-earning property in the Philippines from which he income taxes on the money they enrich themselves with
continues to derive substantial income. He also receives through embezzlement, while honest people pay their taxes
income from his employment in the United States on which on every conceivable type of income. (James vs. U.S.)
the US income tax is paid. On which of the above income
is the taxable, if at all, in the Philippines, and how, in
general terms, would such income or incomes be taxed? 3) The deficiency income tax assessment is a direct tax
imposed on the owner which is an excise on the privilege to
SUGGESTED ANSWER: earn an income. It will not necessarily be paid out of the
Juan, shall be taxed on both his income from the Philippines same income that were subjected to the tax. Mr. Lajojo's
and on his Income from the United States because his being liability to pay the tax is based on his having realized a
a citizen makes him taxable on all Income wherever derived. taxable income from his swindling activities and will not
For the income he derives from his property in the affect his obligation to make restitution. Payment of the tax
Philippines, Juan shall be taxed on his net income under the is a civil obligation imposed by law while restitution is a
Simplified Net Income Taxation Scheme (SNITS) civil liability arising from a crime.
whereby he shall be considered as a self-employed
individual. His Income as employee in the United States, on Taxable or Non-Taxable; Income and Gains (2005)
the other hand, shall be taxed in
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 24 of 73
Explain briefly whether the following items are taxable or of its territorial jurisdiction to file a return; for this reason,
non-taxable: (5%) a) Income from JUETENG; the income tax on income derived from within must be
collected through the withholding tax system and thus
SUGGESTED ANSWER: relieve the recipient of the income the duty to file income
Taxable. Gross income includes "all income derived from whatever tax returns. (Section 51, NIRC).
source" (Sec. 32[A], NIRC), which was interpreted as all income not
expressly excluded or exempted from the class of taxable income, Withholding Tax: Retirement Benefit (2000)
irrespective of the voluntary or involuntary action of the taxpayer To start a business of his own, Mr. Mario de Guzman
in producing the income. Thus, the income may proceed from a opted for an early retirement from a private company after
legal or illegal source such as from jueteng. Unlawful gains, ten (10) years of service. Pursuant to the company's
gambling winnings, etc. are subject to income tax. The tax code qualified and approved private retirement benefit plan, he
stands as an indifferent neutral party on the matter of where the was paid his retirement benefit which was subjected to
income comes from. withholding tax. Is the employer correct in withholding the
tax? Explain. (2%)
(Commissioner of Internal Revenue v. Manning, G.R. No. SUGGESTED ANSWER:
L-28398, August 6, 1975)
(a) It depends. An employee retiring under a company's
b) Gain arising from EXPROPRIATION OF qualified and private retirement plan can only be exempt
PROPERTY; from income tax on his retirement benefits if the following
SUGGESTED ANSWER: requisites
(1) are met:
that the retiring employee must have been in
Taxable. Sale exchange or other disposition of property to service of the same employer for at least ten (10) years;
the government of real property is taxable. It includes taking (2) that he is not less than 50 years of age at the time
by the government through condemnation proceedings. of retirement; and
(Gonzales v. Court of Tax Appeals, G.R. No. L-14532, May 26, (3) the benefit is availed of only
1965) once.
In the instant case, there is no mention whether the
c) TAXES paid and subsequently refunded;
SUGGESTED ANSWER:
employee has likewise complied with requisites number
Taxable only if the taxes were paid and claimed as deduction (2) and (3).
and which are subsequently refunded or credited. It shall be
included as part of gross income in the year of the receipt to Withholding Tax: Retirement Benefit (2000)
the extent of the income tax benefit of said deduction. (Sec. Under what conditions are retirement benefits received by
34[C][1], NIRC) Not taxable if the taxes refunded were not officials and employees of private firms excluded from
originally claimed as deductions. gross income and exempt from taxation? (3%)
SUGGESTED ANSWER:
The conditions to be met in order that retirement benefits
d) Recovery of BAD DEBTS previously charged off;
SUGGESTED ANSWER:
received by officials and employees of private firms are
Taxable under the TAX BENEFIT RULE. Recovery of excluded from gross income and exempt from taxation are
bad debts previously allowed as deduction in the preceding as follows:
years shall be included as part of the gross income in the 2. Under Republic Act No. 4917 (those received
year of recovery to the extent of the income tax benefit of under a reasonable private benefit plan):
said deduction. (Sec. 34[E][1], NIRC) This is sometimes
referred as the RECAPTURE RULES. a. the retiring official or employee must have
been(10)
in service
years; of the same employer for at least ten
e) Gain on the sale of a car used for personal purposes. b. that he is not less than fifty (50) years of age
SUGGESTED ANSWER: at the time of retirement; and
Taxable. Since the car is used for personal purposes, it is c. that the benefit is availed of only
considered as a capital asset hence the gain is considered once.
income. (Sec. 32[A][3] and Sec. 39[A][1], NIRC) 3. Under Republic Act No. 7641 (those received
from employers without any retirement plan):
Withholding Tax: Non-Resident Alien (2001)
Is a non-resident alien who is not engaged in trade or
business or in the exercise of profession in the Philippines
but who derived rental income from the Philippines
required to file an income tax return on April of the year
following his receipt of said income? If not, why not?
Explain your answer. (5%)
SUGGESTED ANSWER:
No. The income tax on all income derived from Philippine
sources by a non-resident alien who is not engaged in trade
or business in the Philippines is withheld by the lessee as a
Final Withholding Tax. (Section 57(A), NIRC). The
government can not require persons outside
• Those received under existing collective
bargaining agreement and other agreements are exempt;
and
• In the absence of retirement plan or agreement
providing for retirement benefits the benefits are
excluded from gross income and exempt from income
tax if:
i. retiring employee must have served
at least five(5) years; and
ii. that he is not less than sixty (60)
years of age but not more than sixty five
(65).
Withholding Tax: Royalty (2002)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 25 of 73
The MKB-Phils. is a BOI-registered domestic corporation a resident citizen or alien from a domestic corporation, is to
licensed by the MKB of the United Kingdom to distribute, ensure the collection of income tax on said income. If we
support and use in the Philippines its computer software subject the dividend to the progressive tax rate, which can
systems, including basic and related materials for banks. The only be done through the filing of income tax returns, there
MKB-Phils. provides consultancy and technical services is no assurance that the taxpayer will declare the income,
incidental thereto by entering into licensing agreements with especially when there are other items of gross income
banks. Under such agreements, the MKB-Phils. will not earned during the year. It would be extremely difficult for
acquire any proprietary rights in the licensed systems. The the BIR to monitor compliance considering the huge
MKB-Phils. pays royalty to the MKB-UK, net of 15% number of stockholders. By shifting the responsibility to
withholding tax prescribed by the RP-UK Tax Treaty. remit the tax to the corporation, it is very easy to check
compliance because there are fewer withholding agents
compared to the number of income recipients.
Is the income of the MKB-Phils. under the licensing
agreement with banks considered royalty subject to 20%
final withholding tax? Why? If not, what kind of tax will its Likewise, the imposition of a final withholding tax will
income be subject to? Explain. (5%) make the tax available to the government at an earlier time.
SUGGESTED ANSWER: Finally, the final withholding tax will be a sure revenue to
Yes. The income of MKB-Phils. under the licensing the government unlike when the dividend is treated as a
agreement with banks shall be considered as royalty subject returnable income where the recipient thereof who is in a
to the 20% final withholding tax. The term royalty is broad tax loss position is given the chance to offset such loss
enough to include technical advice, assistance or services against dividend income thereby depriving the government
rendered in connection with technical management or of the tax on said dividend income. [Note: It is recommended
administration of any scientific, industrial or commercial that any of the foregoing answers can be given full credit because the
undertaking, venture, project or scheme. (Sec. 42(4)(f), question involves a policy issue which can only be found in the
NIRC). Accordingly, the consultancy and technical services deliberations of Congress.]
rendered by MKB-Phils, which are incidental to the ALTERNATIVE ANSWER:
distribution, support and use of the computer systems of The reason why cash dividends received by a resident
MKB-UK are taxable as royalty. citizen or alien from a domestic corporation are subjected
to the final withholding tax of 10% and not at the
Withholding Tax; Coverage (2004) progressive rate tax schedule is to lessen the impact of a
Citing Section 10, Article VIII of the 1987 Constitution second layer of tax on the same income.
which provides that salaries of judges shall be fixed by law
and that during their continuance in office their salary shall Withholding Tax; Income subject thereto (2001)
not be decreased, a judge of MM Regional Trial Court What is meant by income subject to "final tax"? Give at
questioned the deduction of withholding taxes from his least two examples of income of resident individuals that is
salary since it results into a net deduction of his pay. Is the subject to the final tax. (3%)
contention of the judge correct? Reason briefly. (5%) SUGGESTED ANSWER:
SUGGESTED ANSWER:
Income subject to final tax refers to an income wherein the
No. The contention is incorrect. The salaries of judges are tax due is fully collected through the withholding tax
not tax-exempt and their taxability is not contrary to the system. Under this procedure, the payor of the income
provisions of Section 10, Article VIII of the Constitution withholds the tax and remits it to the government as a final
on the non-diminution of the salaries of members of the settlement of the income tax due on said income. The
judiciary during their continuance in office. The clear intent recipient is no longer required to include the item of
of the Constitutional Commission that framed the income subjected to "final tax" as part of his gross income
Constitution is to subject their salaries to tax as in the case in his income tax returns. Examples of income subject to
of all taxpayers. Hence, the deduction of withholding taxes, final tax are dividend income, interest from bank deposits,
being a manner of collecting the income tax on their royalties, etc.
salary, is not a diminution contemplated by the
fundamental law. (Nitafan et. al. v. CIR, 152 SCRA 284 Withholding Tax; Non-Resident Alien (1994)
[1987]). Four Catholic parishes hired the services of Frank Binatra, a
foreign non-resident entertainer, to perform for four (4)
Withholding Tax; Domestic Corporation; Cash nights at the Folk Arts Theater. Binatra was paid
Dividends(2001) P200.000.00 a night. The parishes earned P1,000,000.00
What do you think is the reason why cash dividends, when which they used for the support of the orphans in the city.
received by a resident citizen or alien from a domestic Who are liable to pay taxes?
corporation, are taxed only at the final tax of 10% and not SUGGESTED ANSWER:
The following are liable to pay income taxes:
at the progressive tax rate schedule under Section 24(A) of
(a) The four catholic parishes because the income
the Tax Code? Explain your answer. (5%)
received by them, not being income earned "as such" in the
SUGGESTED ANSWER:
performance of their religious functions and duties, is
The reason for imposing final withholding tax rather than taxable income under the last paragraph of Sec. 26, in
the progressive tax schedule on cash dividends received by relation to Sec. 26(e) of the Tax Code. In
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 26 of 73
promoting and operating the Binatra Show, they year but not more than ten (10) years (1st par.,
engaged in an activity conducted for profit. (Ibid.) Sec. 255, NIRC).
(b) The income of Frank Binatra, a non-resident alien COMMENT: It is suggested that any of the following answers
under our law is taxable at the rate of 30%, final to the question, "What are the liabilities for failure to withhold
withholding tax based on the gross income from the show. such a tax?" be given full credit: 1) The payor shall be liable for
Mr. Binatra is not engaged in any trade or business in the the payment of the tax which
Philippines. was not withheld. 2) The payer/withholding agent shall be liable
to both civil
and criminal penalties imposed by the Tax Code.
Withholding Tax; Non-Resident Corporation (1994)
Bates Advertising Company is a non-resident corporation duly Withholding Tax; Time Deposit Interest; GSIS Pension
organized and existing under the laws of Singapore. It is not (1994)
doing business and has no office in the Philippines. Pilipinas Maribel Santos, a retired public school teacher, relies on
Garment Incorporated, a domestic corporation, retained the her pension from the GSIS and the Interest Income from a
services of Bates to do all the advertising of its products time deposit of P500.000.00 with ABC Bank. Is Miss
abroad. For said services, Bates' fees are paid through outward Santos liable to pay any tax on her Income?
remittances. Are the fees received by Bates subject to any SUGGESTED ANSWER:
withholding tax? Maribel Santos is exempt from tax on the pension from the
SUGGESTED ANSWER: GSIS (Sec. 28(b((7)(F), Tax Code). However, as regards her
The fees paid to Bates Advertising Co., a non-resident time deposit, the interest she receives thereon is subject to
foreign corporation are not subject to withholding tax since 20% final withholding tax. (Sec. 21(a)(c), Tax Code).
they are not subject to Philippine tax. They are exempt
because they do not constitute income from Philippine
sources, the same being compensation for labor or personal
services performed outside the Philippines (Sec. 36{c) (3)
DEDUCTIONS, EXEMPTIONS,
and Sec. 25(b)(l), Tax Code). EXCLUSIONS & INCLUSIONS
Deduction: Facilitation Fees or "kickback" (1998)
Withholding Tax; Reader's Digest Award (1998)
Is the prize of one million pesos awarded by the Reader's
Digest subject to withholding of final tax? Who is
responsible for withholding the tax? What are the liabilities
for failure to withhold such tax? [5%]
SUGGESTED ANSWER:
SUGGESTED ANSWER:
No. The premium is not deductible because it is not an
ordinary business expense. The term "ordinary" is used in
the income tax law in its common significance and it has the
connotation of being normal, usual or customary (Deputy v.
Du Pont, 308 US 488 [1940]). Paying premiums for the
insurance of a person not connected to the company is not
normal, usual or customary.
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 27 of 73
Another reason for its non-deductibility is the fact that it ordinary gains which are subject to a higher rate of income
can be considered as an illegal compensation made to a tax. (Chirelstein, Federal Income Taxation, 1977 Ed.)
government employee. This is so because if the insured, his
estate or heirs were made as the beneficiary (because of the
requirement of insurable interest), the payment of premium will Deductions: Deductible Items from Gross Income (1999)
constitute bribes which are not allowed as deduction from Explain if the following items are deductible from gross
gross income (Section 34[A][l][c], NIRC). income for income tax purposes. Disregard who is the
person claiming the expense. (5%) 1) Interest on loans used
On the other hand, if the company was made the to acquire capital equipment
beneficiary, whether directly or indirectly, the premium is or machinery. 2) Depreciation
not allowed as a deduction from gross income (Section of goodwill.
36[A}14], NIRC). SUGGESTED ANSWER:
1) Interest on loans used to acquire capital equipment
Deductions: Amount for Bribe (2001) or machinery is a deductible item from gross income. The
In order to facilitate the processing of its application for a law gives the taxpayer the option to claim as a deduction or
license from a government office, Corporation A found it treat as capital expenditure interest incurred to acquire
necessary to pay the amount of Php 100,000 as a bribe to property used in trade, business or exercise of a profession.
the approving official. Is the Php 100,000 deductible from (Section 34(B) (3), NIRC).
the gross income of Corporation A? On the other hand, is
the Php 100,000 taxable income of the approving official? 2) Depreciation for goodwill is not allowed as deduction
Explain your answers. (5%) from gross income. While intangibles maybe allowed to be
SUGGESTED ANSWER: depreciated or amortized, it is only allowed to those
Since the amount of Phpl00.000 constitutes a bribe, it is not intangibles whose use in the business or trade is definitely
allowed as a deduction from gross income of Corporation A, limited in duration. (Basilan Estates, Inc. v, CIR, 21
(Section 34(A)(l)(c), NIRC). However, to the recipient government SCRA 17). Such is not the case with goodwill.
official, the same constitutes a taxable income. All income from
legal or illegal sources are taxable absent any clear provision of law ALTERNATIVE ANSWER:
Depreciation of goodwill is allowed as a deduction from
exempting the same. This is the reason why gross income had
gross income if the goodwill is acquired through capital
been defined to include income from whatever source derived.
outlay and is known from experience to be of value to the
(Section 32(A), NIRC). Illegally acquired income constitutes realized
business for only a limited period. (Section 107, Revenue
income under the claim of right doctrine (Rutkin
Regulations No. 2). In such case, the goodwill is allowed to be
v. US, 343 US 130).
amortized over its useful life to allow the deduction of the
current portion of the expense from gross income, thereby
Deductions: Capital Losses; Prohibitions (2003) paving the way for a proper matching of costs against
What is the rationale for the rule prohibiting the deduction revenues which is an essential feature of the income tax
of capital losses from ordinary gains? Explain. system.
SUGGESTED ANSWER:
It is to insure that only costs or expenses incurred in Deductions: Income Tax: Donation: Real Property
earning the income shall be deductible for income tax (2002)
On December 06, 2001, LVN Corporation donated a piece
purposes consonant with the requirement of the law that of vacant lot situated in Mandaluyong City to an accredited
only necessary expenses are allowed as deductions from and duly registered non-stock, non-profit educational
gross income. The term "NECESSARY EXPENSES" institution to be used by the latter in building a sports
presupposes that in order to be allowed as deduction, the complex for students.
expense must be business connected, which is not the case A. May the donor claim in full as deduction from its
insofar as capital losses are concerned. This is also the gross income for the taxable year 2001 the amount of the
reason why all non-business connected expenses like donated lot equivalent to its fair market value/zonal value at
personal, living and family expenses, are not allowed as the time of the donation? Explain your answer. (2%)
deduction from gross income (Section 36(A)(1) of the 1997
Tax Code). SUGGESTED ANSWER:
A. No. Donations and/or contributions made to
The prohibition of deduction of capital losses from qualified donee institutions consisting of property
ordinary gains is designed to forestall the shifting of other than money shall be based on the acquisition
deductions from an area subject to lower taxes to an area cost of the property. The donor is not entitled to claim
subject to higher taxes, thereby unnecessarily resulting in as full deduction the fair market value/zonal value of
leakage of tax revenues. Capital gains are generally taxed at a the lot donated. (Sec. 34(H), NIRC).
lower rate to prevent, among others, the bunching of
income in one taxable year which is a liberality in the law B. In order that donations to non-stock, non-profit
begotten from motives of public policy (Rule on Holding educational institution may be exempt from the donor's gift
Period). It stands to reason therefore, that if the transaction tax, what conditions must be met by the donee? (3%)
results in loss, the same should be allowed only from and to
SUGGESTED ANSWER:
the extent of capital gains and not to be deducted from
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 28 of 73
B. In order that donations to non-stock, non-profit that they are not allowed to deduct any item from their gross
educational institution may be exempt from the donor's income for purposes of computing their net taxable income.
gift tax, it is required that not more than 30% of the With the passage of the Comprehensive Tax Reform Act of
said gifts shall be used by the donee-institution for 1997, is this complaint still valid? Explain your answer. (5%)
administration purposes. (Sec. 101(A)(3), NIRC).
SUGGESTED ANSWER:
Deductions: Non-Deductible Items; Gross Income (1999) No more. Gross compensation income earners are now
Explain if the following items are deductible from gross allowed at least an item of deduction in the form of
income for income tax purposes. Disregard who is the premium payments on health and/or hospitalization
person claiming the deduction. (5%) insurance in an amount not exceeding P2,400 per annum
1. Reserves for bad debts. [Section 34(M)]. This deduction is allowed if the aggregate
2. Worthless securities family income do not exceed P250.000 and by the spouse,
SUGGESTED ANSWER: in case of married individual, who claims additional personal
1 RESERVE FOR BAD DEBTS are not allowed as exemption for dependents.
deduction from gross income. Bad debts must be charged off
during the taxable year to be allowed as deduction from gross Deductions; Vanishing Deduction; Purpose (2006)
income. The mere setting up of reserves will not give rise to any Vanishing deduction is availed of by taxpayers to:
deduction. (Section 34(E). NTRC). Correct his accounting records to reflect the
2 WORTHLESS SECURITIES, which are ordinary actual deductions made
assets, are not allowed as deduction from gross income because Reduce his gross income
the loss is not realized. However, if these worthless securities are Reduce his output value-added tax liability
capital assets, the owner is considered to have incurred a capital Reduce his gross estate Choose the correct
loss as of the last day of the taxable year and, therefore, deductibleanswer. Explain. (5%)
to the extent of capital gains. (Section 34(D)(4), NIRC). This SUGGESTED ANSWER:
deduction, however, is not allowed to a bank or trust company. (D) reduce his gross estate. Vanishing deduction or prop-
(Section 34(E)(2), NIRC). erty previously taxed is one of the items of deduction
allowed in computing the net estate of a decedent (Section
86[A][2] and 86[B][2], NIRC).
Deductions; Income Tax: Allowable Deductions (2001) Exclusion vs. Deduction from Gross Income (2001)
Taxpayers whose only income consists of salaries and
wages from their employers have long been complaining
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 29 of 73
Distinguish "Exclusion from Gross Income" from which are exclusions from gross income pursuant
"Deductions From Gross Income". Give an example of to Section 28(b)(5) of the Tax Code.
each. (2%)
SUGGESTED ANSWER: Exclusions & Inclusions: Executive Benefits (1995)
EXCLUSIONS from gross income refer to a flow of Mr. Adrian is an executive of a big business corporation.
wealth to the taxpayer which are not treated as part of gross Aside from his salary, his employer provides him with the
income, for purposes of computing the taxpayer’s taxable following benefits: free use of a residential house in an
income, due to the following reasons: (1) It is exempted by exclusive subdivision, free use of a limousine and
the fundamental law; (2) It is exempted by statute; and (3) It membership in a country club where he can entertain
does not come within the definition of income. (Section 61, customers of the corporation. Which of these benefits, if
RR No. 2). DEDUCTIONS from gross income, on the any, must Mr. Adrian report as income? Explain.
other hand, are the amounts, which the law allows to be SUGGESTED ANSWER:
deducted from gross income in order to arrive at net Mr. Adrian must report the imputed rental value of the
income. house and limousine as income. If the rental value exceeds
the personal needs of Mr. Adrian because he is expected to
Exclusions pertain to the computation of gross income, provide accommodation in said house for company guests
while deductions pertain to the computation of net income. or the car is used partly for business purpose, then Mr.
Exclusions are something received or earned by the Adrian is entitled only to a ratable rental value of the house
taxpayer which do not form part of gross income while and limousine as exclusion from gross income and only a
deductions are something spent or paid in earning gross reasonable amount should be reported as income. This is
income. because the free housing and use of the limousine are given
partly for the convenience and benefit of the employer
Example of an exclusion from gross income is proceeds of (Collector vs. Henderson).
life insurance received by the beneficiary upon the death of ALTERNATIVE ANSWER:
the insured which is not an income or 13th month pay of Remuneration for services although not given in the form
an employee not exceeding P30.000 which is an income not of cash constitutes compensation income. Accordingly, the
recognized for tax purposes. Example of a deduction is value for the use of the residential house is part of his
business rental. compensation income which he must report for income tax
purposes. However, if the residential house given to Mr.
Exclusions & Inclusions: Benefits on Account of Injury Adrian for his free use as an executive is also used for the
(1995) benefit of the corporation/employer, such as for
Mr. Infante was hit by a wayward bus while on his way to entertaining customers of the corporation, only 50% of the
work. He survived but had to pay P400.000.00 for his rental value or depreciation (if the house is owned by the
hospitalization. He was unable to work for six months corporation) shall form part of compensation income
which meant that he did not receive his usual salary of P (RAMO 1-87).
10,000.00 a month or a total of P60.000.00. He sued the bus
company and was able to obtain a final judgment awarding The free use of a limousine and the membership in a
him P400.000.00 as reimbursement for his hospitalization, country club is not part of Mr. Adrian's compensation
P60.000 for the salaries he failed to receive while income because they were given for the benefit of the
hospitalized, P200,000.00 as moral damages for his pain and employer and are considered to be necessary incidents for
suffering, and P 100,000.00 as exemplary damages. He was the proper performance of his duties as an executive of the
able to collect in full from the judgment. How much income corporation.
did he realize when he collected on the judgment? Explain.
The membership fee in the country club needs to be
SUGGESTED ANSWER: reported as income. It appears that the membership of Mr.
None. The P200.000 moral and exemplary damages are Adrian to the country club is primarily for the benefit and
compensation for injuries sustained by Mr. Infante. The convenience of the employer. This is to enable Mr. Adrian to
P400.000.00 reimbursement for hospitalization expenses entertain company guests (Collector vs. Henderson).
and the P60.000.00 for salaries he failed to receive are
'amounts of any damages received whether by suit or
agreement on account of such injuries.' Section 28(b)(5) of Exclusions & Inclusions; Assets; Resident Alien (2005)
the Tax Code specifically exclude these amounts from the Ralph Donald, an American citizen, was a top executive of
gross income of the individual injured. (Section 28(b), a U.S. company in the Philippines until he retired in 1999.
NIRC and Sec. 63 Rev. Reg. No. 2) He came to like the Philippines so much that following his
ALTERNATIVE ANSWER: retirement, he decided to spend the rest of his life in the
The income realized from the judgment is only the recovery country. He applied for and was granted a permanent
for lost salaries. This constitutes taxable income because resident status the following year. In the spring of 2004,
were it not for the injury, he could have received it from his while vacationing in Orlando, Florida, USA, he suffered a
employer as compensation income. All the other amounts heart attack and died. At the time of his death, he left the
received are either compensation for injuries or damages following properties: (a) bank deposits with Citibank Makati
received on account of such injuries' and Citibank Orlando, Florida; (b) a resthouse in Orlando,
Florida; (c) a condominium unit in
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 30 of 73
Makati; (d) shares of stock in the Philippine subsidiary of was reached under the terms of which JR was paid the
the U.S. Company where he worked; (e) shares of stock in following amounts: P500,000.00 for his hospitalization;
San Miguel Corp. and PLOT; (f) shares of stock in Disney P250,000.00 as moral damages; and P300,000.00 for loss of
World in Florida; (g) U.S. treasury bonds; and (g) proceeds income during the period of his treatment and recuperation.
from a life insurance policy issued by a U.S. corporation. In addition, JR received from his employer the amount of
Which of the foregoing assets shall be included in the P200,000.00 representing the cash equivalent of his earned
taxable gross estate in the Philippines? Explain. (5%) vacation and sick leaves. Which, if any, of the amounts he
SUGGESTED ANSWER: received are subject to income tax? Explain. (5%)
All of the properties enumerated except (g), the proceeds
from life insurance, are included in the taxable gross estate SUGGESTED ANSWER:
in the Philippines. Ralph Donald is considered a resident All amounts received from the airline company are excluded
alien for tax purposes since he is an American Citizen and from gross income. Under Sec. 32(B)(4) of the NIRC,
was a permanent resident of the Philippines at the time of amounts of damages received, whether by suit or
his death. The value of the gross estate of a resident alien agreement, on account of personal injuries or sickness are
decedent shall be determined by including the value at the excluded from gross income. Since the amounts received
time of his death of all property, real or personal, tangible from the airline company were received as damages by
or intangible, wherever situated. (Sec. 85, NIRC) The other agreement on account of personal injuries, all shall be
item, (g) proceeds from a life insurance policy, may also be excluded from JR's gross income.
included on the assumption that it was Ralph Donald who
took out the insurance upon his own life, payable upon his The amount of P200,000.00, less the equivalent of not
death to his estate. (Sec. 85[E], NIRC) more than 10 days of vacation leave, received by JR from
his employer, is subject to income tax under Sec. 2.78.1 (a)
Exclusions & Inclusions; Benefits on Account of Death (7) of R.R. No. 2-98.
(1996)
X, an employee of ABC Corporation died. ABC Exclusions & Inclusions; Compensation for personal
Corporation gave X’s widow an amount equivalent to X’s injuries or sickness (2003)
salary for one year. Is the amount considered taxable income X, while driving home from his office, was seriously injured
to the widow? Why? when his automobile was bumped from behind by a bus
SUGGESTED ANSWER: driven by a reckless driver. As a result, he had to pay
No. The amount received by the widow from the decedent's P200,000.00 to his doctor and P100, 000.00 to the hospital
employer may either be a gift or a separation benefit on where he was confined for treatment. He filed a suit against
account of death. Both are exclusions from gross income the bus driver and the bus company and was awarded and
pursuant to provisions of Section 28(b) of the Tax Code. paid actual damages of P300, 000.00 (for his doctor and
hospitalization bills), P100,000.00 by way of moral damages,
ALTERNATIVE ANSWER: and P50,000.00 for what he had to pay his attorney for
No. Since the amount was given to the widow and not to bringing his case to court. Which, if any, of the foregoing
the estate, it becomes obvious that the amount is more of a awards are taxable income to X and which are not? Explain.
gift. In one U.S. tax case (Estate of Hellstrom vs. (8%)
Commissioner, 24 T.C. 916), it was held that payments to the SUGGESTED ANSWER:
widow of the president of a corporation of the amount the Nothing is taxable. Under the Tax Code, any amount
president would have received in salary if he lived out the received as compensation for personal injuries or sickness,
year constituted a gift and not an income. plus the amounts for any damages received whether by suit
or agreement, on account of such injuries or sickness shall
The controlling facts which would lead to the conclusion be excluded from gross income. Since the entire amount of
that the amount received by the widow is not an income P450, 000.00 received are award of damages on account of
are as follows: 7) the gift was made to the widow rather the injuries sustained; all shall be excluded from his gross
than the income. Obviously, these damages are considered by law as
estate: 8) there was no obligation for the corporation to mere return of capital. (Section 32(B)(4), 1997 Tax Code)
make
further payments to the deceased; 9) the widow had never
worked for the corporation; 10) the corporation received Exclusions & Inclusions; Facilities or Privileges;
no economic benefit; and 11) the deceased had been fully MilitaryCamp (1995)
compensated for his Capt. Canuto is a member of the Armed Forces of the
services (Estate of Sydney Carter vs. Commissioner, Philippines. Aside from his pay as captain, the government
453 F. 2d 61 (2dCir. 1971). gives him free uniforms, free living quarters in whatever
military camp he is assigned, and free meals inside the camp.
Exclusions & Inclusions; Benefits on Account of Injury Are these benefits income to Capt. Canuto? Explain.
(2005)
JR was a passenger of an airline that crashed. He survived SUGGESTED ANSWER:
the accident but sustained serious physical injuries which No, the free uniforms, free living quarters and the free
required hospitalization for 3 months. Following meals inside the camp are not income to Capt. Canute
negotiations with the airline and its insurer, an agreement because these are facilities or privileges furnished by the
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 31 of 73
employer for the employer's convenience which are Exclusions & Inclusions; ITR; 13th month pay and
necessary incidents to proper performance of the military de minimis benefits (2005)
personnel's duties. State with reasons the tax treatment of the following in the
preparation of annual income tax returns: 13th month pay
Exclusions & Inclusions; Gifts over and above the and de minimis benefits;
Retirement Pay (1995) SUGGESTED ANSWER:
Mr. Quiroz worked as chief accountant of a hospital for The 13th month pay not exceeding P30,000.00 shall not
forty-five years. When he retired at 65 he received be reported in the income tax return because it is excluded
retirement pay equivalent to two months' salary for every from gross income (Sec. 32[B][7], [e], NIRC) The amount
year of service as provided in the hospital BIR approved of the 13th month pay in excess of P30,000.00 shall be
retirement plan. The Board of Directors of the hospital felt reported in the annual income tax return.
that the hospital should give Quiroz more than what was
provided for in the hospital's retirement plan in view of his De minimis benefits which do not exceed the ceilings are
loyalty and invaluable services for forty-five years; hence, it excluded from gross income, and not to be considered for
resolved to pay him a gratuity of P1 Million over and above determining the P30,000.00 ceiling hence not reportable in
his retirement pay. the annual income tax return. (Sec. 2.78.1[A][3], R.R. 2-98 as
amended by Sec. 2.33 [C] and further amended by R.R. No. 8-2000)
The Commissioner of Internal Revenue taxed the P1 Mil-
lion as part of the gross compensation income of Quiroz
who protested that it was excluded from income because Exclusions & Inclusions; ITR; Dividends received by a
(a) it was a retirement pay, and (b) it was a gift. domestic corporation (2005)
1) Is Mr. Quiroz correct in claiming that the additional State with reasons the tax treatment of the following in the
P1 Million was retirement pay and therefore preparation of annual income tax returns: Dividends
excluded from income? Explain. received by a domestic corporation from (i) another
2) Is Mr. Quiroz correct in claiming that the domestic corporation; and (ii) a foreign corporation;
additional P1 Million was gift and therefore excluded from SUGGESTED ANSWER:
income? Explain.
(i) Dividends received by a domestic corporation from a
SUGGESTED ANSWERS:
1) No. The additional P1 million is not a retirement pay domestic corporation shall not be subject to tax (Sec.
but a part of the gross compensation income of Mr. Quiroz. 27[D][4], NIRC), hence, excluded from the income tax
This is not a retirement benefit received in accordance with return.
a reasonable private benefit plan maintained by the employer (ii) Dividends received by a domestic corporation from a
as it was not paid out of the retirement plan. Accordingly, foreign corporation form part of the gross income and are
the amount received in excess of the retirement benefits that accordingly subject to net income tax, hence included in
he is entitled to receive under the BIR-approved retirement the annual ITR (Sec. 42[A][2][b], NIRC), hence, must be
plan would not qualify as an exclusion from gross income. included in the income tax return.
SUGGESTED ANSWER:
(i) Income realized from sale of capital assets is subject to
the final withholding tax at source and therefore excluded
from the Income Tax Return (Sec. 24[C] and [D], NIRC);
SUGGESTED ANSWER:
SUGGESTED ANSWER: No. The interest income on bank deposits and yields from
deposit substitutes are not automatically exempt from
taxation. There must be a showing that the incomes are
1 The Christmas gift of P100,000.00 given by Imelda
included in the school's annual information return and duly
) to her parents is taxable up to P50,000.00 because
audited financial statements together with:
under the law (Sec. 92 (a) of the Tax Code), net gifts
1 Certifications from depository banks as to the
not exceeding P50,000.00 are exempt.
amount of interest income earned from passive investments
2 The donation of P50,000.00 to the parish church not subject to the 20% final withholding tax;
) even assuming that it is exclusively for religious 2 Certification of actual, direct and exclusive
purposes is not tax-exempt because the exemption utilization of said income for educational purposes;
granted under Article VI, Sec. 28(3) of the 3 Board resolution on proposed project to be
Constitution applies only to real estate taxes (Lladoc funded out of the money deposited in banks or placed in
v. Commissioner, 14SCRA292). money market placements (Finance Department Order No.
149-95 issued November 24, 1995), which must be used
3 The donation to the P.U.P. Alumni Association actually, directly and exclusively for educational purposes.
) does not also qualify for exemption both under the
Constitution and the aforecited law because it is not
an educational or research organization,
ALTERNATIVE ANSWER: The income derived from dormitories, canteens and
corporation,
Donation institution,
to the P.U.P. Alumnifoundation or trust.
Association is exempt from bookstores are not also automatically exempt from taxation.
donor's tax if it is proven that the association is a nonstock, There is still the requirement for evidence to show actual,
non-profit charitable association, paying no dividends, direct and exclusive use for educational purposes. It is to be
governed by trustees who receive no compensation, and noted that the 1987 Philippine Constitution does not
devoting all its income to the accomplishment and distinguish with respect to the source or origin of the
promotion of the purposes enumerated in its articles of income. The distinction is with respect to the use which
incorporation. Not more than 30% of the gift should be should be actual, direct and exclusive for educational
used for administration purposes by the donee. purposes.
Minimum Corporate Income Tax; Exemption (2001) Donor’s Tax; Basis for Determining Gain (1995)
Is a corporation which is exempted from the minimum (1) Kenneth Yusoph owns a commercial lot which he
corporate income tax automatically exempted from the bought many years ago for P1 Million. It is now worth P20
regular corporate income tax? Explain your answer. (2%) Million although the zonal value is only P15 Million. He
SUGGESTED ANSWER: donates one-half pro-indiviso interest in the land to his son
No. The minimum corporate income tax is a proxy for the Dino on 31 December 1994, and the other one-half
normal corporate income tax, not the regular corporate pro-indiviso interest to the same son on 2 January 1995.
income tax paid by a corporation. For instance, a
proprietary educational institution may be subject to a How much is the value of the gifts in 1994 and 1995 for
regular corporate income tax of 10% (depending on its purposes of computing the gift tax? Explain.
dominant income), but it is exempt from the imposition of SUGGESTED ANSWER:
MCIT because the latter is not intended to substitute 1) The value of the gifts for purposes of computing the gift
tax shall be P7.5million in 1994 and P7.5million in
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 42 of 73
1995. In valuing a real property for gift tax purposes the An insolvent company had an outstanding obligation of P
property should be appraised at the higher of two values as l00,000.00 from a creditor. Since it could not pay the debt,
of the time of donation which are (a) the fair market value the creditor agreed to accept payment through dacion en
as determined by the Commissioner (which is the zonal pago a property which had a market value of P30.000.00.
value fixed pursuant to Section 16(e) of the Tax Code), or In the dacion en pago document, the balance of the debt
(b) the fair market value as shown in the schedule of values was condoned.
fixed by the Provincial and City Assessors. The fact that the A. What is the tax effect on the discharge of the
property is worth P20 million as of the time of donation is unpaid balance of the obligation on the debtor
immaterial unless it can be shown that this value is one of B. Insofar as the creditor is concerned, how is he
corporation?
the two values mentioned as provided under Section 81 of effected tax-wise as a consequence of the transaction?
the Tax Code. SUGGESTED ANSWERS:
(2) The Revenue District Officer questions the (a) The condonation of the unpaid balance of the obligation
splitting of the donations into 1994 and 1995. He says that has the effect of a donation made on the part of the creditor.
since there were only two (2) days separating the two It is obvious that the creditor merely desires to benefit the
donations they should be treated as one, having been made debtor and without any consideration therefore cancels the
within one year. Is he correct? Explain. debt, the amount of the debt cancelled is a gift from the
SUGGESTED ANSWER: creditor to the debtor and need not be included in the latter's
2) The Revenue District Officer is not correct because the gross income (Sec. 50, RR No. 2);
computation of the gift tax is cumulative but only insofar as
gifts made within the same calendar year. Therefore, there is (b) For the difference of P70,000 the creditor shall be
no legal justification for treating two gifts effected in two subject to donor's tax at the applicable rates provided for
separate calendar years as one gift. under the National Internal Revenue Code.
(3) Dino subsequently sold the land to a buyer for P 20 ALTERNATIVE ANSWER:
Million. How much did Dino gain on the sale? Explain. (a) If the discharge was prompted by the insolvency of the
debtor company, then it is a clear case of a write-off of a
SUGGESTED ANSWER: bad debts which has no tax consequence to the debtor.
3) Dino gained an income of 19 million from the sale. Dino
acquires a carry-over basis which is the basis of the (b) The write-off of the bad debt will entitle the creditor to
property in the hands of the donor or P1 million. The gain claim the same as a deduction from its gross income.
from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or Donor’s Tax; Donation to a Sibling (2001)
adjusted basis for determining gain (Sec. 34(a), NIRC). Your bachelor client, a Filipino residing in Quezon City,
Since the property was acquired by gift, the basis for wants to give his sister a gift of Php 200,000.00. He seeks
determining gain shall be the same as if it would be in the your advice, for purposes of reducing if not eliminating the
hands of the donor or the last preceding owner by whom donor's tax on the gift, on whether it is better for him to
the property was not acquired by gift. Hence, the gain is give all of the Php 200,000.00 on Christmas 2001 or to give
computed by deducting the basis of P1 million from the Php 100,000.00 on Christmas2001 and the other Php
amount realized which is P20 million. 100,000.00 on January 1, 2002. Please explain your advice.
(5%)
(4) Suppose, instead of receiving the lot by way of donation, SUGGESTED ANSWER:
Dino received it by inheritance. What would be his gain on I would advice him to split the donation. Giving the
the sale of the lot for P20 Million? Explain. Php200,000 as a one-time donation would mean that it will
be subject to a higher tax bracket under the graduated tax
SUGGESTED ANSWER: structure thereby necessitating the payment of donor's tax.
4) If the commercial lot was received by inheritance the gain On the other hand, splitting the donation into two equal
from the sale for P20 million is P5 million because the basis amounts of Php 100,000 given on two different years will
is the fair market value as of the date of acquisition. The totally relieve the donor from the donor’s tax because the
stepped-up basis of P15 million which is the value for estate first Phpl00.000 donation in the graduated brackets is
tax purposes is the basis for determining the gain (Sec. exempt. (Section 99, NIRC). While the donor’s tax is
34(b)(2), NIRC). computed on the cumulative donations, the aggregation of
ALTERNATIVE ANSWER: all donations made by a donor is allowed only over one
If Dino held on to the property as a capital asset in that it is calendar year.
neither for sale in the ordinary course of business nor used
in Dino's business, then upon sale thereof there is Donor’s Tax; Donation to Non-Stock, Non-Profit Private
presumed to be realized an income of P20 million which is Educational Institutions (2000)
the gross selling price of the property. (Sec. 21(e), NIRC). What conditions must occur in order that all grants,
The same would be subject to the 5% capital gains tax. donations and contributions to non-stock, non-profit
private educational institutions may be exempt from the
donor's tax under Section 101 (a) of the Tax Code? (3%)
Donor’s Tax; Dacion en Pago; Effect: Taxation (1997) SUGGESTED ANSWER:
The following are the conditions:
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 43 of 73
1 Not more than thirty percent (30%) of said gifts shall be stake in its business. Explain if the above
used by such donee for administration purposes; transactions are subject to donor's tax. (5%)
2 The educational institution is incorporated as a non-stockSUGGESTED ANSWER:
entity, The first transaction where a lot was sold by A to his
3 paying no dividends, brother-in-law for a price below its fair market value will
4 governed by trustees who receive no compensation, and not be subject to donor's tax if the lot qualifies as a capital
5 devoting all its income, whether students' fees or gifts, asset. The transfer for less than adequate and full consideration, which
donations, subsidies or other forms of philanthropy, to the gives rise to a deemed gift, does not apply to a sale of property subject to
accomplishment and promotion of the purposes enumerated in itscapital gains tax. (Section 100, NIRC). However, if the lot
Articles of Incorporation. (Sec. 101 (A) (3), NIRC of 1997] sold is an ordinary asset, the excess of the fair market value
over the consideration received shall be considered as a gift
subject to the donor's tax.
Furthermore, in case a taxpayer applies for an application to BIR: Summary Remedy: Estate Tax Deficiencies (1998)
compromise the payment of his tax liabilities on his claim Is the BIR authorized to collect estate tax deficiencies by
that his financial position demonstrates a clear inability to the summary remedy of levy upon and sale of real
pay the tax assessed, his application shall not be considered properties of the decedent without first securing the
unless and until he waives in writing his privilege under authority of the court sitting in probate over the supposed
R.A. No. 1405, and such waiver shall constitute the will of the decedent?
SUGGESTED ANSWER:
authority of the Commissioner to inquire into the bank
Yes. The BIR is authorized to collect estate tax deficiency
deposits of the taxpayer.
through the summary remedy of levying upon and sale of
real properties of a decedent, without the cognition and
BIR; Consequence; Taxpayer guilty of Tax Evasion (2005)
authority of the court sitting in probate over the supposed
Josel agreed to sell his condominium unit to Jess for P2.5
will of the deceased, because the collection of estate tax is
Million. At the time of the sale, the property had a zonal
executive in character. As such the estate tax is exempted
value of P2.0 Million. Upon the advice of a tax consultant,
from the application of the statute of non-claims, and this is
the parties agreed to execute two deeds of sale, one
justified by the necessity of government funding,
indicating the zonal value of P2.0 Million as the selling price
immortalized in the maxim that taxes are the lifeblood of
and the other showing the true selling price of P2.5 Million.
the government (Marcos v. CIR, G.R. No. 120880, June
The tax consultant filed the capital gains tax return using
5, 1997).
the deed of sale showing the zonal value of ALTERNATIVE ANSWER:
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 53 of 73
Yes, if the tax assessment has already become final, assessment so long as there is a prima facie showing of
executory and enforceable. The approval of the court sitting violation of the provisions of the Tax Code. After all, a
in probate over the supposed will of the deceased is not a criminal charge is instituted not to demand payment, but to
mandatory requirement for the collection of the estate tax. penalize the tax payer for violation of the Tax Code.
The probate court is determining issues which are not (Commissioner of Internal Revenue v. Pascor Realty and
against the property of the decedent, or a claim against the Development Corporation, G.R. No. 128315, June 29, 1999)
estate as such, but is against the interest or property right Furthermore, there is nothing in the problem that shows
which the heir, legatee, devisee, etc. has in the property that the BIR in filing the case is also interested in collecting
formerly held by the decedent. (Marcos v. CIR, G.R, No. the tax deficiency.
120880, June 5, 1997).
However, it is in error when it ruled that the joint affidavit of
BIR: Unpaid Taxes vs. Claims for Unpaid Wages (1995) the BIR examiners may be considered as an assessment of the
For failure of Oceanic Company, Inc. (OCEANIC), to pay tax liability of the corporation. The joint affidavit showing the
deficiency taxes of P20 Million, the Commissioner of computation of the tax liabilities of the erring taxpayer is not a
Internal Revenue issued warrants of distraint on tax assessment because it was not sent to the taxpayer, and
OCEANIC's personal properties and levied on its real does not demand payment of the tax within a certain period of
properties. Meanwhile, the Department of Labor through time. An assessment is deemed made only when the BIR
the Labor Arbiter rendered a decision ordering OCEANIC releases, mails or sends such notice to the taxpayer.
to pay unpaid wages and other benefits to its employees. (Commissioner of Internal Revenue
Four barges belonging to OCEANIC were levied upon by v. Pascor Realty and Development Corporation, G.R. No.
the sheriff and later sold at public auction. 128315, June 29, 1999) Notes and Comments: A plea is made for
liberality in correcting the examinees answers because the examination is very
The Commissioner of Internal Revenue filed a motion with long.
the Labor Arbiter to annul the sale and enjoin the sheriff
from disposing the proceeds thereof. The employees of BIR; Authority; Refund or Credit of Taxes (2005)
OCEANIC opposed the motion contending that Art. 110 of State the conditions required by the Tax Code before the
the Labor Code gives first preference to claims for unpaid Commissioner of Internal Revenue could authorize the
wages. Resolve the motion. Explain. refund or credit of taxes erroneously or illegally received.
SUGGESTED ANSWER:
SUGGESTED ANSWER: Under Sec. 204(C), NIRC, the following conditions must
The motion filed by the Commissioner should be granted be met:
because the claim of the government for unpaid taxes are 1. There must be a written claim for refund filed by the
generally preferred over the claims of laborers for unpaid taxpayer with the Commissioner.
wages. The provision of Article 110 of the Labor Code, 2. The claim for refund must be a categorical demand
which gives laborers' claims for preference applies only in for reimbursement.
case of bankruptcy or liquidation of the employer's business. 3. The claim for refund must be filed within two (2) years
In the instant case, Oceanic is not under bankruptcy or from date of payment of the tax or penalty regardless of any
liquidation at the time the warrants of distraint and levy supervening cause.
were issued hence, the opposition of the employees is
unwarranted. (CIR vs. NLRC et al G.R. No. 74965, BIR; Compromise (2004)
November 9, 1994). After the tax assessment had become final and unappealable,
the Commissioner of Internal Revenue initiated the filing of
BIR; Assessment; Criminal Complaint (2005)
a civil action to collect the tax due from NX. After several
In 1995, the BIR filed before the Department of Justice
years, a decision was rendered by the court ordering NX to
(DOJ) a criminal complaint against a corporation and its
pay the tax due plus penalties and surcharges. The judgment
officers for alleged evasion of taxes. The complaint was
became final and executory, but attempts to execute the
supported by a sworn statement of the BIR examiners
judgment award were futile.
showing the computation of the tax liabilities of the erring
taxpayer. The corporation filed a motion to dismiss the
criminal complaint on the ground that there has been, as
Subsequently, NX offered the Commissioner a compromise
yet, no assessment of its tax liability; hence, the criminal
settlement of 50% of the judgment award, representing that
complaint was premature. The DOJ denied the motion on
this amount is all he could really afford. Does the
the ground that an assessment of the tax deficiency of the
Commissioner have the power to accept the compromise
corporation is not a precondition to the filing of a criminal
offer? Is it legal and ethical? Explain briefly. (5%)
complaint and that in any event, the joint affidavit of the
BIR examiners may be considered as an assessment of the SUGGESTED ANSWER:
tax liability of the corporation. Is the ruling of the DOJ Yes. The Commissioner has the power to accept the offer
correct? Explain. (5%) of compromise if the financial position of the taxpayer
SUGGESTED ANSWER:
clearly demonstrates a clear inability to pay the tax (Section
The DOJ is correct in ruling that an assessment of the tax
204, NIRC).
deficiency of the corporation is not a precondition to the
filing of a criminal complaint. There is no need for an
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 54 of 73
As represented by NX in his offer, only 50% of the
judgment award is all he could really afford. This is an offer BIR; Deficiency Tax Assessment vs. Tax Refund / Tax
for compromise based on financial incapacity which the Credit (2005)
Commissioner shall not accept unless accompanied by a Is a deficiency tax assessment a bar to a claim for tax
waiver of the secrecy of bank deposits (Section 6[F}, refund or tax credit? Explain.
NIRC). The waiver will enable the Commissioner to SUGGESTED ANSWER:
ascertain the financial position of the taxpayer, although the Yes, the deficiency tax assessment is a bar to a tax refund or
inquiry need not be limited only to the bank deposits of the credit. The Taxpayer cannot be entitled to a refund and at the
taxpayer but also as to his financial position as reflected in same time liable for a tax deficiency assessment for the same
his financial statements or other records upon which his year. The deficiency assessment creates a doubt as to the truth
property holdings can be ascertained. and accuracy of the Tax Return. Said Return cannot therefore
be the basis of the refund
If indeed, the financial position of NX as determined by (Commissioner of Internal Revenue v. Alltel [2002], citing
the Commissioner demonstrates a clear inability to pay the Commissioner of Internal Revenue v. Court of Appeals, City
tax, the acceptance of the offer is legal and ethical because Trust Banking Corporation and Court of Tax Appeals,
the ground upon which the compromise was anchored is G.R. No. 106611, July 21, 1994)
within the context of the law and the rate of compromise is
BIR; Distraint; Prescription of the Action (2002)
well within and far exceeds the minimum prescribed by law
Mr. Sebastian is a Filipino seaman employed by a
which is only 10% of the basic tax assessed.
Norwegian company which is engaged exclusively in
international shipping. He and his wife, who manages their
BIR; Compromise (2005)
business, filed a joint income tax return for 1997 on March
State and discuss briefly whether the following cases may
15, 1998. After an audit of the return, the BIR issued on
be compromised or may not be compromised: a)
April 20, 2001 a deficiency income tax assessment for the
Delinquent accounts; b) Cases under administrative
sum of P250.000.00, inclusive of interest and penalty. For
protest, after issuance of
failure of Mr. and Mrs. Sebastian to pay the tax within the
the final assessment notice to the taxpayer, which are
period stated in the notice of assessment, the BIR issued on
still pending; c) Criminal tax fraud cases; d) Criminal
August 19, 2001 warrants of distraint and levy to enforce
violations already filed in court; e) Cases where final reports
collection of the tax.
of reinvestigation or
A. What is the rule of income taxation with respect to
Mr. Sebastian's income in 1997 as a seaman on board the
reconsideration have been issued resulting in the
Norwegian vessel engaged in international shipping? Explain
reduction of the original assessment agreed to by the
your answer. (2%)
taxpayer when he signed the required agreement SUGGESTED ANSWER:
form. (5%) A. The income of Mr. Sebastian as a seaman is considered
SUGGESTED ANSWERS: as income of a non-resident citizen derived from without
The following cases may still be compromised (R.R. 30-02
the Philippines. The total gross income, in US dollars (or if
[2002]) because of the taxpayer's financial incapacity to pay
in other foreign currency, its dollar equivalent) from
the tax due or the assessment's doubtful validity: a)
without shall be declared by him for income tax purposes
DELINQUENT ACCOUNTS may be compromised because
using a separate income tax return which will not include
there is no showing that there is a duly-approved schedule of
his income from business derived within (to be covered by
installment payments; and b) Cases under administrative
another return). He is entitled to deduct from his dollar
protest, after issuance of the final assessment notice to the
gross income a personal exemption of $4,500 and foreign
taxpayer, which are still pending.
national income taxes paid to arrive at his adjusted income
during the year. His adjusted income will be subject to the
graduated tax rates of 1% to 3%. (Sec. 21 (b), Tax Code of
The following cases MAY NO LONGER BE
1986[PD 1158], as amended by PD 1994).
COMPROMISED (R.R. 30-02 [2002]) because the taxpayer
has not paid his taxes for reasons other than his financial [Note: The bar candidates are not expected to be familiar with tax
incapacity or the doubtful validity of the assessment: a) history. Considering that this is already the fourth year of
CRIMINAL TAX FRAUD cases as may be determined by implementation of the Tax Code of 1997, bar candidates were
the Commissioner or his authorized agents may not be taught and prepared to answer questions based on the present
compromised; b) CRIMINAL VIOLATIONS law. It is therefore requested that the examiner be more lenient in
ALREADY FILED IN COURT so that the taxpayer will checking the answers to this question. Perhaps, an answer based
not profit from his fraud which would encourage tax on the present law be given full credit.]
evasion; and c) Cases where final reports of
reinvestigation or reconsideration have been issued B. If you are the lawyer of Mr. and Mrs. Sebastian,
resulting in the reduction of the original assessment agreed to what possible defense or defenses will you raise in behalf of
by the taxpayer when he signed the required agreement form. your clients against the action of the BIR in enforcing
The taxpayer is estopped from applying for a compromise. collection of the tax by the summary remedies of warrants
of distraints and levy? Explain your answer. (3%)
SUGGESTED ANSWER:
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 55 of 73
B. I will raise the defense of prescription. The right of the properties left by his father with intent to evade payment of
BIR to assess prescribes after three years counted from the the correct tax. As a result, a deficiency estate tax
last day prescribed by law for the filing of the income tax assessment for P1,250,000.00, inclusive of 50% surcharge
returns when the said return is filed on time. (Section 203, for fraud, interest and penalty, was issued against him on
NIRC). The last day for filing the 1997 income tax return is January 10, 2001. Mr. Castro protested the assessment on
April 15, 1998. Since the assessment was issued only on the ground of prescription.
April 20, 2001, the BIR's right to assess has already A. Decide Mr. Castro's protest. (2%)
prescribed. SUGGESTED ANSWER:
A. The protest should be resolved against Mr. Castro. What
BIR; False vs. Fraudulent Return (1996) was filed is a fraudulent return making the prescriptive
Distinguish a false return from a fraudulent return. period for assessment ten (10) years from discovery of the
SUGGESTED ANSWER: fraud (Section 222, NIRC). Accordingly, the assessment was
The distinction between a false return and a fraudulent issued within that prescriptive period to make an assessment
return is that the first merely implies a deviation from the based on a fraudulent return.
truth or fact whether intentional or not, whereas the second
is intentional and deceitful with the sole aim of evading the B. What legal requirement/s must Mr. Santos
correct tax due (Aznar us. Commissioner, L-20569, comply with so that he can claim his reward? Explain. (3%)
August 23, 1974). SUGGESTED ANSWER:
ALTERNATIVE ANSWER: The legal requirements that must be complied by Mr.
A false return contains deviations from the truth which may Santos to entitle him to reward are as follows: 1) He should
be due to mistakes, carelessness or ignorance of the person voluntarily file a confidential information
preparing the return. A fraudulent return contains an under oath with the Law Division of the Bureau of
intentional wrongdoing with the sole object of avoiding the Internal Revenue alleging therein the specific
tax and it may consist in the intentional underdeclaration of violations constituting fraud; 2) The information must not
income, intentional overdeclaration of deductions or the yet be in the possession of
recurrence of both. A false return is not necessarily tainted the Bureau of Internal Revenue, or refer to a case
with fraud because the fraud contemplated by law is actual already pending or previously investigated by the
and not constructive. Any deviation from the truth on the Bureau of Internal Revenue; 3) Mr. Santos should not be a
other hand, whether intentional or not, constitutes falsity. government employee or
(Aznar vs. Commissioner, L-20569, August 23, 1974) a relative of a government employee within the sixth
degree of consanguinity; and 4) The information must result
to collections of
BIR; Jurisdiction; Review Rulings of the Commissioner revenues and/or fines and penalties. (Sec. 282,
(2006) NIRC)
Mr. Abraham Eugenio, a pawnshop operator, after having
been required by the Revenue District Officer to pay value BIR; Prescriptive Period; Criminal Action (2006)
added tax pursuant to a Revenue Memorandum Order Gerry was being prosecuted by the BIR for failure to pay
(RMO) of the Commissioner of Internal Revenue, filed his income tax liability for Calendar Year 1999 despite
with the Regional Trial Court an action questioning the several demands by the BIR in 2002. The Information was
validity of the RMO. If you were the judge, will you dismiss filed with the RTC only last June 2006. Gerry filed a motion
the case? (5%) to quash the Information on the ground of prescription, the
SUGGESTED ANSWER: Information having been filed beyond the 5-year
Yes. The RMO is in reality a ruling of the Commissioner in reglementary period. If you were the judge, will you dismiss
implementing the provisions of the Tax Code on the the Information? Why? (5%)
taxability of pawnshops. Jurisdiction to review rulings of the SUGGESTED ANSWER:
Commissioner is lodged with the Court of Tax Appeals and No. The trial court can exercise jurisdiction. Prescription of
not with the Regional Trial Court (CIR v. Josefina Leal, G.R. a criminal action begins to run from the day of the violation
No. 113459, November 18, 2002; Tax of the law. The crime was committed when Gerry willfully
Reform Act, RA 8424, Title I, Sec. 4 [1997]). refused to pay despite repeated demands in 2002. Since the
(NOTA BENE: This concept pertains to the VAT law information was filed in June 2006, the criminal case was
which is excluded from the bar coverage, Guidelines for 2006 instituted within the five-year period required by law
Bar Examinations, June 15, 2006)
(Tupaz v. Ulep, G.R. No. 127777, October 1, 1999; Section
281, NIRC).
BIR; Prescriptive Period; Assessment; Fraudulent Return
(2002) BIR; Taxpayer: Civil Action & Criminal Action (2002)
Mr. Castro inherited from his father, who died on June 10, Minolta Philippines, Inc. (Minolta) is an EPZA-registered
1994, several pieces of real property in Metro Manila. The enterprise enjoying preferential tax treatment under a
estate tax return was filed and the estate tax due in the special law. After investigation of its withholding tax returns
amount of P250.000.00 was paid on December 06, 1994. for the taxable year 1997, the BIR issued a deficiency
The Tax Fraud Division of the BIR investigated the case on withholding tax assessment in the amount of P150.000.00.
the basis of confidential information given by Mr. Santos On May 15, 1999, because of financial difficulty, the
on January 06, 1998 that the return filed by Mr. Castro was deficiency tax remained unpaid, as a result of which the
fraudulent and that he failed to declare all assessment became final and executory. The
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 56 of 73
BIR also found that, in violation of the provisions of the with the Collector of Customs. The Bureau of Customs
National Internal Revenue Code, Minolta did not file its moved to dismiss the case for lack of jurisdiction of the
final corporate income tax return for the taxable year 1998, Court of Tax Appeals.
because it allegedly incurred net loss from its operations.
On May 17, 2002, the BIR filed with the Regional Trial A. Does the Court of Tax Appeals have jurisdiction
Court an action for collection of the deficiency withholding over the petition for review and writ of prohibition?
tax for 1997. Explain (3%)
A. Will the BIR's action for collection prosper? As SUGGESTED ANSWER:
counsel of Minolta, what action will you take? Explain your A. No, because there is no decision as yet by the
answer. (5%) Commissioner of Customs which can be appealed to the
SUGGESTED ANSWER: CTA. Neither the remedy of prohibition would lie because
A. Yes, BIR's action for collection will prosper because the CTA has not acquired any appellate jurisdiction over the
the assessment is already final and executory, it can already seizure case. The writ of prohibition being merely ancillary to
be enforced through judicial action. the appellate jurisdiction, the CTA has no jurisdiction over it
until it has acquired jurisdiction on the petition for review.
As counsel of Minolta, I will introduce evidence that the Since there is no appealable decision, the CTA has no
income payment was reported by the payee and the income jurisdiction over the petition for review and writ of
tax was paid thereon in 1997 so that my client may only be prohibition. (Commissioner of Customs v. Alikpala, 36
allowed to pay the civil penalties for non-withholding SCRA 208 [1970]).
pursuant to RMO No. 38-83.
[Note: It is not clear whether this is a case of
non-withholding/ underwithholding or non-remittance of tax B. Will an appeal to the CTA for tax refund be
withheld. As such, the tax counsel may be open to other possible? Explain (2%)
remedies against the assessment.] SUGGESTED ANSWER:
B. No, because the Commissioner of Customs has not yet
B. May criminal violations of the Tax Code be rendered a decision on the claim for refund. The
compromised? If Minolta makes a voluntary offer to jurisdiction of the Commissioner and the CTA are not
compromise the criminal violations for non-filing and concurrent in so far as claims for refund are concerned.
non-payment of taxes for the year 1998, may the The only exception is when the Collector has not acted on
Commissioner accept the offer? Explain (5%) the protested payment for a long time, the continued
inaction of the Collector or Commissioner should not be
SUGGESTED ANSWER: allowed to prejudice the taxpayer. (Nestle Phils., Inc. v.
B. All criminal violations of the Tax Code may be Court of Appeals, GR No. 134114, July 6, 2001).
compromised except those already filed in court or those
involving fraud (Section 204, NIRC). Accordingly, if Customs; Basis; Automatic Review (2002)
Minolta makes a voluntary offer to compromise the criminal Whenever the decision of the Collector of Customs is
violations for non-filing and non-payment of taxes for the adverse to the government, it is automatically elevated to
year 1998, the Commissioner may accept the offer which is the Commissioner for review and, if it is affirmed by him, it
allowed by law. However, if it can be established that a tax is automatically elevated to the Secretary of Finance for
has not been paid as a consequence of non-filing of the review. What is the basis of the automatic review procedure
return, the civil liability for taxes may be dealt with in the Bureau of Customs? Explain your answer. (5%)
independently of the criminal violations. The compromise
settlement of the criminal violations will not relieve the SUGGESTED ANSWER:
taxpayer from its civil liability. But the civil liability for taxes Automatic review is intended to protect the interest of the
may also be compromised if the financial position of the Government in the collection of taxes and customs duties in
taxpayer demonstrates a clear inability to pay the tax. seizure and protest cases. Without such automatic review,
neither the Commissioner of Customs nor the Secretary of
Finance would know about the decision laid down by the
Custom: Violation of Tax & Custom Duties (2002) Collector favoring the taxpayer. The power to decide seizure
The Collector of Customs of the Port of Cebu issued and protest cases may be abused if no checks are instituted.
warrants of seizure and detention against the importation of Automatic review is necessary because nobody is expected
machineries and equipment by LLD Import and Export Co. to appeal the decision of the Collector which is favorable to
(LLD) for alleged nonpayment of tax and customs duties in the taxpayer and adverse to the Government. This is the
violation of customs laws. LLD was notified of the seizure, reason why whenever the decision of the Collector is
but, before it could be heard, the Collector of Customs adverse to the Government, the said decision is
issued a notice of sale of the articles. In order to restrain the automatically elevated to the Commissioner for review; and
Collector from carrying out the order to sell, LLD filed with if such decision is affirmed by the Commissioner, the same
the Court of Tax Appeals a petition for review with shall be automatically elevated to and be finally reviewed by
application for the issuance of a writ of prohibition. It also the Secretary of Finance (Yaokasin v. Commissioner of
filed with the CTA an appeal for refund of overpaid taxes Customs, 180 SCRA 591 [1989]).
on its other importations of raw materials which has been
pending
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 57 of 73
Delinquent Tax Return (1998) functions It has been Instituted to perform. (Jao, et al,
When is a revenue tax considered delinquent? [3%) Court of Appeals, et al, and companion case, 249 SCRA
SUGGESTED ANSWER: 35, 43)
A revenue tax is considered delinquent when it is unpaid
after the lapse of the last day prescribed by law for its LGU: Collection of Taxes, Fees & Charges (1997)
payment. Likewise, it could also be considered as delinquent Give the remedies available to local government units to
where an assessment for deficiency tax has become final and enforce the collection of taxes, fees, and charges?
the taxpayer has not paid it within the period given in the SUGGESTED ANSWER:
notice of assessment. The remedies available to the local government units to
enforce collection of taxes, fees, and charges are: 1)
Jurisdiction: Customs vs. CTA ADMINISTRATIVE REMEDIES of distraint of
(2000)
a) On the basis of a warrant of seizure and detention issued personal property of whatever kind whether tangible
by the Collector of Customs for the purpose of enforcing or intangible, and levy of real property and interest
the Tariff and Customs Laws, assorted brands of cigarettes therein; and 2) JUDICIAL REMEDY by institution of an
said to have been illegally imported into the Philippines ordinary
were seized from a store where they were openly offered for civil action for collection with the regular courts of
sale. Dissatisfied with the decision rendered after hearing by proper jurisdiction.
the Collector of Customs on the confiscation of the articles,
the importer filed a petition for review with the Court of Tax Amnesty vs. Tax Exemption (2001)
Tax Appeals. The Collector moved to dismiss the petition Distinguish a tax amnesty from a tax exemption. (3%)
for lack of Jurisdiction. Rule on the motion. (2%) SUGGESTED ANSWER:
Tax amnesty is an immunity from all criminal, civil and
administrative liabilities arising from nonpayment of taxes.
SUGGESTED ANSWER: It is a general pardon given to all taxpayers. It applies only
Motion granted. The Court of Tax Appeals has jurisdiction to past tax periods, hence of retroactive application.
only over decisions of the Commissioner of Customs in (People v. Costonedo, G.R. No. L-46881, 1988).
cases involving seizures, detention or release of property
affected. (Sec. 7, R.A. No. 1125). There is no decision yet of Tax exemption is an immunity from the civil liability only. It
the Commissioner which is subject to review by the Court is an immunity or privilege, a freedom from a charge or
of Tax Appeals. burden to which others are subjected. (Florer v. Sheridan,
ALTERNATIVE ANSWER: 137 Ind. 28, 36 ME 365). It is generally prospective in
Motion granted. The Court of Tax Appeals has no application.
jurisdiction because there is no decision rendered by the
Commissioner of Customs on the seizure and forfeiture Taxpayer: Administrative & Judicial Remedies (2000)
case. The taxpayer should have appealed the decision Describe separately the procedures on the legal remedies
rendered by the Collector within fifteen (15) days from under the Tax Code available to an aggrieved taxpayer both
receipt of the decision to the Commissioner of Customs. at the administrative and judicial levels. (5%)
The Commissioner’s adverse decision would then be the SUGGESTED ANSWER:
subject of an appeal to the Court of Tax Appeals. The legal remedies of an aggrieved taxpayer under the Tax
Code, both at the administrative and judicial levels, may be
classified into those for assessment, collection and
b) Under the same facts, could the importer file an action in refund.
the Regional Trial Court for replevin on the ground that the
articles are being wrongfully detained by the Collector of The procedures for the ADMINISTRATIVE
Customs since the importation was not illegal and therefore REMEDIES for ASSESSMENT are as follows:
exempt from seizure? Explain. (3%) a. After receipt of the Pre-Assessment Notice, he
must within fifteen (15) days from receipt explain why no
SUGGESTED ANSWER: additional taxes should be assessed against him.
No. The legislators intended to divest the Regional Trial
Courts of the jurisdiction to replevin a property which is a b. If the Commissioner of Internal Revenue issues
subject of seizure and forfeiture proceedings for violation of an assessment notice, the taxpayer must administratively
the Tariff and Customs Code otherwise, actions for protest or dispute the assessment by filing a motion for
forfeiture of property for violation of the Customs laws reconsideration or reinvestigation within thirty
could easily be undermined by the simple device of replevin. (30) days from receipt of the notice of assessment.
(De la Fuente v. De Veyra, et. al, 120 SCRA 455) (4th par.. Sec. 228, NIRC of 1997)
Taxpayer: Exhaustion of Administrative Remedies (1997) (a) Administrative Remedy which is the filing of
(a) A taxpayer received, on 15 January 1996 an as- protest within 30 days from receipt of assessment, and
sessment for an internal revenue tax deficiency. On 10 (b) Judicial Remedy which is the appeal of the
February 1996, the taxpayer forthwith filed a petition for adverse decision of the Commissioner on the protest with
review with the Court of Tax Appeals. Could the Tax the Court of Tax Appeals, and finally with the Supreme
Court entertain the petition? Court.
(b) Under the above factual setting, the taxpayer, The remedy AFTER PAYMENT is availed of
instead of questioning the assessment he received on 15 (c) by paying the assessed tax within 30 days from
January 1996 paid, on 01 March 1996 the "deficiency tax" receipt of assessment and
assessed. The taxpayer requested a refund from the (d) the filing of a claim for refund or tax credit of
Commissioner by submitting a written claim on 01 March these taxes on grounds that they are erroneously paid within
1997. It was denied. The taxpayer, on 15 March 1997, filed two years from date of payment.
a petition for review with the Court of Appeals. Could the
petition still be entertained?
SUGGESTED ANSWER:
(a) No. Before taxpayer can avail of Judicial remedy he
must first exhaust administrative remedies by filing a protest
within 30 days from receipt of the assessment. It is the
Commissioner's decision on the protest that give the Tax
Court jurisdiction over the case provided that the appeal is
filed within 30 days from receipt of the Commissioner's
decision. An assessment by the BIR is not the
Commissioner's decision from which a petition for review
may be filed with the Court of Tax Appeals. Rather, it is the
action taken by the Commissioner in response to the
taxpayer's protest on the assessment that would constitute
the appealable decision (Section 7, RA 1125).
(b) No, the petition for review can not be entertained by the
Court of Appeals, since decisions of the
(e) If there is a denial of the claim, appeal to the CTA
shall be made within 30 days from denial but within two
years from date of payment. If the Commissioner fails
to act on the claim for
refund or tax credit and the two-year period is
about to expire, the taxpayer should consider the
continuous inaction of the Commissioner as a
denial and elevate the case to the CTA before the
expiration of the two-year period.
Tetchie Sonora protests the assessment and claims that the Local Taxation: Coverage (2002)
transfer of the condominium unit was a gift and therefore Aside from the basic real estate tax, give three (3) other
excluded from income. How will you rule on the protest of taxes which may be imposed by provincial and city
Tetchie Sonora? Explain. governments as well as by municipalities in the Metro
SUGGESTED ANSWER: Manila area. (3%)
I will grant the protest and cancel the assessment. The SUGGESTED ANSWER:
transfer of the property by Mr. Rodrigo to Ms. Sonora was The following real property taxes aside from the basic real
gratuitous. The deed of sale indicating a P10 million property tax may be imposed by provincial and city
consideration was simulated because Mr. Rodrigo did not governments as well as by municipalities in the Metro
receive anything from the sale. The problem categorically Manila area:
states that the transfer was made in gratitude to Ms. 1 Additional levy on real property for the Special
Sonora's companionship. The transfer being gratuitous is Education Fund (Sec. 235, LGC);
subject to donor's tax. Mr. Rodrigo should be assessed 2 Additional Ad-valorem tax on Idle lands (Sec. 23§,
deficiency donor's tax and a 50% surcharge imposed for LGC); and
fraudulently simulating a contract of sale to evade donor's 3 Special levy (Sec. 240).
tax. (Sec. 91(b), NIRC).
[Note: The question is susceptible to dual interpretation
Taxpayer; Withholding Agent; Claim of Tax Refund (2005) because it is asking for three other taxes and not three other
Does a withholding agent have the right to file an real property taxes. Accordingly, an alternative answer
application for tax refund? Explain. should be considered and given full credit]
SUGGESTED ANSWER: A. The following taxes, aside from basic real estate tax,
Yes. A taxpayer is "any person subject to tax." Since, the may be imposed by:
withholding tax agent who is "required to deduct and 1. Provincial Government
withheld any tax" is made "personally liable for such tax" Printer's or publisher's
should the amount of the tax withheld be finally found to be tax
less than that required to be withheld by law, then he is a Franchise Tax
taxpayer. Thus, he has sufficient legal interest to file an Professional tax
application for refund, of the amount he believes was
illegally collected from him. (Commissioner of Internal
Revenue v. Procter & Gamble, G.R. No. 66838, December
2, 1991)
2. City Government - may levy taxes which the province or
municipality are authorized to levy (Sec. 151, LGC)
Printer's or publisher's
tax
Franchise tax
Professional tax
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 65 of 73
3. Municipalities in the Metro Manila Area - may levy Local Taxation: Legality/ Constitutionality; Tax
taxes at rates which shall not exceed by 50% the maximum Ordinance (2003)
rates prescribed in the Local Government Code. X, a taxpayer who believes that an ordinance passed by the
City Council of Pasay is unconstitutional for being
Annual fixed tax on manufacturers, assemblers, discriminatory against him, want to know from you, his tax
repackers, processors, brewers, distillers, rectifiers and lawyer, whether or not he can file an appeal. In the
compounders of liquors, distilled spirits, and wines or affirmative, he asks you where such appeal should be made:
manufacture of any article of commerce of whatever kind or the Secretary of Finance, or the Secretary of Justice, or the
nature; Court of Tax Appeals, or the regular courts. What would
Annual fixed tax on wholesalers, distributors, or your advice be to your client, X? (8%)
dealers in any article of commerce of whatever kind or nature; SUGGESTED ANSWER:
Percentage tax on retailers The appeal should be made with the Secretary of Justice. Any
question on the constitutionality or legality of a tax ordinance
may be raised on appeal with the Secretary of Justice within 30
[Note: Other taxes may comprise the enumeration because many days from the effectivity thereof. (Sec. 187, LGC; Hagonoy
other taxes are authorized to be imposed by LGUs.] Market Vendor Association v.
Municipality of Hagonoy, 376 SCRA 376 [2002]).
Local Taxation: Exemption; Real Property Taxes (2002)
Under the Local Government Code, what properties are Local Taxation: Legality; Imposition of Real Property Tax
exempt from real property taxes? (5%) Rate (2002)
SUGGESTED ANSWER: An Ordinance was passed by the Provincial Board of a
The following properties are exempt from real property Province in the North, increasing the rate of basic real
taxes: (Sec. 234, LGC). property tax from 0.006% to 1 % of the assessed value of
1 Real property owned by the Republic of the Philippines the real property effective January 1, 2000. Residents of the
or any of its political subdivisions except when the beneficial use municipalities of the said province protested the Ordinance
thereof has been granted, for consideration or otherwise, to a on the ground that no public hearing was conducted and,
taxable person; therefore, any increase in the rate of real property tax is
2 All lands, buildings and improvements actually, directly, void. Is there merit in the protest? Explain your answer.
and exclusively used for religious, charitable or educational (2%)
purposes by charitable institutions, churches, parsonages or SUGGESTED ANSWER:
convents appurtenant thereto, mosques, nonprofit or religious The protest is devoid of merit. No public hearing is
cemeteries; required before the enactment of a local tax ordinance
3 All machineries and equipment that are actually, directly levying the basic real property tax (Art. 324, LGC
and exclusively used by local water districts and Regulations).
government-owned or controlled corporations engaged in the ALTERNATIVE ANSWER:
supply and distribution of water and/or generation and Yes, there is merit in the protest provided that sufficient
transmission of electric power; proof could be introduced for the non-observance of public
4 All real property owned by duly registered hearing. By implication, the Supreme Court recognized that
cooperatives as provided for under R.A. No. 6938; and public hearings are required to be conducted prior to the
5 Machinery and equipment used for pollution control andenactment of an ordinance imposing real property taxes.
environmental protection. Although it was concluded by the highest tribunal that
presumption of validity of a tax ordinance can not be
overcome by bare assertions of procedural defects on its
enactment, it would seem that if the taxpayer had presented
evidence to support the allegation that no public hearing was
conducted, the Court should have ruled that the tax
ordinance is invalid. (Belen Figuerres v. Court of
Appeals, GRNo. 119172, March 25, 1999).
Local Taxation: Imposition of Ad Valorem Tax (2000)
May local governments impose an annual realty tax in
addition to the basic real property tax on idle or vacant lots Local Taxation: Power to Impose (2003)
located in residential subdivisions within their respective In order to raise revenue for the repair and maintenance of
territorial jurisdictions? (3%) the newly constructed City Hall of Makati, the City Mayor
SUGGESTED ANSWER: ordered the collection of P1.00, called "elevator tax", every
Not all local government units may do so. Only provinces, time a person rides any of the high-tech elevators in the city
cities, and municipalities within the Metro Manila area (Sec. hall during the hours of 8:00 a.m. to
232, Local Government Code) may impose an ad valorem tax 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the "elevator tax"
not exceeding five percent (5%) of the assessed value (Sec. a valid imposition? Explain. (8%)
236, Ibid.) of idle or vacant residential lots in a subdivision, SUGGESTED ANSWER:
duly approved by proper authorities regardless of area. No. The imposition of a tax, fee or charge or the generation
(Sec.237, Ibid.) of revenue under the Local Government Code, shall be
exercised by the SANGUNIAN of the local government
unit concerned through an appropriate
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 66 of 73
ordinance (Section 132 of the Local Government Code). The city two professions. He has his main office in Makati City and
mayor alone could not order the collection of the tax; as maintains a branch office in Pasig City. Mr. Fermin pays his
such, the "elevator tax" is an invalid imposition. professional tax as a CPA in Makati City and his
professional tax as a lawyer in Pasig City. (5%) a) May
Local Taxation: Remission/Condonation of Taxes (2004) Makati City, where he has his main office, require him to
RC is a law-abiding citizen who pays his real estate taxes pay his professional tax as a lawyer? Explain.
promptly. Due to a series of typhoons and adverse
economic conditions, an ordinance is passed by MM City SUGGESTED ANSWER:
granting a 50% discount for payment of unpaid real estate No. Makati City where Mr. Fermin has his main office may
taxes for the preceding year and the condonation of all not require him to pay his professional tax as a lawyer. Mr.
penalties on fines resulting from the late payment. Arguing Fermin has the option of paying his professional tax as a
that the ordinance rewards delinquent taxpayers and lawyer in Pasig City where he practices law or in Makati City
discriminates against prompt ones, RC demands that he be where he maintains his principal office. (Sec. 139[b], Local
refunded an amount equivalent to one-half of the real taxes Government Code)
he paid. The municipal attorney rendered an opinion that
RC cannot be reimbursed because the ordinance did not b) May Quezon City, where he has his residence and where
provide for such reimbursement. RC files suit to declare the he also practices his two professions, go after him for the
ordinance void on the ground that it is a class legislation. payment of his professional tax as a CPA and a lawyer?
Will his suit prosper? Explain your answer briefly. (5%) Explain.
SUGGESTED ANSWER:
SUGGESTED ANSWER: No, the situs of the professional tax is the city where the
The suit will not prosper. The remission or condonation of professional practices his profession or where he maintains
taxes due and payable to the exclusion of taxes already his principal office in case he practices his profession in
collected does not constitute unfair discrimination. Each set several places. The local government of Quezon City has no
of taxes is a class by itself and the law would be open to right to collect the professional tax from Mr. Fermin as the
attack as class legislation only if all taxpayers belonging to place of residence of the taxpayer is not the proper situs in
one class were not treated alike (Juan Luna Subdivision, the collection of the professional tax.
Inc., v. Sarmiento, 91 Phil. 371 [1952]).
Local Taxation: Rule of Uniformity and Equality (2003) Local Taxation; Special Levy on Idle Lands (2005)
The City of Makati, in order to solve the traffic problem in A city outside of Metro Manila plans to enact an ordinance
its business districts, decided to impose a tax, to be paid by that will impose a special levy on idle lands located in
the driver, on all private cars entering the city during peak residential subdivisions within its territorial jurisdiction in
hours from 8:00 a.m. to 9:00 a.m. from Mondays to addition to the basic real property tax. If the lot owners of a
Fridays, but exempts those cars carrying more than two subdivision located in the said city seek your legal advice on
occupants, excluding the driver. Is the ordinance valid? the matter, what would your advice be? Discuss. (5%)
Explain. (8%)
SUGGESTED ANSWER: SUGGESTED ANSWER:
The ordinance is in violation of the Rule of Uniformity and I would advise the lot owners that a city, even if it is
Equality, which requires that all subjects or objects of outside Metro Manila, may levy an annual tax on idle lands
taxation, similarly situated must be treated alike in equal at the rate not exceeding five percent (5%) of the assessed
footing and must not classify the subjects in an arbitrary value of the property which shall be in addition to the basic
manner. In the case at bar, the ordinance exempts cars real property tax. (Sec. 236, Local Government Code) I would
carrying more than two occupants from coverage of the likewise advise them that the levy may apply to residential
said ordinance. Furthermore, the ordinance only imposes lots, regardless of land area, in subdivisions duly approved
the tax on private cars and exempts public vehicles from by proper authorities, the ownership of which has been
the imposition of the tax, although both contribute to the transferred to individual owners who shall be liable for the
traffic problem. There exists no substantial standard used additional tax. (Last par., Sec. 237)
in the classification by the City of Makati.
The term "Idle Lands" means, land not devoted directly to
Another issue is the fact that the tax is imposed on the any crop or to any definite purpose for at least one year
driver of the vehicle and not on the registered owner of the prior to the notice of expropriation, except for reasons
same. The tax does not only violate the requirement of other than force majeure or any fortuitous event, but used to
uniformity, but the same is also unjust because it places the be devoted or is suitable to such crop or is contiguous to
burden on someone who has no control over the route of land devoted directly to any crop and does not include land
the vehicle. The ordinance is, therefore, invalid for violating devoted permanently or regularly to other essential and
the rule of uniformity and equality as well as for being more productive purpose. (Philippine Legal Encyclopedia, by
unjust. Sibal, 1986 Ed.)
Local Taxation; Situs of Professional Taxes (2005) Finally, I would advise them to construct or place
Mr. Fermin, a resident of Quezon City, is a Certified Public improvements on their idle lands by making valuable
Accountant-Lawyer engaged in the practice of his additions to the property or ameliorations in the land's
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 67 of 73
conditions so the lands would not be considered as idle.
(Sec. 199[m]) In this manner their properties would not be 2. Assuming Joachin is a registered owner, will your
subject to the ad valorem tax on idle lands. answer be the same? (2.5%)
SUGGESTED ANSWER:
Real Property Tax: Underground Gasoline Tanks (2003) Yes. The law requires that a notice of the auction sale must
Under Article 415 of the Civil Code, in order for machinery be properly sent to Joachin and not merely through
and equipment to be considered real property, the pieces publication (Tan v. Bantegui, G.R. No, 154027, October
must be placed by the owner of the land and, in addition, 24,2005; Estate of Mercedes Jacob v. CA, G.R. No. 120435,
must tend to directly meet the needs of the industry or Dec. 22, 1997).
works carried on by the owner. Oil companies install
underground tanks in the gasoline stations located on land Real Property Taxation: Capital Asset vs. Ordinary Asset
leased by the oil companies from the owners of the land (1995)
where the gasoline stations [are] located. Are those In 1990, Mr. Naval bought a lot for P1,000,000.00 In a
underground tanks, which were not placed there by the subdivision with the intention of building his residence on
owner of the land but which were instead placed there by it. In 1994, he abandoned his plan to build his residence on
the lessee of the land, considered real property for purposes it because the surrounding area became a depressed area
of real property taxation under the local Government Code? and land values in the subdivision went down; instead, he
Explain. (8%) sold it for P800.000.00. At the time of the sale, the zonal
SUGGESTED ANSWER: value was P500.000.00. 1) Is the land a capital asset or an
Yes. The properties are considered as necessary fixtures of the ordinary asset? Explain. 2) Is there any income tax due on
gasoline station, without which the gasoline station would be the sale? Explain.
useless. Machinery and equipment installed by the lessee of SUGGESTED ANSWERS:
leased land is not real property for purposes of execution of a 1) The land is a capital asset because it is neither for sale in
final judgment only. They are considered as real property for the ordinary course of business nor a property used in the
real property tax purposes as "other improvements to affixed trade or business of the taxpayer. (Sec. 33. NIRC).
or attached real property under the Assessment Law and the
Real Property Tax Code. 2) Yes, Mr. Naval is liable to the 5% capital gains tax
imposed under Section 21(e) of the Tax Code based on the
gross selling price of P800.000.00 which is an amount
(Caltex v. Central Board of Assessment Appeals, 114 SCRA
higher than the zonal value.
296 [1982]).
Real Property Tax; Requirements; Auction Sales of Real Property Taxation: Capital Gains vs. Ordinary
Property for Tax Delinquency (2006) Gains(1998)
Quezon City published on January 30, 2006 a list of What is the difference between capital gains and ordinary
delinquent real property taxpayers in 2 newspapers of gains? [3%]
general circulation and posted this in the main lobby of the SUGGESTED ANSWER:
City Hall. The notice requires all owners of real properties CAPITAL GAINS are gains realized from the sale or
in the list to pay the real property tax due within 30 days exchange of capital assets, while ORDINARY GAINS
from the date of publication, otherwise the properties listed refer to gains realized from the sale or disposition of
shall be sold at public auction. ordinary assets.
Joachin is one of those named in the list. He purchased a Real Property Taxation: Coverage of Ordinary
real property in 1996 but failed to register the document of Income(1998)
sale with the register of Deeds and secure a new real What does the term "ordinary income" include? [2%]
SUGGESTED ANSWER:
property tax declaration in his name. He alleged that the
The term ordinary income includes any gain from the sale
auction sale of his property is void for lack of due process
or exchange of property which is not a capital asset. These
considering that the City Treasurer did not send him
are the gains derived from the sale or exchange of property
personal notice. For his part, the City Treasurer maintains
such as stock in trade of the taxpayer or other property of a
that the publication and posting of notice are sufficient
kind which would properly be included in the inventory of
compliance with the requirements of the law.
the taxpayer if on hand at the close of the taxable year, or
1. If you were the judge, how will you resolve this issue?
property held by the taxpayer primarily for sale to
(2.5%)
SUGGESTED ANSWER:
customers in the course of his trade or business, or property
I will resolve the issue in favor of Joachin. In auction sales used in trade or business of a character which is subject to
of property for tax delinquency, notice to delinquent the allowance for depreciation, or real property used in
landowners and to the public in general is an essential and trade or business of the taxpayer. (Sec. 22 [Z] in relation to Sec.
indispensable requirement of law, the non-fulfillment of 39[A](1), both of the NIRC).
ALTERNATIVE ANSWER:
which vitiates the same (Tiongco v. Phil. Veterans Bank,
The term ordinary income includes income from
G.R. No. 82782, Aug. 5, 1992). The failure to give notice to
performance of services, whether professional or personal,
the right person i.e., the real owner, will render an auction
gains accruing from business, and profit arising from the
sale void (Tan v. Bantegui, G.R. No, 154027, October 24,
sale or exchange of ordinary assets.
2005; City Treasurer of Q.C. v. CA, G.R. No. 120974, Dec.
22, 1997).
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 68 of 73
Real Property Taxation: Exchange of Lot; Capital Gain Tax hence the value of the land may be deductible in full from
(1997) the gross income of Ace Tobacco Corporation if in
A corporation, engaged in real estate' development, accordance to a National Priority Plan determined by the
executed deeds of sale on various subdivided lots. One National Economic Development Authority. (Sec.
buyer, after going around the subdivision, bought a corner 34{H](2)(a), NIRC). If the utilization is not in accordance to
lot with a good view of the surrounding terrain. He paid a National Priority Plan determined by the National
P1.2 million, and the title to the property was issued. A year Economic Development Authority, then Ace Tobacco
later, the value of the lot appreciated to a market value of Corporation may deduct the value of the land donated only
P1.6 million, and the buyer decided to build his house to the extent of five (5%) percent of its taxable income
thereon. Upon inspection, however, he discovered that a derived from trade or business as computed without the
huge tower antennae had been erected on the lot frontage benefit of the donation. (Sec. 34[H](2)(a) in relation to Sec.
totally blocking his view. When he complained, the realty 34[H](1), NIRC).
company exchanged his lot with another corner lot with an
equal area but affording a better view. Is the buyer liable for The Municipality of Pateros is not subject to any donor's
capital gains tax on the exchange of the lots? tax on the value of land it subsequently donated, it being
exempt from taxes as a political subdivision of the National
SUGGESTED ANSWER: Government.
Yes, the buyer is subject to capital gains tax on the
exchange of lots on the basis of prevailing fair market value The occupants/beneficiaries are subject to real property
of the property transferred at the time of the exchange or taxes because they now own the land.
the fair market value of the property received, whichever is
higher (Section 21(e), NIRC). Real property transactions ALTERNATIVE ANSWER on Taxability of Municipality and Awardees:
subject to capital gains tax are not limited to sales but also
exchanges of property unless exempted by a specific The awarding by the Municipal Government of lots to
provision of law. specific awardees or donees is likewise exempt from the
ALTERNATIVE ANSWER: donor's tax because it is only an implementation of the
No. The exchange is not subject to capital gains tax because purpose for which the property was given by Ace Tobacco
it is merely done to comply with the intentions of the Corporation. The purpose of the first donation is to devote
parties to the previous contract regarding the sale and the land as a relocation site for the less fortunate
acquisition of a property with a good view. This is a simple constituents. If later on the Municipality gives out
substitution of the object of sale and since the previous Certificates of Award over specific lots occupied by the
transaction was already subjected to tax, no new tax should qualified occupants/beneficiaries, this is intended to
be imposed on the exchange (BIR Ruling No. 21(e) 053-89 perpetuate the purpose of the previous donor, the Mu-
008-95). nicipality acting merely as a conduit and not the true donor.
This is simply a donation by the Municipality in form but
Real Property Taxation: Exemption/Deductions; Donor’s not in substance.
Tax (1998)
Ace Tobacco Corporation bought a parcel of land situated The receipt by the occupant beneficiaries of their respective
at Pateros and donated it to the Municipal Government of lots through the Certificate of Award has no tax
Pateros for the sole purpose of devoting the said land as a implications. They are, however, liable for real property
relocation site for the less fortunate constituents of said taxes.
municipality. In accordance therewith, the Municipal Gov-
ernment of Pateros issued to the occupants/beneficiaries Real Property Taxation: Exemption: Acquiring New
Certificates of Award giving to them the respective areas Principal Residence (2000)
where their houses are erected. Through Ordinance No. 2, Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their
Series of 1998, the said municipal government ordained that principal residence situated in Tandang Sora, Quezon City
the lots awarded to the awardees/donees be finally for Ten Million Pesos (P10,000,000.00) with the intention
transferred and donated to them. Determine the tax of using the proceeds to acquire or construct a new
consequence of the foregoing dispositions with respect to principal residence in Aurora Hills, Baguio City. What
Ace Tobacco Corporation, the Municipal Government of conditions must be met in order that the capital gains
Pateros, and the occupants/beneficiaries. [5%] presumed to have been realized from such sale may not be
SUGGESTED ANSWER: subject to capital gains tax? (5%)
The donation by Ace Tobacco Corporation is exempt SUGGESTED ANSWER:
from the donor's tax because it qualifies as a gift to or for The conditions are:
the use of any political subdivision of the National 1. The proceeds are fully utilized in acquiring or
Government (Section 101(2), NIRC). The conveyance is constructing a new principal residence within eighteen (18)
likewise exempt from documentary stamp tax because it is a calendar months from the sale or disposition of the principal
transfer without consideration. residence or eighteen (18) months from July 12, 2000.
ALTERNATIVE ANSWER:
The examinee should be given credit if he chooses the
above two (2) or any two (2) of those enumerated below: 1)
Assessment must be on the basis of uniform classification;
2) Appraisal, assessment, levy and collection shall not be let
to private persons; and 3) Appraisal and assessment must
be equitable. (Sec. 198, Local Government Code)
(1) Real property owned by the REPUBLIC OF THE
PHILIPPINES or any of its political subdivisions except
when the beneficial use thereof has been granted for
consideration or otherwise to a taxable person;
Customs: Kinds of Custom Duties (1997) Customs: Returning Residents: Tourist/Travelers (2003)
Explain briefly each of the special customs duties authorized X and his wife, Y, Filipinos living in the Philippines, went
under the Tariff and Customs Code. on a three-month pleasure trip around the world during the
SUGGESTED ANSWER: months of June, July and August 2002. In the course of
The following are the Special Duties imposed under the their trip, they accumulated some personal effects which
Tariff and Customs Code: were necessary, appropriate and normally used in leisure
(a) Dumping Duty - This is a duty levied on trips, as well as souvenirs in non-commercial quantities. Are
imported goods where it appears that a specific kind or they "returning residents" for purposes of Section 105 of
class of foreign article is being imported into or sold or is the Tariff and Customs Code? Explain. (8%)
likely to be sold in the Philippines at a price less than its fair
value; SUGGESTED ANSWER:
No. The term "returning residents" refers to nationals who
(b) Countervailing Duty - This is a duty equal to the have stayed in a foreign country for a period of at least six
ascertained or estimated amount of the subsidy or bounty (6) months. (Section 105(f) of the Tariff and Customs Code). Due
or subvention granted by the foreign country on the to their limited duration of stay abroad X and Y are not
production, manufacture, or exportation into the considered as "returning residents" but they are merely
Philippines of any article likely to injure an industry in the considered as travelers or tourists who enjoy the benefit of
Philippines or retard or considerable retard the conditionally free importation.
establishment of such industry; [Note: Credit must likewise be given if the candidate answered in
the affirmative, considering that travelers or tourists are given the
(c) Marking Duty - This is a duty on an ad valorem same tax treatment as that of returning residents, treating their
personal effects, not in commercial quantities, as conditionally free
basis imposed for improperly marked articles. The law
importation.]
requires that foreign importations must be marked in any
official language of the Philippines the name of the country Customs: Seizure & Forfeiture: Effects (1994)
of origin of the article; In smuggling a shipment of garlic, the smugglers used an
eight-wheeler truck which they hired for the purpose of
(d) Discriminatory or Retaliatory Duty - This is a taking out the shipment from the customs zone. Danny, the
duty imposed on imported goods whenever it is found as a truck owner, did not have a certificate of public
fact that the country of origin discriminates against the convenience to operate his trucking business. Danny did
commerce of the Philippines in such a manner as to place not know that the shipment of garlic was illegally imported.
the commerce of the Philippines at a disadvantage Can the Collector of Customs of the port seize and forfeit
compared with the commerce of any foreign country. the truck as an instrument in the smuggling?
SUGGESTED ANSWER:
Customs: Remedies of an Importer (1996) Yes, the Collector of Customs of the port can seize and
Discuss briefly the remedies of an importer during the forfeit the truck as an instrument in the smuggling activity,
pendency of seizure proceedings. since the same was used unlawfully in the importation of
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 72 of 73
smuggled articles. The mere carrying of such articles on similar goods (Sec. 201[C]); Deductive value (Sec. II.E.1,
board the truck (in commercial quantities) shall subject the CA.O. No. 4-2004); Computed value (Sec., II.F.l, C.A.O.
truck to forfeiture, since it was not being used as a duly No. 1-20040) and Fallback value. (Sec. 201[F])
authorized common carrier, which was chartered or leased
as such. (Sec. 2530 [a], TCC) ALTERNATIVE ANSWER:
The basis of dutiable value of an imported article subject to
Moreover, although forfeiture of the vehicle will not be an ad valorem tax under the Tariff and Customs Code is its
effected if it is established that the owner thereof had no transaction value, which shall be the price actually paid or
knowledge of or participation in the unlawful act, there payable for the goods when sold for export to the
arises a prima facie presumption or knowledge or Philippines, adjusted by adding certain cost elements to the
participation if the owner is not in the business for which extent that they are incurred by the buyer but are not
the conveyance is generally used. Thus, not having a included in the price actually paid or payable for the
certificate of public convenience to operate a trucking imported goods. (Sec. 201[A], Tariff and Customs Code, as
business, he is legally deemed not to have been engaged in amended by R.A. 9135)
the trucking business. (Sec. 2531, Tariff and Customs Code)
If such value could not be determined, then the following
Customs: Steps involving Protest Cases (1994) values are to be utilized in their sequence: Transaction value
The Collector of Customs instituted seizure proceedings of identical goods (Sec. 201[B]); Transaction value of
against a shipment of motor vehicles for having been similar goods (Sec. 201[C]); Deductive value (Sec. II.E.1,
misdeclared as second-hand vehicles. State the procedure CA.O. No. 4-2004); Computed value (Sec. II.F.l,
for the review of the decision up to the Supreme Court of C.A.O. No. 1-20040) and Fallback value. (Sec. 201[F])
the Collector of Customs adverse to the importer.
SUGGESTED ANSWER: Customs; Countervailing Duty vs. Dumping Duty (2005)
The procedure in seizure cases may be summarized as Distinguish countervailing duty from dumping duty. (5%)
follows: SUGGESTED ANSWER:
(a) The collector issues a warrant for the detention or The distinctions between countervailing duty and dumping
forfeiture of the imported articles; (Sec. 2301, Tariff and duty are the following:
Customs Code) (1) Basis: The countervailing duty is imposed whenever
(b) The Collector gives the importer a written notice there is granted upon the imported article by the country of
of the seizure and fixes a hearing date to give the importer origin a specific subsidy upon its production, manufacture
an opportunity to be heard; (Sec. 2303, TCC) or exportation and this results or threatens injury to local
industry while the basis for the imposition of dumping duty
(c) A formal hearing is conducted; (Sec. 2312, is the importation and sale of imported items at below their
TCC)
(d) The Collector renders a declaration of forfeiture; normal value causing or likely to cause injury to local
(Sec. 2312, TCC) industry.
(e) The Importer aggrieved by the action of the (2) Amount: The countervailing duty imposed is equivalent
Collector in any case of seizure may appeal to the to the value of the specific subsidy while the dumping duty
Commissioner for his review within fifteen (15) days from is equivalent to the margin of dumping which is equal to the
written notice of the Collector's decision; (Sec. 2313, TCC) difference between the export price to the Philippines and
the normal value of the imported article.
(f) The importer aggrieved by the action or ruling of
the Commissioner in any case of seizure may appeal to the
Court of Tax Appeals; (Sec. 2402, TCC)
(g) The importer adversely affected by the decision of
the Court of Tax Appeals (Division) may appeal to the
Court of Tax Appeals (en banc) within fifteen
(15) days which may be extended for another fifteen
(15) days or such period as the Court of Tax Appeals
may decide.
decedent;
b) Where the taxpayer has filed an application for
compromise of his tax liability by reason of financial
incapacity to pay such tax liability. (Sec. 6 (F), NIRC of
1997]