Taxation Law: Answers To Bar Examination Questions

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.
com 1 of
73
ANSWERS TO BAR
EXAMINATION QUESTIONS
IN
TAXATION LAW
* ARRANGED BY TOPIC *
(1994 2006)
E!"# $% A&&$%'# ()*
ROMUALDO L. SEERIS II
Silliman University - College of Law
From the ANSWERS TO BAR EXAMINATION QUESTIONS
by the UP LAW COMPLEX
&
PILIPPINE ASSOCIATION OF LAW SCOOLS
June 3, 2007
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com 2 of
73
FOREWARD
This work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may
be freely o!ied and distrib"ted# ne$ertheless# %ERMISSION TO CO%& from the editors
is A'(ISA)LE to !rotet the interest of the ORI*INAL SO+RCES,REFERENCES
of this material-. It is !rimarily intended for all those who desire to ha$e a
dee!er "nderstandin. of the iss"es ommonly to"hed by the %hili!!ine )ar
E/aminations and its trend on s!eifially on Ta/ation Laws. It is s!eifially intended
for law st"dents from the !ro$ines who# $ery often# are rei!ients of deliberately
distorted notes from other "nsr"!"lo"s law shools and st"dents.
I wo"ld like to seek the ind"l.ene of the reader for some )ar 0"estions whih
are im!ro!erly lassified "nder a to!i and for some to!is whih are im!ro!erly
or i.norantly !hrased# for the arran.er is 1"st a )ar Re$iewee who has !re!ared this
work while re$iewin. for the 2
nd
time for the )ar E/ams 2334 "nder time
onstraints and within his limited knowled.e of the law. I wo"ld like to seek the reader5s
ind"l.ene also for a n"mber of ty!o.ra!hial errors in this work.
The Arranger
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com + of
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Detailed Table of Contents
GENERAL PRINCIPLES...................................................................................................................8
Basic Features: Present Income Tax System (1996)........................................................................................8
Basic Stages or Aspects of Taxation (26)...............................................................................................8
!o""ection of Taxes: Aut#ority$ %r&inary !ourts (21)................................................................................8
!o""ection of Taxes: Prescription (21)......................................................................................................8
'irect Tax (s) In&irect Tax (199*)............................................................................................................8
'irect Tax (s) In&irect Tax (2)............................................................................................................8
'ou+"e Taxation (199,)..........................................................................................................................9
'ou+"e Taxation: -#at !onstitutes 'T. (1996)..........................................................................................9
'ou+"e Taxation$ In&irect 'up"icate Taxation (199,)....................................................................................9
'ou+"e Taxation$ /icense Fee (s) /oca" Tax (2*).....................................................................................9
'ou+"e Taxation$ 0et#o&s of A(oi&ing 'T (199,)...........................................................................................9
Imprescripti+i"ity of Tax /a1s (199,)..........................................................................................................9
Po1er of Taxation: 23ua" Protection of t#e /a1 (2)..................................................................................10
Po1er of Taxation: In#erent in a So(ereign State (24).............................................................................10
Po1er of Taxation: /ega"ity$ /oca" 5o(6t Taxation (24)................................................................................10
Po1er of Taxation: /egis"ati(e in 7ature (199*)...........................................................................................10
Po1er of Taxation: /imitations of t#e !ongress (21)..................................................................................10
Po1er of Taxation: /imitations: Passing of 8e(enue Bi""s (199,)......................................................................11
Po1er of Taxation: /imitations$ Po1er to 'estroy (2)................................................................................11
Po1er of Taxation: 8e(ocation of 2xempting Statutes (199,)......................................................................11
Po1er of Taxation$ In#erent in a So(ereign State (29).............................................................................11
Po1er of Taxation$ /egis"ati(e in 7ature (1996)...........................................................................................12
Purpose of Taxation$ Interpretation (2*)..............................................................................................12
Purpose of Taxation$ /egis"ati(e in 7ature (2*).........................................................................................12
8u"e on Set:%ff or !ompensation of Taxes (1996)........................................................................................12
8u"e on Set:%ff or !ompensation on Taxes (29)........................................................................................13
Tax A(oi&ance (s) Tax 2(asion (1996)....................................................................................................13
Tax A(oi&ance (s) Tax 2(asion (2)....................................................................................................13
Tax 2xemptions: 7ature ; !o(erage$ Proper Party (2*)..............................................................................13
Tax /a1s$ BI8 8u"ing$ 7on:8etroacti(ity of 8u"ings (2*).............................................................................14
Tax Pyrami&ing$ 'efinition ; /ega"ity (26)..............................................................................................14
Taxpayer Suit$ -#en A""o1e& (1996)........................................................................................................14
<niformity in t#e !o""ection of Taxes (199=).............................................................................................14
INCOME TAXATION........................................................................................................................14
Basic: A""o1a+"e 'e&uctions (s) Persona" 2xemptions (21).........................................................................14
Basic: 0eaning of Taxa+"e Income (2)..................................................................................................15
Basic: Princip"e of Mobilia Sequuntur Personam (199*).................................................................................15
Basic: Proper A""o1ance of 'epreciation (199=)..........................................................................................15
Basic: Sources of Income: Taxa+"e Income (199=)........................................................................................15
Basic: Tax Benefit 8u"e (24)................................................................................................................15
Basic$ Basis of Income Tax (1996)...........................................................................................................16
Basic$ 5ross Income: 'efine (1999).......................................................................................................16
Basic$ Income (s) !apita" (1999).............................................................................................................16
Basic$ Sc#e&u"ar Treatment (s) 5"o+a" Treatment (199*)...............................................................................16
!ompensation$ Income Tax: 'ue to Profita+"e Business 'ea" (1999)..................................................................16
!orporate: Income: 'onor6s tax$ Tax /ia+i"ity (1996).....................................................................................17
!orporate$ Income Tax$ 8easona+"eness of t#e Bonus (26)..........................................................................17
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (199*).................................................................................17
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (29).................................................................................17
'i(i&en&s: 'isguise& &i(i&en&s (199*).....................................................................................................18
'i(i&en&s$ Income Tax$ 'e&ucti+"e 5ross Income (1999)...............................................................................18
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2ffect$ !on&onation of /oan in Taxation (1999)...........................................................................................18
Fringe Benefit Tax: !o(ere& 2mp"oyees (21)...........................................................................................18
Fringe Benefit Tax: 2mp"oyer re3uire& to Pay (24).....................................................................................19
Interest: 'eficiency Interest: &efine (1999 Bar).........................................................................................19
Interest: 'e"in3uency Interest: &efine (1999)...............................................................................................19
IT8: Persona" Income$ 2xempte& to Fi"e IT8 (199,)......................................................................................19
IT8$ 'omestic !orporate Taxation (199,)................................................................................................19
IT8$ 'omestic !orporate Taxation (21)................................................................................................20
IT8$ Persona" Income: T1o 2mp"oyment (21)........................................................................................20
IT8$ Persona" Income$ 5SIS Pension (2)............................................................................................20
IT8$ Persona" Income$ 0arrie& In&i(i&ua" (2*)..........................................................................................20
IT8$ Taxpayer$ /ia+i"ities$ Fa"sifie& Tax 8eturn (29)....................................................................................20
Partners#ip: Income Tax (1999)............................................................................................................21
Persona"$ Income Tax: 7on:8esi&ent A"ien (2)........................................................................................21
Persona"$ Income Tax: 7on:8esi&ent !iti?en (1999)......................................................................................21
Persona"$ Income Tax: Tax:Free 2xc#ange (199,)........................................................................................22
Persona"$ Income Tax$ !ontract of /ease (1999)..........................................................................................22
Persona"$ Income Tax$ 0arrie& In&i(i&ua" (199,)..........................................................................................22
Persona"$ Income Tax$ 8etiring A"ien 2mp"oyee (29)..................................................................................23
Persona"$ Income Taxation: 7on:8esi&ent !iti?en (199,)................................................................................23
Taxa+"e Income: I""ega" Income (1999 Bar)..............................................................................................23
Taxa+"e or 7on:Taxa+"e$ Income an& 5ains (29).......................................................................................23
-it##o"&ing Tax: 7on:8esi&ent A"ien (21)...............................................................................................24
-it##o"&ing Tax: 8etirement Benefit (2).............................................................................................24
-it##o"&ing Tax: 8etirement Benefit (2).............................................................................................24
-it##o"&ing Tax: 8oya"ty (22).............................................................................................................24
-it##o"&ing Tax$ !o(erage (2*)...........................................................................................................25
-it##o"&ing Tax$ 'omestic !orporation$ !as# 'i(i&en&s (21)......................................................................25
-it##o"&ing Tax$ Income su+@ect t#ereto (21).......................................................................................25
-it##o"&ing Tax$ 7on:8esi&ent A"ien (199*)...............................................................................................25
-it##o"&ing Tax$ 7on:8esi&ent !orporation (199*)......................................................................................26
-it##o"&ing Tax$ 8ea&erAs 'igest A1ar& (199=)...........................................................................................26
-it##o"&ing Tax$ Time 'eposit Interest$ 5SIS Pension (199*)..........................................................................26
DEDUCTIONS, EXEMPTIONS, EXCLUSIONS - INCLUSIONS.....................................................2
'e&uction: Faci"itation Fees or >BicB+acB> (199=).....................................................................................26
'e&uctions: %r&inary Business 2xpenses (2*)........................................................................................26
'e&uctions: Amount for Bri+e (21).......................................................................................................27
'e&uctions: !apita" /osses$ Pro#i+itions (24).........................................................................................27
'e&uctions: 'e&ucti+"e Items from 5ross Income (1999)............................................................................27
'e&uctions: Income Tax: 'onation: 8ea" Property (22)..............................................................................27
'e&uctions: 7on:'e&ucti+"e Items$ 5ross Income (1999)...........................................................................28
'e&uctions: 8e3uisites$ 'e&uci+i"ity of a /oss (199=)...................................................................................28
'e&uctions$ Income Tax: A""o1a+"e 'e&uctions (21)..................................................................................28
'e&uctions$ Canis#ing 'e&uction$ Purpose (26).......................................................................................28
2xc"usion ; Inc"usion$ 5ross 8eceipts (26).............................................................................................28
2xc"usion (s) 'e&uction from 5ross Income (21)......................................................................................28
2xc"usions ; Inc"usions: Benefits on Account of In@ury (1999).....................................................................29
2xc"usions ; Inc"usions: 2xecuti(e Benefits (1999)......................................................................................29
2xc"usions ; Inc"usions$ Assets$ 8esi&ent A"ien (29).................................................................................29
2xc"usions ; Inc"usions$ Benefits on Account of 'eat# (1996).........................................................................30
2xc"usions ; Inc"usions$ Benefits on Account of In@ury (29).....................................................................30
2xc"usions ; Inc"usions$ !ompensation for persona" in@uries or sicBness (24)..................................................30
2xc"usions ; Inc"usions$ Faci"ities or Pri(i"eges$ 0i"itary !amp (1999)..........................................................30
2xc"usions ; Inc"usions$ 5ifts o(er an& a+o(e t#e 8etirement Pay (1999)...........................................................31
2xc"usions ; Inc"usions$ IT8$ 14t# mont# pay an& &e minimis +enefits (29)......................................................31
2xc"usions ; Inc"usions$ IT8$ 'i(i&en&s recei(e& +y a &omestic corporation (29)..............................................31
2xc"usions ; Inc"usions$ IT8$ Income rea"i?e& from sa"e (29).......................................................................31
2xc"usions ; Inc"usions$ IT8$ Interest on &eposits (29)...........................................................................31
2xc"usions ; Inc"usions$ IT8$ Procee&s of "ife insurance (29)...................................................................32
2xc"usions ; Inc"usions$ /ife Insurance Po"icy (24)...................................................................................32
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2xemptions: !#arita+"e Institutions (2).................................................................................................32
2xemptions: !#arita+"e Institutions$ !#urc#es (1996)...................................................................................32
2xemptions: 2&ucationa" institution (2*)................................................................................................32
2xemptions: 5ifts ; 'onations (199*)....................................................................................................32
2xemptions: Dea& of t#e Fami"y: (199=)...................................................................................................33
2xemptions: 7on:Profit 2&ucationa" Institutions (2).................................................................................33
2xemptions: 7on:Profit 2ntity$ Anci""ary Acti(ity ; Inci&enta" %perations (199*)...................................................33
2xemptions: 7on:StocBE 7on:Profit Association (22)..................................................................................34
2xemptions: Pri?e of Peace Poster !ontest (2)....................................................................................34
2xemptions: Pri?es ; A1ar&s$ At#"etes (1996)............................................................................................34
2xemptions: 8etirement Benefits: -orB Separation (1999).............................................................................34
2xemptions: Separation Pay (199*).......................................................................................................35
2xemptions: Separation Pay (1999).......................................................................................................35
2xemptions: Separation Pay (29).......................................................................................................36
2xemptions: StocB 'i(i&en&s (24)........................................................................................................36
2xemptions: Strict"y !onstrue& (1996)...................................................................................................36
2xemptions: Termina" /ea(e Pay (1996)....................................................................................................36
2xemptions$ !#arita+"e Institutions (26).................................................................................................36
2xemptions$ 2&ucationa" institution (2*)................................................................................................36
2xemptions$ 2xemptions are <ni"atera" in 7ature (2*)................................................................................37
2xemptions$ 5o(6t BonusF 5iftsF ; A""o1ances (199*)...................................................................................37
2xemptions$ Persona" ; A&&itiona" 2xemption (26)...................................................................................37
2xemptions$ 8oman !at#o"ic !#urc#$ /imitations (29)...........................................................................38
CAPITAL GAIN TAX........................................................................................................................38
!apita" Asset (s) %r&inary Asset (24)..................................................................................................38
!apita" 5ain Tax$ 7ature (21)..............................................................................................................38
%r&inary Sa"e of a !apita" Asset (199*).....................................................................................................38
Sa"es of S#are of StocBs: !apita" 5ains Tax 8eturn (1999)..............................................................................39
Tax Basis: !apita" 5ains: 0erger of !orporations (199*)................................................................................39
Tax Basis: !apita" 5ains: Tax:Free 2xc#ange of Property (199*)......................................................................39
CORPORATION - PARTNERS/IP.................................................................................................3!
Ba& 'e+ts$ Factors$ 2"ements t#ereof (2*)...........................................................................................39
!on&ominium !orp)$ Sa"e of !ommon Areas (199*)..................................................................................40
!orporation$ Sa"e$ !re&ita+"e -it##o"&ing Tax (199*)....................................................................................40
'i(i&en&s: -it##o"&ing Tax (1999)..........................................................................................................40
2ffect: 'isso"ution$ !orporate 2xistence (2*)...........................................................................................41
0inimum !orporate Income Tax (21).....................................................................................................41
0inimum !orporate Income Tax$ 2xemption (21)......................................................................................41
ESTATE - DONOR0S TAXES..........................................................................................................41
'onor6s Tax: 2"ection !ontri+utions (199=)................................................................................................41
'onor6s Tax$ Basis for 'etermining 5ain (1999)..........................................................................................41
'onor6s Tax$ 'acion en Pago$ 2ffect: Taxation (199,)................................................................................42
'onor6s Tax$ 'onation to a Si+"ing (21)..................................................................................................42
'onor6s Tax$ 'onation to 7on:StocBF 7on:Profit Pri(ate 2&ucationa" Institutions (2)....................................42
'onor6s Tax$ 'onation to Po"itica" !an&i&ate (24)..................................................................................43
'onor6s Tax$ 'onee or Beneficiary$ Stranger (2)......................................................................................43
'onor6s Tax$ Sa"e of s#ares of StocB ; Sa"e of 8ea" Property (1999)..............................................................43
2state Tax: !ompre#ensi(e Agrarian 8eform /a1 (199*)............................................................................43
2state Tax: 'onation 0ortis !ausa (21)..................................................................................................43
2state Tax: 'onation 0ortis !ausa (s) Inter Ci(os (199*)...............................................................................44
2state Tax: 5ross 2state: A""o1a+"e 'e&uction (21)...................................................................................44
2state Tax: 5ross 2state: 'e&uctions (2)..............................................................................................44
2state Tax: Inc"usion: 8esi&ent A"ien (199*)...............................................................................................44
2state Tax: Payment (s) Pro+ate Procee&ings (2*)....................................................................................45
2state Tax: Situs of Taxation: 7on:8esi&ent 'ece&ent (2)......................................................................45
2state Tax: Canis#ing 'e&uctions (199*)...................................................................................................45
2state Tax$ Payment (s) Pro+ate Procee&ings (29)....................................................................................45
BUSINESS TAXES """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" 4#
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CAT: Basis of CAT (1996).......................................................................................................................45
CAT: !#aracteristics of CAT (1996)...........................................................................................................45
CAT: 2xempte& Transactions (1996).........................................................................................................45
CAT: /ia+"e for Payment (1996)...............................................................................................................46
CAT: Transactions >'eeme& Sa"esG (199,).................................................................................................46
CAT$ !o(ere& Transactions (199=).........................................................................................................46
CAT$ 2xemption: !onstitutiona"ity (2*)...................................................................................................46
CAT$ 7on:CAT taxpayer$ !"aim for 8efun& (26)......................................................................................47
REMEDIES IN INTERNAL RE1ENUE TAXES.................................................................................47
BI8: Assessment: <nregistere& Partners#ip (199,)......................................................................................47
BI8: !o""ection of Tax 'eficiency (1999)....................................................................................................47
BI8: !ompromise$ !on&itions (2).......................................................................................................48
BI8: !ompromise$ 2xtent of Aut#ority (1996).............................................................................................48
BI8: !ompromise$ -it##o"&ing Agent (199=)..............................................................................................48
BI8: !orporation: 'istraint ; /e(y (22)..................................................................................................48
BI8: !ourt of Tax Appea"s: !o""ection of Taxes$ 5roun&s for !ompromise (1996)..................................................49
BI8: !rimina" Prosecution: Tax 2(asion (199=).........................................................................................49
BI8: 2xtinction$ !rimina" /ia+i"ity of t#e Taxpayer (22)............................................................................49
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (199=)................................................................................50
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (22)................................................................................50
BI8: 5arnis#ment: BanB Account of a Taxpayer (199=)..................................................................................50
BI8: Pre:Assessment 7otice not 7ecessary (22).......................................................................................51
BI8: Prescripti(e Perio&: !i(i" Action (22)...............................................................................................51
BI8: Prescripti(e Perio&$ Assessment ; !o""ection (1999)..............................................................................51
BI8: Prescripti(e Perio&$ !rimina" Action (22)..........................................................................................51
BI8: Secrecy of BanB 'eposits /a1 (199=).................................................................................................52
BI8: Summary 8eme&y: 2state Tax 'eficiencies (199=).................................................................................52
BI8: <npai& Taxes (s) !"aims for <npai& -ages (1999).................................................................................53
BI8$ Assessment$ !rimina" !omp"aint (29)...........................................................................................53
BI8$ Aut#ority$ 8efun& or !re&it of Taxes (29)..........................................................................................53
BI8$ !ompromise (2*)......................................................................................................................53
BI8$ !ompromise (29)......................................................................................................................54
BI8$ 'eficiency Tax Assessment (s) Tax 8efun& E Tax !re&it (29)..............................................................54
BI8$ 'istraint$ Prescription of t#e Action (22).......................................................................................54
BI8$ Fa"se (s) Frau&u"ent 8eturn (1996)....................................................................................................55
BI8$ Huris&iction$ 8e(ie1 8u"ings of t#e !ommissioner (26)........................................................................55
BI8$ Prescripti(e Perio&$ Assessment$ Frau&u"ent 8eturn (22)......................................................................55
BI8$ Prescripti(e Perio&$ !rimina" Action (26)..........................................................................................55
BI8$ Taxpayer: !i(i" Action ; !rimina" Action (22).....................................................................................55
!ustom: Cio"ation of Tax ; !ustom 'uties (22)........................................................................................56
!ustoms$ Basis$ Automatic 8e(ie1 (22)..............................................................................................56
'e"in3uent Tax 8eturn (199=).................................................................................................................57
Huris&iction: !ustoms (s) !TA (2)....................................................................................................57
/5<: !o""ection of TaxesF Fees ; !#arges (199,).........................................................................................57
Tax Amnesty (s) Tax 2xemption (21).....................................................................................................57
Taxpayer: A&ministrati(e ; Hu&icia" 8eme&ies (2)....................................................................................57
Taxpayer: Assessment: Protest: !"aims for refun& (2)...............................................................................58
Taxpayer: Assessment$ In@unction (2*)................................................................................................58
Taxpayer: BI8 Au&it or In(estigation (1999).............................................................................................58
Taxpayer: !ity Boar& of Assessment 'ecision$ -#ere to appea" (1999)..............................................................59
Taxpayer: !"aim for 8efun&$ Proce&ure (22).........................................................................................59
Taxpayer: 'eficiency Income Tax (1999)....................................................................................................59
Taxpayer: 2x#austion of A&ministrati(e 8eme&ies (199,)...........................................................................60
Taxpayer: Fai"ure to -it##e"& ; 8emit Tax (2).....................................................................................60
Taxpayer: 7I8! (s) T!! 8eme&ies (1996)..................................................................................................60
Taxpayer: %(er1it#o"&ing !"aim for 8efun& (1999).......................................................................................61
Taxpayer: Prescripti(e Perio&: Suspen&e& (2)........................................................................................61
Taxpayer: Prescripti(e Perio&$ !"aim for 8efun& (199,).................................................................................61
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (199*)................................................................................61
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (2*)................................................................................62
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Taxpayer: Protest against Assessment (199=).............................................................................................62
Taxpayer: Protest against Assessment (1999).............................................................................................62
Taxpayer: Protest against Assessment (1999).............................................................................................62
Taxpayer: Protest$ !"aim of 8efun& (1996).................................................................................................63
Taxpayer$ Appea" to t#e !ourt of Tax Appea"s (29).................................................................................63
Taxpayer$ !"aim for Tax !re&its (26)......................................................................................................63
Taxpayer$ !ompromise after !rimina" Action (199=).....................................................................................63
Taxpayer$ Protest against Assessment$ 'onor6s Tax (1999)............................................................................64
Taxpayer$ -it##o"&ing Agent$ !"aim of Tax 8efun& (29)..............................................................................64
LOCAL - REAL PROPERTY TAXES..............................................................................................4
/oca" Taxation: Actua" <se of Property (22).............................................................................................64
/oca" Taxation: !o(erage (22).............................................................................................................64
/oca" Taxation: 2xemption$ 8ea" Property Taxes (22).................................................................................65
/oca" Taxation: Imposition of A& Ca"orem Tax (2)....................................................................................65
/oca" Taxation: /ega"ityE !onstitutiona"ity$ Tax %r&inance (24).................................................................65
/oca" Taxation: /ega"ity$ Imposition of 8ea" Property Tax 8ate (22)................................................................65
/oca" Taxation: Po1er to Impose (24)....................................................................................................65
/oca" Taxation: 8emissionE!on&onation of Taxes (2*)................................................................................66
/oca" Taxation: 8u"e of <niformity an& 23ua"ity (24)...............................................................................66
/oca" Taxation$ Situs of Professiona" Taxes (29).......................................................................................66
/oca" Taxation$ Specia" /e(y on I&"e /an&s (29)........................................................................................66
8ea" Property Tax: <n&ergroun& 5aso"ine TanBs (24).............................................................................67
8ea" Property Tax$ 8e3uirements$ Auction Sa"es of Property for Tax 'e"in3uency (26).........................................67
8ea" Property Taxation: !apita" Asset (s) %r&inary Asset (1999).......................................................................67
8ea" Property Taxation: !apita" 5ains (s) %r&inary 5ains (199=)......................................................................67
8ea" Property Taxation: !o(erage of %r&inary Income (199=)..........................................................................67
8ea" Property Taxation: 2xc#ange of /ot$ !apita" 5ain Tax (199,).....................................................................68
8ea" Property Taxation: 2xemptionE'e&uctions$ 'onor6s Tax (199=)..............................................................68
8ea" Property Taxation: 2xemption: Ac3uiring 7e1 Principa" 8esi&ence (2)....................................................68
8ea" Property Taxation: Fun&amenta" Princip"es (199,).................................................................................69
8ea" Property Taxation: Princip"es ; /imitations: /5< (2)..........................................................................69
8ea" Property Taxation: Property So"& is an %r&inary Asset (199=)....................................................................69
8ea" Property Taxation: <n&ergroun& 5aso"ine TanBs (21)..........................................................................69
8ea" Property Taxation$ 2xempte& Properties (26).....................................................................................69
TARI33 AND CUSTOMS DUTIES...................................................................................................70
!ustoms: IF"exi+"e Tariff !"auseG (21)...................................................................................................70
!ustoms: A&ministrati(e (s) Hu&icia" 8eme&ies (199,).................................................................................70
!ustoms: Importation (1999).................................................................................................................70
!ustoms: Huris&iction$ Sei?ure ; Forfeiture Procee&ings (1996)......................................................................70
!ustoms: Jin&s of !ustom 'uties (1999)..................................................................................................70
!ustoms: Jin&s of !ustom 'uties (199,)..................................................................................................71
!ustoms: 8eme&ies of an Importer (1996).................................................................................................71
!ustoms: 8eturning 8esi&ents: TouristETra(e"ers (24)................................................................................71
!ustoms: Sei?ure ; Forfeiture: 2ffects (199*).............................................................................................71
!ustoms: Steps in(o"(ing Protest !ases (199*).......................................................................................72
!ustoms$ Basis of 'utia+"e Ca"ue$ Importe& Artic"e (29)..........................................................................72
!ustoms$ !ounter(ai"ing 'uty (s) 'umping 'uty (29)................................................................................72
!ustoms$ Taxa+i"ity$ Persona" 2ffects (29)..............................................................................................72
OT/ER RELATED MATTERS.........................................................................................................73
BI8: BanB 'eposits Secrecy Cio"ation (2)...........................................................................................73
BI8: Secrecy of BanB 'eposit /a1 (24)...............................................................................................73
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics
GENERAL PRINCIPLES
Basic Features: Present Income Tax System (1996)
What are the basic features of the
present income tax system"?
SUGGESTED ANSWER*
Our present income tax system can be
said to have the following basic features:
(a) It has adopted a
COMPREHENSIVE TAX SITUS by
using the nationality residence
and source rules! "his ma#es citi$ens
and resident aliens taxable on their
income derived from all sources
while non%resident aliens are taxed
only on their income derived from
within the &hilippines! 'omestic
corporations are also taxed on
universal income while foreign
corporations are taxed only on income
from within!
(b) "he individual income tax system
is mainly
PROGRESSIVE IN NATURE in that it
provides a graduated rates of
income tax! (orporations in general
are taxed at a )at rate of thirty *ve
percent (+,-) of net income!
(c) It has retained MORE SCHEDULAR
THAN GLOBAL FEATURES with
respect to individual taxpayers but
has maintained a more global
treatment on corporations!
Note: The following might also be cited by
the bar candidates as features of the
income tax system:
a. Individual compensation income earners
are taxed on modi*ed .ross Income
(.ross compensation income less
personal exemptions)! /elf%employed
and professionals are taxed on net
income with deductions limited to seven
items or in lieu thereof the forty percent
(01-) maximum deduction plus the
personal exemptions! (orporations
are generally taxed on net income except
for non%resident foreign corporations
which are taxed on gross income!
b. "he income tax is generally imposed
via the self% assessment system or
pay%as%you%*le concept of imposing the
tax although certain incomes! Including
income of non%residents are taxed on
the pay%as% you%earn concept or the so
called withholding tax!
c. "he corporate income tax is a one%
layer tax in that distribution of
pro*ts to stoc#holders (except to
non- residents) are not sub2ect to
income tax!
Basic Stages or Aspects of Taxation (26)
3numerate the + stages or aspects of
taxation! 3xplain each! (,-)
SUGGESTED ANSWER*
"he aspects of taxation are:
(4) 5367I8. 9 the act of the legislature in
choosing the persons properties
rights or privileges to be sub2ected to
taxation!
(:) ;//3//<38" and (O553("IO8 9
"his is the act of executing the law
through the administrative agencies of
government!
(+) &;7<38" 9 the act of the taxpayer in
settling his tax obligations!
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73
!o""ection of Taxes: Aut#ority$ %r&inary !ourts (21)
<ay the courts en2oin the collection of
revenue taxes? 3xplain your answer! (:-)
SUGGESTED ANSWER*
;s a general rule the courts have no authority
to en2oin the collection of revenue taxes!
(/ec! :4= 8I>()! ?owever the (ourt of
"ax ;ppeals is empowered to en2oin the
collection of taxes through administrative
remedies when collection could 2eopardi$e the
interest of the government or taxpayer!
(/ection 44 >; 44:,)!
!o""ection of Taxes: Prescription (21)
<ay the collection of taxes be barred
by prescription? 3xplain your answer!
(+-)
SUGGESTED ANSWER*
7es! "he collection of taxes may be
barred by prescription! "he prescriptive
periods for collection of taxes are
governed by the tax law imposing the
tax! ?owever if the tax law does not
provide for prescription the right of the
government to collect taxes becomes
imprescriptible!
'irect Tax (s) In&irect Tax (199*)
'istinguish a direct from an indirect tax!
SUGGESTED ANSWER*
; 'I>3(" ";@ is one in which the taxpayer
who pays the tax is directly liable therefor
that is the burden of paying the tax falls
directly on the person paying the tax!
;n I8'I>3(" ";@ is one paid by a person who
is not directly liable therefor and who may
therefore shift or pass on the tax to
another person or entity which
ultimately assumes the tax burden! (Maceda v.
Macaraig
!"# SCRA ##!$
'irect Tax (s) In&irect Tax (2)
;mong the taxes imposed by the Aureau
of Internal >evenue are income tax
estate and donorBs tax value% added
tax excise tax other percentage
taxes and documentary stamp tax!
(lassify these taxes into direct and
indirect taxes and diCerentiate direct
from Indirect taxes! (,-)
SUGGESTED ANSWER*
Income tax estate and donorBs tax are
considered as direct taxes! On the other
hand value%added tax excise tax other
percentage taxes and documentary
stamp tax are indirect taxes!
'I>3(" ";@3/ are demanded from the
very person who as intended should
pay the tax which he cannot shift to
anotherD while an I8'I>3(" ";@ is
demanded in the *rst instance from one
person with the expectation that he can
shift the burden to someone else not as a
tax but as a part of the purchase price!
'istinguish direct taxes from indirect
taxes and give an example for each one!
(:-)
SUGGESTED ANSWER*
'I>3(" ";@3/ are taxes wherein both the
incidence (or liability for the payment of
the tax) as well as the impact or burden of
the tax falls on the same person! ;n
example of this tax is income tax where the
person sub2ect to tax cannot shift the
burden of the tax to another person!
I8'I>3(" ";@3/ on the other hand
are taxes wherein the incidence of or the
liability for the payment of the tax falls on
one person but the burden thereof can be
shifted or passed on to another person!
3xample of this tax is the value%added tax!
ALTERNATI1E ANSWER*
; direct tax is a tax which is demanded from
the person who also shoulders the
burden of the tax! 3xample: corporate
and individual income tax!
;n indirect tax is a tax which is
demanded from one person in the
expectation and intention that he shall
indemnify himself at the expense of
another and the burden *nally resting
on the ultimate purchaser or
consumer! 3xample: value added tax!
'istinguish "direct taxes" from "indirect
taxes!" .ive examples! (,-)
SUGGESTED ANSWER*
'I>3(" ";@3/ are demanded from the
very person who should pay the tax and
which he can not shift to another! ;n
I8'I>3(" ";@ is demanded from one
person with the expectation that he can
shift the burden to someone else not as a
tax but as part of the purchase price!
3xamples of direct taxes are the income
tax the estate tax and the donorBs tax!
3xamples of indirect taxes are the value%
added tax the percentage tax and the
excise tax on exciseable articles!
'ou+"e Taxation (199,)
Is double taxation a valid defense against
the legality of a tax measure?
SUGGESTED ANSWER*
8o double taxation standing alone and
not being forbidden by our fundamental law
is not a valid defense
against the legality of a tax measure
?owever if double
taxation
amounts to a direct duplicate taxation
4! in that the same sub2ect is taxed twice
when it should be taxed but once
:! in a fashion that both taxes are imposed
for the same purpose
+! by the same taxing authority
within the same 2urisdiction or taxing
district
0! for the same taxable period and
,! for the same #ind or character of a tax
then it becomes legally
ob2ectionable for being oppressive
and ineEuitable!
'ou+"e Taxation: -#at !onstitutes 'T. (1996)
@ a lessor of a property pays real
estate tax on the premises a real estate
dealerBs tax based on rental receipts and
income tax on the rentals! @ claims that this
is double taxation? 'ecide!
SUGGESTED ANSWER*
Ta%a&a% '" SCRA
(')$.
(Pe*+i C,-a
v.
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"her
e is no
doubl
e
taxatio
n!
'OFA5
3
";@;"IO8 means taxing for the same tax
period the same thing or activity twice when
it should be taxed but once by the same
taxing authority for the same purpose and
with the same #ind or character of tax!
"he >3;5 3/";"3 ";@ is a tax on propertyD
the >3;5 3/";"3 '3;53>B/ ";@ is a tax
on the privilege to engage in businessD
while the I8(O<3 ";@ is a tax on the
privilege to earn an income! "hese taxes are
imposed by diCerent taxing authorities and
are essentially of diCerent #ind and character
(Vi--a%.eva v+. Ci/0 ,1 I-,i-, 2' SCRA
3#4$.
'ou+"e Taxation$ In&irect 'up"icate Taxation (199,)
When an item of income is taxed in the
&hilippines and the same income is taxed
in another country is there a case of
double taxation?
SUGGESTED ANSWER*
7es but it is only a case of indirect
duplicate taxation which is not legally
prohibited because the taxes are
imposed by diCerent taxing authorities!
'ou+"e Taxation$ /icense Fee (s) /oca" Tax (2*)
; municipality AA has an ordinance which
reEuires that all stores restaurants and
other establishments selling liEuor
should pay a *xed annual fee of
&:1!111! /ubseEuently the municipal
board proposed an ordinance imposing a
sales tax eEuivalent to ,- of the amount
paid for the purchase or consumption of
liEuor in stores restaurants and other
establishments! "he municipal mayor
(( refused to sign the ordinance on the
ground that it would constitute double
taxation! Is the refusal of the mayor
2usti*ed? >eason brie)y! (,-)
SUGGESTED ANSWER*
8o! "he refusal of the mayor is not
2usti*ed! "he impositions are of diCerent
nature and character! "he *xed annual fee
is in the nature of a license fee imposed
through the exercise of police power while the
,- tax on purchase or consumption is a local
tax imposed through the exercise of taxing
powers! Aoth a license fee and a tax may be
imposed on the same business or occupation
or for selling the same article and this is not
in violation of the rule against double taxation
GCa5*a%ia Ge%era- de
Ta6ac,+ de Fi-i*i%,+ v. Ci/0 ,1 Ma%i-a 4
SCRA 7'# 8!"'79)!
'ou+"e Taxation$ 0et#o&s of A(oi&ing 'T (199,)
What are the usual methods of avoiding the
occurrence of double taxation?
SUGGESTED ANSWER*
"he usual methods of avoiding the
occurrence of double taxation are:
4! ;llowing reciprocal exemption either
by law or by treatyD
:! ;llowance of tax credit for foreign taxes
paidD
+! ;llowance of deduction for foreign
taxes paidD and
0! >eduction of the &hilippine tax rate!
Note: Any three of the methods shall be
given full credit.
Imprescripti+i"ity of Tax /a1s (199,)
"axes were generally imprescriptibleD
statutes however may provide
otherwise! /tate the rules that have
been adopted on this score by %
(a) "he 8ational Internal >evenue (odeD
(b) "he "ariC and (ustoms (odeD and
(c) "he 5ocal .overnment (ode ;nswer:
SUGGESTED ANSWERS*
"he rules that have been adopted on
prescription are as follows:
(a) National Internal Revenue Code %
"he statute of limitation for assessment
of tax if a return is *led is within three
(+) years from the last day prescribed by
law for the *ling of the return or if *led
after the last day within three years
from date of actual *ling! If no
return is *led or the return *led is
false or fraudulent the period to
assess is within "38 73;>/ from
discovery of the omission fraud or
falsity!
"he period to collect the tax is
within "?>33 73;>/ from date of
assessment! In the case however of
omission to *le or if the return *led is
false or fraudulent the period to
collect is within "38 73;>/ from
discovery without need of an
assessment!
(b) Tarif and Customs Code % It does not
express any general statute of
limitationD it provided however that
"when articles have entered and passed
free of duty or *nal ad2ustment of
duties made with subseEuent delivery
such entry and passage free of duty or
settlement of duties will after the
expiration of O83 (4) 73;> from the
date of the *nal payment of duties in
the absence of fraud or protest be *nal
and conclusive upon all parties unless
the liEuidation of Import entry was merely
tentative" (/ec 4H1+ "(()!
(c)
Local Government
Code %
5ocal taxes
fees or
charges shall be assessed within II63
(,) 73;>/
from the date they became due! In case
of fraud or
intent to evade the payment of taxes
fees or charges
the same maybe assessed within "38
73;>/ from
discovery of the fraud or intent to
evade payment!
"hey shall also be collected either by
administrative
or 2udicial action within II63 (,) 73;>/
from date
of assessment (/ec! 4J0
5.()!
Po1er of Taxation: 23ua" Protection of t#e /a1 (2)
;n 3xecutive Order was issued pursuant to law
granting tax and duty incentives only to
businesses and residents within the "secured
area" of the /ubic 3conomic /pecial Kone and
denying said incentives to those who live
within the Kone but outside such "secured
area"! Is the constitutional right to eEual
protection of the law violated by the 3xecutive
Order? 3xplain! (+-)
SUGGESTED ANSWER*
8o! 3Eual protection of the law clause is
sub2ect to reasonable classi*cation!
(lassi*cation to be valid must (4) rest on
substantial distinctions (:) be germane to
the purpose of the law (+) not be
limited to existing conditions only (0)
apply eEually to all members of the same
class!
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"here are
substantial
diCerenc
es
betwe
en big
investors being enticed to the "secured
area" and the business operators outside
that are in accord with the eEual
protection clause that does not reEuire
territorial uniformity of laws! "he
classi*cation applies eEually to all the
resident individuals and businesses within
the "secured area"! "he residents being
in li#e circumstances to contributing
directly to the achievement of the
end purpose of the law are not
categori$ed further! Instead they are
similarly treated both in privileges
granted and obligations reEuired! (Tiu et
al v. !ourt of "npeals et al #.$. No.
%&'"%( )anuary &( %***)
Po1er of Taxation: In#erent in a So(ereign State (24)
Why is the power to tax considered
inherent in a sovereign /tate? (0-)
SUGGESTED ANSWER*
It is considered inherent in a sovereign
/tate because it is a necessary attribute
of sovereignty! +ithout this power no
sovereign ,tate can exist or endure! The
power to tax proceeds upon the theory
that the existence of a government is a
necessity and this power is an essential
and inherent attribute of sovereignty
belonging as a matter of right to every
independent state or government. 8o
sovereign state can continue to exist
without the means to pay its expensesD
and that for those means it has the right
to compel all citi$ens and property
within its limits to contribute hence the
emergence of the power to tax! (-% Am.
)ur.Taxation "().
Po1er of Taxation: /ega"ity$ /oca" 5o(6t Taxation (24)
<ay (ongress under the 4J=L
(onstitution abolish the power to tax of
local governments? (0-)
SUGGESTED ANSWER*
8o! (ongress cannot abolish what is
expressly granted by the fundamental
law! "he only authority conferred to
(ongress is to provide the guidelines
and limitations on the local governmentBs
exercise of the power to tax (/ec! , ;rt!
@ 4J=L (onstitution)!
Po1er of Taxation: /egis"ati(e in 7ature (199*)
"he /ecretary of Iinance upon
recommendation of the (ommissioner of
Internal >evenue issued a >evenue
>egulation using gross income as
the tax base for corporations doing
business in the &hilippines! Is the
>evenue >egulation valid?
SUGGESTED ANSWER*
"he regulation establishing gross income
as the tax base for corporations doing
business in the &hilippines (domestic as
well as resident foreign) is not valid! "his is
no longer implementation of the law
but actually it constitutes legislation
because among the powers that are
exclusively within the legislative
authority to tax is the power to
determine %the amount of the tax! (,ee %
!ooley %'.-%/"). (ertainly if the tax is
limited to gross income without
deductions of these corporations this is
changing the amount of the tax as said
amount ultimately depends on the taxable
base!
Po1er of Taxation: /imitations of t#e !ongress (21)
(ongress after much public hearing and
consultations with various sectors of
society came to the conclusion that it will
be good for the country to have only one
system of taxation by centrali$ing the
imposition and collection of all taxes
in the national government!
;ccordingly it is thin#ing of passing a
law that would abolish the taxing power of
all local government units! In your opinion
would such a law be valid under the present
(onstitution? 3xplain your answer! (,-)
SUGGESTED ANSWER*
8o! "he law centrali$ing the imposition and
collection of all taxes in the national
government would contravene the
(onstitution which mandates that: ! ! !
"3ach local government unit shall have the
power to create their own sources of
revenue and to levy taxes fees and
charges sub2ect to such guidelines and
limitations as (ongress may provide
consistent with the basic policy of local
autonomy!" It is clear that (ongress can
only give the guidelines and limitations on
the exercise by the local governments of
the power to tax but what was granted by the
fundamental law cannot be withdrawn by
(ongress!
Po1er of Taxation: /imitations: Passing of 8e(enue Bi""s
(199,)
"he ?ouse of >epresentatives introduced
?A L111 which envisioned to levy a tax on
various transactions! ;fter the bill was
approved by the ?ouse the bill was sent to
the /enate as so reEuired by the
(onstitution! In the upper house
instead of a deliberation on the ?ouse
Aill the /enate introduced /A =111 which
was its own version of the same tax! "he
/enate deliberated on this /enate Aill
and approved the same! "he ?ouse Aill
and the /enate Aill were then
consolidated in the Aicameral (ommittee!
3ventually the consolidated bill was
approved and sent to the &resident who
signed the same! "he private sectors
aCected by the new law Euestioned the
validity of the enactment on the ground
that the constitutional provision reEuiring
that all revenue bills should originate
from the ?ouse of >epresentatives had
been violated! >esolve the issue!
SUGGESTED ANSWER*
"here is no violation of the constitutional
reEuirement that all revenue bills should
originate from the ?ouse of >epresentatives!
What is prohibited is for the /enate to
enact revenue measures on its own
without a bill originating from the ?ouse!
Aut once the revenue bill was passed by the
?ouse and sent to the /enate the latter can
pass its own version on the same
sub2ect matter consonant with the latterBs
power to propose or concur with
amendments! "his follows from the co%
eEuality of the two chambers of (ongress
(T,-e%/i%, v. Secre/ar0 ,1 Fi%a%ce GR N,.
!!3(33 Oc/. 7) !""3)!
Po1er of Taxation: /imitations$ Po1er to 'estroy (2)
Mustice ?olmes once said: The power to tax is
not the power to destroy while this !ourt
(the ,upreme !ourt) sits.0 'escribe the
power to tax and its limitations! (,-)
SUGGESTED ANSWER*
"he power to tax is an inherent power of
the sovereign which is exercised through
the legislature to impose burdens upon
sub2ects and ob2ects within its Murisdiction for
the purpose of raising revenues to carry
out the legitimate ob2ects of government! "he
underlying basis for its exercise is
governmental necessity for without it no
government can exist nor endure! ;ccordingly
it has the
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broadest scope of all the powers of
government
because in the absence of limitations
it is considered as unlimited plenary
comprehensive and supreme! "he two
limitations on the power of taxation are
the inherent and constitutional
limitations which are intended to
prevent abuse on the exercise of the
otherwise plenary and unlimited power!
It is the (ourtBs role to see to it that the
exercise of the power does not
transgress these limitations!
Po1er of Taxation: 8e(ocation of 2xempting
Statutes (199,)
"@" (orporation was the recipient in
4JJ1 of two tax exemptions both from
(ongress one law exempting the
companyBs bond issues from taxes and
the other exempting the company from
taxes in the operation of its public utilities!
"he two laws extending the tax
exemptions were revo#ed by (ongress
before their expiry dates! Were the
revocations constitutional?
SUGGESTED ANSWER*
7es! "he exempting statutes are both
granted unilaterally by (ongress in the
exercise of taxing powers! /ince
taxation is the rule and tax exemption the
exception any tax exemption unilaterally
granted can be withdrawn at the pleasure
of the taxing authority without violating
the (onstitution (Mac/a% Ce6.
I%/er%a/i,%a- Air*,r/
A./:,ri/0 v Marc,+ G.R N,. !2))42
Se*/e56er !! !""')!
8either of these were issued by the taxing
authority in a contract lawfully entered
by it so that their revocation would not
constitute an impairment of the
obligations of contracts!
ALTERNATI1E ANSWER*
8o! "he withdrawal of the tax
exemption amounts to a deprivation of
property without due process of law hence
unconstitutional!
Po1er of Taxation$ In#erent in a So(ereign State (29)
'escribe the power of taxation! <ay a
legislative body enact laws to raise
revenues in the absence of a
constitutional provision granting said
body the power to tax? 3xplain!
SUGGESTED ANSWER*
7es the legislative body may enact laws
even in the absence of a constitutional
provision because the power to tax is
inherent in the government and not
merely a constitutional grant! "he power of
taxation is an essential and inherent attribute
of sovereignty belonging as a matter of right
to every independent government without
being expressly granted by the people!
(Pe*+i;C,-a B,//-i%g
C,5*a%0 ,1 /:e P:i-i**i%e+ I%c. v.
M.%ici*a-i/0 ,1 Ta%a.a% Le0/e G.R. N,.
L;7!!3' Fe6r.ar0 2#!"#'$
"axation is the inherent power of a
/tate to collect enforced proportional
contribution to support the expenses
of government! "axation is the power vested
in the legislature to impose burdens or
charges upon persons and property in
order to raise revenue for public
purposes!
"he power to tax is so unlimited in force
and so searching in extent that courts
scarcely venture to declare it is
sub2ect to any restrictions whatever except
such as rest in the discretion of the
authority which exercises it! (Ti, v.
Vide,gra5 Reg.-a/,r0 B,ard G.R. N,. L;
#3'"# <.%e !4 !"4#$ /o potent is the power
to tax that it was once opined that "the
power to tax involves the power to
destroy!"
(C.<. Mar+:a-- i% McC.--,c: v. Mar0-a%d (
=:ea/ 7!' ( L. Ed. 3#" ')#$
Po1er of Taxation$ /egis"ati(e in 7ature (1996)
What is the nature of the power of taxation?
SUGGESTED ANSWER*
"he &OW3> "O ";@ is an attribute of
sovereignty and is inherent in the /tate!
It is a power emanating from necessity
because it imposes a necessary
burden to preserve the /tateBs
sovereignty (P:i- G.ara%/ee C,. v+.
C,55i++i,%er L;22)#( A*ri- 7) !"'3$!
It is inherently legislative in nature and
character in that the power of taxation
can only be exercised through the
enactment of law!
ALTERNATI1E ANSWER*
"he nature of the power of taxation refers
to its own limitations such as the
reEuirement that it should be for a public
purpose that it be legislative that it is
territorial and that it should be sub2ect to
international comity!
Purpose of Taxation$ Interpretation (2*)
Which of the following propositions
may now be untenable:
4) "he court should construe a law
granting tax exemption strictly against
the taxpayer!
:) "he court should construe a law
granting a municipal corporation the
power to tax most strictly!
+) "he (ourt of "ax ;ppeals has
2urisdiction over decisions of the
(ustoms (ommissioner in cases
involving liability for customs duties!
0) "he (ourt of ;ppeals has 2urisdiction
to review decisions of the (ourt of "ax
;ppeals!
,) "he /upreme (ourt has 2urisdiction
to review decisions of the (ourt of
;ppeals!
Mustify your answer or choice brie)y! (,-)
SUGGESTED ANSWER*
2! The court should construe a law granting
a municipal corporation the power to tax
most strictly.
"his proposition is now untenable! "he basic
rationale for the grant of tax power to
local government units is to safeguard
their viability and self%suCiciency by
directly granting them general and broad
tax powers (Ma%i-a
E-ec/ric C,5*a%0 v. Pr,vi%ce ,1 Lag.%a e/. a-.
7)' SCRA #3) 8!"""9$! (onsidering that
inasmuch as the power to tax may be exercised
by local legislative bodies no longer by valid
congressional delegation but by direct
authority conferred by the (onstitution in
interpreting statutory provisions on
municipal *scal powers doubts will
therefore have to be resolved in favor of
municipal corporations (Ci/0 G,ver%5e%/ ,1
Sa% Pa6-, Lag.%a v. Re0e+ 7)3 SCRA 737
8!"""9$. "his means that the court must
adopt a liberal construction of a law
granting a municipal corporation the power to
tax!
Note: If the examinee chose proposition no.
4 as his answer it should be given full credit
considering that the present ("; ;ct
(>!;! 8o! J:=:) has made the ("; a
coeEual 2udicial body of the (ourt of ;ppeals!
"he Euestion "Which of the following
propositions
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73
may now be untenable" may
lead the examinee to choose a
proposition which is untenable on the
basis of the new law despite the cut%
oC date adopted by the Aar
3xamination (ommittee! >!;! 8o! J:=:
was passed on <arch +1 :110!
Purpose of Taxation$ /egis"ati(e in 7ature (2*)
"axes are assessed for the purpose of
generating revenue to be used for public
needs! "axation itself is the power by
which the /tate raises revenue to defray
the expenses of government! ; 2urist said
that a tax is what we pay for civili$ation!In
our 2urisdiction which of the following
statements may be erroneous:
4) "axes are pecuniary in nature!
:) "axes are enforced charges and
contributions!
+) "axes are imposed on persons and
property within the territorial
2urisdiction of a /tate!
0) "axes are levied by the executive
branch of the government!
,) "axes are assessed according to a
reasonable rule of apportionment!
Mustify your answer or choice brie)y! (,-)
SUGGESTED NS!ER:
. 4. Taxes are levied by the executive
branch of government! "his statement is
erroneous because levy refers to the act of
imposition by the legislature which is done
through the enactment of a tax law! 5evy
is an exercise of the power to tax which is
exclusively legislative in nature and
character! (learly taxes are not levied
by the executive branch of government!
(<VPC v. A-6a0 !4' SCRA !"4 8!"")9$.
8u"e on Set:%ff or !ompensation of Taxes (1996)
@ is the owner of a residential lot
situated at Nuirino ;venue &asay (ity!
"he lot has an area of +11 sEuare
meters! On Mune 4 4JJ0 411 sEuare
meters of said lot owned by @ was
expropriated by the government to be
used in the widening of Nuirino ;venue for
&+11!111!11 representing the estimated
assessed value of said portion! Irom 4JJ4
to 4JJ, @ who is a businessman has
not been paying his income taxes! @ is now
being assessed for the unpaid income
taxes in the total amount of
&4,1111!11! @ claims his income tax liability
has already been compensated by the
amount of &+11!111!11 which the
government owes him for the
expropriation of his property! 'ecide!
SUGGESTED ANSWER*
"he income tax liability of @ can not be
compensated with the amount owed
by the .overnment as compensation
for his property expropriated taxes are of
distinct #ind essence and nature
than ordinary obligations! "axes and debts
cannot be the sub2ect of compensation
because the .overnment and @ are not
mutually creditors and debtors of each other
and a claim for taxes is not a debt demand
contract or Mudgment as is allowable to be
set oC! (Fra%cia v+. IAC. G.R #'#(" <.%e
24. !"44$
<ay a taxpayer who has pending claims
for 6;" input credit or refund set%oC
said claims against his other tax
liabilities? 3xplain your answer! (,-)
SUGGESTED ANSWER*
8o! /et%oC is available only if both
obligations are liEuidated and demandable!
5iEuidated debts are those where the
exact amounts have already been
determined! In the instant case the claim
of the taxpayer for 6;" refund is still
pending and the amount has still to be
determined! ; fortiori the liEuidated
obligation of the taxpayer to the
government can not therefore be set%oC
against the unliEuidated claim which
the taxpayer conceived to exist in his favor!
(P:i-e> Mi%i%g C,r*. v. CIR GR N,.
!23#)( A.g.+/ 2" !""4)!
ALTERNATI1E ANSWER*
8o! "axes and claims for refund cannot be
the sub2ect of set%oC for the simple reason
that the government and the taxpayer are
not creditors and debtors of each other!
"here is a material distinction between a
tax and a claim for refund! (laims for
refunds 2ust li#e debts are due from the
government in its corporate capacity while
taxes are due to the government in its
sovereign capacity! (P:i-e>
Mi%i%g C,r*. v. CIR GR N,.
!23#)( A.g.+/ 2" !""4)!
<ay taxes be the sub2ect of set%oC or
compensation? 3xplain!
SUGGESTED ANSWER5
8o taxes cannot be the sub2ect
of set%oC or compensation for the
following reasons:
4) "he lifeblood theory reEuires that there
should be no unnecessary impediments to
the collection of taxes to ma#e available
to the government the wherewithal to meet
its legitimate ob2ectivesD and
:)"he payment of taxes is not a contractual
obligation but arises out of a duty to pay and
in respect of the positive acts of
government regarding the ma#ing and
enforcing of taxes the personal consent of
the individual taxpayer is not reEuired!
(Re*.6-ic v. Ma56.-a, L.56er C,. G.R.
N,. L;!##23 Fe6r.ar0 24 !"'2? Ca-/e> v.
C,55i++i,% ,% A.di/ G.R. N,. "2343
Ma0 4 !""2? a%d P:i-e> v.
C,55i++i,%er ,1 I%/er%a- Reve%.e
G.R. N,. !23#)( A.g.+/ 24 !""4$
?owever there is a possibility that set%oC may
arise if the claims against the government
have been recogni$ed and an amount has
already been appropriated for that
purpose! Where both claims have already
become overdue and demandable as well as
fully liEuidated! (ompensation ta#es place by
operation of law under ;rt! 4:11 in relation to
;rticles 4:LJ and 4:J1 of the 8ew
(ivil (ode!
(D,5i%g, v. Gar-i/,+ G.R. N,. L;!4""( <.%e
2" !"'7$
8u"e on Set:%ff or !ompensation on Taxes (29)
(an an assessment for a local tax be the
sub2ect of set%oC or compensation against
a *nal 2udgment for a sum of money
obtained by the taxpayer against the
local government that made the assessment?
3xplain!
SUGGESTED ANSWER*
8o taxes cannot be the sub2ect of set%oC
even when there is a *nal 2udgment for a sum
of money against the local government
ma#ing the assessment! "he
government and the taxpayer are not
the "mutual creditors and debtors" of each
other who can avail of the remedy of
compensation which ;rt! 4:L= ((ivil (ode) is
<.%e
2"!"'7
D,5i%g, v. Gar-i/,+ G.R. N,.
L;!4""(
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referri
ng to
Re*.6-i
c ,1
/:
e
P:i-i**i%
e+ v.
Ma56.-a, L.56er C,. G.R. N,. L;
!##23 Fe6r.ar0 24 !"'2? a%d Fra%cia
v. I%/er5edia/e A**e--a/e C,.r/ G.R.
N,. L;'#'(" <.%e 24!""4.
"here is however legal basis to state that an
assessment for a local tax may be the
sub2ect of set%oC or compensation
against a *nal 2udgment for a sum of
money obtained by the taxpayer
against the local government by
operation of law where the local
government and the taxpayer are in their
own right reciprocally debtors and creditors
of each other and that the debts are both
due and demandable! "his is consistent
with the ruling in
relying upon ;rts! 4:L= and 4:LJ
of the (ivil
(ode where these provisions were applied
in relation to the national tax and
should therefore be applicable to a
local tax!
Tax A(oi&ance (s) Tax 2(asion (1996)
'istinguish tax evasion from tax avoidance!
SUGGESTED ANSWER*
"ax evasion is a scheme used outside
of those lawful means to escape tax
liability and when availed of it usually
sub2ects the taxpayer to further or
additional civil or criminal liabilities! "ax
avoidance on the other hand is a tax
saving device within the means
sanctioned by law hence legal!
Tax A(oi&ance (s) Tax 2(asion (2)
<r! &ascualBs income from leasing his
property reaches the maximum rate of tax
under the law! ?e donated one% half of his
said property to a non%stoc# non%pro*t
educational institution whose income
and assets are actually directly and
exclusively used for educational
purposes and therefore Euali*ed for tax
exemption under ;rticle @I6 /ection 0 (+) of
the (onstitution and /ection +1 (h) of the
"ax (ode! ?aving thus transferred a portion
of his said asset <r! &ascual succeeded in
paying a lesser tax on the rental income
derived from his property! Is there tax
avoidance or tax evasion? 3xplain! (:-)
SUGGESTED ANSWER*
"here is tax avoidance! <r! &ascual has
exploited a fully permissive alternative
method to reduce his income tax by
transferring part of his rental income
to a tax exempt entity through a
donation of one%half of the income
producing property! "he donation is
li#ewise exempt from the donorBs tax! "he
donation is the legal means employed to
transfer the incidence of income tax on
the rental income!
Tax 2xemptions: 7ature ; !o(erage$ Proper Party (2*)
;s an incentive for investors a law was
passed giving newly established companies
in certain economic $one exemption from all
taxes duties fees imposts and other charges
for a period of three years! ;A( (orp!
was organi$ed and was granted such
incentive! In the course of business ;A(
(orp! purchased mechanical eEuipment from
@7K Inc! 8ormally the sale is sub2ect to a
sales tax!
@7K Inc! claims however that since
it sold the eEuipment to ;A( (orp!
which is tax exempt @7K
should not be liable to pay the sales
tax! Is this claim tenable? (,-)
SUGGESTED ANSWER*
;! 8o! 3xemption from taxes is personal
in nature and covers only taxes for which
the taxpayer%grantee is directly liable! "he
sales tax is a tax on the seller who is not
exempt from taxes! /ince @7K Inc! is
directly liable for the sales tax and no tax
exemption privilege is ever given to him
therefore its claim that the sale is tax exempt
is not tenable! ; tax exemption is construed
in strictissimi 1uris and it can not be
permitted to exist upon vague
implications (A+ia/ic Pe/r,-e.5 C,. L/d. V.
L-a%e+ (" P:i-
('' 8!"2'9$.
;ssume arguendo that @7K had to and did
pay the sales tax! ;A( (orp! later found
out however that @7K merely shifted or
passed on to ;A( the amount of the
sales tax by increasing the purchase price!
;A( (orp! now claims for a refund from
the Aureau of Internal >evenue in an
amount corresponding to the tax passed
on to it since it is tax exempt! Is
the claim of ;A( (orp! meritorious?
(,-)
SUGGESTED ANSWER6
A! 8o! "he claim of ;A( (orp! is not
meritorious! ;lthough the tax was shifted to
;A( (orp! by the seller what is paid by it is
not a tax but part of the cost it has
assumed! ?ence since ;A( (orp! is not a
taxpayer it has no capacity to *le a claim
for refund! "he taxpayer who can *le a
claim for refund is the person statutorily
liable for the payment of the tax!
Tax /a1s$ BI8 8u"ing$ 7on:8etroacti(ity of 8u"ings (2*)
'ue to an uncertainty whether or not a
new tax law is applicable to printing
companies '3I &rinters submitted a legal
Euery to the Aureau of Internal >evenue
on that issue! "he AI> issued a ruling that
printing companies are not covered by the
new law! >elying on this ruling '3I
&rinters did not pay said tax!
/ubseEuently however the AI> reversed
the ruling and issued a new one stating
that the tax covers printing companies!
(ould the AI> now assess '3I &rinters for
bac# taxes corresponding to the years
before the new ruling? >eason brie)y!
(,-)
SUGGESTED ANSWER*
8o! >eversal of a ruling shall not be
given a retroactive application if said
reversal will be pre2udicial to the
taxpayer! "herefore the AI> can not assess
'3I printers for bac# taxes because it
would be violative of the principle of non%
retroactivity of rulings and doing so would
result in grave in2ustice to the taxpayer who
relied on the *rst ruling in good faith (Sec/i,%
2(' NIRC? CIR v.
B.rr,.g:+ I%c. !(2 SCRA 72(8!"4'9$.
Tax Pyrami&ing$ 'efinition ; /ega"ity (26)
What is tax pyramiding? What is its basis in
law? (,-)
SUGGESTED ANSWER*
"ax &yramiding is the imposition of a tax
upon another tax! It has no basis in
fact or in law (Pe,*-e v. Sa%diga%6a0a%
G.R. N,. !32372 A.g.+/ !' 2))3$. "here is
also tax pyramiding when sales taxes
are incorrectly applied to goods several
times from production to *nal
(P:i-. Tr.+/ @
C,. v.
(C:.rc:i-- @
Tai- v.
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sale thus shifting the tax burden to the
ultimate consumer!
(NOTABENE: This concept pertains to the
2AT law which is excluded from the bar
coverage #uidelines for &((. 3ar
4xaminations )une %- &((.)
Taxpayer Suit$ -#en A""o1e& (1996)
When may a taxpayerBs suit be allowed?
SUGGESTED NS!ER:
; taxpayerBs suit may only be allowed
when an act complained of which may
include a legislative enactment directly
involves the illegal disbursement of
public funds derived from taxation
(Pa+c.a- v+. Secre/ar0 ,1 P.6-ic
=,rA+ !!) P:i-. 77!)!
<niformity in t#e !o""ection of Taxes (199=)
3xplain the reEuirement of uniformity
as a limitation in the imposition andOor
collection of taxes! (,-P
SUGGESTED ANSWER*
Fniformity in the imposition andOor
collection of taxes means that all taxable
articles or #inds of property of the same
class shall be taxed at the same rate!
"he reEuirement of uniformity is complied
with when the tax operates with the same
force and eCect in every place
where the sub2ect of it is found
C,%ce*/i,% 7( P:i-. "'"$! It does not
mean that lands chattels securities
income occupations franchises
privileges necessities and luxuries shall be
assessed at the same rate! 'iCerent
articles maybe taxed at diCerent amounts
provided that the rate is uniform on the
same class everywhere with all people at all
times! ;ccordingly singling out one
particular class for taxation purposes does
not infringe the reEuirement of uniformity!
"IRST LTERNTI#E NS!ER:
"he criteria is met when the tax laws
operate eEually and uniformly on all
persons under similar circumstances! ;ll
persons are treated in the same
manner the conditions not being
diCerent both in privileges conferred
and liabilities imposed! Fniformity in
taxation also refers to geographical
uniformity! Iavoritism and preference is
not allowed!
SEC$ND LTERNTI#E NS!ER:
; tax is deemed to have satis*ed the
uniformity rule when it operates with the
same force and eCect in every place
where the sub2ect maybe found!
Ba/c, '" P:i-. (2)$.
INCOME TAXATION
Basic: A""o1a+"e 'e&uctions (s) Persona" 2xemptions
(21)
'istinguish ;llowable 'eductions from
&ersonal 3xemptions! .ive an example of an
allowable deduction and another example for
personal exemption! (,-)
SUGGESTED ANSWER*
"he distinction between allowable
deductions and personal exemptions are
as follows:
a! A+ /, a5,.%/ 9 ;llowable
deductions generally refer to actual
expenses incurred in the pursuit of
trade business or practice of
profession while
personal exemptions are arbitrary
amounts allowed by law!
b! A+ /, %a/.re 9 ;llowable
deductions constitute business
expenses while personal
exemptions pertain to personal
expenses!
c! A+ /, *.r*,+e 9 'eductions are
allowed to enable the taxpayer to
recoup his cost of doing business
while personal exemptions are allowed to
cover personal family and living
expenses!
d! A+ /, c-ai5a%/+ 9 ;llowable
deductions can be claimed by all
taxpayers corporate or otherwise
while personal exemptions can be
claimed only by individual taxpayers!
Basic: 0eaning of Taxa+"e Income (2)
What is meant by taxable income? (:-)
SUGGESTED ANSWER*
";@;A53 I8(O<3 means the pertinent items
of gross income speci*ed in the "ax (ode
less the deductions andOor personal and
additional exemptions if any authori$ed
for such types of income by the "ax (ode or
other special laws! (,ec. 5% N6$! of %**')
Basic: Princip"e of Mobilia Sequuntur Personam (199*)
What is the principle of mobilia
se7uuntur personam in income taxation?
SUGGESTED ANSWER*
&rinciple of 8obilia ,e7uuntur 9ersonam in
income taxation refers to the principle that
taxation follows the property or person who
shall be sub2ect to the tax!
Basic: Proper A""o1ance of 'epreciation (199=)
:! What is the proper allowance for
depreciation of any property used in
trade or business? Q+-)
+! What is the annual depreciation of a
depreciable *xed asset with a cost of
&411111 and an estimated useful life of
:1 years and salvage value of & 41111
after its
useful life?
SUGGESTED ANSWER*
4! "he *r,*er a--,&a%ce ,1
de*recia/i,% of any property used in
trade or business refers to the reason%
able allowance for the exhaustion wear
and tear (including reasonable
allowance for obsolescence) of said
property! "he reasonable allowance shall
include but not limited to an allowance
computed under any of the following
methods:
(a) straight%line methodD
(b) declining%balance methodD
(c) sum%of%years%digit methodD and
(d) any other method which may be
prescribed by the /ecretary
of Iinance upon
recommendation of the
(ommissioner of Internal >evenue
(/ec! +0(I)! 8I>()!
:! "he annual depreciation of the depreciable
*xed asset may be computed on the
straight%line method which will allow the
taxpayer to deduct an annual depre%
ciation of &hp0,11 arrived at by
dividing the depreciable value (&hp
l11!111%&hpl1!111) of &hpJ1111 by the
estimated useful life (:1 years)!
N$TE: "he bar candidate may give a diCerent *gure
depending on the method he used in computing
the annual depreciation!
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"he facts given
in the
proble
m
ar
e
suCicie
nt
t
o
compute the annual depreciation either under
the declining% balance method or sum%of%
years%digit method! ;ny answer arrived at by
using any of the recogni$ed methods should
be given full credit! It is suggested that no
Euestion reEuiring computation should be given
in future bar examinations!
Basic: Sources of Income: Taxa+"e Income (199=)
Irom what sources of income are
the following personsOcorporations
taxable by the &hilippine
government?
:) (iti$en of the &hilippines residing
thereinD Q4-R
+) 8on%resident citi$enD Q4-4
0) ;n individual citi$en of the
&hilippines who is wor#ing and
deriving income from abroad as an
overseas contract wor#erD Q4-R
,) ;n alien individual whether a resident
or not of the &hilippinesD Q4-R
H) ; domestic corporationD Q4-R
SUGGESTED ANSWER* (/ection :+ 8I>( of 4JJL)
4) ; citi$en of the &hilippines
residing therein is taxable on all
income derived from sources within
and without the &hilippines!
:) ; nonresident citi$en is taxable
only on income derived from sources
within the &hilippines!
+) ;n individual citi$en of the
&hilippines who is wor#ing and
deriving income from abroad as an
overseas contract wor#er is taxable
only on income from sources within
the &hilippines!
0) ;n alien individual whether a resident
or not of the &hilippines is taxable
only on income derived from sources
within the &hilippines!
,) ; domestic corporation is taxable
on all income derived from
sources within and without the
&hilippines!
Basic: Tax Benefit 8u"e (24)
(a) What is meant by the "tax bene*t
rule"?
SUGGESTED ANSWER*
(a) ";@ A383II" >F53 states that the
taxpayer is obliged to declare as taxable
income subseEuent recovery of bad debts
in the year they were collected to the
extent of the tax bene*t en2oyed by the
taxpayer when the bad debts were
written%oC and claimed as a deduction
from income! It also applies to taxes
previously deducted from gross income
but which were subseEuently refunded
or credited! "he taxpayer is also reEuired
to report as taxable income the subseEuent
tax refund or tax credit granted to the
extent of the tax bene*t the taxpayer
en2oyed when such taxes were previously
claimed as deduction from income!
(b) .ive an illustration of the application
of the tax
bene*t rule!
SUGGESTED ANSWER*
(b) @ (ompany has a business connected
receivable amounting to &411111!11 from
7 who was declared ban#rupt by a
competent court! 'espite earnest eCorts to
collect the same 7 was not able to pay
prompting @ (ompany to write%oC the entire
liability! 'uring the year of write%oC the
entire amount was claimed as a deduction for
income tax purposes reducing the taxable net
income of @ (ompany to only &4111111!11!
"hree years later 7
voluntarily paid his obligation previously
written%oC to @ (ompany! In the year of
recovery the entire amount constitutes
part of gross income of @ (ompany because
it was able to get full tax bene*t three
years earlier!
Basic$ Basis of Income Tax (1996)
@ is employed as a driver of a
corporate lawyer and receives a monthly
salary of &,111!11 with free board and
lodging with an eEuivalent value of
&4,11!11!
4! What will be the basis of @Bs income tax?
Why
:! Will your answer in Euestion (a) be the
same if @Bs
employer is an obstetrician? Why?
SUGGESTED ANSWERS*
4) "he basis of @Ss income tax would
depend on whether his employer is an
employee or a practicing corporate
lawyer!
If his employer is an employee the
basis of @Bs income tax is &H,11!11
eEuivalent to the total of the basic
salary and the value of the board and
lodging! "his is so because the
employerOcorporate lawyer has no
place of business where the free
board and lodging may be given!
On the other hand if the corporate
lawyer is a "practicing lawyer (self%
employed) @ should be taxed only on
&,111!11 provided that the free
board and lodging is given in the
business premises of the lawyer and
for his convenience and that the free
lodging was given to @ as a
condition for employment!
:) If the employer is an obstetrician who
is self%em% ployed the basis of @Bs income will
only be &,111!11 if it is proven that the free
board and lodging is given within the
business premises of said employer
for his convenience and that the free
lodging is reEuired to be accepted by @ as
condition for employment! Otherwise @
would be taxed on &H,11!11!
Basic$ 5ross Income: 'efine (1999)
What is "gross Income" for purposes of the
Income tax?
SUGGESTED ANSWER*
.>O// I8(O<3 means all income from
whatever source derived including
(but not limited to) compensation for
services including fees commissions and
similar itemsD gross income from businessD
gains derived from dealings in propertyD
interestD rentsD royaltiesD dividendsD annuitiesD
pri$es and winningsD pensionsD and partnerBs
distributive share of the gross income of
general professional partnership (/ec! :=
8I>()!
ALTERNATI1E ANSWER*
a) .ross income means all wealth which
)ows into the taxpayer other than as a mere
return of capital! It includes the forms of
income speci*cally described as gains and
pro*ts including gains derived from the
sale or other disposition of capital!
b) .ross income means income (in the broad
sense) less income which is by statutory
provision or otherwise exempt from the tax
imposed by law (/ec! +H >ev! >eg! 8o! :)!
.ross income from business means total
sales less cost of goods sold plus any income
from investments
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and from incidental or outside
operations or sources (/ec! 0+ >ev! >eg!
8o! :)!
Basic$ Income (s) !apita" (1999)
?ow does "Income" diCer from "capital"?
3xplain!
SUGGESTED ANSWER*
Income diCers from capital in that
I8(O<3 is any wealth which )ows into the
taxpayer other than a return of capital while
capital constitutes the investment which is
the source of income! "herefore capital
is fund while income is the )ow! (apital is
wealth while income is the service of
wealth! (apital is the tree while income is
the fruit (Vice%/e Madriga- e/ a- v. <a5e+
RCDer/0 74 P:i-. (!()!
Basic$ Sc#e&u"ar Treatment (s) 5"o+a" Treatment (199*)
'istinguish "schedular treatment" from
"global treatment" as used in income
taxation!
SUGGESTED ANSWER*
Fnder a /(?3'F53> /7/"3<
the various typesOitems of income
(compensation: business;professional
income) are classi*ed accordingly and
are accorded diCerent tax treatments in
accordance with schedules characteri$ed
by graduated tax rates! /ince these types of
income are treated separately the
allowable deductions shall li#ewise vary for
each type of income!
Fnder the .5OA;5 /7/"3< all income
received by the taxpayer are grouped
together without any distinction as to the
type or nature of the income and after
deducting therefrom expenses and other
allowable deductions are sub2ected to
tax at a *xed rate!
!ompensation$ Income Tax: 'ue to Profita+"e
Business 'ea" (1999)
<r! Osorio a ban# executive while playing
golf with <r! &ere$ a manufacturing *rm
executive mentioned to the latter that
his (Osorio) ban# had 2ust opened a
business relationship with a big foreign
importer of goods which &ere$B company
manufactures! &ere$ reEuested Osorio to
introduce him to this foreign importer and
put in a good word for him (&ere$) which
Osorio did! ;s a result &ere$ was able to
ma#e a pro*table business deal with
the foreign Importer!
In gratitude &ere$ in behalf of his
manufacturing *rm sent Osorio an
expensive car as a gift! Osorio called &ere$
and told him that there was really no
obligation on the part of &ere$ or his
company to give such an expensive gift!
Aut &ere$ insisted that Osorio #eep the
car! "he company of &ere$ deducted the
cost of the car as a business expense!
"he (ommissioner of Internal >evenue
included the fair mar#et value of the
car as Income of Osorio who
protested that the car was a gift and
therefore excluded from income! Who
is correct the (ommissioner or
Osorio? 3xplain!
SUGGESTED ANSWER*
"he (ommissioner is correct! "he car
having been given to <r! Osorio in
consideration of having introduced <r!
&ere$ to a foreign Importer which resulted
to a pro*table business deal is
considered to be a compensation for
services rendered! "he transfer is not a gift
because it is not made out of a detached or
disinterested generosity but for a bene*t
accruing to <r! &ere$! "he fact that the
company of <r! &ere$ ta#es a business
deduction for the payment indicates that it
was considered as a pay rather than a
gift! ?ence the fair mar#et value of the
car is includable in the gross income
pursuant to /ection :=(a)(l) of the "ax (ode
(,ee %*'" <ederal Tax =andboo> p. %"-). ;
payment though voluntary if it is in return
for services rendered or proceeds from the
constraining force of any moral or legal duty
or a bene*t to the payer is anticipated is a
taxable income to the payee even if
characteri$ed as a BgiftB by the payor
(C,55i++i,%er v+. D.6er+/ei% 7'7 U.S.
2#4$.
ALTERNATI1E ANSWER*
<r! Osorio is correct! "he car was not
payment for services rendered! "here
was no prior agreement or negotiations
between <r! Osorio and <r! &ere$ that the
former will be compensated for his services!
<r! &ere$ in behalf of his company gave the
car to <r! Osorio out of gratitude! "he
transfer having been made gratuitously
should be treated as a gift sub2ect to
donorBs tax and should be excluded from
the gross income of the recipient <r!
Osorio! "he (ommissioner should cancel
the assessment of de*ciency income tax to
<r! Osorio and instead assess de*ciency
donorBs tax on <r &ere$B company! (/ec!
:=(b)(+) 8I>(D Pir,va%, v+.
C,55i++i,%er)
!orporate: Income: 'onor6s tax$ Tax /ia+i"ity (1996)
@ a multinational corporation doing
business in the &hilippines donated
411 shares of stoc# of said
corporation to <r! 7 its resident
manager in the &hilippines!
4) What is the tax liability if any of @
corporation?
:) ;ssuming the shares of stoc#s were given
to <r! 7 in consideration of his
services to the corporation
what are the tax implications? 3xplain!
SUGGESTED ANSWERS*
4) Ioreign corporations eCecting a donation
are sub2ect to donorBs tax only if the
property donated is located in the
&hilippines! ;ccordingly donation of a
foreign corporation of its own shares of
stoc#s in favor of resident employee is not
sub2ect to donorBs tax (AI> >uling 8o! 14=%
=L Manuary :H 4J=L)! ?owever if =,- of
the business of the foreign corporation is
located in the &hilippines or the shares
donated have acEuired business situs in the
&hilippines the donation may be taxed in the
&hilippines sub2ect to the rule of reciprocity!
:) If the shares of stoc#s were given to
<r! 7 in consideration of his services to the
corporation the same shall constitute
taxable compensation income to the
recipient because it is a compensation
for services rendered under an
employer%employee relationship hence
sub2ect to income tax!
"he par value or stated value of the shares
issued also constitutes deductible expense
to the corporation provided it is sub2ected
to withholding tax on wages!
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!orporate$ Income Tax$ 8easona+"eness of t#e
Bonus (26)
.old and /ilver (orporation gave extra
40th month bonus to all its oCicials and
employees in the total amount of &L,
<illion! When it *led its corporate
income tax return the following year the
corporation declared a net operating loss!
When the income tax return of the
corporation was reviewed by the AI> the
following year it disallowed as item of
deduction the &L, <illion bonus the
corporation gave its oCicials and
employees on the ground of
unreasonableness! "he corporation claimed
that the bonus is an ordinary and
necessary expense that should be
allowed! If you were the AI>
(ommissioner how will you resolve the
issue? (,-)
SUGGESTED ANSWER*
I will disallow the expense! ; bonus is
ordinary and necessary where said
expenditure is (4) appropriate and helpful
in the development of the taxpayers
business
(8artens ?aw of <ederal 6ncome
Taxation 2olume 62 p. 5%-) and (:) is
normal in relation to the business of
the taxpayer and the surrounding
circumstances (p. 5%. 6bid).
"o determine the reasonableness of the
bonus it must be commensurate with
services performed by the oCicials and
employees! Other factors to consider are
whether the payment was made in good
faithD the character of the taxpayerBs
businessD the volume and amount of its
net earningsD its localityD the type and
extent of the services renderedD the salary
policy of the corporationD the si$e of the
particular businessD the employeesB
Euali*cation and contributions to the
business ventureD and general economic
conditions (A/-a+ Mi%i%g v. CIR G.R. N,.
L; 2'"!! <a%.ar0 2# !"4!$! ?owever
since the business suCers from a net
operating loss I will rule that the bonus is
an unreasonable expense!
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (199*)
(aledonia ;ircargo is an oC%line
international carrier without any )ight
operations in the &hilippines! It has
however a liaison oCice in the &hilippines
which is duly licensed with the /ecurities
and 3xchange (ommission established
for the purpose of providing passenger
and )ight information reservation and
tic#eting services!
;re the revenues of (aledonia ;ircargo
from tic#ets reserved by its &hilippine
oCice sub2ect to tax?
SUGGESTED ANSWER*
"he revenues in the &hilippines of (aledonia
;ircargo as an "oC%line" airline from tic#et
reservation services are taxable income
from "whatever source" under /ec! :=(a) of
the "ax (ode! "his case is analogous to
C,55i++i,%er v. BOAC G.R N,. N,. '3##7;#(
A*ri- 7) !"4# where the /upreme (ourt
ruled that the income received in the
&hilippines from the sale of tic#ets by an "oC%
line" airline is taxable as income from
whatever source!
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (29)
;n international airline with no landing
rights in the &hilippines sold tic#ets in
the &hilippines for air transportation!
Is income derived from such sales of
tic#ets considered taxable income of the
said international
air carrier from &hilippine sources under
the "ax (ode? 3xplain! (,-)
ALTERNATI1E ANSWER*
7es! "he income derived from the sales of
tic#ets in the &hilippines is considered
taxable income of the international air
carrier from &hilippine sources!
"he source of income is the property
activity or service that produced the
income! "he sale of tic#ets in the
&hilippines is the activity that produces the
income! "he absence of landing rights in
the &hilippines cannot alter the fact that
revenues were derived from tic#et sales
within the &hilippines! (C,55i++i,%er ,1
I%/er%a- Reve%.e v. <a*a% Air Li%e+
G.R. N,. ')#!( Oc/,6er ( !""!
rei/era/i%g Bri/i+: Over+ea+ Air&a0+
C,r*. Air I%dia a%d A5erica% Air-i%e+
I%c.$
ALTERNATI1E ANSWER*
8o under ,ec. 5 of $.$. No. %--&((& an
oC%line airline having a branch oCice or a
sales agent in the &hilippines which sells
passage documents for compensation or
commission to cover oC%line )ights of its
principal or head oCice or for other
airlines covering )ights originating from
&hilippine ports or oC%line )ights is not
considered engaged in business as an
international air carrier in the &hilippines
and is therefore not sub2ect to .ross
&hilippine Aillings "ax nor to the +-
common carrierBs tax!
Aased on the foregoing the international
airline company is not considered as
engaged in business in the &hilippines and
is therefore a non%resident foreign
corporation! ; non%resident foreign
corporation is sub2ect to the gross
income tax on its income derived from
sources within the &hilippines! "he
income from sale of tic#ets shall not
form part of taxable income because the
term "taxable income" as de*ned under
/ec! +4 of the 8I>( refers only to income
of those taxpayers who pay by way of the
net income tax! "axable income means the
pertinent items of gross income speci*ed
in the 8I>( less the deductions andOor
personal and additional exemptions if
any authori$ed for such types of income
by the 8I>( or other special laws!
'i(i&en&s: 'isguise& &i(i&en&s (199*)
'isguised dividends in income taxation?
.ive an example!
SUGGESTED ANSWER*
'isguised dividends are those income
payments made by a domestic corporation
which is a subsidiary of a non% resident
foreign corporation to the latter ostensibly
for services rendered by the latter to the
former but which payments are
disproportionately larger than the actual
value of the services rendered! In such case
the amount over and above the true value of
the service rendered shall be treated as a
dividend and shall be sub2ected to the
corresponding tax of +,- on &hilippine
sourced gross income or such other
preferential rate as may be provided under a
corresponding "ax "reaty!
E>a5*-eE >oyalty payments under a
corresponding licensing agreement!
'i(i&en&s$ Income Tax$ 'e&ucti+"e 5ross Income (1999)
; (o! a &hilippine corporation issued
preferred shares of stoc# with the following
features:
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4) 8on%votingD
:) &referred and cumulative dividends at
the rate of 41- per annum whether
or not in any period the amount is
covered by earnings or pro2ectsD
+) In the event of dissolution of the
issuer holders of preferred stoc# shall
be paid in full or ratably as the assets
of the issuer may permit before
any distribution shall be made to
common stoc#holdersD and
0) "he issuer has the option to
redeem the preferred stoc#!
; (o! declared dividends on the preferred
stoc# and claimed the dividends as
interests deductible from its gross Income
for income tax purposes! "he AI>
disallowed the deduction! ; (o!
maintains that the preferred shares with
their features are really debt and therefore
the dividends are realty interests! 'ecide!
(41-)
SUGGESTED ANSWER*
"he dividends are not deductible from
gross income! &referred shares shall be
considered capital regardless of the
conditions under which such shares are
issued and therefore dividends paid
thereon are not considered BinterestB
which are allowed to be deducted from the
gross income of the corporation!
($evenue 8emorandum !ircular No. %'-
'% )uly %& %*'%).
2ffect$ !on&onation of /oan in Taxation (1999)
<r! Irancisco borrowed &41111!11 from
his friend <r! .utierre$ payable in one year
without interest! When the loan became due
<r! Irancisco told <r! .utierre$ that he (<r!
Irancisco) was unable to pay because of
business reverses! <r! .utierre$ too# pity
on <r! Irancisco and condoned the loan!
<r! Irancisco was solvent at the time he
borrowed the & 41111!11 and at the time the
loan was condoned! 'id <r! Irancisco derive
any income from the cancellation or
condonation of his indebtedness? 3xplain!
SUGGESTED ANSWER*
8o <r! Irancisco did not derive any
income from the cancellation or condonation
of his indebtedness! /ince it is obvious that
the creditor merely desired to bene*t the
debtor in view of the absence of
consideration for the cancellation the
amount of the debt is considered as a gift
from the creditor to the debtor and need not
be included in the latterBs gross income!
Fringe Benefit Tax: !o(ere& 2mp"oyees (21)
@ was hired by 7 to watch over 6Ss
*shponds with a salary of &hp
41111!11! "o enable him to perform his
duties well he was also provided a
small hut which he could use as his
residence in the middle of the *shponds! Is
the fair mar#et value of the use of the small
hut by @ a "fringe bene*t" that is sub2ect to
the +:- tax imposed by /ection ++ of
the 8ational Internal >evenue (ode?
3xplain your answer! (,-)
SUGGESTED ANSWER*
8o! @ is neither a managerial nor a
supervisory employee! Only managerial or
supervisory employees are entitled to a
fringe bene*t sub2ect to the fringe
bene*ts tax! 3ven assuming that he is a
managerial or supervisory employee the
small hut is provided for the
convenience of the
employer hence does not constitute a
taxable fringe bene*t! (,ection 55 N4$!).
Fringe Benefit Tax: 2mp"oyer re3uire& to Pay (24)
; "fringe bene*t" is de*ned as being any
good service or other bene*t furnished or
granted in cash or in #ind by an employer
to an individual employee! Would it be
the employer or the employee who is
legally reEuired to pay an income tax on it?
3xplain! (0-)
SUGGESTED ANSWER*
It is the employer who is legally reEuired to
pay an income tax on the fringe bene*t!
"he fringe bene*t tax is imposed as a
II8;5 WI"??O5'I8. ";@ placing the
legal obligation to remit the tax on the
employer such that if the tax is not paid
the legal recourse of the AI> is to go after
the employer! ;ny amount or value received
by the employee as a fringe bene*t is
considered tax paid hence net of the
income tax due thereon! "he person who
is legally reEuired to pay (same as
statutory incidence as distinguished
from economic incidence) is that person
who in case of non%payment can be
legally demanded to pay the tax!
Interest: 'eficiency Interest: &efine (1999 Bar)
What is a "de*ciency interest" for purposes
of the income tax? Illustrate!
SUGGESTED ANSWER*
'3II(I38(7 I8"3>3/" for purposes of
the income tax is the interest due on
any amount of tax due or installment
thereof which is not paid on or before the
date prescribed for its payment
computed at the rate of :1- per annum
or the <anila >eference >ate whichever
is higher from the date prescribed for its
payment until it is fully paid!
If for example after the audit of the boo#s of
@7K (orp! for taxable year 4JJ+ there was
found to be due a de*ciency income tax of
&4:,111!11 inclusive of the :,- surcharge
imposed under /ection :0= of the "ax
(ode the interest will be computed on
the &4:,!111!11 from ;pril 4, 4JJ0 up to
its date of payment!
Interest: 'e"in3uency Interest: &efine (1999)
What is a "delinEuency interest" for
purposes of the income tax? Illustrate!
SUGGESTED ANSWER*
'elinEuency interest is the interest of :1-
or the <anila >eference >ate whichever is
higher reEuired to be paid in case of
failure to pay:
(a) the amount of the tax due on any return
reEuired to be *ledD or
(b) the amount of the tax due for which
return is reEuiredD or
(c) the de*ciency tax or any surcharge
or interest thereon on the due date
appearing in the notice and demand of the
(ommissioner of Internal >evenue!
If in the above illustration the assessment
notice was released on 'ecember +4
4JJ0 and the amount of de*ciency tax
inclusive of surcharge and de*ciency
interest were computed up to Manuary +1
4JJ, which is the due date for payment per
assessment notice failure to
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pay on this latter
date
wil
l
rend
er the
ta
x
delinEuent and will reEuire the
payment of delinEuency interest!
IT8: Persona" Income$ 2xempte& to Fi"e IT8 (199,)
; bachelor was employed by (orporation ;
on the *rst wor#ing day of Manuary 4JJH on
a part%time basis with a salary of &+,11!11
a month! ?e then received the 4+th
month pay! In /eptember 4JJH he accepted
another part% time Mob from (orporation A
from which he received a total
compensation of &40,11!11 for the year
4JJH! "he correct total taxes were
withheld from both earnings! With the
withholding taxes already paid would he still
be reEuired to *le an income tax return for
his 4JJH income?
SUGGESTED ANSWER*
7es because what is exempt from
*ling are those individuals who have
total compensation income not exceeding
&H1!111 with the taxes correctly withheld
only by one employer! In this case even
if his aggregate compensation income from
both his employers does not exceed
&H1!111 and that total withholding taxes
were correctly withheld by his employers
the fact that he derives compensation
income concurrently from two employers
at anytime during the taxable year does
not exempt him from *ling his income tax
return ($A '"*' as implemented by $$ No.
"-*5).
IT8$ 'omestic !orporate Taxation (199,)
'uring the year a domestic corporation
derived the following items of revenue:
(a) gross receipts from a trading businessD
(b) interests from money placements in the
ban#sD (c) dividends from its stoc#
investments in domestic corporationsD (d)
gains from stoc# transactions through
the &hilippine /toc# 3xchangeD (e)
proceeds under an insurance policy on
the loss of goods! In preparing the
corporate income tax return what should be
the tax treatment on each of the above
items?
SUGGESTED ANSWER*
"he gr,++ recei*/+ 1r,5 /radi%g
6.+i%e++ is includible as an item of
income in the corporate income tax return
and sub2ect to corporate income tax
rate based on net income!
"he other items of revenue will not be
included in the corporate income tax
return!
"he interest from money mar#et
placements is sub2ect to a *nal
withholding tax of :1-D
"he dividends from domestic
corporation are exempt from income
taxD and
gains from stoc# transactions with
the &hilippine /toc# 3xchange are
sub2ect to transaction tax which is in
lieu of the income tax!
"he proceeds under an insurance
policy on the loss of goods is not an
item of income but merely a return of
capital hence not taxable!
ALTERNATI1E ANSWER*
"he gross receipts from trading business is
includible as an item of income in the
corporate income tax return! 5i#ewise the
gain or loss reali$ed as a conseEuence of the
receipt of proceeds under an insurance policy
on the loss of goods will be included in the
corporate income tax
return either as a taxable gain or a
deductible loss! "he gain or loss is arrived at
by deducting from the proceeds of insurance
(amount reali$ed) the basis of the good lost
(/ec! +0(a) 8I>()! "he net income of the
corporation shall be sub2ect to corporate
income tax rate of +,-!
"he other items of revenue will not be
included in the corporate income tax
return! "he interest from money mar#et
placements is sub2ect to a *nal withholding
tax of :1-D dividends from domestic
corporations are exempt from income taxD
and gains from stoc# transactions with the
&hilippine /toc# 3xchange are sub2ect to
transaction tax which is in lieu of the income
tax!
IT8$ 'omestic !orporate Taxation (21)
a) ?ow often does a domestic corporation
*le income tax return for income earned
during a single taxable
year? 3xplain the process! (+-)
SUGGESTED ANSWER*
a) ; domestic corporation is reEuired to *le
income tax returns four (0) times for income
earned during a single taxable year!
Nuarterly returns are reEuired to be *led for
the *rst three Euarters where the corporation
shall declare its Euarterly summary of gross
income and deductions on a cumulative
basis! (,ection '- N6$!)! "hen a *nal
ad2ustment return is reEuired to be *led
covering the total taxable income for the
entire year calendar or *scal!
(,ection '. N6$!)!
b) What is the reason for such procedure?
(:-)
SUGGESTED ANSWER*
b) "he reason for this procedure is to
ensure the timeliness of collection to meet
the budgetary needs of the government!
5i#ewise it is designed to ease the burden on
the taxpayer by providing it with an
installment payment scheme rather than
reEuiring the payment of the tax on a lump%
sum basis after the end of the year!
ALTERNATI1E ANSWER*
b) "he reason for the Euarterly *ling of tax
returns is to allow partial collection of
the tax before the end of the taxable
year and also to improve the
liEuidity of government
IT8$ Persona" Income: T1o 2mp"oyment (21)
In the year :111 @ wor#ed part time
as a waitress in a restaurant in <ega
<all from =:11 a!m! to 0:11 p!m! and then
as a cashier in a :0%hour convenience
store in her neighborhood! "he total
income of @ for the year from the two
employers does not exceed her total personal
and additional exemptions for the year :111!
Was she reEuired to *le an income tax
return last ;pril? 3xplain your answer!
(,-)
SUGGESTED ANSWER*
7es! ;n individual deriving compensation
concurrently from two or more employers
at any time during the taxable year
shall *le an income tax return (/ec!
,4(;)(:)(b) 8I>(!)
ALTERNATI1E ANSWER*
It depends! ;n individual with pure
compensation income is not reEuired to *le
an income tax returns when she meets the
following conditionsD (4) the total gross
compensation income does not exceed
&hpH1111!11 and (:) the income tax has
been correctly withheld meaning
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the tax withheld is eEual to the tax
due! (,ection -
l(A@(&)(b) N6$!).
"here is no mention in the problem of
the amount of personal and additional
personal exemption to Euantify how
much is that compensation income that
did not exceed the personal and
additional personal exemptions! "here is
no mention either of whether or not
the employers withheld taxes and that the
amount withheld is eEual to the tax due!
Whether or not she will be reEuired to
*le an income tax return last ;pril 4,
on the :111 income will depend on
her compliance with the reEuirements
of the law!
IT8$ Persona" Income$ 5SIS Pension (2)
<r! Mavier is a non%resident senior
citi$en! ?e receives a monthly pension
from the ./I/ which he deposits with
the &8A%<a#ati Aranch! Is he exempt
from income tax and therefore not
reEuired to *le an income tax return?
(,-)
SUGGESTED ANSWER*
<r! Mavier is exempt from income tax on
his monthly ./I/ pension (,ec. 5&(3)(.)(f)
N6$! of %**') but not on the interest
income that might accrue on the
pensions deposited with &8A which
are sub2ect to *nal withholding tax!
(onseEuently since <r! MavierBs sole
taxable income would have been
sub2ected to a *nal withholding tax he is
not reEuired anymore to *le an income
tax return! (,ec. -% (A) (&) (c). 6bid@.
IT8$ Persona" Income$ 0arrie& In&i(i&ua" (2*)
>;< got married to 5I/; last
Manuary :11+! On 8ovember +1
:11+ 5I/; gave birth to twins!
Fnfortunately however 5I/; died in
the course of her delivery! 'ue to
complications one of the twins also died
on 'ecember 4, :11+!
In preparing his Income "ax >eturn (I">)
for the year :11+ what should >;<
indicate in the I"> as his civil status: (a)
singleD (b) marriedD (c) ?ead of the familyD
(d) widowerD (e) none of the above? Why?
>eason! (,-)
SUGGESTED ANSWER*
>;< should indicate "(b) married" as his
civil status in preparing his Income "ax
>eturn for the year :11+! "he death of his
wife during the year will not change his
status because should the spouse die during
the taxable year the taxpayer may still claim
the same exemptions (that of being married)
as if the spouse died at the close of such
year
(,ection 5-;!1 N6$!).
IT8$ Taxpayer$ /ia+i"ities$ Fa"sifie& Tax 8eturn (29)
'anilo who is engaged in the trading
business entrusted to his accountant the
preparation of his income tax return and
the payment of the tax due! "he
accountant *led a falsi*ed tax return
by underdeclaring the sales and
overstating the expense deductions by
'anilo!
Is 'anilo liable for the de*ciency tax
and the penalties thereon? What is the
liability if any of the accountant?
'iscuss! (,-)
SUGGESTED ANSWER*
'anilo is liable for the de*ciency tax as
well as for the de*ciency interest! ?e
should not be held liable for the
fraud penalty because the accountant
acted beyond the limits of his authority!
"here is no showing in the problem that
'anilo signed the falsi*ed return or that
it was prepared under his direction!
GOn the other hand the accountant may be
held criminally liable for violation of the "ax
(ode when he falsi*ed the tax return by
underdeclaring the sale and overstating the
expense deductions! If 'annyBs accountant
is a (erti*ed &ublic ;ccountant his
certi*cate as a (&; shall automatically
be revo#ed or cancelled upon conviction!
Partners#ip: Income Tax (1999)
Iive years ago <arEue$ &eneyra Mayme
&osadas and <anguiat all lawyers formed
a partnership which they named <arEue$
and &eneyra 5aw OCices! "he (ommis% sioner
of Internal >evenue thereafter issued $evenue
$egulation No. &-*5 implementing $A.
'"*. #nown as the /impli*ed 8et
Income "axation /cheme (/8I"/)!
>evenue >egulation 8o! :%J+ provides in part:
Sec. '. Ge%era- Pr,1e++i,%a-
Par/%er+:i*! 9 "he general
professional partnership and the
partners are covered by >!;! L0JH!
"hus in determining pro*t of the
partnership only the direct costs
mentioned in said law are to be
deducted from partnership income!
;lso the expenses paid or Incurred
by partners in their individual
capacities in the practice of their
profession which are not reimbursed
or paid by the partnership but are not
considered as direct costs are not
deductible from his gross income!
4) <arEue$ and &eneyra 5aw OCices *led a
taxpayerBs suit alleging that >evenue
>egulation 8o! :%J+ violates the
principle of uniformity in taxation
because general professional
partnerships are now sub2ect to
payment of income tax and that there is
a diCerence in the tax treatment
between individuals engaged in the
practice of their respective profes%
sions and partners in general
professional
partnerships! Is this contention
correct? 3xplain!
SUGGESTED ANSWER*
4) "he contention is not correct! .eneral
professional partnerships remain to be a
non%taxable entity! What is taxable are the
partners comprising the same and they are
obligated to report as income their share in
the income of the general professional
partnership during the taxable year
whether distributed or not! "he /8I"/
treat professionals as one class of taxpayer so
that they shall be treated ali#e irrespective of
whether they practice their profession alone
or in association with other professionals under
a general professional partnership! What are
taxed diCerently are individuals and
corporations! ;ll individuals similarly situated
are taxed ali#e under the regulations
therefore the principle of uniformity in
taxation is not violated! On the contrary all
the reEuirements of a valid classi*cation have
been complied with (T,% v+. De-
R,+ari, e/ a- G.R N,. !)"24" Oc/,6er+
!""($.
:) Is >evenue >egulation 8o! :%J+ now
considered as having adopted a gross
income method instead of
retaining the net income taxation
scheme? 3xplain!
SUGGESTED ANSWER*
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:
) 8o! >evenue
>egulatio
n 8o! :%J+
implementing >; 8o! L0JH have indeed
signi*cantly reduced the items of
deduction by limiting it to direct costs
and expenses or the 01- of gross receipts
maximum deduction in cases where the
direct costs are diCicult to determine!
"he allowance of limited deductions
however is still in consonance with the
net income taxation scheme rather than
the gross income method! While it is true
that not all the expenses of earning
the income might be allowed this can
well be 2usti*ed by the fact that
deductions are not matters of right but
are matters of legislative grace!
Persona"$ Income Tax: 7on:8esi&ent A"ien (2)
<r! (orte$ is a non%resident alien
based in ?ong Tong! 'uring the calendar
year 4JJJ he came to the &hilippines
several times and stayed in the country for
an aggregated period of more than 4=1
days! ?ow will <r! (orte$ be taxed on
his income derived from sources within
the &hilippines and from abroad? (,-)
SUGGESTED ANSWER*
<r! (orte$ being a non%resident alien
individual who has stayed for an
aggregated period of more than 4=1
days during the calendar year 4JJJ shall
for that taxable year be deemed to be
a non%resident alien doing business in
the &hilippines!
(onsidering the above <r! (orte$ shall be
sub2ect to an income tax in the same
manner as an individual citi$en and a
resident alien individual on taxable
income received from all sources within
the &hilippines! A,ec. &- (A) (%) N6$!
of %**'@ "hus he is allowed to avail of the
itemi$ed deductions including the
personal and additional exemptions
but sub2ect to the rule on reciprocity on
the personal exemptions! (,ec. 5" (A) to
()) and (8) in relation to ,ec. &- (A) (%)
6bid ,ec. 5- (B) 6bid.@
NCT4: 6t is suggested that full
credit should be given if the
examineeDs answer only cover the Erst
two paragraphs.
Persona"$ Income Tax: 7on:8esi&ent !iti?en (1999)
; (o! a &hilippine corporation has an
executive (&) who is a Iilipino citi$en! ; (o!
has a subsidiary in ?ong Tong (?T (o!)
and will assign & for an inde*nite period
to wor# full time for ?T (o! & will bring his
family to reside in ?T and will lease out his
residence in the &hilippines! "he salary of &
will be shouldered ,1- by ; (o! while the
other ,1- plus housing cost of living and
educational allowances of &Bs dependents
will be shouldered by ?T (o! ; (o! will
credit the ,1- of &Bs salary to &Bs
&hilippine ban# account! & will sign the
contract of employment in the &hilippines!
& will also be receiving rental income for
the lease of his &hilippine residence! ;re
these salaries allowances and rentals
sub2ect to the &hilippine income tax? (,-)
SUGGESTED ANSWER*
"he salaries and allowances received by & are
not sub2ect to &hilippine income tax! &
Euali*es as a nonresident citi$en because
he leaves the &hilippines for employment
reEuiring him to be physically present abroad
most of the time during the taxable year!
(,ection &&(4) N6$!). ; non% resident
citi$en is taxable only on income derived
from &hilippine sources! (,ection &5
N6$!). "he salaries and
allowances received from being employed
abroad are incomes from without
because these are compensation for
services rendered outside of the
&hilippines! (,ection "& N6$!).
?owever & is taxable on rental income for
the lease of his &hilippine residence
because this is an income derived from
within the leased property being located
in the &hilippines! (,ection "& N6$!).
Persona"$ Income Tax: Tax:Free 2xc#ange (199,)
"hree brothers inherited in 4JJ: a parcel of
land valued for real estate tax purposes at
&+!1 million which they held in co%
ownership! In 4JJ, they transferred the
property to a newly organi$ed
corporation as their eEuity which was
placed at the $onal value of &H!1 million! In
exchange for the property the three
brothers thus each received shares of stoc#
of the corporation with a total par value of
&:!1 million or altogether a total of &H!1
million! 8o business was done by the
(orporation and the property remained
idle! In the early part of 4JJL one of the
brothers who was in dire need of funds
sold his shares to the two brothers for
&:!1 million! Is the transaction sub2ect to
any internal revenue tax (other than the
documentary stamp tax)?
SUGGESTED ANSWER*
7es! "he exchange in 4JJ, is a tax%free
exchange so that the subseEuent sale of
one of the brothers of his shares to the
other two (:) brothers in 4JJL will be
sub2ect to income tax! "his is so
because the tax%free exchange merely
deferred the recognition of income on
the exchange transaction! "he gain
sub2ect to income tax in the sale is
measured by the diCerence between the
selling price of the shares (&: <illion) and
the basis of the real property in the hands
of the transferor at the time of
exchange which is the fair mar#et value of
his share in the real property at the time of
inheritance (/ection +0(b)(:) 8I>()! "he
net gain from the sale of shares of stoc#
is sub2ect to the schedular capital gains tax
of 41- for the *rst &411!111 and :1-
for the excess thereof (/ection :l(d)
8I>()!
ALTERNATI1E ANSWER*
"he exchange eCected in 4JJ, did not Eualify
as a tax%free exchange because there is no
showing that the three brothers gained
control of the corporation by acEuiring at
least ,4- of the voting rights! /ince the entire
gain on the exchange was previously
sub2ected to income tax then the sale will
also be taxable if a gain results therefrom! In
the instant case the sale will not be sub2ect to
any internal revenue tax other than the
documentary stamp tax because the seller
did not reali$e any gain from the sale! "he
gain is measured by the diCerence between
the amount reali$ed (selling price) and
the basis of the property! Incidentally the
basis to him is his share in the value of the
property received at the time of exchange
which is &: <illion an amount 2ust eEual to the
amount reali$ed from the sale!
Persona"$ Income Tax$ !ontract of /ease (1999)
<r! 'omingo owns a vacant parcel of land! ?e
leases the land to <r! 3nriEue$ for ten
years at a rental of &4:111!11 per year!
"he condition is that <r! 3nriEue$
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will erect a
building on
th
e
lan
d
whic
h
wi
ll
become the property of <r! 'omingo at
the end of the lease without compensation
or reimbursement whatsoever for the
value of the building!
<r! 3nriEue$ erects the building! Fpon
completion the building had a fair
mar#et value of &4 <illion! ;t the end of
the lease the building is worth only
&J11!111!11 due to depreciation!
Will <r! 'omingo have income when
the lease expires and becomes the
owner of the building with a fair mar#et
value of &J11!111!11? ?ow much income
must he report on the building? 3xplain!
SUGGESTED ANSWER*
When a building is erected by a lessee
in the leased premises in pursuance of
an agreement with the lessor that the
building becomes the property of the
lessor at the end of the lease the
lessor has the option to report income
as follows:
4) "he lessor may report as income the
mar#et value of the building at the
time when such building is
completedD or
:) "he lessor may spread over the life of
the lease the estimated depreciated
value of such building at the
termination of the lease and report
as income for each year of the
lease an aliEuot part thereof (/ec!
0J >> 8o! :)!
Fnder the *rst option the lessor will
have no income when the lease expires
and becomes the owner of the building!
"he second option will give rise to an
income during the year of lease expiration of
&J1!111!11 or 4O41 of the depreciated value
of the building!
"he availment of the *rst option
will reEuire <r! 'omingo to report an
income of &4!111111!11 during the
year when the building was completed!
; total of &J11!111!11 income will be
reported under the second option but
will be spread over the life of the
lease or &J1!111!11 per year!
ALTERNATI1E ANSWER*
<r! 'omingo will reali$e an income
when the lease expires and becomes the
owner of the building with a fair mar#et
value of &J11!111!11 because the
condition for the lease is the transfer of
the building at the expiration of the lease!
"he income to be reali$ed by <r! 'omingo
at the time of the expiration will consist
of the value of the building which is
&J11!111!11 and any rental income that
has accrued as of said date!
Persona"$ Income Tax$ 0arrie& In&i(i&ua" (199,)
<ar and Moy got married in 4JJ1! ; wee#
before their marriage! Moy received by
way of donation a condominium unit
worth &L,1!111!11 from her parents! ;fter
marriage some renovations were made at a
cost of &4,1!111!11! "he spouses were both
employed in 4JJ4 by the same company! On
+1 'ecember 4JJ: their *rst child was
born and a second child was born on 1L
8ovember 4JJ+! In 4JJ0 they sold the
condominium unit and bought a new unit!
Fnder the foregoing facts what
were the events in the life of the spouses
that had income tax incidences?
SUGGESTED ANSWER*
"he events in the life of spouses! <ar and
Moy which have income tax incidences are
the following:
4) "heir marriage in 4JJ1 Euali*es
them to claim personal exemption for
married individualsD
:) "heir employment in 4JJ4 by the
same company will ma#e them liable
to the income tax imposed on gross
compensation incomeD
+) Airth of their *rst child in
'ecember 4JJ: would give rise to
an additional exemption of &,111
for taxable year 4JJ:D
0) Airth of their second child in 8ovember
4JJ+ would li#ewise entitle them to
claim additional exemption of &,111
raising their additional personal
exemptions to & 41111 for taxable year
4JJ+D and
,) /ale of their condominium unit in 4JJ0
shall ma#e the spouses liable to the ,-
capital gains tax on the gain presumed
to have been reali$ed from the sale!
Persona"$ Income Tax$ 8etiring A"ien 2mp"oyee (29)
;n alien employee of the ;sian
'evelopment Aan# (;'A) who is retiring
soon has oCered to sell his car to you
which he imported tax%free for his personal
use! "he privilege of exemption from tax
is granted to Euali*ed personal use under
the ;'A (harter which is recogni$ed by the
tax authorities! If you decide to purchase
the car is the sale sub2ect to tax? 3xplain!
(,-)
SUGGESTED ANSWER*
"he sales transaction is sub2ect to value
added tax (6;") under /ec! 41L(A) of the
8I>( although this provision is expressly
excluded from the coverage of the :11,
bar exam!
"he proceeds from the sale are sub2ect to
income tax! "he car is considered a
capital asset of the retiring alien
employee because he is not engaged in
the business of buying and selling cars!
?e therefore derived income which
should be reported in his income tax return!
(/ees! +: and +J 8I>()
Persona"$ Income Taxation: 7on:8esi&ent !iti?en (199,)
Muan a Iilipino citi$en has immigrated
to the Fnited /tates where he is now a
permanent resident! ?e owns certain
income%earning property in the
&hilippines from which he continues to
derive substantial income! ?e also receives
income from his employment in the Fnited
/tates on which the F/ income tax is
paid! On which of the above income is
the taxable if at all in the &hilippines
and how in general terms would such
income or incomes be taxed?
SUGGESTED ANSWER*
Muan shall be taxed on both his income
from the &hilippines and on his Income from
the Fnited /tates be% cause his being a citi$en
ma#es him taxable on all Income wherever
derived! Ior the income he derives from his
property in the &hilippines Muan shall be taxed
on his net income under the Si5*-iFed Ne/
I%c,5e Ta>a/i,% Sc:e5e (/8I"/) whereby
he shall be considered as a self%employed
individual! ?is Income as employee in the
Fnited /tates on the other hand shall
be taxed in
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accordance with the schedular
graduated rates of
4- :- and +-! based on the ad2usted
gross income derived by non%resident
citi$ens from all sources without the
&hilippines during each taxable year!
Taxa+"e Income: I""ega" Income (1999 Bar)
<r! 5a2o2o is a big%time swindler! In one year
he was able to earn &4 <illion from his
swindling activities! When the
discovered his income from swindling the
(ommissioner assessed him a de*ciency
income tax for such income! "he lawyer of
<r! 5a2o2o protested the assessment on the
following grounds:
4) "he income tax applies only to legal
income not to illegal incomeD
:) <r! 5a2o2oBs receipts from his
swindling did not constitute income
because he was under obligation to
return the amount he had swindled
hence his receipt from swindling was
similar to a loan which is not income
because for every peso borrowed he has
a corresponding liability to pay one
pesoD and
+) If he has to pay the de*ciency income
tax assess%
ment there will be hardly anything
left to return to the victims of the
swindling!
?ow will you rule on each of the
three grounds for the protest? 3xplain!
SUGGESTED ANSWERS*
%) "he contention that the income tax
applies to legal income and not to illegal
income is not correct! /ection :=(a) of
the "ax (ode includes within the purview
of gross income all Income from
whatever source derived! ?ence the
illegality of the income will not preclude
the imposition of the income tax thereon!
&) "he contention that the receipts
from his swindling did not constitute
income because of his obligation to
return the amount swindled is li#ewise not
correct! When a taxpayer acEuires
earnings lawfully or unlawfully
without the consensual recognition
express or implied of an obligation to
repay and without restriction as to their
disposition he has received taxable
income even though it may still be
claimed that he is not entitled to retain the
money and even though he may still
be ad2udged to restore its eEuivalent
(<a5e+ v+. U.S.7'' U.S. 2!7 !"'!$. "o
treat the embe$$led funds not as taxable
income would perpetuate in2ustice by
relieving embe$$lers of the duty of paying
income taxes on the money they enrich
themselves with through embe$$lement
while honest people pay their taxes on
every conceivable type of income! ()ames
vs. F.,.)
5) "he de*ciency income tax assessment is a
direct tax imposed on the owner which is an
excise on the privilege to earn an income! It
will not necessarily be paid out of the same
income that were sub2ected to the tax! <r!
5a2o2oBs liability to pay the tax is based on
his having reali$ed a taxable income from his
swindling activities and will not aCect his
obligation to ma#e restitution! &ayment of
the tax is a civil obligation imposed by
law while restitution is a civil liability arising
from a crime!
Taxa+"e or 7on:Taxa+"e$ Income an& 5ains (29)
3xplain brie)y whether the following items
are taxable or non%taxable: (,-)
a) Income from <UETENGD
SUGGESTED ANSWER*
"axable! .ross income includes "all income
derived from whatever source" (,ec.
5&AA@ N6$!) which was interpreted as
all income not expressly excluded or
exempted from the class of taxable income
irrespective of the voluntary or involuntary
action of the taxpayer in producing the
income! "hus the income may proceed
from a legal or illegal source such as
from 2ueteng! Fnlawful gains gambling
winnings etc! are sub2ect to income tax!
"he tax code stands as an indiCerent neutral
party on the matter of where the income
comes from!
(C,55i++i,%er ,1 I%/er%a- Reve%.e v.
Ma%%i%g G.R. N,. L;247"4 A.g.+/ '
!"#3$
b) .ain arising from
EXPROPRIATION OF PROPERTBD
SUGGESTED ANSWER*
"axable! /ale exchange or other disposition of
property to the government of real
property is taxable! It includes ta#ing by
the government through condemnation
proceedings! (G,%Ga-e+ v. C,.r/ ,1 Ta>
A**ea-+ G.R. N,.
L;!(372 Ma0 2' !"'3$
c) TAXES paid and subseEuently
refundedD
SUGGESTED ANSWER*
"axable only if the taxes were paid
and claimed as deduction and which
are subseEuently refunded or credited! It
shall be included as part of gross income in
the year of the receipt to the extent of the
income tax bene*t of said deduction! (,ec.
5"A!@A%@ N6$!) 8ot taxable if the taxes
refunded were not originally claimed as
deductions!
d) >ecovery of BAD DEBTS previously
charged oCD
SUGGESTED ANSWER*
"axable under the T% &ENE"IT RULE!
>ecovery of bad debts previously
allowed as deduction in the preceding
years shall be included as part of the
gross income in the year of recovery to the
extent of the income tax bene*t of said
deduction! (,ec. 5"A4@A%@ N6$!) "his is
sometimes referred as the REC'TURE
RULES!
e) .ain on the sale of a car used for
personal purposes!
SUGGESTED ANSWER*
"axable! /ince the car is used for personal
purposes it is considered as a capital asset
hence the gain is considered income! (,ec.
5&AA@A5@ and ,ec. 5*AA@A%@ N6$!)
-it##o"&ing Tax: 7on:8esi&ent A"ien (21)
Is a non%resident alien who is not
engaged in trade or business or in the
exercise of profession in the &hilippines but
who derived rental income from the
&hilippines reEuired to *le an income tax
return on ;pril of the year following his
receipt of said income? If not why not?
SUGGESTED ANSWER*
8o! "he income tax on all income
derived from &hilippine sources by a non%
resident alien who is not engaged in trade
or business in the &hilippines is withheld by
the lessee as a Iinal Withholding "ax!
(,ection -'(A) N6$!). "he government can
not reEuire persons outside
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24 of 73
o
f
its territorial
2urisdiction to
*l
e a
retur
nD
fo
r
this reason the income tax on income
derived from within must be collected
through the withholding tax system and
thus relieve the recipient of the income
the duty to *le income tax returns!
(,ection -% N6$!).
-it##o"&ing Tax: 8etirement Benefit (2)
"o start a business of his own <r!
<ario de .u$man opted for an early
retirement from a private company
after ten (41) years of service! &ursuant to
the companyBs Euali*ed and approved
private retirement bene*t plan he was
paid his retirement bene*t which was
sub2ected to withholding tax! Is the
employer correct in withholding the
tax? 3xplain! (:-)
SUGGESTED ANSWER*
(a) It depends! ;n employee retiring
under a companyBs Euali*ed and private
retirement plan can only be exempt from
income tax on his retirement
bene*ts if the following reEuisites are
met:
(4) that the retiring employee must have
been in service of the same employer
for at least ten (41) yearsD
(:) that he is not less than ,1 years of age
at the time of retirementD and
(+) the bene*t is availed of only once!
In the instant case there is no
mention whether the employee has
li#ewise complied with reEuisites
number (:) and (+)!
-it##o"&ing Tax: 8etirement Benefit (2)
Fnder what conditions are retirement
bene*ts received by oCicials and
employees of private *rms excluded
from gross income and exempt from
taxation? (+-)
SUGGESTED ANSWER*
"he conditions to be met in order that
retirement bene*ts received by oCicials
and employees of private *rms are
excluded from gross income and
exempt from taxation are as follows:
:! Fnder >epublic ;ct 8o! 0J4L (those
received under
areasonable private bene*t plan):
a! the retiring oCicial or employee
must have been in service of the
same employer for at least ten
(41) yearsD
b! that he is not less than *fty (,1)
years of age at the time of
retirementD and
c! that the bene*t is availed of only once!
+! Fnder >epublic ;ct 8o! LH04 (those
received from employers without any
retirement plan):
a! "hose received under existing
collective bargaining agreement
and other agreements are exemptD
and
b! In the absence of retirement plan or
agreement providing for
retirement bene*ts the bene*ts
are excluded from gross income
and exempt from income tax if:
i! retiring employee must have
served at least *ve(,) yearsD
and
ii! that he is not less than sixty
(H1) years of age but not more
than sixty *ve (H,)!
-it##o"&ing Tax: 8oya"ty (22)
"he <TA%&hils! is a AOI%registered domestic
corporation licensed by the <TA of
the Fnited Tingdom to distribute
support and use in the &hilippines its
computer software systems including basic
and related materials for ban#s! "he
<TA%&hils! provides consultancy and
technical services incidental thereto by
entering into licensing agreements with
ban#s! Fnder such agreements the <TA%
&hils! will not acEuire any proprietary rights
in the licensed systems! "he <TA%&hils!
pays royalty to the <TA%FT net of 4,-
withholding tax prescribed by the >&%FT
"ax "reaty!
Is the income of the <TA%&hils! under
the licensing agreement with ban#s
considered royalty sub2ect to :1- *nal
withholding tax? Why? If not what #ind of
tax will its income be sub2ect to? 3xplain!
(,-)
SUGGESTED ANSWER*
7es! "he income of <TA%&hils! under
the licensing agreement with ban#s shall
be considered as royalty sub2ect to the
:1- *nal withholding tax! "he term royalty is
broad enough to include technical advice
assistance or services rendered in
connection with technical management
or administration of any scienti*c industrial
or commercial underta#ing venture pro2ect
or scheme! (/ec! 0:(0)(f) 8I>()!
;ccordingly the consultancy and technical
services rendered by <TA%&hils which
are incidental to the distribution support
and use of the computer systems of <TA%
FT are taxable as royalty!
-it##o"&ing Tax$ !o(erage (2*)
(iting /ection 41 ;rticle 6III of the 4J=L
(onstitution which provides that salaries of
2udges shall be *xed by law and that during
their continuance in oCice their salary
shall not be decreased a 2udge of <<
>egional "rial (ourt Euestioned the
deduction of withholding taxes from his
salary since it results into a net deduction of
his pay! Is the contention of the 2udge
correct? >eason brie)y! (,-)
SUGGESTED ANSWER*
8o! "he contention is incorrect! "he salaries
of 2udges are not tax%exempt and their
taxability is not contrary to the provisions
of /ection 41 ;rticle 6III of the
(onstitution on the non%diminution of the
salaries of members of the 2udiciary during
their continuance in oCice! "he clear
intent of the (onstitutional (ommission that
framed the (onstitution is to sub2ect their
salaries to tax as in the case of all
taxpayers! ?ence the deduction of
withholding taxes being a manner of
collecting the income tax on their salary
is not a diminution contemplated by the
fundamental law! (Ni/a1a% e/. a-. v. CIR
!32 SCRA 24( 8!"4#R)!
-it##o"&ing Tax$ 'omestic !orporation$ !as# 'i(i&en&s
(21)
What do you thin# is the reason why
cash dividends when received by a
resident citi$en or alien from a domestic
corporation are taxed only at the *nal
tax of 41- and not at the progressive
tax rate schedule under /ection :0(;) of
the "ax (ode? 3xplain your answer! (,-)
SUGGESTED ANSWER*
"he reason for imposing *nal withholding tax
rather than the progressive tax schedule on
cash dividends received by
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2. of 73
a
resident citi$en
or
alie
n
fro
m a
domes
tic
corporation is to ensure the collection of
income tax on said income! If we sub2ect
the dividend to the progressive tax rate
which can only be done through the
*ling of income tax returns there is no
assurance that the taxpayer will declare
the income especially when there are
other items of gross income earned during
the year! It would be extremely diCicult
for the AI> to monitor compliance
considering the huge number of
stoc#holders! Ay shifting the responsibility
to remit the tax to the corporation it is
very easy to chec# compliance because
there are fewer withholding agents
compared to the number of income
recipients!
5i#ewise the imposition of a *nal
withholding tax will ma#e the tax
available to the government at an earlier
time! Iinally the *nal withholding tax
will be a sure revenue to the government
unli#e when the dividend is treated as a
returnable income where the recipient
thereof who is in a tax loss position is given
the chance to oCset such loss against
dividend income thereby depriving the
government of the tax on said dividend
income! QNote: 6t is recommended that
any of the foregoing answers can be
given full credit because the 7uestion
involves a policy issue which can only be
found in the deliberations of !ongress!R
ALTERNATI1E ANSWER*
"he reason why cash dividends
received by a resident citi$en or alien
from a domestic corporation are sub2ected
to the *nal withholding tax of 41-
and not at the progressive rate tax
schedule is to lessen the impact of a
second layer of tax on the same income!
-it##o"&ing Tax$ Income su+@ect t#ereto (21)
What is meant by income sub2ect to "*nal
tax"? .ive at least two examples of
income of resident individuals that is
sub2ect to the *nal tax! (+-)
SUGGESTED ANSWER*
Income sub2ect to *nal tax refers to an
income wherein the tax due is fully
collected through the withholding tax
system! Fnder this procedure the payor
of the income withholds the tax and
remits it to the government as a *nal
settlement of the income tax due on said
income! "he recipient is no longer reEuired
to include the item of income sub2ected to
"*nal tax" as part of his gross income in his
income tax returns! 3xamples of income
sub2ect to *nal tax are dividend income
interest from ban# deposits royalties etc!
-it##o"&ing Tax$ 7on:8esi&ent A"ien (199*)
Iour (atholic parishes hired the services of
Iran# Ainatra a foreign non%resident
entertainer to perform for four (0) nights
at the Iol# ;rts "heater! Ainatra was
paid &:11!111!11 a night! "he parishes
earned &4111111!11 which they used for
the support of the orphans in the city! Who
are liable to pay taxes?
SUGGESTED ANSWER*
"he following are liable to pay income taxes:
(a) "he four catholic parishes because
the income received by them not being
income earned "as such" in the
performance of their religious functions
and duties is taxable income under the
last paragraph of /ec! :H in relation to
/ec! :H(e) of the "ax (ode! In
promoting and operating the Ainatra
/how they engaged in an activity
conducted for pro*t! (Ibid!)
(b) "he income of Iran# Ainatra a non%
resident alien under our law is taxable
at the rate of +1- *nal withholding
tax based on the gross income from the
show! <r! Ainatra is not engaged in
any trade or business in the &hilippines!
-it##o"&ing Tax$ 7on:8esi&ent !orporation (199*)
Aates ;dvertising (ompany is a non%resident
corporation duly organi$ed and existing
under the laws of /ingapore! It is not
doing business and has no oCice in
the &hilippines! &ilipinas .arment
Incorporated a domestic corporation
retained the services of Aates to do all
the advertising of its products abroad! Ior
said services AatesB fees are paid through
outward remittances! ;re the fees received
by Aates sub2ect to any withholding tax?
SUGGESTED NS!ER:
"he fees paid to Aates ;dvertising (o! a
non%resident foreign corporation are not
sub2ect to withholding tax since they are
not sub2ect to &hilippine tax! "hey are
exempt because they do not constitute
income from &hilippine sources the same
being compensation for labor or
personal services performed outside
the &hilippines (/ec! +HGc) (+) and /ec! :,(b)
(l) "ax (ode)!
-it##o"&ing Tax$ 8ea&erAs 'igest A1ar& (199=)
Is the pri$e of one million pesos awarded by
the >eaderBs 'igest sub2ect to
withholding of *nal tax? Who is
responsible for withholding the tax?
What are the liabilities for failure to
withhold such tax? Q,-R
SUGGESTED ANSWER*
4) It depends! If the pri$e is considered
as winnings derived from sources
within the &hilippines it is sub2ect to
withholding of *nal tax (/ec! :0QAR in
relation to /ec! ,LQ;R 8I>()! If
derived from sources without the
&hilippines it is not sub2ect to
withholding of *nal tax because the
&hilippine tax law and regulations
could not reach out to foreign
2urisdictions!
:) "he tax shall be withheld by the
>eaderBs 'igest or local agent who has
control over the payment of the pri$e!
+) ;ny person reEuired to withhold or
who willfully fails to withhold shall
in addition to the other penalties
provided under the (ode be liable
upon conviction to a penalty eEual to the
total amount of tax not withheld (/ec! :,4
8I>()! In case of failure to withhold the
tax or in the case of under
withholding the de*ciency tax shall be
collected from the payorOwithholding
agent (4st par!! /ec! :!,LQ;R >!>! 8o! :%
J=)!
;ny person reEuired under the "ax (ode or by
rules and regulations to withhold taxes at the
time or times reEuired by law or rules and
regulations shall in addition to other penalties
provided by law upon conviction be
punished by a *ne of not less than "en
thousand pesos (&hp 41!1OO) and suCer
imprisonment of not less than one (4)
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year but not more than ten (41)
years (4st par!
/ec! :,, 8I>()!
C$((ENT: It is suggested that any of the
following answers to the Euestion "What are
the liabilities for failure to withhold such a
tax?" be given full credit:
4) "he payor shall be liable for the payment
of the tax which was not withheld!
:) "he payerOwithholding agent shall be liable
to both civil
and criminal penalties imposed by the "ax
(ode!
-it##o"&ing Tax$ Time 'eposit Interest$ 5SIS
Pension (199*)
<aribel /antos a retired public school
teacher relies on her pension from the
./I/ and the Interest Income from a time
deposit of &,11!111!11 with ;A( Aan#!
Is <iss /antos liable to pay any tax on
her Income?
SUGGESTED ANSWER*
<aribel /antos is exempt from tax on
the pension from the ./I/ (,ec. &/(b((')
(<) Tax !ode). ?owever as regards her
time deposit the interest she receives
thereon is sub2ect to :1- *nal
withholding tax! (,ec. &%(a)(c) Tax
!ode).
DEDUCTIONS, EXEMPTIONS,
EXCLUSIONS - INCLUSIONS
'e&uction: Faci"itation Fees or >BicB+acB> (199=)
<( .arcia a contractor who won
the bid for the construction of a
public highway claims as expenses
facilitation fees which according to
him is standard operating procedure in
transactions with the government! ;re
these expenses allowable as deduction
from gross income? Q,-R
SUGGESTED ANSWER*
8o! "he alleged facilitation fees which he
claims as standard operating procedure in
transactions with the government comes
in the form of bribes or "#ic#bac#" which
are not allowed as deductions from gross
income
(,ection 5"(A)(l)(c) N6$!)!
'e&uctions: %r&inary Business 2xpenses (2*)
O@7 is the president and chief executive
oCicer of ;'' (omputers Inc! When
O@7 was as#ed to 2oin the
government service as director of a
bureau under the 'epartment of "rade
and Industry he too# a leave of
absence from ;''! Aelieving that its
business outloo# goodwill and
opportunities improved with O@7 in the
government ;'' proposed to obtain
a policy of insurance on his life! On
ethical grounds O@7 ob2ected to the
insurance purchase but ;'' purchased the
policy anyway! Its annual premium
amounted to &411111! Is said premium
deductible by ;'' (omputers Inc!?
>eason! (,-)
SUGGESTED ANSWER*
8o! "he premium is not deductible
because it is not an ordinary business
expense! "he term "ordinary" is used in the
income tax law in its common signi*cance and
it has the connotation of being normal
usual or customary
(De*./0 v. D. P,%/ 7)4 US (44 8!"()9$!
&aying premiums for the insurance of a
person not connected to the company is
not normal usual or customary!
;nother reason for its non%deductibility is
the fact that it can be considered as an
illegal compensation made to a
government employee! "his is so because
if the insured his estate or heirs were
made as the bene*ciary (because of the
re7uirement of insurable interest) the
payment of premium will constitute bribes
which are not allowed as deduction from
gross income (,ection 5"AA@Al@Ac@ N6$!).
On the other hand if the company
was made the bene*ciary whether
directly or indirectly the premium is not
allowed as a deduction from gross
income (,ection 5.AAG%"@ N6$!).
'e&uctions: Amount for Bri+e (21)
In order to facilitate the processing of its
application for a license from a government
oCice (orporation ; found it necessary to
pay the amount of &hp 411111 as a bribe to
the approving oCicial! Is the &hp 411111
deductible from the gross income of
(orporation ;? On the other hand is the
&hp 411111 taxable income of the
approving oCicial? 3xplain your answers!
(,-)
SUGGESTED ANSWER*
/ince the amount of &hpl11!111 constitutes a
bribe it is not allowed as a deduction
from gross income of (orporation ;
(,ection 5"(A)(l)(c) N6$!)! ?owever to the
recipient government oCicial the same
constitutes a taxable income! ;ll income
from legal or illegal sources are taxable
absent any clear provision of law
exempting the same! "his is the reason why
gross income had been de*ned to include
income from whatever source derived!
(,ection 5&(A) N6$!). Illegally acEuired
income constitutes reali$ed income under the
claim of right doctrine (R./Ai% v. US 7(7 US
!7)$.
'e&uctions: !apita" /osses$ Pro#i+itions (24)
What is the rationale for the rule
prohibiting the deduction of capital losses
from ordinary gains? 3xplain!
SUGGESTED ANSWER*
It is to insure that only costs or expenses
incurred in earning the income shall be
deductible for income tax purposes
consonant with the reEuirement of the law
that only necessary expenses are allowed
as deductions from gross income! "he
term "N4!4,,A$H 4I94N,4,"
presupposes that in order to be allowed as
deduction the expense must be business
connected which is not the case insofar
as capital losses are concerned! "his is
also the reason why all non%business connected
expenses li#e personal living and family
expenses are not allowed as deduction from
gross income (,ection 5.(A)(%) of the %**' Tax
!ode).
"he prohibition of deduction of capital
losses from ordinary gains is designed to
forestall the shifting of deductions from an
area sub2ect to lower taxes to an area sub2ect
to higher taxes thereby unnecessarily resulting
in lea#age of tax revenues! (apital gains are
generally taxed at a lower rate to prevent
among others the bunching of income in
one taxable year which is a liberality in the law
begotten from motives of public policy ($ule
on =olding 9eriod)! It stands to reason
therefore that if the transaction results in loss
the same should be allowed only from and to
the extent of capital gains and not to be
deducted from
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22 of 73
ordinary gains which are sub2ect to a
higher rate
of income tax! (!hirelstein <ederal
6ncome Taxation %*'' 4d.)
'e&uctions: 'e&ucti+"e Items from 5ross Income (1999)
3xplain if the following items are
deductible from gross income for
income tax purposes! 'isregard who is
the person claiming the expense! (,-)
4) Interest on loans used to acEuire
capital eEuipment or machinery!
:) 'epreciation of goodwill!
SUGGESTED ANSWER*
!$ I%/ere+/ ,% -,a%+ .+ed /, acC.ire
ca*i/a- eC.i*; 5e%/ ,r 5ac:i%er0 is
a deductible item from gross income!
"he law gives the taxpayer the option to
claim as a deduction or treat as capital
expenditure interest in% curred to
acEuire property used in trade
business or exercise of a profession!
(,ection 5"(3) (5) N6$!).
2$ De*recia/i,% 1,r g,,d&i-- is not
allowed as de% duction from gross
income! While intangibles maybe
allowed to be depreciated or amorti$ed it is
only allowed to those intangibles whose use
in the business or trade is de*nitely limited
in duration! (Ba+i-a% E+/a/e+ I%c. v
CIR 2! SCRA !#)! /uch is not the case with
goodwill!
ALTERNATI1E ANSWER*
'epreciation of goodwill is allowed as a
deduction from gross income if the
goodwill is acEuired through capital
outlay and is #nown from experience to be
of value to the business for only a
limited period! (,ection %(' $evenue
$egulations No. &)! In such case the
goodwill is allowed to be amorti$ed over
its useful life to allow the deduction of the
current portion of the expense from
gross income thereby paving the way
for a proper matching of costs against
revenues which is an essential feature
of the income tax system!
'e&uctions: Income Tax: 'onation: 8ea" Property (22)
On 'ecember 1H :114 568
(orporation donated a piece of vacant
lot situated in <andaluyong (ity to an
accredited and duly registered non%
stoc# non%pro*t educational institution
to be used by the latter in building a
sports complex for students!
;! <ay the donor claim in full as
deduction from its gross income for the
taxable year :114 the amount of the
donated lot eEuivalent to its fair
mar#et valueO$onal value at the time
of the donation?
3xplain your answer! (:-)
SUGGESTED ANSWER*
;! 8o! 'onations andOor contributions
made to Euali*ed donee institutions
consisting of property other than
money shall be based on the
acEuisition cost of the property! "he
donor is not entitled to claim as full
deduction the fair mar#et valueO$onal
value of the lot donated! (/ec! +0(?)
8I>()!
A! In order that donations to non%stoc#
non%pro*t educational institution may
be exempt from the donorBs gift tax
what conditions must be met by the
donee? (+-)
SUGGESTED ANSWER*
A! In order that donations to non%stoc#
non%pro*t educational institution may
be exempt from the donorBs gift tax it
is reEuired that not more than +1- of the
said gifts shall be used by the donee%
institution for administration purposes!
(/ec! 414(;)(+) 8I>()!
'e&uctions: 7on:'e&ucti+"e Items$ 5ross Income (1999)
3xplain if the following items are
deductible from gross income for income
tax purposes! 'isregard who is the
person claiming the deduction! (,-)
4! >eserves for bad debts!
:! Worthless securities
SUGGESTED ANSWER*
4! RESER#E "$R &D DE&TS are not
allowed as deduction from gross
income! Aad debts must be charged
oC during the taxable year to be allowed
as deduction from gross income! "he
mere setting up of reserves will not give
rise to any deduction! (/ection +0(3)!
8">()!
:! !$RT)LESS SECURITIES which are
ordinary assets are not allowed as
deduction from gross income because
the loss is not reali$ed! ?owever if these
worthless securities are capital assets the
owner is considered to have incurred a
capital loss as of the last day of the
taxable year and therefore deductible to
the extent of capital gains! (,ection 5"(B)
(") N6$!). "his deduction however is not
allowed to a ban# or trust company!
(,ection 5"(4)(&) N6$!).
'e&uctions: 8e3uisites$ 'e&uci+i"ity of a /oss (199=)
.ive the reEuisites for deducibility of a loss!
(,-4
SUGGESTED ANSWER*
"he reEuisites for deducibility of a loss are
4) loss belongs to the taxpayerD
:) actually sustained and charged oC
during the taxable yearD
+) evidenced by a closed and completed
transactionD
0) not compensated by Insurance or
other forms of indemnityD
,) not claimed as a deduction for estate
tax purposes in case of individual
taxpayersD and
H) if it is a casualty loss it is evidenced by a
declaration of loss *led within 0, days
with the AI>!
COMMENT*
"he Euestion is vague! "here are diCerent
#inds of losses recogni$ed as deductible under
the "ax (ode! "hese are losses in general (/ec!
+0Q'R(4)D net operating loss carryover (/ec!
+0Q'R(+)D capital losses (/ec! +0Q'R(0)D 5osses from
wash sales of stoc#s or securities (/ec! +0Q'R
(,) in relation to /ec! +=)D wagering losses
(/ec! +0Q'R(H)D and abandonment losses (/ec!
+0('R(L)! 5osses are also deductible from the
gross estate (/ec! =HQ;R(l)(e) 8I>()!
(onsidering the time allotted for a *ve (,) point
Euestion is only nine (J) minutes the candidates
would not be able to write down a complete
answer! It is suggested that any answer which
states the reEuisites for the deducibility of any of
the above losses be given full credit!
'e&uctions$ Income Tax: A""o1a+"e 'e&uctions (21)
"axpayers whose only income consists of
salaries and wages from their employers
have long been complaining
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that they are not
allowed to
dedu
ct
an
y item
from their gross income for purposes of
computing their net taxable income!
With the passage of the
(omprehensive "ax >eform ;ct of
4JJL is this complaint still valid?
SUGGESTED ANSWER*
8o more! .ross compensation income
earners are now allowed at least an item
of deduction in the form of premium
payments on health andOor
hospitali$ation insurance in an amount not
exceeding &:011 per annum Q/ection
+0(<)R! "his deduction is allowed if the
aggregate family income do not exceed
&:,1!111 and by the spouse in case of
married individual who claims
additional personal exemption for
dependents!
'e&uctions$ Canis#ing 'e&uction$ Purpose (26)
6anishing deduction is availed of by
taxpayers to:
a! (orrect his accounting records to
re)ect the actual deductions made
b! >educe his gross income
c! >educe his output value%added tax
liability
d! >educe his gross estate
(hoose the correct answer! 3xplain! (,-)
SUGGESTED ANSWER*
(') reduce his gross estate! 6anishing
deduction or prop% erty previously taxed
is one of the items of deduction
allowed in computing the net estate of a
decedent (,ection /.AA@A&@ and /.A3@A&@
N6$!).
2xc"usion ; Inc"usion$ 5ross 8eceipts (26)
(ongress enacts a law imposing a ,- tax on
gross receipts of common carriers! "he
law does not de*ne the term "gross
receipts!" 3xpress "ransport Inc! a bus
company plying the <anila%Aaguio route
has time deposits with ;A( Aan#! In :11,
3xpress "ransport earned &4 <illion
interest after deducting the :1- *nal
withholding tax from its time deposits with
the ban#! "he AI> wants to collect a ,-
gross receipts tax on the interest income of
3xpress "ransport without deducting
the :1- *nal withholding tax! Is the AI>
correct? 3xplain! (,-)
ALTERNATI1E ANSWER*
7es! "he term ".ross >eceipts" is broad
enough to include income constructively
received by the taxpayer! "he amount
withheld is paid to the government on its
behalf in satisfaction of withholding taxes!
"he fact that it did not actually receive the
amount does not alter the fact that it is
remitted in satisfaction of its tax
obligations! /ince the income withheld is
an income owned by 3xpress "ransport
the same forms part of its gross receipts
(CIR v. S,-id6a%A C,r*. G.R. N,.
!(4!"!
N,ve56er 23 2))7$.
ALTERNATI1E ANSWER*
8o! "he term "gross receipts" as applied to
the business of a common carrier consists
of revenues from carriage of goods
cargoes and passengers! It does not
comprehend or include interest income
which is properly described as "Other
Income!"
(NOTA BENE: This 7uestion pertains to a
percentage tax on #ross $eceipts which is
excluded from the 3ar coverage)
2xc"usion (s) 'e&uction from 5ross Income (21)
'istinguish "3xclusion from .ross
Income" from "'eductions Irom .ross
Income"! .ive an example of each! (:-)
SUGGESTED ANSWER*
EXCLUSIONS 1r,5 gr,++ i%c,5e refer
to a )ow of wealth to the taxpayer which
are not treated as part of gross income
for purposes of computing the taxpayerSs
taxable income due to the following
reasons: (4) It is exempted by the
fundamental lawD (:) It is exempted by
statuteD and (+) It does not come within the
de*nition of income! (/ection H4 >> 8o! :)!
DEDUCTIONS 1r,5 gr,++ i%c,5e on the
other hand are the amounts which the law
allows to be deducted from gross income in
order to arrive at net income!
3xclusions pertain to the computation of
gross income while deductions pertain
to the computation of net income!
3xclusions are something received or
earned by the taxpayer which do not
form part of gross income while
deductions are something spent or paid
in earning gross income!
3xample of an exclusion from gross income
is proceeds of life insurance received by
the bene*ciary upon the death of the
insured which is not an income or 4+th
month pay of an employee not exceeding
&+1!111 which is an income not recogni$ed
for tax purposes! 3xample of a deduction is
business rental!
2xc"usions ; Inc"usions: Benefits on Account of
In@ury (1999)
<r! Infante was hit by a wayward bus while on
his way to wor#! ?e survived but had to
pay &011!111!11 for his hospitali$ation! ?e
was unable to wor# for six months which
meant that he did not receive his usual salary
of & 41111!11 a month or a total of
&H1!111!11! ?e sued the bus company and
was able to obtain a *nal 2udgment
awarding him &011!111!11 as
reimbursement for his hospitali$ation
&H1!111 for the salaries he failed to receive
while hospitali$ed &:11111!11 as moral
damages for his pain and suCering and
& 411111!11 as exemplary damages! ?e
was able to collect in full from the 2udgment!
?ow much income did he reali$e when he
collected on the 2udgment? 3xplain!
SUGGESTED ANSWER*
8one! "he &:11!111 moral and exemplary
damages are compensation for in2uries
sustained by <r! Infante! "he &011!111!11
reimbursement for hospitali$ation expenses
and the &H1!111!11 for salaries he failed
to receive are Bamounts of any damages
received whether by suit or agreement on
account of such in2uries!B /ection :=(b)(,) of
the "ax (ode speci*cally exclude these
amounts from the gross income of the
individual in2ured! (/ection :=(b) 8I>( and
/ec! H+ >ev! >eg! 8o! :)
ALTERNATI1E ANSWER*
"he income reali$ed from the 2udgment
is only the recovery for lost salaries! "his
constitutes taxable income because were it not
for the in2ury he could have received it from
his employer as compensation income! ;ll
the other amounts received are either
compensation for in2uries or damages
received on account of such in2uriesB
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which are exclusions from gross
income pursuant to /ection :=(b)(,) of the
"ax (ode!
2xc"usions ; Inc"usions: 2xecuti(e Benefits (1999)
<r! ;drian is an executive of a big business
corporation! ;side from his salary his
employer provides him with the following
bene*ts: free use of a residential house
in an exclusive subdivision free use of
a limousine and membership in a
country club where he can entertain
customers of the corporation! Which of these
bene*ts if any must <r! ;drian report as
income? 3xplain!
SUGGESTED ANSWER*
<r! ;drian must report the imputed
rental value of the house and limousine as
income! If the rental value exceeds the
personal needs of <r! ;drian because he is
expected to provide accommodation in
said house for company guests or the car
is used partly for business purpose then <r!
;drian is entitled only to a ratable rental
value of the house and limousine as
exclusion from gross income and only a
reasonable amount should be reported as
income! "his is because the free housing and
use of the limousine are given partly for
the convenience and bene*t of the
employer (C,--ec/,r v+. He%der+,%$.
ALTERNATI1E ANSWER*
>emuneration for services although not
given in the form of cash constitutes
compensation income! ;ccordingly the
value for the use of the residential house is
part of his compensation income which he
must report for income tax purposes!
?owever if the residential house given to
<r! ;drian for his free use as an executive is
also used for the bene*t of the
corporationOemployer such as for
entertaining customers of the corporation
only ,1- of the rental value or
depreciation (if the house is owned by the
corporation) shall form part of compensation
income (>;<O 4%=L)!
"he free use of a limousine and the
membership in a country club is not
part of <r! ;drianBs compensation
income because they were given for
the bene*t of the employer and are
considered to be necessary incidents for
the proper performance of his duties as
an executive of the corporation!
"he membership fee in the country club
needs to be reported as income! It
appears that the membership of <r!
;drian to the country club is primarily for the
bene*t and convenience of the employer!
"his is to enable <r! ;drian to entertain
company guests (C,--ec/,r v+.
He%der+,%$.
2xc"usions ; Inc"usions$ Assets$ 8esi&ent A"ien (29)
>alph 'onald an ;merican citi$en was a
top executive of a F!/! company in the
&hilippines until he retired in 4JJJ! ?e
came to li#e the &hilippines so much that
following his retirement he decided to spend
the rest of his life in the country! ?e applied
for and was granted a permanent resident
status the following year! In the spring of
:110 while vacationing in Orlando
Ilorida F/; he suCered a heart attac# and
died! ;t the time of his death he left the
following properties: (a) ban# deposits with
(itiban# <a#ati and (itiban# Orlando
IloridaD (b) a resthouse in Orlando IloridaD
(c) a condominium unit in
<a#atiD (d) shares of stoc# in the &hilippine
subsidiary of the F!/! (ompany where he
wor#edD (e) shares of stoc# in /an <iguel
(orp! and &5O"D (f) shares of stoc# in
'isney World in IloridaD (g) F!/! treasury
bondsD and (g) proceeds from a life
insurance policy issued by a F!/!
corporation!
Which of the foregoing assets shall be
included in the taxable gross estate in the
&hilippines? 3xplain! (,-)
SUGGESTED ANSWER*
;ll of the properties enumerated except (g)
the proceeds from life insurance are
included in the taxable gross estate in the
&hilippines! >alph 'onald is considered a
resident alien for tax purposes since he is
an ;merican (iti$en and was a permanent
resident of the &hilippines at the time of his
death! "he value of the gross estate of a
resident alien decedent shall be determined
by including the value at the time of his
death of all property real or personal
tangible or intangible wherever situated!
(/ec! =, 8I>()
"he other item (g) proceeds from a life
insurance policy may also be included on the
assumption that it was >alph 'onald who
too# out the insurance upon his own life
payable upon his death to his estate! (/ec!
=,Q3R 8I>()
2xc"usions ; Inc"usions$ Benefits on Account of
'eat# (1996)
@ an employee of ;A( (orporation
died! ;A( (orporation gave @Ss widow an
amount eEuivalent to @Ss salary for one
year! Is the amount considered taxable
income to the widow? Why?
SUGGESTED ANSWER*
8o! "he amount received by the
widow from the decedentBs employer
may either be a gift or a separation
bene*t on account of death! Aoth are
exclusions from gross income pursuant
to provisions of /ection :=(b) of the "ax
(ode!
ALTERNATI1E ANSWER*
8o! /ince the amount was given to the
widow and not to the estate it becomes
obvious that the amount is more of a gift!
In one F!/! tax case (E+/a/e ,1
He--+/r,5 v+. C,55i++i,%er 2( T.C. "!')
it was held that payments to the widow of
the president of a corporation of the
amount the president would have received
in salary if he lived out the year constituted
a gift and not an income!
"he controlling facts which would lead to
the conclusion that the amount received by
the widow is not an income are as follows:
#$ the gift was made to the widow
rather than the estate:
4$ there was no obligation for the
corporation to ma#e further payments
to the deceasedD
"$ the widow had never wor#ed for the
corporationD
!)$ the corporation received no economic
bene*tD and
!!$ the deceased had been fully
compensated for his services
(E+/a/e ,1 S0d%e0 Car/er v+.
C,55i++i,%er (37 F. 2d '! (2dCir.
!"#!)!
2xc"usions ; Inc"usions$ Benefits on Account of In@ury
(29)
M> was a passenger of an airline that crashed!
?e survived the accident but sustained
serious physical in2uries which reEuired
hospitali$ation for + months!
Iollowing negotiations with the airline and
its insurer an agreement
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was reached under the terms of
which M> was
paid the following amounts:
&,11111!11 for his hospitali$ationD
&:,1111!11 as moral damagesD and
&+11111!11 for loss of income during
the period of his treatment and
recuperation! In addition M> received from
his employer the amount of &:11111!11
representing the cash eEuivalent of his
earned vacation and sic# leaves!
Which if any of the amounts he received
are sub2ect to income tax? 3xplain! (,-)
SUGGESTED ANSWER*
;ll amounts received from the
airline company are excluded from
gross income! Fnder /ec! +:(A)(0) of the
8I>( amounts of damages received
whether by suit or agreement on account
of personal in2uries or sic#ness are
excluded from gross income! /ince the
amounts received from the airline
company were received as damages by
agreement on account of personal
in2uries all shall be excluded from M>Bs
gross income!
"he amount of &:11111!11 less the
eEuivalent of not more than 41 days of
vacation leave received by M> from his
employer is sub2ect to income tax under
/ec! :!L=!4 (a) (L) of >!>! 8o! :%J=!
2xc"usions ; Inc"usions$ !ompensation for
persona" in@uries or sicBness (24)
@ while driving home from his oCice
was seriously in2ured when his
automobile was bumped from behind by a
bus driven by a rec#less driver! ;s a result
he had to pay &:11111!11 to his
doctor and &411 111!11 to the
hospital where he was con*ned for
treatment! ?e *led a suit against the bus
driver and the bus company and was
awarded and paid actual damages of &+11
111!11 (for his doctor and hospitaliJation
bills) &411111!11 by way of moral
damages and &,1111!11 for what he
had to pay his attorney for bringing his
case to court! Which if any of the
foregoing awards are taxable income to @
and which are not? 3xplain! (=-)
SUGGESTED ANSWER*
8othing is taxable! Fnder the "ax
(ode any amount received as
compensation for personal in2uries or
sic#ness plus the amounts for any
damages received whether by suit or
agreement on account of such in2uries or
sic#ness shall be excluded from gross
income! /ince the entire amount of
&0,1 111!11 received are award of
damages on account of the in2uries
sustainedD all shall be excluded from his
gross income! Obviously these damages
are considered by law as mere return of
capital! (/ection +:(A)(0) 4JJL "ax (ode)
2xc"usions ; Inc"usions$ Faci"ities or Pri(i"eges$
0i"itary !amp (1999)
(apt! (anuto is a member of the ;rmed
Iorces of the &hilippines! ;side from
his pay as captain the government
gives him free uniforms free living Euarters
in whatever military camp he is assigned
and free meals inside the camp! ;re
these bene*ts income to (apt! (anuto?
3xplain!
SUGGESTED ANSWER*
8o the free uniforms free living Euarters
and the free meals inside the camp are
not income to (apt! (anute because these
are facilities or privileges furnished by the
employer for the employerBs
convenience which are necessary
incidents to proper performance of the
military personnelBs duties!
2xc"usions ; Inc"usions$ 5ifts o(er an& a+o(e
t#e 8etirement Pay (1999)
<r! Nuiro$ wor#ed as chief accountant of a
hospital for forty%*ve years! When he
retired at H, he received retirement pay
eEuivalent to two monthsB salary for every
year of service as provided in the hospital AI>
approved retirement plan! "he Aoard of
'irectors of the hospital felt that the
hospital should give Nuiro$ more than what
was provided for in the hospitalBs retirement
plan in view of his loyalty and invaluable
services for forty%*ve yearsD hence it resolved
to pay him a gratuity of &4 <illion over and
above his retirement pay!
taxed the &4 <il% lion as part of the gross
compensation income of Nuiro$ who
protested that it was excluded from income
because (a) it was a retirement pay and (b)
it was a gift!
4) Is <r! Nuiro$ correct in claiming that
the additional &4 <illion was
retirement pay and therefore
excluded from income? 3xplain!
:) Is <r! Nuiro$ correct in claiming that
the additional &4 <illion was gift
and therefore excluded from
income? 3xplain!
SUGGESTED ANSWERS*
4) 8o! "he additional &4 million is not a
retirement pay but a part of the gross
compensation income of <r! Nuiro$! "his
is not a retirement bene*t received in
accordance with a reasonable private
bene*t plan maintained by the employer as
it was not paid out of the retirement plan!
;ccordingly the amount received in excess
of the retirement bene*ts that he is
entitled to receive under the AI>%approved
retirement plan would not Eualify as an
exclusion from gross income!
:) 8o! "he amount received was in
consideration of his loyalty and invaluable
services to the company which is clearly a
compensation income received on account
of employment! Fnder the employerBs
Bmotivation testB emphasis should be
placed on the value of <r! Nuiro$ services
to the company as the compelling reason
for giving him the gratuity hence it
should constitute a taxable income! "he
payment would only Eualify as a gift if there
is nothing but Bgood will esteem and
#indnessB which motivated the employer
to give the gratuity!
(S/,%/,% v+. U.S. !4' F. S.**. 7"7$. /uch is
not the case in the herein problem!
ALTERNATI1E ANSWER*
7es! "he 4 million is not compensation income
sub2ect to income tax but a gift from his
employer! "here was no evidence presented
to show that he was not fully compen% sated for
his 0, years of service! If his services
contributed in a large measure to the success
of the hospital it did not give rise to a
recoverable debt! "he &4 million is purely a
gratuity from the company! It is a taxable
gift to the transferor! Fnder the "ax (ode
gifts are excluded from gross income
therefore exempt from income tax! (/ec!
:=Gb)(+) 8I>(D Pir,va%, v+. C,55i++i,%er)
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2xc"usions ; Inc"usions$ IT8$ 14t# mont# pay
an& &e minimis +enefits (29)
/tate with reasons the tax treatment of
the following in the preparation of
annual income tax returns: 4+th month
pay and de minimis bene*tsD
SUGGESTED ANSWER*
"he !7/: 5,%/: *a0 not exceeding
&+1111!11 shall not be reported in the
income tax return because it is excluded
from gross income (,ec. 5&A3@A'@ Ae@
N6$!) "he amount of the 4+th month
pay in excess of &+1111!11 shall be
reported in the annual income tax return!
De 5i%i5i+ 6e%eF/+ which do not
exceed the ceilings are excluded from
gross income and not to be considered
for determining the &+1111!11
ceiling hence not reportable in the
annual income tax return! (,ec.
&.'/.%AA@A5@ $.$. &-*/ as amended by
,ec. &.55 A!@ and further amended by
$.$. No. /-&((()
2xc"usions ; Inc"usions$ IT8$ 'i(i&en&s recei(e& +y
a &omestic corporation (29)
the following in the preparation of annual
income tax returns: 'ividends received
by a domestic corporation from (i)
another domestic corporationD and (ii) a
foreign corporationD
SUGGESTED ANSWER*
(i) 'ividends received by a domestic
corporation from a domestic corporation
shall not be sub2ect to tax (/ec! :LQ'R
Q0R 8I>() hence excluded from the
income tax return!
(ii)'ividends received by a domestic
corporation from a foreign corporation
form part of the gross income and are
accordingly sub2ect to net income tax
hence included in the annual I"> (/ec!
0:Q;RQ:RQbR 8I>() hence must be
included in the income tax return!
2xc"usions ; Inc"usions$ IT8$ Income rea"i?e& from
sa"e (29)
the following in the preparation of
annual income tax returns: Income
reali$ed from sale of: (i) capital assetsD
and (ii) ordinary assets!
SUGGESTED ANSWER*
(i)Income reali$ed from sale of capital
assets is sub2ect to the *nal withholding
tax at source and therefore excluded from
the Income "ax >eturn (/ec! :0Q(R and Q'R
8I>()D
(ii) Income reali$ed from sale of ordinary
assets is part of .ross Income included in
the Income "ax >eturn! (/ec! +:Q;RQ+R
8I>()
2xc"usions ; Inc"usions$ IT8$ Interest on &eposits (29)
income tax returns: Interest on deposits
with: (i) A&I Iamily Aan#D and (ii) a
local oCshore ban#ing unit of a foreign
ban#D
SUGGESTED ANSWER*
Aoth items are excluded from the income tax
return: (i) Interest income from any
currency ban# deposit is considered
passive income from sources within the
&hilippines and sub2ect to *nal tax! /ince it is
sub2ect to
*nal tax it is not to be included in the
annual I">! (/ec! :0QARQ4R 8I>() (u) /ame
as 8o! (2)!
2xc"usions ; Inc"usions$ IT8$ Procee&s of "ife insurance
(29)
income tax returns: &roceeds of life
insurance received by a child as
irrevocable bene*ciaryD
SUGGESTED ANSWER*
8ot to be reported in the annual income
tax returns because the proceeds of the
life insurance are excluded from gross
income! &roceeds of 5ife insurance
policies paid to the heirs or bene*ciaries
upon the death of the insured is an
exclusion from gross income! (,ec.5&A3@
Al@N6$!)
2xc"usions ; Inc"usions$ /ife Insurance Po"icy (24)
On +1 Mune :111 @ too# out a life insurance
policy on his own life in the amount of
&:111111!11! ?e designated his wife 7
as irrevocable bene*ciary to
&4111111!11 and his son K to the
balance of &4111111!11 but in the latter
designation reserving his right to substitute
him for another! On 14 /eptember :11+ @
died and his wife and son went to the
insurer to collect the proceeds of @Bs life
insurance policy! (=-)
(a) ;re the proceeds of the
insurance sub2ect to income tax on
the part of 7 and K for their
respective shares? 3xplain!
(b) ;re the proceeds of the insurance to
form part of
the gross estate of @? 3xplain!
SUGGESTED ANSWERS*
(a) 8o! "he law explicitly provides that
proceeds of life insurance policies paid to
the heirs or bene*ciaries upon the death of
the insured are excluded from gross income
and is exempt from taxation! "he
proceeds of life insurance received
upon the death of the insured
constitute a compensation for the loss of
life hence a return of capital which is
beyond the scope of income taxation!
(,ection 5&(3)(%) %**' Tax !ode)
(b)Only the proceeds of &4111111!11 given
to the son K shall form part of the .ross
3state of @! Fnder the "ax (ode proceeds
of life insurance shall form part of the
gross estate of the decedent to the extent
of the amount receivable by the
bene*ciary designated in the policy of
the insurance except when it is
expressly stipulated that the designation
of the bene*ciary is irrevocable! ;s stated
in the problem only the designation of 7 is
irrevocable while the insuredOdecedent
reserved the right to substitute K as
bene*ciary for another person! ;ccordingly
the proceeds received by 7 shall be excluded
while the proceeds received by K shall be
included in the gross estate of @! (,ect;on
/-(4) %**' Tax !ode)
2xemptions: !#arita+"e Institutions (2)
;rticle 6I /ection := (+) of the 4J=L
&hilippine (onstitution provides that
charitable institutions churches and
personages or covenants appurtenant
thereto mosEues non%pro*t cemeteries and
all lands buildings and improvements
actually directly and
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73
exclusively used for religious
charitable or educational purposes shall
be exempt from taxation!
a) "o what #ind of tax does this exemption
apply? (:-)
SUGGESTED NS!ER:
"his exemption applies only to property
taxes! What is exempted is not the
institution itself but the lands buildings
and improvements actually directly
and exclusively used for religious
charitable and educational purposes!
(C,55i++i,%er ,1 I%/er%a- Reve%.e v. C,.r/
,1
A**ea-+ e/ a- G.R. N,. !2()(7 Oc/,6er !(
!""4$.
b) Is proof of actual use necessary for
tax exemption
purposes under the (onstitution? (+-)
SUGGESTED ANSWER*
7es because tax exemptions are strictly
construed against the taxpayer! "here
must be evidence to show that the
taxpayer has complied with the
reEuirements for exemption!
Iurthermore real property taxation is
based on use and not on ownership hence
the same rule must also be applied for real
property tax exemptions!
2xemptions: !#arita+"e Institutions$ !#urc#es (1996)
"he (onstitution exempts from taxation
charitable in% stitutions churches
parsonages or convents appurtenant
thereto mosEues arid non%pro*t
cemeteries and lands buildings and
improvements actually directly and
exclu% sively used for religious
charitable and educational purposes!
<ercy ?ospital is a 411%bed hospital
organi$ed for charity patients! (an said
hospital claim exemption from taxation
under the above%Euoted constitutional
provision? 3xplain!
SUGGESTED ANSWER*
7es! <ercy ?ospital can claim
exemption from taxation under the
provision of the (onstitution but only
with respect to real property taxes
provided that such real properties are
used actually directly and exclusively
for charitable purposes!
2xemptions: 2&ucationa" institution (2*)
/uppose that @7K (olleges is a
proprietary educational institution owned
by the ;rchbishopBs family rather than the
;rchdiocese which of those above cited
income and donation would be exempt
from taxation? 3xplain brie)y! (,-)
SUGGESTED ANSWER*
If @7K (olleges is a proprietary
educational institution all of its income
from school related and non%school related
activities will be sub2ect to the income
tax based on its aggregate net income
derived from both activities (/ection :L(A)
8<()! ;ccordingly all of the income
enumerated in the problem will be taxable!
"he donation of lot and building will
li#ewise be sub2ect to the donorBs tax
because a donation to an educational
institution is exempt only if the school is
incorporated as a non%stoc# entity paying
no dividends!
/ince the donee is a proprietary
educational institution the donation is
taxable (/ection 414(;@+) 8M>()!
2xemptions: 5ifts ; 'onations (199*)
In 4JJ4 Imelda gave her parents a
(hristmas gift of & 411111!11 and a
donation of &,1111!11 to her parish
church! /he also donated a parcel of
land for the construction of a
building to the &F& ;lumni
;ssociation a non%stoc# non%pro*t
organi$ation! &ortions of the building shall
be leased to generate income for the
association!
4) Is the (hristmas gift of &
411111!11 to ImeldaBs parents sub2ect to
tax?
:) ?ow about the donation to the parish
church?
+) ?ow about the donation to the &!F!&
;lumni ;sso% ciation?
SUGGESTED ANSWER*
4) "he (hristmas gift of &411111!11 given
by Imelda to her parents is taxable up
to &,1111!11 because under
the law
(,ec. *&
(a) of the
Tax
!od
e)
net gifts
not
exceeding &,1111!11 are
exempt!
2$ "he donation of &,1111!11 to the
parish church even assuming that it
is exclusively for religious purposes is
not tax%exempt because the exemption
granted under ;rticle 6I /ec!
:=(+) of the (onstitution applies
only to real estate taxes (L-ad,c v.
C,55i++i,%er !(SCRA2"2$.
7$ "he donation to the &!F!&! ;lumni
;ssociation does not also Eualify for
exemption both under the (onstitution
and the aforecited law because it is not an
educational or research organi$ation
corporation
institution foundation or trust!
ALTERNATI1E ANSWER*
'onation to the &!F!&! ;lumni ;ssociation
is exempt from donorBs tax if it is
proven that the association is a
nonstoc# non%pro*t charitable
association paying no dividends
governed by trustees who receive
no compensation and devoting all its
income to the accomplishment and
promotion of the purposes
enumerated in its articles of incorporation!
8ot more than +1- of the gift should
be used for administration purposes by
the donee!
2xemptions: Dea& of t#e Fami"y: (199=)
;rnold who is single cohabits with 6ilma
who is legally married to Kachary! ;rnold
and 6ilma have six minor children who
live and depend upon ;rnold for their chief
support! "he children are not married
and not gainfully employed!
4) Ior income tax purposes may ;rnold
be considered as "head of a family?"
Q+-R
:) Is ;rnold entitled to deduct from his
gross income an additional exemption
for each of his illegitimate
child? Q:-R
SUGGESTED ANSWER*
%) 7es! ;n unmarried man who has
illegitimate minor children who live with
him and depend upon him for their chief
support is considered as "head of the
family" ($$ No. &-*/ implementing ,ection
5- N6$!).
&) 8o! ;rnold is only entitled to deduct
additional personal exemption for four
(0) out of the six (H) illegitimate
children! "he maximum number of
dependents for purposes of the additional
personal exemption is four! (/ec! +,
8I>()!
2xemptions: 7on:Profit 2&ucationa" Institutions (2)
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Fnder ;rticle @"6 /ection 0 (+) of the
4J=L
&hilippine (onstitution all revenues and
assets of non% stoc# nonpro*t
educational institutions used actually
directly and exclusively for
educational purposes are exempt from
taxes and duties! ;re income derived from
dormitories canteens and boo#stores as
well as interest income on ban#
deposits and yields from deposit
substitutes automatically exempt from
taxation? 3xplain! (,-)
SUGGESTED ANSWER*
8o! "he interest income on ban# deposits
and yields from deposit substitutes are not
automatically exempt from taxation! "here
must be a showing that the incomes are
included in the schoolBs annual
information return and duly audited
*nancial statements together with:
4! (erti*cations from depository
ban#s as to the amount of
interest income earned from
passive investments not sub2ect to the
:1- *nal withholding taxD
:! (erti*cation of actual direct and
exclusive utili$ation of said income for
educational purposesD
+! Aoard resolution on proposed pro2ect
to be funded out of the money
deposited in ban#s or placed in
money mar#et placements (<inance
Bepartment Crder No. %"*-*- issued
November &" %**-) which must be
used actually directly and exclusively
for educational purposes!
"he income derived from dormitories
canteens and boo#stores are not also
automatically exempt from taxation!
"here is still the reEuirement for
evidence to show actual direct and
exclusive use for educational purposes!
It is to be noted that the 4J=L
&hilippine (onstitution does not
distinguish with respect to the source
or origin of the income! "he distinction
is with respect to the use which
should be actual direct and exclusive
for educational purposes!
(onseEuently the provisions of /ec! +1 of
the 8I>( of 4JJL that a non%stoc#
and nonpro*t educational institution is
exempt from taxation only "in respect
to income received by them as such"
could not aCect the constitutional tax
exemption! Where the (onstitution
does not distinguish with respect to source
or origin the "ax (ode should not ma#e
distinctions!
2xemptions: 7on:Profit 2ntity$ Anci""ary Acti(ity
; Inci&enta" %perations (199*)
"he Fniversity of Aigaa a non%stoc# non%
pro*t entity operates a canteen for its
students and a boo#store inside the campus!
It also operates two dormitories for its
students one of which is in the campus! Is the
Fniversity liable to pay income taxes for
the operation of the: 4) canteen? :)
boo#store? +) two dormitories?
SUGGESTED ANSWER*
%) Ior the operation of the canteen inside the
campus the income thereon being incidental
to the operations of the Fniversity as a
school is exempt (Art. I62 (") (5)
!onstitution: B4!, $egulations No. %5'-/'
Bec. %. %*/').
&) Ior the same reasons the Fniversity of
Aigaa is not liable to pay income taxes
for the operation of the
boo#store since this is an ancillary activity
the conduct of which is carried out within
the school premises!
+) "he Fniversity of Aigaa shall not be
liable to pay income taxes for the
operation of the dormitory located in the
campus for same reasons as the foregoing!
?owever the latter shall be liable for
income taxes on income from operations of
the dormitory located outside the school
premises!
2xemptions: 7on:StocBE 7on:Profit Association (22)
@7K Ioundation is a non%stoc# non%pro*t
association duly organi$ed for religious
charitable and social welfare purposes! 5ast
Manuary + :111 it sold a portion of its lot
used for religious purposes and utili$ed
the entire proceeds for the construction of
a building to house its free 'ay and 8ight
(are (enter for children of single parents!
In order to subsidi$e the expenses of the 'ay
and 8ight (are (enter and to support its
religious charitable and social welfare
pro2ects the Ioundation leased the +11%
sEuare meter area of the second and third
)oors of the building for use as a boarding
house! "he Ioundation also operates a
canteen and a gift shop within the premises
all the income from which is used actually
directly and exclusively for the purposes
for which the Ioundation was organi$ed!
A. (onsidering the constitutional provision
granting tax exemption to non%stoc#
corporations such as those formed
exclusively for religious charitable or
social welfare purposes explain the
meaning of the last paragraph of said
/ec! +1 of the 4JJL "ax (ode which
states that K6ncome of whatever >ind and
character of the foregoing organiJations
from any of their properties real or
personal or from any of their activities
conducted for proEt regardless of the
disposition made of such income shall
be
sub1ect to tax imposed under this !ode.0
(,-)
SUGGESTED ANSWER*
;! "he exemption contemplated in the
(onstitution covers real estate tax on real
properties actually directly and exclusively
used for religious charitable or social
welfare purposes! It does not cover
exemption from the imposition of the income
tax which is within the context of /ection +1
of the "ax (ode! ;s a rule non%stoc# non%
pro*t corporations organi$ed for religious
charitable or social welfare purposes are
exempt from income tax on their income
received by them as such! ?owever if these
religious charitable or social welfare
corporations derive income from their
properties or any of their activities
conducted for pro*t the income tax shall be
imposed on said items of income irrespective
of their disposition! (Sec. 7) NIRC? CIR v
BMCA GR N,. !2()(7 !""4)!
A! Is the income derived by @7K Ioundation
from the sale of a portion of its lot
rentals from its boarding house and the
operation of its canteen and gift shop
sub2ect to tax? 3xplain! (,-)
SUGGESTED ANSWER*
A! 7es! "he income derived from the sale of
lot and rentals from its boarding house are
considered as income from properties which
are sub2ect to tax! 5i#ewise the income
from the operation of the canteen and gift shop
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are income
from its
activiti
es
conduct
ed
fo
r
pro*t which are sub2ect to tax! "he
income tax attaches irrespective of the
disposition of these incomes! (Sec. 7)
NIRC? CIR v. BMCA GR N,. !2()(7
!""4)!
2xemptions: Pri?e of Peace Poster !ontest (2)
Mose <iranda a young artist and designer
received a pri$e of &411111!11 for
winning in the on%the%spot peace poster
contest sponsored by a local 5ions (lub!
/hall the reward be included in the
gross income of the recipient for tax
purposes? 3xplain! (+-)
SUGGESTED ANSWER*
8o! It is not includable in the gross
income of the recipient because the same
is sub2ect to a *nal tax of :1- the amount
thereof being in excess of &41!111 (,ec.
&"(3)L%) N6$! of %**'). "he pri$e
constitutes a taxable income because it
was made primarily in recognition of
artistic achievement which he won due to an
action on his part to enter the contest! A,ec.
5& (3) (') (c) N6$! of %**'@
/ince it is an on%the%spot contest it is
evident that he must have 2oined the
contest in order to earn the pri$e or
award!
2xemptions: Pri?es ; A1ar&s$ At#"etes (1996)
Onyoc an amateur boxer won in a
boxing competition sponsored by the .old
(up Aoxing (ouncil a sports association
duly accredited by the &hilippine
Aoxing ;ssociation! Onyoc received the
amount of &,11111 as his pri$e which
was donated by ;yala 5and (orporation!
"he AI> tried to collect income tax on
the amount received by Onyoc and
donorBs tax from ;yala 5and (orporation
which taxes Onyoc and ;yala 5and
(orporation refuse to pay! 'ecide!
SUGGESTED ANSWER*
"he pri$e will not constitute a taxable
income to Onyoc hence the AI> is not
correct in imposing the income tax! >!;!
8o! L,0J explicitly provides that B;ll
pri$es and awards granted to athletes in
local and international sports
tournaments and competitions held in the
&hilippines or abroad and sanctioned by
their respective national sports
associations shall be exempt from income
tax"!
8either is the AI> correct in collecting
the donorBs tax from ;yala 5and
(orporation! "he law is clear when it
categorically stated ""hat the donorBs of
said pri$es and awards shall be exempt
from the payment of the donorBs tax!"
2xemptions: 8etirement Benefits: -orB Separation (1999)
; (o! a &hilippine corporation has two
divisions 9 manufacturing and
construction! 'ue to the economic
situation it had to close its construction
division and lay% oC the employees in that
division! ; (o! has a retirement plan
approved by the AI> which reEuires a
minimum of ,1 years of age and 41
years of service in the same employer at
the time of retirement! "here are : groups
of employees to be laid oC:
4) 3mployees who are at least ,1 years of
age and has at 41 years of service at
the time of termination of employment!
:) 3mployees who do no meet either the
age or length of service ; (o! plans to
give the following:
a! Ior category (;) employees % the
bene*ts under the AI> approved
plan plus an ex gratia payment of
one month of every year of
service!
b! Ior category (A) employees % one
month for
every year of service!
Ior both categories the cash
eEuivalent of
unused vacation and sic# leave
credits!
; (o! see#s your advice as to whether
or not it will sub2ect any of these
payments to W"! 3xplain your advice!
(,-)
SUGGESTED ANSWER*
Ior category employees all the bene*ts
received on account of their separation are
not sub2ect to income tax hence no
withholding tax shall be imposed! "he bene*ts
received under the AI>%approved plan upon
meeting the service reEuirement and age
reEuirement are explicitly excluded from
gross income! "he ex gratia payment also
Euali*es as an exclusion from gross income
being in the nature of bene*t received on
account of separation due to causes beyond
the employeesB control! (/ection +:(A)
8I>()! "he cash eEuivalent of unused vacation
and sic# leave credits Euali*es as part
of separation bene*ts excluded from gross
income (CIR v. C,.r/ ,1 A**ea-+ GR N,.
"'O!' Oc/,6er !# !""!)!
Ior category A employees all the
bene*ts received by them will also be
exempt from income tax hence not
sub2ect to withholding tax! "hese are
bene*ts received on account of
separation due to causes beyond the
employeesB control which are speci*cally
excluded from gross income! (,ection
5&(3) N6$!).
ALTERNATI1E ANSWER6
;ll of the payments are not sub2ect to
income tax and should not also be
sub2ect to withholding tax! "he
employees were laid oC hence separated
for a cause beyond their control!
(onseEuently the amounts to be paid by
reason of such involuntary separation
are excluded from gross income irrespective
of whether the employee at the time of
separation has rendered less than ten years
of service andOor is below *fty years of
age!
(,ection 5&(3) N6$!).
2xemptions: Separation Pay (199*)
&edro >eyes an oCicial of (orporation @
as#ed for an "earlier retirement" because
he was emigrating to ;ustralia! ?e was
paid &:!111!111!11 as separation pay in
recognition of his valuable services to the
corporation!
Muan (ru$ another oCicial of the same
company was separated for occupying a
redundant position! ?e was given
&4111!111!11 as separation pay!
Mose Aautista was separated due to his failing
eyesight! ?e was given &,11!111!11 as
separation pay!
;ll the three (+) were not Euali*ed to
retire under the AI>%approved pension plan
of the corporation!
4) Is the separation pay given to >eyes
sub2ect to income tax?
:) ?ow about the separation pay received by
(ru$?
+) ?ow about the separation pay received by
Aautista?
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SUGGESTED ANSWER*
4) "he separation pay given to >eyes
is sub2ect to income tax as compensation
income because it arises from a service
rendered pursuant to an employer%
employee rela% tionship! It is not
considered an exclusion from gross
income because the rule in taxation is
tax construed in strictissimi 1uris or the
rule on strict Interpretation of tax
exemptions!
:) "he separation pay received by (ru$ is
not sub2ect to income tax because his
separation from the company was
involuntary (/ec! := b (L) "ax (ode)!
+) "he separation pay received by Aautista
is li#ewise not sub2ect to tax! ?is
separation is due to disability hence
involuntary! Fnder the law separation
pay received through involuntary causes
are exempt from taxation!
2xemptions: Separation Pay (1999)
<r! Macobo wor#ed for a manufacturing
*rm! 'ue to business reverses the *rm
oCered voluntary redundancy program
in order to reduce overhead expenses!
Fnder the program an employee who
oCered to resign would be given
separation pay eEuivalent to his three
monthBs basic salary for every year of
service! <r! Macobo accepted the oCer
and received &011!111!11 as separation
pay under the program!
;fter all the employees who accepted the
oCer were paid the *rm found its
overhead still excessive! ?ence it
adopted another redundancy
program! 6arious unpro*table
departments were closed! ;s a result
<r! Tintanar was separated from the
service! ?e also received &011!111!11 as
separation pay!
4) 'id <r! Macobo derive income when he
received his separation pay? 3xplain!
:) 'id <r! Tintanar derive income when
he received his separation pay? 3xplain!
SUGGESTED ANSWER*
4) 7es <r! Macobo derived a taxable
income when he received his separation
pay because his separation from
employment was voluntary on his part in
view of his oCer to resign! What is
excluded from gross income is any
amount received by an oCicial or
employee as a conseEuence of separation
of such oCicial or employee from the
service of the employer for any cause beyond
the control of the said oCicial or employee
(/ec := 8I>()!
ALTERNATI1E ANSWER*
8o <r! Macobo did not derive any taxable
income because the separation pay was
due to a retrenchment policy adopted by
the company so that any employee
terminated by virtue thereof is considered
to have been separated due to causes
beyond the employeeBs control! "he
voluntary redundancy program reEuiring
employees to ma#e an oCer to resign is
only considered as a tool to expedite the
lay%oC of excess manpower whose services
are no longer needed by the employer
but is not the main reason or cause for
the termination
SUGGESTED ANSWER*
:) 8o <r! Tintanar did not derive any
income when he received his separation
pay because his separation from
employment is due to causes beyond his
control! "he separation was involuntary as
it was a conseEuence of the closure of
various unpro*table departments
pursuant to the redundancy program!
2xemptions: Separation Pay (29)
(ompany ; decides to close its
operations due to continuing losses and
to terminate the services of its employees!
Fnder the 5abor (ode employees who are
separated from service for such cause are
entitled to a minimum of one%half month pay
for every year of service! (ompany ; paid
the eEuivalent of one month pay for every
year of service and the cash eEuivalent of
unused vacation and sic# leaves as separation
bene*ts!
;re such bene*ts taxable and sub2ect to
withholding tax under the "ax (ode?
'ecide with reasons! (,-)
SUGGESTED ANSWER*
;ll of the bene*ts are not taxable
hence they are not sub2ect to withholding
tax under the "ax (ode! Aene*ts received
as a conseEuence of separation for any
cause beyond the control of the
employees such as closure of business
are excluded from gross income. (,ec. 5&A3@
A.@Ab@ N6$! in relation to ,ec. &Ab@A&@ $.$.
&-*/)
2xemptions: StocB 'i(i&en&s (24)
On 1+ Manuary 4JJ= @ a Iilipino citi$en
residing in the &hilippines purchased one
hundred (411) shares in the capital stoc# of
7 (orporation a domestic company! On 1+
Manuary :111 7 (orporation declared out
of the pro*ts of the company earned after
14 Manuary 4JJ= a hundred percent
(411-) stoc# dividends on all
stoc#holders of record as of +4 'ecember
4JJJ as a result of which @ holding in 7
(orporation became two hundred (:11)
shares! ;re the stoc# dividends received by @
sub2ect to income tax? 3xplain! (=-)
SUGGESTED ANSWER*
8o! /toc# dividends are not reali$ed
income! ;ccordingly the diCerent
provisions of the "ax (ode imposing a tax
on dividend income only includes within its
purview cash and property dividends
ma#ing stoc# dividends exempt from
income tax! ?owever if the distribution
of stoc# dividends is the eEuivalent of
cash or property as when the
distribution results in a change of
ownership interest of the shareholders the
stoc# dividends will be sub2ect to income
tax! (,ection &"(3)(&): ,ection &-(A)M(3):
,ection &/(3)(-)(b) %**' Tax !ode)
2xemptions: Strict"y !onstrue& (1996)
Why are tax exemptions strictly construed
against the taxpayer?
SUGGESTED ANSWER*
"ax exemptions are strictly construed against
the taxpayer because such provisions are
highly disfavored and may almost be said
to be odious to the law (Ma%i-a E-ec/ric
C,5*a%0 v+. Vera '# SCRA 73!)!
"he exception contained in the tax
statutes must be strictly construed against
the one claiming the exemption because
the law does not loo# with favor on tax
exemptions they being contrary to the life%
blood theory which is the underlying basis
for taxes!
2xemptions: Termina" /ea(e Pay (1996)
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; an employee of the (ourt of
;ppeals retired
upon reaching the compulsory age of
H, years! Fpon compulsory retirement ;
received the money value of his
accumulated leave credits in the amount of
&,11!111!11! Is said amount sub2ect to
tax? 3xplain!
SUGGESTED ANSWER*
8o! "he commutation of leave credits
more commonly #nown as terminal leave
pay i!e! the cash eEuivalent of
accumulated vacation and sic# leave
credits given to an oCicer or employee
who retires or separated from the
service through no fault of his own is
exempt from income tax! (BIR R.-i%g
274;"! da/ed N,ve56er 4 !""!?
C,55i++i,%er v. CA a%d E1re% Ca+/a%eda
GR N,. "')!' Oc/,6er !# !""!)!
2xemptions$ !#arita+"e Institutions (26)
"he (onstitution provides "charitable
institutions churches personages or
convents appurtenant thereto mosEues
and non%pro*t cemeteries and all
lands buildings and improvements
actually directly and exclusively used
for religious charitable or educational
purposes shall be exempt from taxation!"
"his provision exempts charitable
institutions and religious institutions
from what #ind of taxes? (hoose
the best answer! 3xplain! (,-)
a! from all #inds of taxes i!e! income
6;" customs duties local taxes and real
property tax
b! from local tax only
c! from value%added tax
d! from real property tax only
e! from capital gains tax only
SUGGESTED ANSWER*
"he provision exemptions charitable
institutions and religious institutions
from (d) >3;5 &>O&3>"7 ";@3/ only!
"he exemption is only for taxes assessed as
property taxes as distinguished from excise
taxes (CIR v.
CA CTA @ BMCA G.R. N,. !2()(7
Oc/,6er !( !""4? L-ad,c v.
C,55i++i,%er ,1 I%/er%a- Reve%.e L;
!"2)! <.%e !'!"'3$.
2xemptions$ 2&ucationa" institution (2*)
@7K (olleges is a non%stoc# non%
pro*t educational institution run by the
;rchdiocese of A& (ity! It collected and
received the following:
(a) "uition fees
(b) 'ormitory fees
(c) >entals from canteen concessionaires
(d) Interest from money%mar#et
placements of the tuition fees
(e) 'onation of a lot and building by school
alumni Which of these above cited income
and donation would
not be exempt from taxation? 3xplain brie)y!
(,-)
SUGGESTED ANSWER*
;! ;ll of the income derived by the non%
stoc# nonpro*t educational institution
will be exempt from taxation provided
they are used actually directly and
exclusively for educational purposes! "he
(onstitution provides that all revenues
and assets of non%stoc# non%pro*t
educational institution which are actually
directly and exclusively used for
educational purposes are exempt from
taxation (,ection " par. 5 Article
I62 %*/' !onstitution).
"he donation is li#ewise exempt from the
donorBs tax if actually directly and
exclusively used for educational purposes
provided not more than +1- of the donation is
used by the donee for administration
purposes! "he donee being a non%
stoc# non%pro*t educational institution
is a Euali*ed entity to receive an exempt
donation sub2ect to conditions prescribed by
law (,ection " par. " Art. I62 %*/'
!onstitution in relation to ,ection
%(%(AI5) N)$!).
;ccordingly none of the cited income
and donation collected and received by
the non%stoc# non%pro*t educational
institution would not be exempt from
taxation!
ALTERNATI1E ANSWER*
"he following receipts by the non%
stoc# nonpro*t educational institution are
not exempt from taxation vi$:
(c) Re%/a-+ 1r,5 Ca%/ee%
C,%ce++i,%aire+! >ental income is
considered as unrelated to the school
operationsD hence taxable (BC< Crder No.
%5'-/' Bec. %. %*/')
(d) I%/ere+/ 1r,5 5,%e0;5arAe/
*-ace5e%/+ ,1 /:e /.i/i,% 1ee+. "he
interest on the placement is taxable (BC<
Crder No. %5'-/'). If however the said
interest is used actually directly and
exclusively for educational purposes as
proven by substantial evidence the same will
be exempt from taxation (CIR v. CA 2"4 SCRA
47 !!""49H.
"he other items of income which were all
derived from school%related activities will
be exempt from taxation in the hands of
the recipient if used actually directly and
exclusively for educational purposes
(/ection 0 par! + ;rticle @"6 4J=L
(onstitution)!
"he donation to a non%stoc# non%
pro*t educational institution will be
exempt from the donorBs tax if used
actually directly and exclusively for
educational purposes and provided that
not more than +1- of the donation is used
for administration purposes (/ection 0
par! 0 ;rt! @M6 4J=L (onstitution in
relation to /ection 414(;<+) 8M>()!
2xemptions$ 2xemptions are <ni"atera" in 7ature (2*)
; law was passed granting tax
exemption to certain industries and
investments for a period of *ve years! Aut
three years later the law was repealed! With
the repeal the exemptions were considered
revo#ed by the AI> which assessed the
investing companies for unpaid taxes
eCective on the date of the repeal of the law!
8&( and T"> companies Euestioned the
assessments on the ground that having
made their investments in full reliance
with the period of exemption granted by the
law its repeal violated their constitutional
right against the impairment of the
obligations and contracts! Is the
contention of the companies tenable or
not? >eason brie)y! (,-)
SUGGESTED ANSWER*
"he contention is not tenable! "he exemption
granted is in the nature of a unilateral tax
exemption! /ince the exemption given is
spontaneous on the part of the
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legislature and no
service or
dut
y or
oth
er
remunerative conditions have been
imposed on the taxpayers receiving the
exemption it may be revo#ed at will by
the legislature (C:ri+/ C:.rc: v.
P:i-ade-*:ia 2( H,&. 7)) 8!4')9)! What
constitutes an impairment of the obligation
of contracts is the revocation of an
exemption which is founded on a
valuable consideration because it ta#es
the form and essence of a contract
(Ca+a%,va+ v. H,rd 4 P:i-. !23 8!")#9?
Ma%i-a Rai-r,ad C,5*a%0 v.
I%+.-ar C,--ec/,r ,1 C.+/,5+ !2 P:i-.
!(' 8!"!39$
2xemptions$ 5o(6t BonusF 5iftsF ; A""o1ances (199*)
In 'ecember 4JJ+ the /angguniang
Aayan authori$ed a (hristmas bonus of
&+111!11 a cash gift of &,111!11 and
transportation and representation
allowance of &H111!11 for each of the
municipal employees!
4) Is the (hristmas bonus sub2ect to any
tax?
:) ?ow about the cash gift?
+) ?ow about the transportation and
representation
allowances?
SUGGESTED ANSWER*
4) "he (?>I/"<;/ AO8F/
given by the /angguniang
Aayan to the municipal employees
is taxable as additional compensation
(/ec! :4 (a)! "ax (ode)!
:) "he cash gift per employee of
&,!111!11 being substantial may be
considered taxable also! "hey
parta#e the nature of additional
compensation income as it is
highly doubtful if municipal
governments are authori$ed to
ma#e gifts in substantial sums such
as this! "hey are not further% more
gifts of "small value" which employers
might give to their employees on
special occasions li#e (hristmas %
items which could be exempt under
AI> >evenue ;udit <emo 8o! 4%=L!
+) "he transportation and representation
allowances are actually
reimbursements for expenses incurred
by the employee for the employer! /aid
allowances spent by the employee
for the employer are designed to
enhance the Euality of the service
that the employer is supposed to
perform for its clientele li#e the people of
the municipality!
2xemptions$ Persona" ; A&&itiona" 2xemption (26)
(harlie a widower has two sons by his
previous marriage! (harlie lives with
Mane who is legally married to <ario!
"hey have a child named Mill! "he children
are all minors and not gainfully employed!
!. H,& 5.c: *er+,%a- e>e5*/i,% ca%
C:ar-ie c-ai5I E>*-ai%. (2.3J$
SUGGESTED ANSWER*
(harlie can claim the personal exemption of a
?ead of a Iamily or &:,111!11 provided
that at least one of his minor and not
gainfully employed children is unmarried
and living with and dependent upon him for
chief support
(Tax $eform Act $A /"&" !hapter 266
,ection 5-AA@: 36$ $evenue $egulation (&-
*/).
2. H,& 5.c: addi/i,%a- e>e5*/i,%
ca% C:ar-ie c-ai5I E>*-ai%. (2.3J$
SUGGESTED ANSWER*
?is children from his previous marriage
who are le% gitimate children and his
illegitimate child with Mane will all entitle
him to additional personal exemption of
&=111!11 for each dependent if apart
from being minor and not gainfully
employed they are unmarried living
with and dependent upon (harlie for
their chief support (Tax $eform Act
$A/"&" !hapter 2= ,ection 5-(A):
36$ $evenue $egulation (&-*/).
2xemptions$ 8oman !at#o"ic !#urc#$ /imitations (29)
"he >oman (atholic (hurch owns a :%
hectare lot in a town in "arlac province!
"he southern side and middle part are
occupied by the (hurch and a convent
the eastern side by a school run by the
(hurch itself the southeastern side by
some commercial establishments while the
rest of the property in particular the
northwestern side is idle or unoccupied!
<ay the (hurch claim tax exemption on the
entire land? 'ecide with reasons!
SUGGESTED ANSWER*
8o! "he (hurch cannot claim tax exemption
on the entire land! Only the southern side
and middle part that are occupied by the
(hurch and a convent and the eastern
side occupied by a school run by the
(hurch itself are exempt because such
parts of the :%hectare lot are actually
directly and exclusively used for religious
and educational purposes! (,ec. &/A5@
Art. 26 %*/' !onstitution: ,ec. &5" ?ocal
#overnment !ode)
"he southeastern side occupied by some
commercial establishment is not tax
exempt! If real property is used for one or
more commercial purposes it is not
exclusively used for the exempted purpose
but is sub2ect to taxation! B/olelyB is
synonymous with Bexclusively!B (L.%g Ce%/er ,1
/:e P:i-i**i%e+ v. K.eG,% Ci/0 G.R. N,.
!((!)( <.%e 2" 2))($ "he property must
be exclusively (solely) used for religious or
educational purposes!
Of course it is apparent that the
northwestern side which is idle or
unoccupied is not "actually directly
and exclusively" used for religious or
educational purposes hence not exempt
from taxation!
CAPITAL GAIN TAX
!apita" Asset (s) %r&inary Asset (24)
'istinguish a "capital asset" from an
"ordinary asset"!
SUGGESTED ANSWER*
(a) "he term "capital asset" regards all
properties not speci*cally excluded in the
statutory de*nition of capital assets the
pro*ts or loss on the sale or the exchange of
which are treated as capital gains or
capital losses! (onversely all those
properties speci*cally excluded are
considered as ordinary assets and the
pro*ts or losses reali$ed must have to be
treated as ordinary gains or ordinary losses!
;ccordingly "Ca*i/a- A++e/+" includes
property held by the taxpayer whether or
not connected with his trade or business but
the term does not include any of the
following which are conseEuently considered
"ordinary assets":
(4) stoc# in trade of the taxpayer or other
property of a #ind which would
properly be included in the
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inventory of the taxpayer if on
hand at
the close of the taxable yearD
(:) property held by the taxpayer
primarily for sale to customers in
the ordinary course of trade or
businessD
(+) property used in the trade or
business of a character which is
sub2ect to the allowance for
depreciation provided in /ection +0
(I) of the "ax (odeD or
(0) real property used in trade or
business of the taxpayer!
"he statutory de*nition of "capital
assets" practically excludes from its
scope it will be noted all property held by
the taxpayer if used in connection with
his trade or business!
!apita" 5ain Tax$ 7ature (21)
; a doctor by profession sold in the year
:111 a parcel of land which he bought as
a form of investment in 4JJ1 for &hp 4
million! "he land was sold to A his
colleague at a time when the real estate
prices had gone down and so the land
was sold only for &hp =11111 which
was then the fair mar#et value of the
land! ?e used the proceeds to *nance
his trip to the Fnited /tates! ?e claims
that he should not be made to pay the H-
*nal tax because he did not have any
actual gain on the sale! Is his
contention correct? Why? (,-)
SUGGESTED ANSWER*
8o! "he H- capital gains tax on sale
of a real property held as capital asset is
imposed on the income presumed to have
been reali$ed from the sale which is
the fair mar#et value or selling price
thereof whichever is higher! (/ection
:0(') 8I>()! ;ctual gain is not reEuired
for the imposition of the tax but it is
the gain by *ction of law which is
taxable!
%r&inary Sa"e of a !apita" Asset (199*)
8oel 5angit and his brother Movy bought a
parcel of land which they registered in
their names as pro%indiviso owners
(&arcel ;)! /ubseEuently they formed
a partnership duly registered with
/ecurities and 3xchange (ommission which
bought another parcel of land (&arcel A)!
Aoth parcels of land were sold reali$ing a
net pro*t of &4111111!11 for parcel ; and
&,11!111!11 for parcel A!
"he AI> claims that the sale of parcel ;
should be taxed as a sale by an
unregistered partnership! Is the AI>
correct?
SUGGESTED ANSWER*
"he AI> is not correct since there is no
showing that the acEuisition of the property
by 8oel and Movy 5angit as pro indiviso
owners and prior to the formation of
the partnership was used intended for
use or bears any relation whatsoever to
the pursuit or conduct of the partnership
business! "he sale of parcel ; shall therefore
not be treated as a sale by an unregistered
partnership but an ordinary sale of a
capital asset and hence will be sub2ect to
the ,- capital gains tax and documentary
stamp tax on transfers of real property
said taxes to be borne eEually by the co%
owners!
ALTERNATI1E ANSWER*
"he AI> is correct in treating the gain
from the sale of parcel of land by 8oel
and Movy 5angit at a pro*t of
&4111111!11! In the case of Pa+c.a-
a%d Drag,% v. C,55i++i,%er G.R. N,.
#4!77 Oc/,6er !4 !"44 the /upreme
(ourt ruled that the sharing of returns does
not in itself establish a partnership
whether or not the persons sharing
therein have a 2oint or common right or
interest in the property! "he decision in said
case cannot be applied here because
clearly the parties organi$ed a
partnership duly registered with the
/ecurities and 3xchange (ommission!
"hey pooled their resources together
with the purpose of dividing the pro*t
between them!
Sa"es of S#are of StocBs: !apita" 5ains Tax 8eturn (1999)
?T (o! is a ?ong Tong corporation not doing
business in the &hilippines! It holds 01- of
the shares of ; (o! a &hilippine company
while the H1- is owned by & (o! a Iilipino%
owned &hilippine corporation! ?T (o! also
owns 411- of the shares of A (o! an
Indonesian company which has a duly
licensed &hilippine branch! 'ue to
worldwide restructuring of the ?T (o!
group ?T (o! decided to sell all its
shares in ; and A (os! "he negotiations
for the buy%out and the signing of the
;greement of /ale were all done in the
&hilippines! "he ;greement provides that the
purchase price will be paid to ?T (oBs ban#
account in the F! /! and that little to ; and A
(os! /hares will pass from ?T (o! to &
(o! in ?T where the stoc# certi*cates will
be delivered! & (o! see#s your advice as to
whether or not it will sub2ect the
payments of purchase price to Withholding
"ax! 3xplain your advice! (41-)
SUGGESTED ANSWER*
& (o! should not sub2ect the payments of
the purchase price to withholding tax! While
the seller is a non%resident foreign
corporation which is not normally reEuired to
*le returns in the &hilippines therefore
ordinarily all its income earned from
&hilippine sources is taxed via the
withholding tax system this is not the
procedure availing with respect to sales of
shares of stoc#! "he capital gains tax on
the sale of shares of stoc# of a
domestic corporation is always reEuired to be
paid through a capital gains tax return *led!
"he sale of the shares of stoc# of the
Indonesian (orporation is not sub2ect to income
tax under our 2urisdiction because the
income derived there from is considered as a
foreign%sourced income!
ALTERNATI1E ANSWER*
7es but only on the shares of stoc#s of ; (o!
and only on the portion of the purchase
price which constitutes capital gains!
Fnder the "ax (ode of 4JJL the capital
gains tax imposed under /ection :=(A)(,)(c)
is collectible via the withholding of tax at
source pursuant to /ection ,L of the same
(ode!
(8ote: "he bar candidate might have
relied on the provision of the "ax (ode
of 4JJL which provides that the capital
gains tax is imposed as withholding taxes
(/ection ,L 8I>()! "his procedure
is impractical and therefore not followed
in practice because the buyerO withholding
agent will not be in a position to determine
how much income is reali$ed by
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the seller from the sale! Ior this
reason any
of the foregoing suggested answers
should be given full credit)!
Tax Basis: !apita" 5ains: 0erger of !orporations (199*)
In a Euali*ed merger under /ection +0 (c)
(:) of the "ax (ode what is the tax basis
for computing the capital gains on: (a)
the sale of the assets received by the
surviving corporation from the absorbed
corporationD and (b) the sale of the
shares of stoc# received by the
stoc#holders from the surviving
corporation?
SUGGESTED ANSWER*
In a Euali*ed merger under /ection +0 (c)
(:) of the "ax (ode the tax basis for
computing the capital gains on:
(a) the sale of the assets received by
the surviving corporation from the
absorbed corporation shall be the
originalOhistorical cost of the assets when
still in the hands of the absorbed
corporation!
(b) the sale of the shares of stoc#
received by the stoc#holders from the
surviving corporation shall be the
acEuisitionOhistorical cost of assets
transferred to the surviving
corporation!
Tax Basis: !apita" 5ains: Tax:Free 2xc#ange of
Property (199*)
In a Euali*ed tax%free exchange of
property for shares under /ection +0 (c)
(:) of the "ax (ode what is the tax basis
for computing the capital gains on: (a) the
sale of the assets received by the
(orporationD and (b) the sale of the shares
received by the stoc#holders in exchange
of the assets?
SUGGESTED ANSWER*
In a Euali*ed tax free exchange of
property for shares under /ection +0 (c)
(:) of the "ax (ode the tax basis for
computing the gain on the:
(a) sale of the assets received by the
corporation shall be the
originalOhistorical cost (purchase
price plus expenses of acEuisition) of
the propertyO assets given in exchange
of the shares of stoc#!
(b) sale of the shares of stoc#
received by the stoc#holders in
exchange of the assets shall be the
originalOhistorical cost of the
property given in
exchange of the shares of stoc#!
ALTERNATI1E ANSWER*
"he basis in computing capital gains tax in
a Euali*ed tax% free exchange under /ec!
+0 (c) (:) is:
(a) With respect to the asset received by the
corporation the same as it would be in
the hands of the transferor increased
by the amount of the gain recogni$ed
to the transferor on the transfer!
(b) With respect to the shares
received by the stoc#holders in
exchange of the assets % the same as the
basis of the property stoc# or
securities exchanged decreased by the
money received and the fair mar#et value
of the other property received and
increased by the amount treated as
dividend of the shareholder and the
amount of any gain that was
recogni$ed on the exchange!
CORPORATION - PARTNERS/IP
Ba& 'e+ts$ Factors$ 2"ements t#ereof (2*)
&N> (orp! claimed as a deduction in its
tax returns the amount of &4111111 as bad
debts! "he corporation was assessed by the
(ommissioner of Internal >evenue for
de*ciency taxes on the ground that the
debts cannot be considered as "worthless"
hence they do not Eualify as bad debts!
"he company as#s for your advice on
"What factors will held in determining
whether or not the debts are bad debts?"
;nswer and explain brie)y! (,-)
SUGGESTED ANSWER*
In order that debts be considered as bad
debts because they have become worthless
the taxpayer should establish that during the
year for which the deduction is sought a
situation developed as a result of which it
became evident in the exercise of sound
ob2ective business 2udgment that there
remained no practical but only vaguely
theoretical prospect that the debt would
ever be paid (C,--ec/,r ,1
I%/er%a- Reve%.e v. G,,dric: I%/er%a/i,%a-
R.66er C,. 2! SCRA !77' 8!"'#9$.
"Worthless" is not determined by an
in)exible formula or slide rule calculation
but upon the exercise of sound business
2udgment! "he factors to be considered
include but are not limited to the following:
4! "he debtor has no property nor visible
incomeD
:! "he debtor has been ad2udged
ban#rupt or insolventD
+! (ollateral shares have become
worthlessD and
0! "here are numerous debtors with small
amounts of debts and further action
on the accounts would entail
expenses exceeding the amounts
sought to be
collected!
ALTERNATI1E ANSWER*
"he following are the factors to be
considered in determining whether or not
the debts are bad debts:
4! "he debt must be valid and subsistingD
:! "he debt is connected with the
taxpayerBs trade or business and is
not between related partiesD
+! "here is an actual ascertainment
that the debt is worthlessD and
0! "he debt is charged%oC within the
taxable year!
(PRC v. CA 23' SCRA ''# 8!""'9?
Reve%.e Reg+. N,. 3;""$.
!on&ominium !orp)$ Sa"e of !ommon Areas (199*)
@%land (ondominium (orporation was
organi$ed by the owners of units in @%land
Auilding in accordance with the <aster
'eed with 'eclaration of >estrictions! "he
@%land Auilding (orporation the
developer of the building conveyed the
common areas in favor of the @%land
(ondominium (orporation! Is the conveyance
sub2ect to any tax?
SUGGESTED ANSWER*
"he conveyance is not sub2ect to any tax!
"he same is without consideration and not
in connection with a sale made to @%land
(ondominium (orporation and the
purpose of the conveyance to the
latter is for the management of the
common areas for the common bene*t
of the unit owners!
"he same is not sub2ect to income tax
since no income was reali$ed as a result
of the conveyance which was made
pursuant to the (ondominium ;ct (>!;! 8o!
0H:H and the purpose of which was merely
to vest title to the common areas in favor
of the 5and (ondominium (orporation!
73
"here being no monetary consideration
neither is the conveyance sub2ect to the
creditable withholding tax im% posed
under >evenue >egulations 4%J1 as
amended!
"he second conveyance was actually no
conveyance at all because when the
units were sold to the various buyers
the common areas were already part and
parcel of the sale of said units
pursuant to the (ondominium ;ct!
?owever the 'eed of (onveyance is
sub2ect to documentary stamp tax!
N.3. Bocumentary stamps tax and
!ondominium ?aw are excluded from
the coverage of the 3ar 4xaminations.
!orporation$ Sa"e$ !re&ita+"e -it##o"&ing Tax (199*)
8oel 5angit and his brother Movy bought a
parcel of land which they registered in
their names as pro%indiviso owners
(&arcel ;)! /ubseEuently they formed
a partnership duly registered with
/ecurities and 3xchange (ommission which
bought another parcel of land (&arcel A)!
Aoth parcels of land were sold reali$ing a
net pro*t of &4111111!11 for parcel ; and
&,11!111!11 for parcel A!
"he AI> also claims that the sale of
parcel A should be taxed as a sale by a
corporation! Is the AI> correct?
SUGGESTED ANSWER*
"he AI> is correct since a "corporation" as
de*ned under /ection :1 (a) of the "ax (ode
includes partnerships no matter how
created or organi$ed except general
profes% sional partnerships! "he business
partnership in the in% stant case shall
therefore be taxed in the same manner as a
corporation on the sale of parcel A! "he sale
shall thus be sub2ect to the creditable
withholding tax under >evenue
>egulations 4%J1 as amended by 4:%J0
on the sale of parcel A and the partnership
shall report the gain reali$ed from the sale
when it *les its income tax return!
'i(i&en&s: -it##o"&ing Tax (1999)
?T (o! is a ?ong Tong company which
has a duly licensed &hilippine branch
engaged in trading activities in the
&hilippines! ?T (o! also invested directly in
01- of the shares of stoc# of ; (o! a
&hilippine corporation! "hese shares are
boo#ed in the ?ead OCice of ?T (o! and are
not re)ected as assets of the &hilippine
branch! In 4JJ= ; (o! declared dividends to
its stoc#holders! Aefore remitting the
dividends to ?T (o! ; (o! see#s your
advice as to whether it will sub2ect the
remittance to W"! 8o need to discuss W"
rates if applicable! Iocus your discussion
on what is the issue! (41-)
SUGGESTED ANSWER*
I will advise ; (o! to withhold and remit the
withholding tax on the dividends! While
the general rule is that a foreign
corporation is the same 2uridical entity as
its branch oCice in the &hilippines when
however the corporation transacts business
in the &hilippines directly and
independently of its branch the taxpayer
would be the foreign corporation itself and
sub2ect to the dividend tax similarly imposed
on non%resident foreign corporation! "he
dividends attributable to the ?ome OCice
would not Eualify as dividends earned by
a resident foreign corporation which is
exempt from tax! (Mar.6e%i
C,r*,ra/i,% v. C,55i++i,%er GR N,.
#'3#7 Se*/e56er !( !"4"$.
2ffect: 'isso"ution$ !orporate 2xistence (2*)
Ior failure to comply with certain corporate
reEuirements the stoc#holders of ;A(
(orp! were noti*ed by the /ecurities and
3xchange (ommission that the corporation
would be sub2ect to involuntary
dissolution! "he stoc#holders did not do
anything to comply with the reEuirements
and the corporation was dissolved! (an the
stoc#holders be held personally liable for the
unpaid taxes of the dissolved corporation?
3xplain brie)y! (,-)
SUGGESTED ANSWER*
8o! ;s a general rule stoc#holders
cannot be held personally liable for the
unpaid taxes of a dissolved corporation!
"he rule prevailing under our 2urisdiction is
that a corporation is vested by law with a
personality that is separate and distinct
from those of the persons
composing it
8O"3: additional point should be given
to the examinee if he answers in
the following that: ?owever
stoc#holders may be held liable for the
unpaid taxes of a dissolved
corporation if it appears that the
corporate assets have passed
into their hands
"4' 8!"'29$. 5i#ewise when
stoc#holders have unpaid
subscriptions to the capital of
the corporation they can be made
liable for unpaid taxes of the
corporation to the extent of their
unpaid subscriptions!
0inimum !orporate Income Tax (21)
What is the rationale of the law in
imposing what is #nown as the
<inimum (orporate Income tax on
'omestic (orporations? (+-)
SUGGESTED ANSWER*
"he imposition of the <inimum (orporate
Income "ax (<(I") is designed to forestall the
prevailing practice of corporations of over
claiming deductions in order to reduce their
income tax payments! "he *ling of income
tax returns showing a tax loss every year goes
against the business motive which impelled
the stoc#holders to form the corporation!
"his is the reason why domestic
corporations (and resident foreign
corporations) after the recovery period of
four years from the time they commence
business operations they become liable to the
<(I" whenever this tax imposed at :- of gross
income exceeds the normal corporate
income tax imposed on net income!
(/ponsorship /peech (hairman of /enate
Ways and <eans (ommittee)!
0inimum !orporate Income Tax$ 2xemption (21)
Is a corporation which is exempted from
the minimum corporate income tax
automatically exempted from the regular
corporate income tax? 3xplain your answer!
(:-)
SUGGESTED ANSWER*
8o! "he minimum corporate income tax is a
proxy for the normal corporate income tax
not the regular corporate income tax paid
by a corporation! Ior instance a
proprietary educational institution may be
sub2ect to a regular corporate income tax
of 41- (depending on its dominant income)
but it is exempt from the imposition of
<(I" because the latter is not intended to
substitute
(Ta% Ti,%g Bi, v. CFR (
SCRA
(S.%i, v. NLRC !2# SCRA
7")L!"4(9H.
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41 of 73
special tax rates! /o is with &3K;
enterprises
('; enterprises etc!
Q8ote: If what is meant by regular
income tax is the +:- tax rate
imposed on taxable income of
corporations the answer would be in the
aCirmative because domestic
corporations and resident foreign
corporations are either liable for the
:- of gross income (<(I") or +:- of
net income (the normal corporate
income tax) whichever is higher!R
ALTERNATI1E ANSWER*
8o! ; corporation which is exempted from
the minimum corporate income tax is not
automatically exempted from the regular
corporate income tax! "he reason for this
is that <(I" is imposed only beginning
on the fourth taxable year immediately
following the year in which such corporation
commenced its business operations! "hus
a corporation may be exempt from <(I"
because it is only on its third year
of operations following its
commencement of business operations!
ESTATE - DONOR0S TAXES
'onor6s Tax: 2"ection !ontri+utions (199=)
;re contributions to a candidate in an
election sub2ect to donorBs tax? On the
part of the contributor is it allowable as a
deduction from gross income? Q,-M
SUGGESTED ANSWER*
4) 8o provided the recipient candidate
had complied with the reEuirement
for *ling of returns of contri% butions
with the (ommission on 3lections
as reEuired under the Omnibus
3lection (ode!
:) "he contributor is not allowed to
deduct the contributions because
the said expense is not directly
attributable to the
development management operation
andOor conduct of a trade business or
profession L,ec. 5"AA)(l)(a) N6$!)!
Iurthermore if the candidate is
an incumbent government oCicial or
employee it may even be considered
as a bribe or a #ic#bac# (/ec! +0Q;M(l)(c)
8I>()!
C$((ENT: It is suggested that full
credit should be given for any answer
to the *rst Euestion because the
answer reEuires an interpretation of
the 3lection (ode! &ursuant to the
provisions of /ection JJ(() of the
8I>( the taxability of this
type of contributionsOdonations is
governed by the 3lection (ode!
'onor6s Tax$ Basis for 'etermining 5ain (1999)
(4) Tenneth 7usoph owns a commercial lot
which he bought many years ago for
&4 <illion! It is now worth &:1 <illion
although the $onal value is only &4,
<illion! ?e donates one%half pro%
indiviso interest in the land to his son
'ino on +4 'ecember 4JJ0 and the other
one%half pro%indiviso interest to
the same son on : Manuary 4JJ,!
?ow much is the value of the gifts in 4JJ0
and 4JJ, for purposes of computing the
gift tax? 3xplain!
SUGGESTED ANSWER*
4) "he value of the gifts for purposes of
computing the gift tax shall be &L!,million
in 4JJ0 and &L!,million in
4JJ,! In valuing a real property for gift tax
purposes the property should be appraised at
the higher of two values as of the time of
donation which are (a) the fair mar#et
value as determined by the (ommissioner
(which is the $onal value *xed pursuant to
/ection 4H(e) of the "ax (ode) or (b) the
fair mar#et value as shown in the
schedule of values *xed by the
&rovincial and (ity ;ssessors! "he fact that
the property is worth &:1 million as of the
time of donation is immaterial unless it can be
shown that this value is one of the two values
mentioned as provided under /ection =4 of
the "ax (ode!
(:) "he >evenue 'istrict OCicer Euestions
the splitting of the donations into 4JJ0
and 4JJ,! ?e says that since there
were only two (:) days separating the two
donations they should be treated as one
having been
made within one year! Is he correct?
3xplain!
SUGGESTED ANSWER*
:) "he >evenue 'istrict OCicer is not
correct because the computation of the gift
tax is cumulative but only insofar as gifts
made within the same calendar year!
"herefore there is no legal 2usti*cation for
treating two gifts eCected in two separate
calendar years as one gift!
(+) 'ino subseEuently sold the land to a
buyer for & :1 <illion! ?ow much
did 'ino gain on the sale?
3xplain!
SUGGESTED ANSWER*
+) 'ino gained an income of 4J million
from the sale! 'ino acEuires a carry%over
basis which is the basis of the property in
the hands of the donor or &4 million! "he
gain from the sale or other disposition of
property shall be the excess of the amount
reali$ed therefrom over the basis or
ad2usted basis for determining gain (/ec!
+0(a) 8I>()! /ince the property was
acEuired by gift the basis for
determining gain shall be the same as if it
would be in the hands of the donor or the
last preceding owner by whom the property
was not acEuired by gift! ?ence the gain is
computed by deducting the basis of &4
million from the amount reali$ed which is
&:1 million!
(0) /uppose instead of receiving the lot
by way of donation 'ino received it
by inheritance! What would be his
gain on the sale of the lot for &:1
<illion? 3xplain!
SUGGESTED ANSWER*
0) If the commercial lot was received by
inheritance the gain from the sale for &:1
million is &, million because the basis is
the fair mar#et value as of the date of
acEuisition! "he stepped%up basis of &4,
million which is the value for estate tax
purposes is the basis for determining
the gain (/ec! +0(b)(:) 8I>()!
ALTERNATI1E ANSWER*
If 'ino held on to the property as a capital
asset in that it is neither for sale in the
ordinary course of business nor used in
'inoBs business then upon sale thereof
there is presumed to be reali$ed an income
of &:1 million which is the gross selling
price of the property! (/ec! :4(e) 8I>()!
"he same would be sub2ect to the ,-
capital gains tax!
'onor6s Tax$ 'acion en Pago$ 2ffect: Taxation (199,)
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42 of 73
;n insolvent
company
ha
d an
outstandi
ng
obligation of & l11111!11 from a creditor!
/ince it could not pay the debt the
creditor agreed to accept payment
through dacion en pago a property
which had a mar#et value of
&+1!111!11! In the dacion en pago
document the balance of the debt was
condoned!
;! What is the tax eCect on the discharge
of the unpaid balance of the obligation
on the debtor corporation?
A! Insofar as the creditor is concerned
how is he
eCected tax%wise as a conseEuence of
the transaction?
SUGGESTED ANSWERS*
(a) "he condonation of the unpaid
balance of the obligation has the eCect
of a donation made on the part of the
creditor! It is obvious that the creditor
merely desires to bene*t the
debtor and without any
consideration therefore cancels the
debt the amount of the debt cancelled
is a gift from the creditor to the debtor
and need not be included in the latterBs
gross income (/ec! ,1 >> 8o! :)D
(b) Ior the diCerence of &L1111 the
creditor shall be sub2ect to donorBs tax at
the applicable rates provided for under
the 8ational Internal >evenue (ode!
ALTERNATI1E ANSWER*
(a) If the discharge was prompted by the
insolvency of the debtor company then it is
a clear case of a write%oC of a bad debts
which has no tax conseEuence to the debtor!
(b)"he write%oC of the bad debt will entitle
the creditor to claim the same as a
deduction from its gross income!
'onor6s Tax$ 'onation to a Si+"ing (21)
7our bachelor client a Iilipino residing in
Nue$on (ity wants to give his sister a gift
of &hp :11111!11! ?e see#s your advice
for purposes of reducing if not
eliminating the donorBs tax on the gift on
whether it is better for him to give all of
the &hp :11111!11 on (hristmas :114 or
to give &hp 411111!11 on (hristmas:114
and the other &hp 411111!11 on Manuary
4 :11:! &lease explain your advice! (,-)
SUGGESTED ANSWER*
I would advice him to split the donation!
.iving the &hp:11111 as a one%time
donation would mean that it will be
sub2ect to a higher tax brac#et under the
graduated tax structure thereby necessitating
the payment of donorBs tax! On the other
hand splitting the donation into two eEual
amounts of &hp 411111 given on two
diCerent years will totally relieve the
donor from the donorSs tax because the
*rst &hpl11!111 donation in the graduated
brac#ets is exempt! (/ection JJ 8I>()! While
the donorSs tax is computed on the
cumulative donations the aggregation of
all donations made by a donor is allowed only
over one calendar year!
'onor6s Tax$ 'onation to 7on:StocBF 7on:Profit
Pri(ate 2&ucationa" Institutions (2)
What conditions must occur in order that
all grants donations and contributions to
non%stoc# non%pro*t private educational
institutions may be exempt from the
donorBs tax under /ection 414 (a) of the "ax
(ode? (+-)
SUGGESTED ANSWER*
"he following are the conditions:
4! 8ot more than thirty percent (+1-)
of said gifts shall be used by such
donee for administration purposesD
:! "he educational institution is
incorporated as a non% stoc# entity
+! paying no dividends
0! governed by trustees who receive no
compensation and
,! devoting all its income whether
studentsB fees or gifts donations
subsidies or other forms of
philanthropy to the accomplishment and
promotion of the purposes
enumerated in its ;rticles of
Incorporation! (/ec! 414 (;) (+) 8I>( of
4JJLR
'onor6s Tax$ 'onation to Po"itica" !an&i&ate (24)
@ is a friend of 7 the chairman of &olitical
&arty K who wants to run for &resident in
the :110 elections! Tnowing that 7 needs
funds for posters and streamers @ is
thin#ing of donating to 7 &4,1111!11 for
his campaign! ?e as#s you whether his
intended donation to 7 will be sub2ect to
the donorBs tax! What would your
answer be? Will your answer be the
same if he were to donate to &olitical
&arty K instead of to 7 directly? (=-)
SUGGESTED ANSWER*
"he donation to 7 once he becomes a
candidate for an elective post is not sub2ect
to donorBs tax provided that he complies
with the reEuirement of *ling returns
of contributions with the (ommission on
3lections as reEuired under the Omnibus
3lection (ode!
"he answer would be the same if @ had
donated the amount to &olitical &arty K
instead of to 7 directly because the law
places in eEual footing any contribution to
any candidate political party or coalition of
parties for campaign purposes! (,ection **(!)
of the %**' Tax !ode).
'onor6s Tax$ 'onee or Beneficiary$ Stranger (2)
When the donee or bene*ciary is a
stranger the tax payable by the donor
shall be +1- of the net gifts! Ior
purposes of this tax who is a stranger? (:-)
SUGGESTED ANSWER*
; /">;8.3> is a person who is not a:
;! Arother sister (whether by whole or
half%blood) spouse ancestor and lineal
descendantD or
A! >elative by consanguinity in the
collateral line within the fourth degree
of relationship!" Q/ec! J= (A) 8I>( of
4JJLR
'onor6s Tax$ Sa"e of s#ares of StocB ; Sa"e of 8ea"
Property (1999)
; an individual sold to A his brother%in%law
his lot with a mar#et value of &4111111 for
&H11!111! ;Bs cost in the lot is &411!111! A is
*nancially capable of buying the lot!
; also owns @ (o! which has a fast growing
business! ; sold some of his shares of stoc#
in @ (o! to his #ey executives in @ (o! "hese
executives are not related to ;! "he selling
price is &+111111 which is the boo# value of
the shares sold but with a mar#et value of
&,111111! ;Bs cost in the shares sold is
&4111111! "he purpose of ; in selling the
shares is to enable his #ey executives to acEuire
a propriety interest in the business and
have a personal
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4+ of 73
sta#
e in its
busine
ss!
3xplai
n if the
abov
e
transactions are sub2ect to donorBs tax! (,-)
SUGGESTED ANSWER*
"he *rst transaction where a lot was
sold by ; to his brother%in%law for a price
below its fair mar#et value will not be
sub2ect to donorBs tax if the lot Euali*es as a
capital asset! The transfer for less than
ade7uate and full consideration which
gives rise to a deemed gift does not apply to
a sale of property sub1ect to capital gains
tax. (/ection 411 8I>()! ?owever if the lot
sold is an ordinary asset the excess of
the fair mar#et value over the
consideration received shall be considered
as a gift sub2ect to the donorBs tax!
"he sale of shares of stoc# below the
fair mar#et value thereof is sub2ect to
the donorBs tax pursuant to the
provisions of /ection 411 of the "ax (ode!
"he excess of the fair mar#et value over
the selling price is a deemed gift!
ALTERNATI1E ANSWER*
"he sale of shares of stoc# below the
fair mar#et value will not give rise to the
imposition of the donorBs tax! In determining
the gain from the transfer the selling price
of the shares of stoc#s shall be the fair
mar#et value of the shares of stoc#s
transferred! (/ection H >> 8o! :%=:)! In
which case the reason for the imposition of
the donorBs tax on sales for inadeEuate
consideration does not exist!
2state Tax: !ompre#ensi(e Agrarian 8eform /a1 (199*)
Mose Orti$ owns 411 hectares of agricultural
land planted to coconut trees! ?e died on
<ay +1 4JJ0! &rior to his death the
government by operation of law acEuired
under the (omprehensive ;grarian
>eform 5aw all his agricultural lands
except *ve (,) hectares! Fpon the death of
Orti$ his widow as#ed you how she will
consider the 411 hectares of agricultural
land in the preparation of the estate tax
return! What advice will you give her?
SUGGESTED ANSWER*
"he 411 hectares of land that Mose Orti$
owned but which prior to his death on
<ay +1 4JJ0 were acEuired by the
government under (;>& are no longer
part of his taxable gross estate with the
exception of the remaining *ve (,)
hectares which under /ec! L=Ga) of the
"ax (ode still forms part of "decedentBs
interest"!
2state Tax: 'onation 0ortis !ausa (21)
; aged J1 years and suCering from
incurable cancer on ;ugust 4 :114 wrote
a will and on the same day made several
inter%vivos gifts to his children! "en days
later he died! In your opinion are the
inter%vivos gifts considered transfers in
contemplation of death for purposes
of determining properties to be included in
his gross estate? 3xplain your answer! (,-)
SUGGESTED ANSWER*
7es! When the donor ma#es his will within a
short time of or simultaneously with the
ma#ing of gifts the gifts are considered as
having been made in contemplation of death!
(R,ce+ v. P,+ada+ 34 P:i-. !)4)! Obviously
the intention of the donor in ma#ing the inter%
vivos gifts is to avoid the imposition of the
estate tax and since the donees are li#ewise
his forced heirs who are called upon to
inherit it will create a presumption 1uris
tantum that said donations were made
mortis causa hence the properties
donated shall be included as part of ;Bs gross
estate!
2state Tax: 'onation 0ortis !ausa (s) Inter Ci(os (199*)
;re donations inter vivos and donations
mortis causa sub2ect to estate taxes?
SUGGESTED ANSWER*
'onations inter vivos are sub2ect to donorBs
gift tax (/ec! J4 (a)! "ax (ode) while
donations mortis causa are sub2ect to estate
tax (/ec! LL "ax (ode)! ?owever
donations inter vivos actually constituting
taxable lifetime li#e trans% fers in
contemplation of death or revocable transfers
(/ec! L= (b) and (c) "ax (ode) may be
taxed for estate tax purposes the theory
being that the transferorBs control thereon
extends up to the time of his death!
ALTERNATI1E ANSWER*
'onations inter vivos are not sub2ect to
estate taxes because the transfer of the
property ta#e eCect during the lifetime of
the donor! "he transfer is therefore sub2ect
to the donorBs tax!
On the other hand donations mortis causa
are sub2ect to estate taxes since the
transfer of the properties ta#es eCect after
the death of the decedent! /uch donated
properties real or personal tangible or
intangible shall form part of the gross
estate!
2state Tax: 5ross 2state: A""o1a+"e 'e&uction (21)
On the *rst anniversary of the death of 7 his
heirs hosted a sumptuous dinner for his
doctors nurses and others who attended to
7 during his last illness! "he cost of the
dinner amounted to &hp ,1111!11!
(ompared to his gross estate the &hp
,1111!11 did not exceed *ve percent of
the estate! Is the said cost of the dinner
to commemorate his one year death
anniversary deductible from his gross estate?
SUGGESTED ANSWER*
8o! "his expense will not fall under any of the
allowable deductions from gross estate!
Whether viewed in the context of either
funeral expenses or medical expenses the
same will not Eualify as a deduction! Iuneral
expenses may include medical expenses of
the last illness but not expenses incurred
after burial nor expenses incurred to
commemorate the death anniversary! (De
G.G5a% V. De G.G5a% 47 SCRA 23'$.
<edical expenses on the other hand are
allowed only if incurred by the decedent
within one year prior to his death! (/ection
=H(;)(H) 8I>()!
2state Tax: 5ross 2state: 'e&uctions (2)
<r! Ielix de la (ru$ a bachelor resident citi$en
suCered from a heart attac# while on a
business trip to the F/;! ?e died intestate
on Mune 4, :111 in 8ew 7or# (ity leaving
behind real properties situated in 8ew 7or#D
his family home in 6alle 6erde &asig
(ityD an oCice condominium in <a#ati
(ityD shares of stoc#s in /an <iguel
(orporationD cash in ban#D and
personal belongings! "he decedent is heavily
insured with Insular 5ife! ?e had no #nown
debts at the time of his death! ;s the sole
heir and appointed ;dministrator how would
you determine the gross estate of the
decedent? What deductions may be claimed
by the estate and when and where shall the
return be *led and estate tax paid? (+-)
SUGGESTED ANSWER*
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44 of 73
"he gross estate shall be determined
by including
the value at the time of his death a--
,1 /:e *r,*er/ie+ 5e%/i,%ed to the
extent of the interest he had at the
time of his death because he is a <ilipino
citiJen! Q/ec! =, (;) 8I>( of 4JJLR
With respect to the -i1e i%+.ra%ce
*r,ceed+ the amount includible in the
gross estate for &hilippine tax purposes
would be to the extent of the amount
receivable by the estate of the
deceased his executor or administrator
under policies ta#en out by decedent
upon his own life irrespective of
whether or not the insured retained
the power of revocation or to the
extent of the amount receivable by any
bene*ciary designated in the policy of
insurance except when it is expressly
stipulated that the designation of the
bene*ciary is irrevocable! Q/ec! =, (3)
8I>( of 4JJLR
"he DEDUCTIONS that may be claimed
by the estate are:
4) "he actual funeral expenses or in an
amount eEual to *ve percent (,-) of
the gross estate whichever is
lower but in no case to exceed
two hundred thousand pesos
(&:11!111!11)! Q/ec! =H (;) (4) (a)!
8I>( of 4JJLR
:) "he 2udicial expenses in the
testate or intestate proceedings!
(/ec! =H(;)(4)
+) "he value of the decedentBs family
home located in 6alle 6erde &asig
(ity in an amount not exceeding one
million pesos (&4111111!11) and
upon presentation of a certi*cation of
the barangay captain of the locality that
the same have been the decedentBs
family home! Q/ec! =H (;) (0) IbidR
0) "he standard deduction of &4111111!
(/ec! =H(;)(,)
,) <edical expenses incurred within
one year from death in an amount
not exceeding &,11111!(/ec! =H(;)
(H)
"he ESTATE TAX RETURN shall be *led
within six (H) months from the decedentBs
death (/ec! J1 (A) 8I>( of 4JJLR
provided that the (ommissioner of
Internal >evenue shall have authority to
grant in meritorious cases a reasonable
extension not exceeding thirty (+1) days for
*ling the return (/ec! J1 (c) IbidR
3xcept in cases where the (ommissioner
of Internal >evenue otherwise permits the
estate tax return shall be *led with an
authori$ed agent ban# or >evenue 'istrict
OCicer (ollection OCicer or duly
authori$ed "reasurer of &asig (ity the
(ity in which the decedent <r! de la
(ru$ was domiciled at the time of his death!
Q/ec! J1 (')! 8I>( of 4JJLR
2state Tax: Inc"usion: 8esi&ent A"ien (199*)
(liC >obertson an ;merican citi$en was
a permanent resident of the &hilippines! ?e
died in <iami Ilorida! ?e left 41111 shares
of <eralco a condominium unit at the
"win "owers Auilding at &asig <etro
<anila and a house and lot in 5os ;ngeles
(alifornia!
What assets shall be included in the 3state
"ax >eturn to be *led with the AI>?
SUGGESTED ANSWER*
;ll of <r! >obertsonBs assets consisting of
41111 shares in the <eralco a
condominium unit in &asig and his
house and lot in 5os ;ngeles (alifornia are
taxable! "he properties of a resident alien
decedent li#e <r! >obertson are taxable
wherever situated (/ees! LL L= and J=
"ax (ode)!
2state Tax: Payment (s) Pro+ate Procee&ings (2*)
6(( is the administrator of the estate of his
father 8.( in the estate proceedings
pending before the << >egional "rial
(ourt! 5ast year he received from the
(ommissioner of Internal >evenue a
de*ciency tax assessment for the estate in
the amount of &4111111! Aut he ignored
the notice! 5ast month the AI> eCected a
levy on the real properties of the estate
to pay the delinEuent tax! 6(( *led a motion
with the probate court to stop the
enforcement and collection of the tax on the
ground that the AI> should have
secured *rst the approval of the probate
court which had 2urisdiction over the estate
before levying on its real properties! Is 6((Bs
contention correct? (,-)
SUGGGESTED ANSWER*
8o! 6((Bs contention is not correct! "he
approval of the probate court is not
necessary! &ayment of estate taxes is a
condition precedent for the distribution of
the properties of the decedent and the
collection of estate taxes is executive in
nature for which the court is devoid of any
2urisdiction! ?ence the approval of the
court sitting in probate or as a
settlement tribunal is not a mandatory
reEuirement in the collection of estate taxes
(Marc,+ H v. C,.r/ ,1 A**ea-+ 2#7 SCRA (#
8!""#R)!
2state Tax: Situs of Taxation: 7on:8esi&ent 'ece&ent
(2)
'iscuss the rule on situs of taxation
with respect to the imposition of the
estate tax on property left behind by a non%
resident decedent! (:-)
SUGGESTED ANSWER*
"he value of the gross estate of a non%resident
decedent who is a Iilipino citi$en at the time
of his death shall be determined by including
the value at the time of his death of all
property real or personal tangible or
intangible wherever situated to the extent of
the interest therein of the decedent at the time
of his death Q/ec! =, (;) 8I>( of 4JJL)! "hese
properties shall have a situs of taxation in the
&hilippines hence sub2ect to &hilippine estate
taxes!
On the other hand in the case of a non%resident
decedent who at the time of his death was
not a citi$en of the &hilippines only that
part of the entire gross estate which is
situated in the 9hilippines to the extent of the
interest therein of the decedent at the time
of his death shall be included in his
taxable estate. &rovided that with respect
to intangible personal property we apply the
rule of reciprocity! (Ibid)
2state Tax: Canis#ing 'e&uctions (199*)
6anishing deductions in estate%taxation?
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4. of 73
SUGGESTED ANSWER*
6anishing deductions or property
previously taxed in estate taxation
refers to the diminishing deducibilityO
exemption at the rate of :1- over a
period of *ve (,) years until it is lost
after the *fth year of any property
(situated in the &hilippines) forming
part of the gross estate acEuired by
the decedent from a prior decedent
who died within a period of *ve (,)
years from the decedentBs death!
2state Tax$ Payment (s) Pro+ate Procee&ings (29)
Is the approval of the court sitting as
probate or estate settlement court
reEuired in the enforcement and
collection of estate tax? 3xplain!
SUGGESTED ANSWER*
8o the approval of the court sitting in
probate or as a settlement tribunal over the
deceased is not a mandatory reEuirement in
the collection of estate taxes! "here is
nothing in the "ax (ode and in the
pertinent remedial laws that implies the
necessity of the probate or estate
settlement courtBs approval of the stateBs
claim for estate taxes before the same
can be enforced and collected!
(Marc,+ v. C,.r/ ,1 A**ea-+ G.R. N,.
!2)44) <.%e 3 !""#$
BUSINESS TAXES
CAT: Basis of CAT (1996)
=:a/ i+ /:e 6a+i+ ,1 /:e Va-.e;Added
Ta> ,% /a>a6-e +a-e+ ,1 rea- *r,*er/0I
SUGGESTED ANSWER*
"he basis of the 6alue%;dded "ax on
taxable sale of real property is ".>O//
/355I8. &>I(3" which is either selling
price stated in the sale document or
the "Konal 6alue" whichever is higher!
In the absence of $onal values the
gross selling price shall refer to the
mar#et value as shown in the latest
tax declaration or the consideration
whichever is higher!
CAT: !#aracteristics of CAT (1996)
=:a/ are /:e c:arac/eri+/ic+ ,1 /:e
Va-.e;Added Ta>I
SUGGESTED ANSWER*
"he value%added tax is an indirect tax and
the amount of tax may be shifted or
passed on to the buyer transferee or
lessee of the goods properties or services!
ALTERNATI1E ANSWER*
"he value%added tax has the following
characteristics:
4) It is an indirect tax where tax
shifting is always presumed:
:) It is consumption%basedD
+) It is imposed on the value%added in
each stage of distributionD
0) It is a credit%invoice method value%added
taxD and
,) It is not a cascading tax!
CAT: 2xempte& Transactions (1996)
.ive at least three (+) real estate
transactions which are not sub2ect to the
6alue%;dded "ax!
SUGGESTED ANSWER*
>eal estate transactions which are exempt
from the value% added tax are:
(a) /ale of real property not primarily
held for sale or lease in the ordinary
course of trade or businessD
(b) /ale of real property utili$ed for
sociali$ed housing under >;! 8o! L:LJD
(c) /ale of real property utili$ed under
the low%cost housing under A& Aig!
::1!
Note: "he other real estate transactions
which are exempt from the value%added tax
which may be cited by the bar candidates
are as follows:
(a) "ransfer of real property to a trustee if
the property is to be held merely in
trust for the trustor!
(b) "ransfer of real property to a
corporation in exchange for its
shares of stoc# under /ection
+0(c)(:) and (H)(:) of the "ax (ode!
(c) ;dvance payment by the lessee in a
lease contract when the same is
actually a loan to the lessor from the
lessee!
(d) /ecurity deposits for lease
arrangements to insure the faithful
performance of certain obligations of
the lessee to the lessor!
(e) 5ease of residential units boarding
houses dormito% ries rooms and bed
spaces oCered for rent by their owners
at a monthly rental not exceeding
&+J,1!11 per unit!
CAT: /ia+"e for Payment (1996)
=:, are -ia6-e 1,r /:e *a05e%/ ,1
Va-.e;Added Ta>I
SUGGESTED ANSWER*
"he persons liable for the value%added tax
are:
a! /ellers of goods and properties in the
course of trade or businessD
b! /ellers of services in the course of trade
or business including lessors of goods and
propertiesD
c! Importers of taxable goods whether in
the course of business or not
CAT: Transactions >'eeme& Sa"esG (199,)
Fnder the 6alue ;dded tax (6;") the tax is
imposed on sales barter or exchange of
goods and services! "he 6;" is also imposed
on certain transactions "deemed%sales"!
What are these so%called transactions "deemed
salesB?
SUGGESTED ANSWER*
"he following transactions shall be deemed
sale:
a) "ransfer use or consumption not in
the course of business of goods
originally intended for sale or for use
in the course of businessD
b) 'istribution or transfer to:
(4) /hareholders or investors as
share in the pro*ts of 6;"%registered
personsD or
(:) (reditors in payment of debtD
c) (onsignment of goods if actual sale
is not made within H1 days following
the date such goods were consignedD
and
d) >etirement from or cessation of
business with respect to inventories of
taxable goods existing as of such
retirement or cessation!
CAT$ !o(ere& Transactions (199=)
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46 of 73
/tate whether the
following
transacti
ons
ar
e
a
)
6;" 3xempt b) sub2ect to 6;" at 41-D or
c) sub2ect to 6;" at 1-:
4) /ale of fresh vegetables by
;ling Ining at the &amilihang
Aayan ng "rece <artire$! Q4-R
:) /ervices rendered by Ma#eBs
(onstruction (ompany a contractor
to the World ?ealth Organi$ation
in the renovation of its oCices in
<anila! Q4-R
+) /ale of tractors and other agricultural
implements by Aung#al Incorporated
to local farmers! Q4-R
0) /ale of >"W by (elyBs AoutiEue a
Iilipino dress designer in her dress
shop and other outlets! Q4-R
,) Iees for lodging paid by students to
Aahay%Aahayan 'ormitory a private
entity operating a student
dormitory (monthly fee &I,11)! Q4-R
SUGGESTED ANSWER*
4) 6;" exempt! /ale of agricultural
products such as fresh vegetables
in their original state of a #ind
generally used as or producing
foods for human consumption is
exempt from 6;"! (/ection 41J(c)
8I>()!
:) 6;" at 1-! /ince Ma#eBs (onstruction
(ompany has rendered services to the
World ?ealth Organi$ation which is
an entity exempted from taxation
under international agreements to
which the &hilippines is a signatory the
supply of services is sub2ect to $ero
percent (1-) rate! (/ec! 41=QA4(+)
8I>()!
+) 6;" at 41-! "ractors and other
agricultural implements fall under
the de*nition of goods which include
all tangible ob2ects which are
capable of pecuniary estimation
(/ec! 41HQ;4(4) 8I>( the sales of
which are sub2ect to 6;" at 41-!
0) "his is sub2ect to 6;" at 41-! "his
transaction also falls under the
de*nition of goods which include all
tangible ob2ects which are capable
of pecuniary estimation (/ec!
41HQ;4(4) 8I>( the sales of
which are sub2ect to 6;" at 41-!
,) 6;" 3xempt! "he monthly fee paid by
each student falls under the lease
of residential units with a monthly
rental per unit not exceeding &hp
=111 which Is exempt from 6;"
regardless of the amount of
aggregate rentals received by the
lessor during the year! (/ec! 41J(x)
8I>()! "he term unit shall mean per
person in the case of dormitories
boarding houses and bed spaces
(/ec! 0!41+%4 >>8o! L%J,)!
C$((ENT: "he problems do not call for a yes
or no answer! ;ccordingly a bar candidate who
answered only 6;" exempt! 6;" at 41- or 6;"
at 1-! as called for in the problem without
further reasons should be given full credit!
CAT$ 2xemption: !onstitutiona"ity (2*)
; law was passed exempting doctors and
lawyers from the operation of the value
added tax! Other professionals complained
and *led a suit Euestioning the law for being
discriminatory and violative of the eEual
protection clause of the (onstitution since
complainants were not given the
same exemption! Is the suit meritorious or
not? >eason brie)y! (,-)
SUGGESTED ANSWER*
A! 7es the suit is meritorious! "he 6;" is
designed for economic eCiciencyD hence
should be neutral to those who belong to
the same class! &rofessionals are a class of
taxpayers by themselves who in compliance
with the rule of eEuality of taxation must
be treated ali#e for tax purposes!
3xempting lawyers and doctors from a burden
to which other professionals are sub2ected will
ma#e the law discriminatory and violative
of the eEual protection clause of the
(onstitution! While singling out a class for
taxation purposes will not infringe
upon this constitutional limitation (S:e--
v. Va%, "( P:i-. 74" 8!"3(9) singling
out a taxpayer from a class will no doubt
transgress the constitutional limitation
(Or5,c S.gar C,. I%c. v. Trea+.rer ,1
Or5,c Ci/0 22 SCRA ')7 8!"'4R)!
"reating doctors and lawyers as a
diCerent class of professionals will not
comply with the reEuirements of a
reasonable hence valid classi*cation
because the classi*cation is not based
upon substantial distinction which ma#es
real diCerences! "he classi*cation does not
comply with the reEuirement that it should be
germane to the purpose of the law either!
(Pe*+i;C,-a B,//-i%g C,. I%c. v. Ci/0 ,1
B./.a% 2( SCRA #4" 8!"'49)!
ANOT/ER ANSWER*
8o! "he suit is not meritorious! "he eEual
protection clause of the (onstitution merely
reEuires that all persons sub2ected to
legislation shall be treated ali#e under
li#e circumstances and conditions both
in the privileges conferred and in the
liabilities imposed! "he eEuality in taxation
rule is not violated if classi*cations or
distinctions are made as long as the same are
based on reasonable and substantial
diCerences! GPe*+i;C,-a B,//-i%g C,.
I%c. v. Ci/0 ,1 B./.a% 2( SCRA #4"
8!"'4R)!
In the instant case the professions of doctors
and lawyers are not principally aimed at
earning money but for the service of the
people! "he exemption granted to doctors and
lawyers from the operation of the 6;" is
2usti*ed as it is not discriminatory against
the other professionals because they have
reasonable and substantial diCerences in
the conduct of their professions!
CAT$ 7on:CAT taxpayer$ !"aim for 8efun& (26)
5ilyBs Iashion Inc! is a garment
manufacturer located and registered as a
/ubic Aay Ireeport 3nterprise under
>epublic ;ct 8o! L::L and a non%6;"
taxpayer! ;s such it is exempt from payment
of all local and national internal revenue
taxes! 'uring its operations it purchased
various supplies and materials necessary
in the conduct of its manufacturing
business! "he suppliers of these goods
shifted to 5ilyBs Iashion Inc! the 41-
6;" on the purchased items amounting
to & ,11111!11! 5ilyBs Iashion Inc! *led
with the AI> a claim for refund for the input
tax shifted to it by the suppliers! If you
were the (ommissioner of Internal
>evenue will you allow the refund? (,-)
ALTERNATI1E ANSWER*
8o I will not allow the refund! Only 6;"%
>egistered taxpayers are entitled to
a refund of their
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42 of 73
unappliedOunused Input 6;" ("ax
>eform ;ct
/ection 44:Q;R Q4JJLR)!
ALTERNATI1E ANSWER*
8o! "he exemption of 5ilyBs Iashion Inc! is
only for taxes for which it is directly
liable! ?ence it can not claim
exemption for a tax shifted to it which
is not at all considered a tax to the
buyer but a part of the purchase price!
5ilyBs fashion is not the taxpayer in so
far as the passed%on tax is concerned and
therefore it can not claim for a refund of
a tax merely shifted to it (&hil! ;cetylene
(o! Inc! v! (I> 5%4JL1L;ug! 4L 4J=L)!
(NCTA 34N4: This concept pertains
to the 2AT law which is excluded
from the 3ar coverage #uidelines
for &((. 3ar 4xaminations )une %-
&((.)
REMEDIES IN
INTERNAL RE1ENUE
TAXES
BI8: Assessment: <nregistere& Partners#ip (199,)
<r! /antos died intestate in 4J=J leaving his
spouse and *ve children as the only
heirs! "he estate consisted of a family
home and a four%door apartment which was
being rented to tenants! Within the year an
extra2udicial settle% ment of the estate
was executed from the heirs each of
them receiving hisOher due share! "he
surviving spouse assumed administration
of the property! 3ach year the net
income from the rental property was
distributed to all proportionately on
which they paid respectively the
corresponding income tax!
In 4JJ0 the income tax returns of
the heirs were examined and de*ciency
income tax assessments were is% sued
against each of them for the years 4J=J
to 4JJ+ inclusive as having entered
into an unregistered partnership! Were
the assessments 2usti*ed?
SUGGESTED ANSWER*
7es the assessments were 2usti*ed because
for income tax purposes the co%
ownership of inherited property is
automatically converted into an
unregistered partnership from the moment
the said properties are used as a
common fund with intent to produce pro*ts
for the heirs in proportion to their shares in
the inheritance!
Irom the moment of such partition the heirs
are entitled already to their respective
de*nite shares of the estate and the income
thereof for each of them to manage and
dispose of as exclusively his own without the
intervention of the other heirs and
accordingly he becomes liable individually
for all taxes in connection therewith! If after
such partition he allows his shares to be held
in common with his co%heir under a single
management to be used with the intent of
ma#ing pro*t thereby in proportion to his
share there can be no doubt that even if no
document or instrument were executed for
the purpose for tax purposes at least an
unregistered partnership is formed
(L,re%G, O%a e/ a- v. CIR (3 SCRA #()!
ALTERNATI1E ANSWER*
8o the assessments are not 2usti*ed! "he
mere sharing of income does not of itself
establish a partnership absent any clear
intention of the co%owners who are only
awaiting liEuidation of the estate!
BI8: !o""ection of Tax 'eficiency (1999)
; died survived by his wife and three
children! "he estate tax was properly paid
and the estate settled and divided and
distributed among the four heirs! 5ater
the AI> found out that the estate failed to
report the income received by the estate
during administration! "he AI> issued a
de*ciency income tax assessment plus
interest surcharges and penalties! /ince the
+ children are residing abroad the AI>
sought to collect the full tax de*ciency
only against the widow! Is the AI> correct?
(41-)
SUGGESTED ANSWER*
7es the AI> is correct! In a case where
the estate has been distributed to the
heirs the collection remedies available to
the AI> in collecting tax liabilities of an estate
may either (4) sue all the heirs and collect
from each of them the amount of tax
proportionate to the inheritance received or
(:) by virtue of the lien created under /ection
:4J sue only one heir and sub2ect the
property he received from the estate to the
payment of the estate tax! "he AI>
therefore is correct in pursuing the
second remedy although this will give rise to
the right of the heir who pays to see#
reimbursement from the other heirs!
(CIR v. Pi%eda 2! SCRA !)3$. In no case
however can the AI> enforce the tax
liability in excess of the share of the widow
in the inheritance!
BI8: !ompromise$ !on&itions (2)
Fnder what conditions may the
(ommissioner of Internal >evenue be
authori$ed to:
. (ompromise the payment of any
internal revenue tax? (:-)
SUGGESTED ANSWER*
"he (ommissioner of Internal
>evenue may be authori$ed to
compromise the payment of any internal
revenue tax where:
4) ; reasonable doubt as to the validity
of the claim against the taxpayer
existsD or
:) the *nancial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax!
A! ;bate or cancel a tax liability? (+-)
SUGGESTED ANSWER*
may abate or cancel a tax liability when:
4) "he tax or any portion thereof appears
to be un2ustly or excessively assessedD
or
:) "he administration and collection
costs involved do not 2ustify the
collection of the amount due! Q/ec!
:10 (A) 8I>( of 4JJLR
BI8: !ompromise$ 2xtent of Aut#ority (1996)
3xplain the extent of the authority of the
(ommissioner of Internal >evenue to
compromise and abate taxes?
SUGGESTED ANSWER*
"he authority of the (ommissioner to
compromise encompasses both civil and
criminal liabilities of the tax% payer! "he civil
compromise is allowed only in cases
4:) where the tax assessment is of doubtful
validity or
4+) when the *nancial position of the
taxpayer demonstrates a clear inability to
pay the tax!
"he compromise of the tax liability is possible
at any stage of litigation and the amount of
compromise is left to the discretion of the
(ommissioner except with respect to
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44 of 73
*nal assessments
issued
again
st
larg
e
taxpay
ers
wherein the (ommissioner cannot
compromise for less than *fty percent
(,1-)! ;ny compromise involving large
taxpayers lower than *fty percent (,1-)
shall be sub2ect to the approval of the
/ecretary of Iinance!
;ll criminal violations except those
involving fraud can be compromised by
the (ommissioner but only prior to the
*ling of the information with the
(ourt! "he (ommissioner may also
abate or cancel a tax liability when
4! the tax or any portion thereof appears
to have been un2ustly or excessively
assessedD or
:! the administrative and collection
costs involved do not Mustify
collection of the amount due! (/ec!
:10 8I>()
BI8: !ompromise$ -it##o"&ing Agent (199=)
<ay the (ommissioner of the Internal
>evenue compro% mise the payment of
withholding tax (tax deducted and
withheld at source) where the
*nancial position of the taxpayer
assessed tax? Q,-4
SUGGESTED ANSWER*
8o! ; taxpayer who is constituted as
withholding agent who has deducted and
withheld at source the tax on the income
payment made by him holds the taxes as
trust funds for the government (/ec! ,=Q'R)
and is obligated to remit them to the AI>!
"he subseEuent inability of the
withholding agent to payOremit the tax
withheld is not a ground for compromise
because the withholding tax is not a tax
upon the withholding agent but it is only
a procedure for the collection of a tax!
BI8: !orporation: 'istraint ; /e(y (22)
On <arch 4, :111 the AI> issued a
de*ciency income tax assessment for the
taxable year 4JJL against the 6alera
.roup of (ompanies (6alera) in the
amount of &41 million! (ounsel for
6alera protested the assessment and
reEuested a reinvestigation of the
case! 'uring the investigation it was
shown that 6alera had been
transferring its properties to other
persons! ;s no additional evidence to
dispute the assessment had been
presented the AI> issued on Mune 4H
:111 warrants of distraint and levy on
the properties and ordered the *ling of
an action in the >egional "rial (ourt for the
collection of the tax! (ounsel for 6alera
*led an in2unctive suit in the >egional
"rial (ourt to compel the AI> to hold
the collection of the tax in abeyance until
the decision on the protest was rendered!
;! (an the AI> *le the civil action for
collection pending decision on the
administrative protest?
3xplain! (+-)
SUGGESTED ANSWER*
;! 7es because there is no
prohibition for this procedure considering
that the *ling of a civil action for collection
during the pendency of an
administrative protest constitutes the *nal
decision of the (ommissioner on the
protest (CIR v. U%i,% S:i**i%g C,r*. 43
SCRA 3(4 8!"")9)!
A! ;s counsel for 6alera what action
would you ta#e in order to protect
the interest of your client?
3xplain your answer! (:-)
SUGGESTED ANSWER*
A! I will wait for the *ling of the civil
action for collection and consider the
same as an appealable decision! I will not
*le an in2unctive suit because it is not an
available remedy! I would then appeal the case
to the (ourt of "ax ;ppeals and move for the
dismissal of the collection case with the >"(!
Once the appeal to the ("; is *led on time
the ("; has exclusive 2urisdiction over the
case! ?ence the collection case in the >"(
should be dismissed (Ta6e+ v. F-,M, !!3
SCRA 2#4 8!"429)!
BI8: !ourt of Tax Appea"s: !o""ection of Taxes$ 5roun&s
for !ompromise (1996)
4! <ay the (ourt of "ax ;ppeals issue an
in2unction to en2oin the collection of
taxes by the Aureau of
Internal >evenue? 3xplain!
SUGGESTED ANSWER*
7es! When a decision of the (ommissioner
on a tax protest is appealed to the (";
pursuant to ,ec. %% of $A. No. %%&- (law
creating the !TA) in relation to ,ec. &&*
of the N6$! such appeal does not
suspend the payment levy distraint andOor
sale of any of the taxpayerBs property for the
satisfaction of his tax liability! ?owever when
in the opinion of the ("; the collection
of the tax may 2eopardi$e the interest of
the .overnment andOor the taxpayer the
(ourt at any stage of the proceedings may
suspend or restrain the collection of the
tax and reEuire the taxpayer either to
deposit the amount claimed or to *le a
surety bond for not more than double the
amount with the (ourt!
:! <ay the tax liability of a taxpayer be
compromised during the pendency of an
appeal? 3xplain!
SUGGESTED ANSWER*
7es! 'uring the pendency of the appeal the
taxpayer may still enter into a compromise
settlement of his tax liability for as long as
any of the grounds for a compromise i!e!D
doubtful validity of assessment and Enancial
incapacity of taxpayer is present! ;
compromise of a tax liability is possible at
any stage of litigation even during appeal
although legal propriety demands that prior
leave of court should be obtained
(Pa+.dec, v+. CIR L;7"74# <.%e 2"
!"42)!
BI8: !rimina" Prosecution: Tax 2(asion (199=)
Is assessment necessary before a
taxpayer may be prosecuted for willfully
attempting in any manner to evade or defeat
any tax imposed by the Internal >evenue
(ode? Q,-)
SUGGESTED ANSWER*
8o! ;ssessment is not necessary before a
taxpayer maybe prosecuted if there is a
prima facie showing of a willful attempt to
evade taxes as in the taxpayerBs failure to
declare a speci*c item of taxable income in his
income tax returns (U%ga6 v. C.+i "# SCRA
4##)! On the contrary if the taxes alleged to
have been evaded is computed based on
reports approved by the AI> there is a
presumption of regularity of the previous
payment of taxes so that unless and until
the AI> has made a *nal determination of
what is supposed to be the correct taxes the
taxpayer should not be placed in the
crucible of
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criminal prosecution (CIR v. F,r/.%e
T,6acc, C,r*. GR N,. !!"722 <.%e (
!""')!
BI8: 2xtinction$ !rimina" /ia+i"ity of t#e Taxpayer (22)
<r! (han a manufacturer of garments
was investigated for failure to *le tax
returns and to pay taxes for the taxable
year 4JJL! 'espite the subpoena duces
tecum issued to him he refused to
present and submit his boo#s of accounts
and allied records! Investigators
therefore raided his factory and
sei$ed several bundles of
manufactured garments supplies and
unpaid imported textile materials! ;fter his
apprehension and based on the testimony of
a former employee de*ciency income and
business taxes were assessed against <r!
(han on ;pril 4, :111! It was then that
he paid the taxes! (riminal action was
nonetheless instituted against him in
the >egional "rial (ourt for violation of
the "ax (ode! <r! (han moved to dismiss
the criminal case on the ground that he had
already paid the taxes assessed against him!
?e also demanded the return of the
garments and materials sei$ed from his
factory! ?ow will you resolve <r! (hanBs
motion? (,-)
SUGGESTED ANSWER*
"he motion to dismiss should be denied!
"he satisfaction of the civil liability is
not one of the grounds for the
extinction of criminal action (Pe,*-e
v. I-de1,%+, Tierra !2 SCRA '''
8!"'(9)! 5i#ewise the payment of the
tax due after apprehension shall not
constitute a valid defense in any
prosecution for violation of any provision
of the "ax (ode (/ec! :,+QaR 8I>()!
?owever the garments and materials
sei$ed from the factory should be ordered
returned because the payment of the
tax had released them from any lien
that the .overnment has over them!
!ustoms$ Huris&iction$ Assessment$ <npai&
!ustoms 'utiesETaxes (26)
"he (ollector of (ustoms issued an
assessment for un% paid customs duties and
taxes on the importation of your client in the
amount of &J=1111!11! Where will you *le
your case to protect your clientBs right?
(hoose the correct courtsO agencies
observing their proper hierarchy! (,-)
4! (ourt of "ax ;ppeals
:! (ollector of (ustoms
+! (ommissioner of (ustoms
0! >egional "rial (ourt
,! <etropolitan "rial (ourt
H! (ourt of ;ppeals
L! /upreme (ourt
SUGGESTED ANSWER*
%. &rotest with the (ollector of (ustoms
(,ec. &5(/ T!!)
&. ;ppeal to the (ommissioner of
(ustoms (,ec. &5%5 T!!).
5. ;ppeal to the ("; ($A *&/&)
".&etition for >eview on (ertiorari /upreme
(ourt ($ule
"- of the %**' $ules of !ivil 9rocedure
($A *&/&).
Taxpayer$ Prescripti(e Perio&$ Assessment$ 'eficiency
Income Tax (26)
issued an assess% ment for de*ciency
income tax for taxable year :111 last Muly
+4 :11H in the amount of & 41 <illion
inclusive of
surcharge and interests! If the delinEuent
taxpayer is your client what steps will
you ta#e? What is your defense? (41-)
ALTERNATI1E ANSWER*
;s (ounsel I shall move to cancel
the ;ssessment because of prescription!
"he three (+) year period of assessment
for the Income "ax >eturns of :111 starts
on ;pril 4, :114 and ends on ;pril
4H :110! "he assessment of Muly +4
:11H is beyond the three (+) year
prescriptive period and can no longer
have any legal binding eCect (Tax $eform
Act Title 2666 !hapter 6 ,ection &(5
A%**'@).
ALTERNATI1E ANSWER*
/ince my client has lost his right to protest I
will advise him to wait for a collection action
by the (ommissioner! "hen I will *le a
petition for review with the ("; to
Euestion the collection! /ince the
assessment was issued beyond the
prescriptive period to assess the action to
collect an invalid assessment is not warranted
(P:i-. <,.r; %a-i+/+ I%c. v. CIR G.R. N,.
!'2432 Dece56er !' 2))($.
Taxpayer$ Assessment$ 'eficiency Tax (26)
On Mune 4 :11+ .lobal Aan# received a
*nal notice of assessment from the AI>
for de*ciency documentary stamp tax in
the amount of &, <illion! On Mune +1 :11+
.lobal Aan# *led a reEuest for
reconsideration with the (ommissioner
of Internal >evenue! "he (ommissioner
denied the reEuest for reconsideration
only on <ay +1 :11H at the same time
serving on .lobal Aan# a warrant of
distraint to collect the de*ciency tax! If
you were its counsel what will be your
advice to the ban#? 3xplain! (,-)
ALTERNATI1E ANSWER*
"he denial for the reEuest for reconsideration
is the *nal decision of the (I>!! I would
advise .lobal Aan# to appeal the denial to
the (ourt of "ax ;ppeals ((";) within +1
days from receipt! I will further advise the
ban# to *le a motion for in2unction with
the (ourt of "ax ;ppeals to en2oin the
(ommissioner from enforcing the assessment
pending resolution of the appeal! While an
appeal to the ("; will not suspend the
payment levy distraint andOor sale of any
property of the taxpayer for the satisfaction of
its tax liability the ("; is authori$ed to give
in2unctive relief if the enforcement would
2eopardi$e the interest of the taxpayer as
in this case where the assessment has
not become *nal (La+c,%a La%d C,. v
CIR CTA Ca+e N,. 3### <a%.ar0 ( 2)))?
See a-+, Revi+ed CTA R.-e+ a**r,ved 60
/:e S.*re5e C,.r/ ,% Dece56er !3 2))3$.
ALTERNATI1E ANSWER*
I will advice the Aan# to promptly pay
the de*ciency documentary stamp tax and
the interest charges to avoid any further
increase in the tax liability! "he Aan# should
have appealed to the (ourt of "ax ;ppeals
when the AI> failed to decide on its >eEuest
for >econsideration within thirty (+1) days
after the inaction of the AI> for one
hundred eighty (4=1) days or on 'ecember
+4 :11+! "he "ax ;ssessment has already
become *nal executory and unappealable at
that point (BPI v. CIR G.R. N,. !7"#7'
Oc/,6er !# 2))3$.
Taxpayer$ CAT:registere&$ !"aim for Tax 8efun& (26)
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>oyal <ining is a 6;"%
registered domestic
mining entity! One of its products is silver
being sold to the Aang#o /entral ng
&ilipinas! It *led a claim with the AI> for
tax refund on the ground that under
/ection 41H of the "ax (ode sales of
precious metals to the Aang#o /entral ng
&ilipinas are considered export sales
sub2ect to $ero%rated 6;"! Is >oyal
<iningBs claim meritorious? 3xplain!
(,-)
SUGGESTED ANSWER*
8o >oyal <iningBs claim is not
meritorious because it is the sale to the
Aang#o /entral ng &ilipinas of gold and
not silver which is considered export sales
at Kero%rated 6;"
(Tax $eform Act Title 62 ,ection %(.A&@Aa@
A"@).
(NOTA BENE: 42AT is excluded from the 3ar
coverage #uidelines for &((. 3ar
4xaminations )une %- &((.)
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (199=)
What constitutes prima facie
evidence of a false or fraudulent
return? Q:-R
SUGGESTED ANSWER*
"here is prima facie evidence of a false
or fraudulent return when the taxpayer has
willfully and #nowingly *led it with the
intent to evade a part or all of the tax legally
due from him (U%ga6 v. C.+i "# SCRA
4##)! "here must appear a design to
mislead or deceive on the part of the
taxpayer or at least culpable negligence! ;
mista#e not culpable in respect of its value
would not constitute a false return! (+ords
and 9hrases 2ol. %. page %'5).
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (22)
What constitutes prima facie evidence
of a false or fraudulent return to
2ustify the imposition of a ,1-
surcharge on the de*ciency tax due
from a taxpayer? 3xplain! (,-)
SUGGESTED ANSWER*
"here is a prima facie evidence of false
or fraudulent return when the taxpayer
,F3,TANT6A??H FNB4$- B4!?A$4B his
taxable sales receipts or income or
,F3,TANT6A??H C24$,TAT4B his
deductions the taxpayerBs failure to report
sales receipts or income in an amount
exceeding +1- of that declared per return
and a claim of deduction in an amount
exceeding +1- of actual deduction shall
render the taxpayer liable for substantial
underdeclaration and overdeclaration
respectively and will 2ustify the
imposition of the ,1- surcharge on the
de*ciency tax due from the taxpayer! (,ec.
&"/ N6$!).
BI8: 5arnis#ment: BanB Account of a Taxpayer (199=)
Is the AI> authori$ed to issue a warrant of
garnishment against the ban# account of
a taxpayer despite the pendency of his
protest against the assessment with the
AI> or appeal with the (ourt of "ax ;ppeals?
Q,-R
SUGGESTED ANSWER*
"he AI> is authori$ed to issue a warrant of
garnishment against the ban# account of
a taxpayer despite the pendency of
protest (Ba6e+ v. F-,M, !3 SCRA 2#4)!
8owhere in the "ax (ode is the (ommissioner
reEuired to rule *rst on the protest
before he can institute collection
proceedings on the tax assessed! "he
legislative policy is to give the
(ommissioner much latitude in the speedy
and prompt collection of taxes because it
is in taxation that the .overnment
depends to obtain the
means to carry on its operations (Re*.6-ic
.. Ti5 Tia% Te%g S,%+ I%c. !' SCRA
34()!
ALTERNATI1E ANSWER*
8o because the assessment has not yet
become *nal executory and demandable!
"he basic consideration in the collection of
taxes is whether the assessment is *nal and
unappealable or the decision of the
(ommissioner is *nal executory and
demandable the AI> has legal basis to
collect the tax liability by either
administrative or 2udicial action!
BI8: Pre:Assessment 7otice not 7ecessary (22)
In the investigation of the withholding tax
returns of ;K <edina /ecurity ;gency (;K
<edina) for the taxable years 4JJL and
4JJ= a discrepancy between the taxes
withheld from its employees and the
amounts actually remitted to the
government was found! ;ccordingly
before the period of prescription commenced
to run the AI> issued an assessment and a
demand letter calling for the immediate
payment of the de*ciency withholding
taxes in the total amount of &:,1111!11!
(ounsel for ;K <edina protested the
assessment for being null and void on the
ground that no pre%assessment notice had
been issued! ?owever the protest was
denied! (ounsel then *led a petition for
prohibition with the (ourt of "ax ;ppeals
to restrain the collection of the tax!
;! Is the contention of the counsel
tenable? 3xplain (:-)
SUGGESTED ANSWER*
;! 8o the contention of the counsel is
untenable! /ection ::= of the "ax (ode
expressly provides that no pre%assessment
notice is reEuired when a discrepancy has
been determined between the tax
withheld and the amount actually remitted
by the withholding agent! /ince the amount
assessed relates to de*ciency withholding
taxes the AI> is correct in issuing the
assessment and demand letter calling for
the immediate payment of the de*ciency
withholding taxes! (/ec! ::= 8I>()!
A! Will the special civil action for
prohibition brought before the (";
under /ec! 44 of >!; 8o! 44:,
prosper? 'iscuss your answer! (+-)
SUGGESTED ANSWER*
A! "he special civil action for
prohibition will not prosper because the
("; has no 2urisdiction to entertain the same!
"he power to issue writ of in2unction provided
for under /ection 44 of >; 44:, is only
ancillary to its appellate 2urisdiction! "he (";
is not vested with original 2urisdiction to issue
writs of prohibition or in2unction
independently of and apart from an
appealed case! "he remedy is to appeal the
decision of the AI>! (C,--ec/,r v. B.+ec, 7
SCRA 7!7 8!"'!9)!
BI8: Prescripti(e Perio&: !i(i" Action (22)
On ;ugust , 4JJL ;damson (o! Inc!
(;damson) *led a reEuest for
reconsideration of the de*ciency withholding
tax assessment on Muly 41 4JJL covering the
taxable year 4JJ0! ;fter administrative
hearings the original assessment of
&4,1111!11 was reduced to &L,!111!11 and
a modi*ed assessment was thereafter issued
on ;ugust 1, 4JJJ! 'espite repeated
demands ;damson failed and
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refuse
d to pay the
modi*e
d
assessm
ent!
(onseEuently the AI> brought an action
for collection in the >egional "rial
(ourt on /eptember 4, :111!
;damson moved to dismiss the action on
the ground that the governmentBs right to
collect the tax by 2udicial action has
prescribed! 'ecide the case! (,-)
SUGGESTED ANSWER*
"he right of the .overnment to collect by
2udicial action has not prescribed! "he
*ling of the reEuest for
reconsideration suspended the running of
the prescriptive period and commenced to
run again when a decision on the protest
was made on ;ugust , 4JJJ! It must be
noted that in all cases covered by an
assessment the period to collect shall
be *ve (,) years from the date of
the assessment but this period is
suspended by the *ling of a reEuest for
reconsideration which was acted upon by
the (ommissioner of Internal >evenue
(CIR v. =0e/: S.ac, La6,ra/,rie+ I%c.
2)2 SCRA !23 8!""!9)!
BI8: Prescripti(e Perio&$ Assessment ; !o""ection (1999)
; (o! a &hilippine (orporation *led
its 4JJ, Income "ax >eturn (I">) on
;pril 4, 4JJH showing a net loss! On
8ovember 41 4JJH it amended its 4JJ,
I"> to show more losses! ;fter a tax
investigation the AI> disallowed certain
deductions claimed by ; (o! putting ;
(o! in a net income position! ;s a result
on ;ugust , 4JJJ the AI> issued a
de*ciency income assessment against ;
(o! ; (o! protested the assessment on the
ground that it has prescribed: 'ecide!
(,-)
SUGGESTED ANSWER*
"he right of the AI> to assess the tax has
not prescribed!
The rule is that internal revenue taxes
shall be assessed within three years after
the last day prescribed by law for the Eling
of the return.
(,ection &(5 N6$!) ?owever if the
return originally *led is amended
substantially the counting of the three%
year period starts from the date the
amended return was *led! (CIR v. P:,e%i>
A++.ra%ce C,. L/d. !( SCRA 32)! "here is
a substantial amendment in this case
because a new return was *led declaring
more losses which can only be done
either (4) in reducing gross income or (:)
in increasing the items of deductions
claimed!
BI8: Prescripti(e Perio&$ !rimina" Action (22)
"7 (orporation *led its *nal ad2usted
income tax return for 4JJ+ on ;pril 4:
4JJ0 showing a net loss from
operations! ;fter investigation the AI>
issued a pre% assessment notice on <arch
+1 4JJH! ; *nal notice and demand letter
dated ;pril 4, 4JJL was issued personally
delivered to and received by the
companyBs chief accountant! Ior willful
refusal and failure of "7 (orporation
to pay the tax warrants of distraint and levy
on its properties were issued and served
upon it! On Manuary 41 :11: a criminal
charge for violation of the "ax (ode was
instituted in the >egional "rial (ourt with
the approval of the (ommissioner!
"he company moved to dismiss the criminal
complaint on the ground that an act for
violation of any provision of the "ax
(ode prescribes after *ve (,) years and
in this case the period commenced to
run on <arch +1 4JJH when the pre%
assessment was issued! ?ow will you
resolve the motion? 3xplain your answer!
(,-)
SUGGESTED ANSWER*
"he motion to dismiss should not be
granted! It is only when the assessment has
become *nal and unappealable that the ,%
year period to *le a criminal action
commences to run (T.*aG v. U-,* 7!'
SCRA !!4 8!"""9)! "he pre% assessment
notice issued on <arch +1 4JJH is not a *nal
assessment which is enforceable by the
AI>! It is the issuance of the *nal notice and
demand letter dated ;pril 4, 4JJL and the
failure of the taxpayer to protest within +1
days from receipt thereof that made the
assessment *nal and unappealable! "he
earliest date that the assessment has
become *nal is <ay 4H 4JJL and since the
criminal charge was instituted on Manuary
41 :11: the same was timely *led!
BI8: Secrecy of BanB 'eposits /a1 (199=)
(an the (ommissioner of Internal
>evenue inEuire into the ban# deposits of
a taxpayer? If so does this power of the
(ommissioner con)ict with >!;! 401,
(/ecrecy of Aan# 'eposits 5aw) Q,-R
SUGGESTED ANSWER*
"he (ommissioner of Internal >evenue is
authori$ed to inEuire into the ban#
deposits of:
%) a decedent to determine his gross
estateD
&) any taxpayer who has *led an
application for compromise of his tax
liability by means of *nancial incapacity
to pay his tax liability (/ec! H(I)! 8I>()!
5) Where the taxpayer has signed a waiver
authori$ing the (ommissioner or
his duly authori$ed representatives
to InEuire into the ban# deposits!
(Note: This answer was not part of the
answers enumerated in the F9 ?aw
Answers to the 3ar in this but was
later added in the recent F9 ?aw
Answers to the 3ar as a result of
A8?A ?aw of &((%)
"he limited power of the (ommissioner does
not con)ict with >!;! 8o! 401, because
the provisions of the "ax (ode granting this
power is an exception to the /ecrecy of Aan#
'eposits 5aw as embodied in a later
legislation!
Iurthermore in case a taxpayer applies for an
application to compromise the payment of
his tax liabilities on his claim that his
*nancial position demonstrates a clear
inability to pay the tax assessed his application
shall not be considered unless and until he
waives in writing his privilege under >!;!
8o! 401, and such waiver shall constitute
the authority of the (ommissioner to
inEuire into the ban# deposits of the taxpayer!
BI8$ !onse3uence$ Taxpayer gui"ty of Tax 2(asion (29)
Mosel agreed to sell his condominium unit to
Mess for &:!, <illion! ;t the time of the sale
the property had a $onal value of &:!1 <illion!
Fpon the advice of a tax consultant the
parties agreed to execute two deeds of
sale one indicating the $onal value of &:!1
<illion as the selling price and the other
showing the true selling price of &:!, <illion!
"he tax consultant *led the capital gains
tax return using the deed of sale showing the
$onal value of
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&:!1 <illion as the selling price!
'iscuss the tax
implications and conseEuences of the
action! (,-)
ALTERNATI1E ANSWER*
"he action of the parties constitutes
tax evasion and exposes Mosel to:
(4) '3II(I38(7 II8;5 I8(O<3 ";@ on the
sale of real property in the
&hilippines classi*ed as a capital asset!
Fnder /ec! :0(') of the 8I>( the *nal
tax of six percent (H-) shall be based
on the gross selling price of &:!,
<illion or $onal value of &:!1 <illion
whichever is higher i!e! &:!, <illionD
(:) I>;F' &38;5"7 amounting to ,1-
surcharge on the amount evaded (/ec!
:0=QAR 8I>()D and
(+) '3II(I38(7 I8"3>3/" of :1- per
annum on
the de*ciency! (/ec! :0JQ;RQAR 8I>()
ALTERNATI1E ANSWER*
"here is tax evasion because of the
concurrence of the following factors:
4)"he payment of less than that #nown by
the taxpayer to be legally due or the non%
payment of tax when it is shown that a tax
is due! It is evident that the parties that
the tax due should be computed based on
the valuation of &:!, million and not &:!1
millionD
:) ;n accompanying state of mind which
is described as being "evil" on "bad faith"
"willful" or "deliberate and not
accidental!" 'espite the above #nowledge
the parties deliberately misrepresented
the true basis of the saleD and
+) ; course of action or failure of
action which is unlawful! "his is shown
by the preparation of the two deeds of
sale which showed diCerent
values!
(C,55i++i,%er ,1 I%/er%a- Reve%.e
v. T:e E+/a/e ,1Be%ig%, P T6da <r.
G.R. N,. !(#!44 Se*/e56er !( 2))($
"he tax evasion committed should
result to the imposition of a ,1- fraud
surcharge on the amount evaded (,ec.
&"/A3@ N6$!) payment of the 'e*ciency
"ax and interest of :1- per annum on
the de*ciency! (,ec. &"*AA@A3@ N6$!)
"he parties may li#ewise be sub2ect to
criminal prosecution for willfully failing to
pay the tax as well as for *ling a false and
fraudulent return!
(,ees. &-" &-- and &-' N6$!)
BI8: Summary 8eme&y: 2state Tax 'eficiencies (199=)
Is the AI> authori$ed to collect estate tax
de*ciencies by the summary remedy of
levy upon and sale of real properties
of the decedent without *rst securing
the authority of the court sitting in probate
over the supposed will of the decedent?
SUGGESTED ANSWER*
7es! "he AI> is authori$ed to collect estate
tax de*ciency through the summary
remedy of levying upon and sale of real
properties of a decedent without the
cognition and authority of the court sitting
in probate over the supposed will of the
deceased because the collection of estate
tax is executive in character! ;s such the
estate tax is exempted from the application
of the statute of non%claims and this is
2usti*ed by the necessity of
government funding immortali$ed in the
maxim that taxes are the lifeblood of the
government (Marc,+ v. CIR G.R. N,.
!2)44) <.%e 3 !""#)!
ALTERNATI1E ANSWER*
7es if the tax assessment has already
become *nal executory and enforceable!
"he approval of the court sitting in probate
over the supposed will of the deceased is not
a mandatory reEuirement for the collection
of the estate tax! "he probate court is
determining issues which are not against
the property of the decedent or a claim
against the estate as such but is against
the interest or property right which the heir
legatee devisee etc! has in the property
formerly held by the decedent! (Marc,+ v.
CIR G.R N,. !2)44) <.%e 3 !""L)!
BI8: <npai& Taxes (s) !"aims for <npai& -ages (1999)
Ior failure of Oceanic (ompany Inc!
(O(3;8I() to pay de*ciency taxes of &:1
<illion the (ommissioner of Internal
>evenue issued warrants of distraint
on O(3;8I(Bs personal properties and
levied on its real properties! <eanwhile the
'epartment of 5abor through the 5abor
;rbiter rendered a decision ordering
O(3;8I( to pay unpaid wages and other
bene*ts to its employees! Iour barges
belonging to O(3;8I( were levied upon by
the sheriC and later sold at public auction!
*led a motion with the 5abor ;rbiter to
annul the sale and en2oin the sheriC
from disposing the proceeds thereof!
"he employees of O(3;8I( opposed the
motion contending that ;rt! 441 of the
5abor (ode gives *rst preference to claims
for unpaid wages!
>esolve the motion! 3xplain!
SUGGESTED ANSWER*
"he motion *led by the (ommissioner should
be granted because the claim of the
government for unpaid taxes are generally
preferred over the claims of laborers for
unpaid wages! "he provision of ;rticle 441
of the 5abor (ode which gives laborersB
claims for preference applies only in case of
ban#ruptcy or liEuidation of the
employerBs business! In the instant case
Oceanic is not under ban#ruptcy or
liEuidation at the time the warrants of
distraint and levy were issued hence the
opposition of the employees is unwarranted!
(CIR v+. NLRC e/ a- G.R. N,.
#("'3 N,ve56er " !""($.
BI8$ Assessment$ !rimina" !omp"aint (29)
In 4JJ, the AI> *led before the
'epartment of Mustice ('OM) a criminal
complaint against a corporation and its
oCicers for alleged evasion of taxes! "he
complaint was supported by a sworn
statement of the AI> examiners showing
the computation of the tax liabilities of the
erring taxpayer! "he corporation *led a
motion to dismiss the criminal complaint on
the ground that there has been as yet no
assessment of its tax liabilityD hence the
criminal complaint was premature! "he 'OM
denied the motion on the ground that an
assessment of the tax de*ciency of the
corporation is not a precondition to the
*ling of a criminal complaint and that
in any event the 2oint aCidavit of the
AI> examiners may be considered as an
assessment of the tax liability of the
corporation! Is the ruling of the 'OM correct?
3xplain! (,-)
SUGGESTED ANSWER*
"he 'OM is correct in ruling that an assessment
of the tax de*ciency of the corporation is not a
precondition to the *ling of a criminal
complaint! "here is no need for an
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.+ of 73
assessment so
long as
ther
e is a
prim
a facie
showing of violation of the provisions of the
"ax (ode! ;fter all a criminal charge is
instituted not to demand payment but to
penali$e the tax payer for violation of the
"ax (ode! (C,55i++i,%er ,1 I%/er%a-
Reve%.e v. Pa+c,r
Rea-/0 a%d Deve-,*5e%/ C,r*,ra/i,%
G.R. N,. !247!3 <.%e 2" !""")
Iurthermore there is nothing in the
problem that shows that the AI> in *ling
the case is also interested in collecting
the tax de*ciency!
?owever it is in error when it ruled that
the 2oint aCidavit of the AI> examiners
may be considered as an assessment of
the tax liability of the corporation! "he
2oint aCidavit showing the computation of
the tax liabilities of the erring taxpayer is
not a tax assessment because it was not
sent to the taxpayer and does not
demand payment of the tax within a
certain period of time! ;n assessment is
deemed made only when the AI>
releases mails or sends such notice to
the taxpayer! (C,55i++i,%er ,1 I%/er%a-
Reve%.e v. Pa+c,r Rea-/0 a%d
Deve-,*5e%/ C,r*,ra/i,% G.R. N,.
!247!3 <.%e 2" !"""$
N,/e+ a%d C,55e%/+E A plea is
made for liberality in correcting the
examinees answers because the
examination is very long.
BI8$ Aut#ority$ 8efun& or !re&it of Taxes (29)
/tate the conditions reEuired by the "ax
(ode before the (ommissioner of Internal
>evenue could authori$e the refund or
credit of taxes erroneously or illegally
received!
SUGGESTED ANSWER*
Fnder /ec! :10(() 8I>( the following
conditions must be met:
4! "here must be a written claim for
refund *led by the taxpayer with the
(ommissioner!
:! "he claim for refund must be a
categorical demand for reimbursement!
+! "he claim for refund must be *led
within two (:) years from date of
payment of the tax or penalty
regardless of any supervening cause!
BI8$ !ompromise (2*)
;fter the tax assessment had
become *nal and unappealable the
initiated the *ling of a civil action to
collect the tax due from 8@! ;fter several
years a decision was rendered by the
court ordering 8@ to pay the tax due
plus penalties and surcharges! "he
2udgment became *nal and executory
but attempts to execute the 2udgment
award were futile!
/ubseEuently 8@ oCered the
(ommissioner a compromise settlement
of ,1- of the 2udgment award
representing that this amount is all he could
really aCord! 'oes the (ommissioner
have the power to accept the
compromise oCer? Is it legal and ethical?
3xplain brie)y! (,-)
SUGGESTED ANSWER*
7es! "he (ommissioner has the power to
accept the oCer of compromise if the
*nancial position of the taxpayer clearly
demonstrates a clear inability to pay
the tax (/ection :10 8I>()!
;s represented by 8@ in his oCer only
,1- of the 2udgment award is all he
could really aCord! "his is an oCer for
compromise based on *nancial incapacity
which the (ommissioner shall not accept
unless accompanied by a waiver of the
secrecy of ban# deposits (/ection HQIU
8I>()! "he waiver will enable the
(ommissioner to ascertain the *nancial
position of the taxpayer although the
inEuiry need not be limited only to the ban#
deposits of the taxpayer but also as to his
*nancial position as re)ected in his *nancial
statements or other records upon which his
property holdings can be ascertained!
If indeed the *nancial position of 8@ as
determined by the (ommissioner
tax the acceptance of the oCer is legal and
ethical because the ground upon which the
compromise was anchored is within the
context of the law and the rate of
compromise is well within and far exceeds
the minimum prescribed by law which is
only 41- of the basic tax assessed!
BI8$ !ompromise (29)
/tate and discuss brie)y whether the
following cases may be compromised or
may not be compromised:
a) 'elinEuent accountsD
b) (ases under administrative protest
after issuance of the *nal assessment
notice to the taxpayer which are still
pendingD
c) (riminal tax fraud casesD
d) (riminal violations already *led in courtD
e) (ases where *nal reports of
reinvestigation or reconsideration
have been issued resulting in the
reduction of the original assessment
agreed to by the taxpayer when he
signed the reEuired agreement
form! (,-)
SUGGESTED ANSWERS*
"he following cases may still be
compromised ($.$. 5(-(& A&((&@) because
of the taxpayerBs *nancial incapacity to
pay the tax due or the assessmentBs doubtful
validity:
a) '35I8NF38" ;((OF8"/ may
be compromised because there is no
showing that there is a duly%approved
schedule of installment paymentsD and
b) (ases under administrative protest
after issuance of the *nal assessment
notice to the taxpayer which are still
pending!
"he following cases 8AH NC
?CN#4$ 34 !C89$O<I/3' ($.$.
5(-(& A&((&@) because the taxpayer has
not paid his taxes for reasons other than his
*nancial incapacity or the doubtful
validity of the assessment:
a) (>I<I8;5 ";@ I>;F' cases as
may be determined by the (ommissioner or
his authori$ed agents may not be
compromisedD
b) (>I<I8;5 6IO5;"IO8/ ;5>3;'7
II53' I8 (OF>" so that the taxpayer will
not pro*t from his fraud which would
encourage tax evasionD and
c) (ases where *nal reports of
reinvestigation or reconsideration have
been issued resulting in the
reduction of the original assessment
agreed to by the taxpayer when he
signed the reEuired agreement form! "he
taxpayer is estopped from applying
for a compromise!
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73
BI8$ 'eficiency Tax Assessment (s) Tax 8efun& E
Tax !re&it (29)
Is a de*ciency tax assessment a bar to
a claim for tax refund or tax credit?
3xplain!
SUGGESTED ANSWER*
7es the de*ciency tax assessment is a bar to
a tax refund or credit! "he "axpayer cannot
be entitled to a refund and at the same time
liable for a tax de*ciency assessment for the
same year! "he de*ciency assessment
creates a doubt as to the truth and
accuracy of the "ax >eturn! /aid >eturn
cannot therefore be the basis of the
refund
(C,55i++i,%er ,1 I%/er%a- Reve%.e v.
A--/e- 82))29 ci/i%g C,55i++i,%er ,1
I%/er%a- Reve%.e v. C,.r/ ,1 A**ea-+
Ci/0 Tr.+/ Ba%Ai%g C,r*,ra/i,% a%d C,.r/
,1 Ta> A**ea-+ G.R. N,. !)''!! <.-0 2!
!""($
BI8$ 'istraint$ Prescription of t#e Action (22)
<r! /ebastian is a Iilipino seaman
employed by a 8orwegian company
which is engaged exclusively in
international shipping! ?e and his wife
who manages their business *led a 2oint
income tax return for 4JJL on <arch 4,
4JJ=! ;fter an audit of the return the
AI> issued on ;pril :1 :114 a
de*ciency income tax assessment for
the sum of &:,1!111!11 inclusive of
interest and penalty! Ior failure of <r! and
<rs! /ebastian to pay the tax within the
period stated in the notice of assessment
the AI> issued on ;ugust 4J :114 warrants
of distraint and levy to enforce collection of
the tax!
;! What is the rule of income taxation
with respect to <r! /ebastianBs
income in 4JJL as a seaman on
board the 8orwegian vessel
engaged in
international shipping? 3xplain your
answer! (:-)
SUGGESTED ANSWER*
;! "he income of <r! /ebastian as a seaman
is considered as income of a non%resident
citi$en derived from without the &hilippines!
"he total gross income in F/ dollars (or if
in other foreign currency its dollar
eEuivalent) from without shall be declared
by him for income tax purposes using a
separate income tax return which will not
include his income from business derived
within (to be covered by another return)!
?e is entitled to deduct from his dollar gross
income a personal exemption of V0,11 and
foreign national income taxes paid to arrive at
his ad2usted income during the year! ?is
ad2usted income will be sub2ect to the
graduated tax rates of 4- to +-! (,ec. &% (b)
Tax !ode of %*/.A9B %%-/@ as amended by
9B %**").
Q8ote: "he bar candidates are not expected to be
familiar with tax history! (onsidering that this is
already the fourth year of implementation of
the "ax (ode of 4JJL bar candidates were
taught and prepared to answer Euestions based
on the present law! It is therefore reEuested that
the examiner be more lenient in chec#ing the
answers to this Euestion! &erhaps an answer
based on the present law be given full credit!R
A! If you are the lawyer of <r! and <rs!
/ebastian what possible defense or
defenses will you raise in behalf of your
clients against the action of the AI> in
enforcing collection of the tax by the
summary remedies of warrants of
distraints and levy?
3xplain your answer! (+-)
SUGGESTED ANSWER*
A! I will raise the defense of prescription!
"he right of the AI> to assess prescribes
after three years counted from the last
day prescribed by law for the *ling of the
income tax returns when the said return is
*led on time! (/ection :1+ 8I>()! "he
last day for *ling the 4JJL income tax
return is ;pril 4, 4JJ=! /ince the
assessment was issued only on ;pril :1
:114 the AI>Bs right to assess has
already prescribed!
BI8$ Fa"se (s) Frau&u"ent 8eturn (1996)
'istinguish a false return from a fraudulent
return!
SUGGESTED ANSWER*
"he distinction between a false return
and a fraudulent return is that the *rst
merely implies a deviation from the truth
or fact whether intentional or not
whereas the second is intentional and
deceitful with the sole aim of evading
the correct tax due (AG%ar .+.
C,55i++i,%er L;2)3'" A.g.+/ 27
!"#()!
ALTERNATI1E ANSWER*
; false return contains deviations from the
truth which may be due to mista#es
carelessness or ignorance of the person
preparing the return! ; fraudulent return
contains an intentional wrongdoing with the
sole ob2ect of avoiding the tax and it
may consist in the intentional
underdeclaration of income intentional
overdeclaration of deductions or the
recurrence of both! ; false return is not
necessarily tainted with fraud because
the fraud contemplated by law is actual
and not constructive! ;ny deviation from
the truth on the other hand whether
intentional or not constitutes falsity!
(AG%ar v+. C,55i++i,%er L;2)3'"
A.g.+/ 27 !"#()
BI8$ Huris&iction$ 8e(ie1 8u"ings of t#e
!ommissioner (26)
<r! ;braham 3ugenio a pawnshop
operator after having been reEuired by
the >evenue 'istrict OCicer to pay value
added tax pursuant to a >evenue
<emorandum Order (><O) of the
(ommissioner of Internal >evenue *led
with the >egional "rial (ourt an action
Euestioning the validity of the ><O! If you
were the 2udge will you dismiss the case?
(,-)
SUGGESTED ANSWER*
7es! "he ><O is in reality a ruling of the
(ommissioner in implementing the
provisions of the "ax (ode on the
taxability of pawnshops! Murisdiction to review
rulings of the (ommissioner is lodged
with the (ourt of "ax ;ppeals and not
with the >egional "rial (ourt (CIR v.
<,+eF%a Lea- G.R. N,. !!7(3" N,ve56er
!4 2))2? Ta> Re1,r5 Ac/ RA 4(2( Ti/-e I
Sec. ( 8!""#9$.
(NOTA BENEE This concept pertains to
the 2AT law which is excluded from
the bar coverage #uidelines for &((.
3ar 4xaminations )une %- &((.)
BI8$ Prescripti(e Perio&$ Assessment$ Frau&u"ent 8eturn
(22)
<r! (astro inherited from his father who died
on Mune 41 4JJ0 several pieces of real
property in <etro <anila! "he estate tax
return was *led and the estate tax due in
the amount of &:,1!111!11 was paid on
'ecember 1H 4JJ0! "he "ax Iraud 'ivision of
the AI> investigated the case on the basis of
con*dential information given by <r! /antos
on Manuary 1H 4JJ= that the return *led
by <r! (astro was fraudulent and that he
failed to declare all
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.. of 73
properties left by his father with
intent to evade
payment of the correct tax! ;s a result a
de*ciency estate tax assessment for
&4:,1111!11 inclusive of ,1-
surcharge for fraud interest and
penalty was issued against him on
Manuary 41 :114! <r! (astro protested the
assessment on the ground of prescription!
;! 'ecide <r! (astroBs protest! (:-)
SUGGESTED ANSWER*
;! "he protest should be resolved against
<r! (astro! What was *led is a
fraudulent return ma#ing the
prescriptive period for assessment ten
(41) years from discovery of the fraud
(/ection ::: 8I>()! ;ccordingly the
assessment was issued within that
prescriptive period to ma#e an assessment
based on a fraudulent return!
A! What legal reEuirementOs must <r!
/antos comply
with so that he can claim his reward?
3xplain! (+-)
SUGGESTED ANSWER*
"he legal reEuirements that must be
complied by <r! /antos to entitle him to
reward are as follows:
4) ?e should voluntarily *le a con*dential
information under oath with the
5aw 'ivision of the Aureau of
Internal >evenue alleging therein
the speci*c violations constituting
fraudD
:) "he information must not yet be in the
possession of the Aureau of Internal
>evenue or refer to a case already
pending or previously investigated
by the Aureau of Internal >evenueD
+) <r! /antos should not be a government
employee or a relative of a
government employee within the sixth
degree of consanguinityD and
0) "he information must result to
collections of revenues andOor
*nes and penalties! (/ec! :=:
8I>()
BI8$ Prescripti(e Perio&$ !rimina" Action (26)
.erry was being prosecuted by the AI> for
failure to pay his income tax liability for
(alendar 7ear 4JJJ despite several
demands by the AI> in :11:! "he
Information was *led with the >"( only
last Mune :11H! .erry *led a motion to
Euash the Information on the ground of
prescription the Information having been
*led beyond the ,%year reglementary
period! If you were the 2udge will you
dismiss the Information? Why? (,-)
SUGGESTED ANSWER*
8o! "he trial court can exercise 2urisdiction!
&rescription of a criminal action begins to
run from the day of the violation of the
law! "he crime was committed when .erry
willfully refused to pay despite repeated
demands in :11:! /ince the information
was *led in Mune :11H the criminal case
was instituted within the *ve%year period
reEuired by law (T.*aG v. U-e* G.R. N,.
!2#### Oc/,6er
! !"""? Sec/i,% 24! NIRC$.
BI8$ Taxpayer: !i(i" Action ; !rimina" Action (22)
<inolta &hilippines Inc! (<inolta) is an 3&K;%
registered enterprise en2oying preferential
tax treatment under a special law! ;fter
investigation of its withholding tax returns
for the taxable year 4JJL the AI> issued
a de*ciency withholding tax assessment in
the amount of &4,1!111!11! On <ay 4,
4JJJ because of *nancial diCiculty the
de*ciency tax remained unpaid as a result
of which the assessment became *nal and
executory! "he
AI> also found that in violation of the
provisions of the 8ational Internal
>evenue (ode <inolta did not *le its
*nal corporate income tax return for the
taxable year 4JJ= because it allegedly
incurred net loss from its operations!
On <ay 4L :11: the AI> *led with
the >egional "rial (ourt an action for
collection of the de*ciency withholding
tax for 4JJL!
;! Will the AI>Bs action for collection
prosper? ;s counsel of <inolta what
action will you ta#e?
SUGGESTED ANSWER*
;! 7es AI>Bs action for collection will
prosper because the assessment is
already *nal and executory it can
already be enforced through 2udicial action!
;s counsel of <inolta I will introduce
evidence that the income payment was
reported by the payee and the income
tax was paid thereon in 4JJL so that
my client may only be allowed to pay
the civil penalties for non% withholding
pursuant to ><O 8o! +=%=+!
QNote: 6t is not clear whether this
is a case of non- withholding;
underwithholding or non-remittance
of tax withheld. As such the tax
counsel may be open to other
remedies against the assessment!R
A! <ay criminal violations of the "ax
(ode be compromised? If <inolta
ma#es a voluntary oCer to compromise
the criminal violations for non% *ling
and non%payment of taxes for the year
4JJ= may the (ommissioner accept
the oCer? 3xplain
(,-)
SUGGESTED ANSWER*
A! ;ll criminal violations of the "ax
(ode may be compromised except those
already *led in court or those involving
fraud (/ection :10 8I>()! ;ccordingly
if <inolta ma#es a voluntary oCer to
compromise the criminal violations for
non%*ling and non%payment of taxes for the
year 4JJ= the (ommissioner may accept the
oCer which is allowed by law! ?owever if
it can be established that a tax has not been
paid as a conseEuence of non%*ling of the
return the civil liability for taxes may be
dealt with independently of the criminal
violations! "he compromise settlement of the
criminal violations will not relieve the
taxpayer from its civil liability! Aut the
civil liability for taxes may also be
compromised if the *nancial position of the
taxpayer demonstrates a clear inability to pay
the tax!
!ustom: Cio"ation of Tax ; !ustom 'uties (22)
"he (ollector of (ustoms of the &ort of
(ebu issued warrants of sei$ure and detention
against the importation of machineries and
eEuipment by 55' Import and 3xport (o!
(55') for alleged nonpayment of tax and
customs duties in violation of customs laws!
55' was noti*ed of the sei$ure but before it
could be heard the (ollector of (ustoms
issued a notice of sale of the articles! In
order to restrain the (ollector from carrying
out the order to sell 55' *led with the
(ourt of "ax ;ppeals a petition for review
with application for the issuance of a writ
of prohibition! It also *led with the ("; an
appeal for refund of overpaid taxes on its other
importations of raw materials which has
been pending
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.6 of 73
with the (ollector of (ustoms! "he
Aureau of
(ustoms moved to dismiss the case for
lac# of 2urisdiction of the (ourt of "ax
;ppeals!
;! 'oes the (ourt of "ax ;ppeals have
2urisdiction over the petition for
review and writ of prohibition?
3xplain (+-)
SUGGESTED ANSWER*
A. 8o because there is no decision
as yet by the (ommissioner of (ustoms
which can be appealed to the (";!
8either the remedy of prohibition
would lie because the ("; has not
acEuired any appellate 2urisdiction over
the sei$ure case! "he writ of prohibition
being merely ancillary to the appellate
2urisdiction the ("; has no 2urisdiction
over it until it has acEuired 2urisdiction
on the petition for review! /ince there
is no appealable decision the ("; has no
2urisdiction over the petition for
review and writ of prohibition!
(C,55i++i,%er ,1 C.+/,5+ v. A-iA*a-a
7' SCRA 2)4 8!"#)9)!
B. Will an appeal to the ("; for tax refund
be possible?
3xplain (:-)
SUGGESTED ANSWER*
A! 8o because the (ommissioner of
(ustoms has not yet rendered a decision
on the claim for refund! "he 2urisdiction
of the (ommissioner and the ("; are
not concurrent in so far as claims for
refund are concerned! "he only exception
is when the (ollector has not acted on the
protested payment for a long time the
continued inaction of the (ollector or
(ommissioner should not be allowed to
pre2udice the taxpayer! (8estle &hils! Inc!
v! (ourt of ;ppeals .> 8o! 4+0440 Muly H
:114)!
!ustoms$ Basis$ Automatic 8e(ie1 (22)
Whenever the decision of the (ollector
of (ustoms is adverse to the
government it is automatically elevated to
the (ommissioner for review and if it is
aCirmed by him it is automatically
elevated to the /ecretary of Iinance for
review! What is the basis of the
automatic review procedure in the
Aureau of (ustoms? 3xplain your
answer! (,-)
SUGGESTED ANSWER*
;utomatic review is intended to protect the
interest of the .overnment in the collection
of taxes and customs duties in sei$ure and
protest cases! Without such automatic
review neither the (ommissioner of
(ustoms nor the /ecretary of Iinance would
#now about the decision laid down by the
(ollector favoring the taxpayer! "he power to
decide sei$ure and protest cases may be
abused if no chec#s are instituted!
;utomatic review is necessary because
nobody is expected to appeal the decision of
the (ollector which is favorable to the
taxpayer and adverse to the .overnment! "his
is the reason why whenever the decision of
the (ollector is adverse to the
.overnment the said decision is
automatically elevated to the
(ommissioner for reviewD and if such decision
is aCirmed by the (ommissioner the same
shall be automatically elevated to and be
*nally reviewed by the /ecretary of
Iinance (Ba,Aa+i% v. C,55i++i,%er ,1
C.+/,5+ !4) SCRA 3"! 8!"4"9)!
'e"in3uent Tax 8eturn (199=)
When is a revenue tax considered
delinEuent? Q+-)
SUGGESTED ANSWER*
; revenue tax is considered delinEuent
when it is unpaid after the lapse of the
last day prescribed by law for its
payment! 5i#ewise it could also be
considered as delinEuent where an
assessment for de*ciency tax has
become *nal and the taxpayer has not paid
it within the period given in the notice of
assessment!
Huris&iction: !ustoms (s) !TA (2)
a) On the basis of a warrant of sei$ure
and detention issued by the (ollector of
(ustoms for the purpose of enforcing the
"ariC and (ustoms 5aws assorted
brands of cigarettes said to have been
illegally imported into the &hilippines
were sei$ed from a store where they
were openly oCered for sale! 'issatis*ed
with the decision rendered after hearing
by the (ollector of (ustoms on the
con*scation of the articles the
importer *led a petition for review with the
(ourt of "ax ;ppeals! "he (ollector
moved to dismiss the petition for lac# of
Murisdiction! >ule on the motion!
(:-)
SUGGESTED ANSWER*
<otion granted! "he (ourt of "ax
;ppeals has 2urisdiction only over
decisions of the (ommissioner of (ustoms
in cases involving sei$ures detention or
release of property aCected! (/ec! L >!;! 8o!
44:,)! "here is no decision yet of the
(ommissioner which is sub2ect to review by
the (ourt of "ax ;ppeals!
ALTERNATI1E ANSWER*
<otion granted! "he (ourt of "ax
;ppeals has no 2urisdiction because there
is no decision rendered by the (ommissioner
of (ustoms on the sei$ure and forfeiture
case! "he taxpayer should have appealed
the decision rendered by the (ollector
within *fteen (4,) days from receipt of the
decision to the (ommissioner of (ustoms! "he
(ommissionerSs adverse decision would then
be the sub2ect of an appeal to the (ourt of "ax
;ppeals!
b) Fnder the same facts could the importer
*le an action in the >egional "rial (ourt for
replevin on the ground that the articles
are being wrongfully detained by the
(ollector of (ustoms since the
importation was not illegal and therefore
exempt from sei$ure? 3xplain!
(+-)
SUGGESTED ANSWER*
8o! "he legislators intended to divest the
>egional "rial (ourts of the 2urisdiction to
replevin a property which is a sub2ect of
sei$ure and forfeiture proceedings for
violation of the "ariC and (ustoms (ode
otherwise actions for forfeiture of
property for violation of the (ustoms laws
could easily be undermined by the simple
device of replevin! (De -a F.e%/e v. De
Ve0ra e/. a- !2) SCRA (33)
"here should be no unnecessary
hindrance on the governmentBs drive to
prevent smuggling and other frauds upon the
(ustoms! Iurthermore the >egional "rial (ourt
do not have Murisdiction in order to render
eCective and eCicient the collection of
Import and export duties due the /tate
which enables the government to carry out the
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functions It has been Instituted to
perform! (<a,
e/ a- C,.r/ ,1 A**ea-+ e/ a- a%d
c,5*a%i,% ca+e 2(" SCRA 73 (7)
/5<: !o""ection of TaxesF Fees ; !#arges (199,)
.ive the remedies available to local
government units to enforce the collection
of taxes fees and charges?
SUGGESTED ANSWER*
"he remedies available to the local
government units to enforce collection of
taxes fees and charges are:
4) ;'<I8I/">;"I63 >3<3'I3/ of
distraint of personal property of
whatever #ind whether tangible or
intangible and levy of real property
and interest thereinD and
:) MF'I(I;5 >3<3'7 by institution of
an ordinary civil action for
collection with the regular courts of
proper 2urisdiction!
Tax Amnesty (s) Tax 2xemption (21)
'istinguish a tax amnesty from a tax
exemption! (+-)
SUGGESTED ANSWER*
"ax amnesty is an immunity from all
criminal civil and administrative liabilities
arising from nonpayment of taxes! It is a
general pardon given to all taxpayers! It
applies only to past tax periods hence
of retroactive application! (Pe,*-e v.
C,+/,%ed, G.R. N,. L;('44! !"44)!
"ax exemption is an immunity from the
civil liability only! It is an immunity or
privilege a freedom from a charge or
burden to which others are
sub2ected! (F-,rer v. S:erida% !7#
I%d. 24 7' ME 7'3)! It is generally
prospective in application!
Taxpayer: A&ministrati(e ; Hu&icia" 8eme&ies (2)
'escribe separately the procedures on the
legal remedies under the "ax (ode
available to an aggrieved taxpayer both at
the administrative and 2udicial levels! (,-)
SUGGESTED ANSWER*
"he legal remedies of an aggrieved
taxpayer under the "ax (ode both at
the administrative and 2udicial levels
may be classi*ed into those for
a++e++5e%/ c,--ec/i,% and re1.%d!
"he procedures for the
D(INISTRTI#E RE(EDIES for
ASSESSMENT are as follows:
a! ;fter receipt of the &re%;ssessment
8otice he must within *fteen (4,)
days from receipt explain why no
additional taxes should be assessed
against him!
b! If the (ommissioner of Internal
>evenue issues an assessment notice
the taxpayer must administratively
protest or dispute the assessment by *ling
a motion for reconsideration or
reinvestigation within thirty
(+1) days from receipt of the
notice of assessment! (0th par!! /ec!
::= 8I>( of 4JJL)
c! Within sixty (H1) days from *ling of the
protest the taxpayer shall submit
all relevant supporting documents!
"he *UDICIL RE(EDIES of an
aggrieved taxpayer relative to an
ASSESSMENT NOTICE are as follows:
a! Where the (ommissioner of Internal
>evenue has not acted on the
taxpayerBs protest within a period of
one hundred eighty (4=1) days from
submission of all relevant documents
then the taxpayer has a period of thirty
(+1) days from the lapse of said 4=1 days
within which to interpose a petition
for review with the (ourt of "ax
;ppeals!
b! /hould the (ommissioner deny the
taxpayerBs protest then he has a period
of thirty (+1) days from receipt of said
denial within which to interpose a
petition for review with the (ourt of "ax
;ppeals!
In both cases the taxpayer must apply with
the (ourt of "ax ;ppeals for the Issuance
of an In2unctive writ to en2oin the Aureau
of Internal >evenue from collecting the
disputed tax during the pendency of the
proceedings!
N$TE: ; :110 ;mendment % "he
decision of the division of ("; is in turn
appeallable within *fteen (4,) days to the
("; en banc! "he decision of the (";
en banc is directly appeallable to the
/upreme (ourt on Euestion of law on
certiorari!
"he employment by the Aureau of
Internal >evenue of any of the
dministrative Remedies for the
c,--ec/i,% ,1 /:e /a> li#e distraint levy
etc! may be administratively appealed by
the taxpayer to the (ommissioner whose
decision is appealable to the (ourt of "ax
;ppeals under other matter arising under
the provisions of the 8ational Internal
>evenue (ode!
"he 2udicial appeals starts with the (ourt of
"ax ;ppeals and continues in the same
manner as shown above!
/hould the Aureau of Internal >evenue
decide to utili$e its Mudicial tax remedies
for collecting the taxes by means of an
ordinary suit *led with the regular
courts for the collection of a sum of
money the taxpayer could oppose the
same going up the ladder of 2udicial
processes from the <unicipal "rial (ourt
(as the case may be) to the >egional
"rial (ourt to the (ourt of ;ppeals thence
to the /upreme (ourt!
"he remedies of an aggrieved taxpayer on
a claim for refund is to appeal the
adverse decision of the (ommissioner to
the ("; in the same manner outlined
above!
Taxpayer: Assessment: Protest: !"aims for refun& (2)
On Mune 4H 4JJL the Aureau of Internal
>evenue (AI>) issued against the 3state of
Mose de la (ru$ a notice of de*ciency
estate tax assessment inclusive of
surcharge interest and compromise penalty!
"he 3xecutor of the 3state of Mose de la (ru$
(3xecutor) *led a timely protest against the
assessment and reEuested for waiver of the
surcharge interest and penalty! "he protest
was denied by the (ommissioner of Internal
>evenue ((ommissioner) with *nality on
/eptember 4+ 4JJL! (onseEuently the
3xecutor was made to pay the de*ciency
assessment on October 41 4JJL! "he
following day the 3xecutor *led a &etition
with the (ourt of "ax ;ppeals ((";) praying for
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the
refun
d of the
surchar
ge
intere
st
an
d
compromise penalty! "he ("; too#
cogni$ance of the case and ordered the
(ommissioner to ma#e a refund! "he
(ommissioner *led a &etition for >eview
with the (ourt of ;ppeals assailing the
2urisdiction of the ("; and the Order to
ma#e refund to the 3state on the ground
that no claim for refund was *led with the
AI>!
. Is the stand of the (ommissioner
correct? >eason! (:-)
SUGGESTED ANSWER*
7es! "here was no claim for refund or
credit that has been duly *led with the
which is reEuired before a suit or
proceeding can be *led in any court (/ec!
::J! 8I>( of 4JJL)! "he denial of the
claim by the (ommissioner is the one
which will vest the (ourt of "ax ;ppeals
2urisdiction over the refund case should
the taxpayer decide to appeal on time!
&. Why is the *ling of an administrative
claim with the AI> necessary? (+-)
SUGGESTED ANSWER*
"he *ling of an administrative claim for
refund with the AI> is necessary in order:
!$ "o aCord the (ommissioner an
opportunity to consider the claim and
to have a chance to correct the
errors of subordinate oCicers
(G,%Ga-e+ v. CTA e/ a- !( SCRA
#")D and
2$ "o notify the .overnment that such
taxes have been Euestioned and the
notice should be borne in mind in
estimating the revenue available
for expenditures! (Ber5eM, v.
C,--ec/,r G.R. N,. L; 7)24. <.-0
2" !"3))
Taxpayer: Assessment$ In@unction (2*)
>> disputed a de*ciency tax assessment
and upon receipt of an adverse decision
by the (ommissioner of Internal
>evenue *led an appeal with the (ourt of
"ax ;ppeals! While the appeal is pending
the AI> served a warrant of levy on the
real properties of >> to enforce the
collection of the disputed tax! .ranting
arguendo that the AI> can legally levy
on the properties what could >> do to
stop the process? 3xplain brie)y! (,-)
SUGGESTED ANSWER*
>> should *le a motion for in2unction with
the (ourt of "ax ;ppeals to stop the
administrative collection process! ;n
appeal to the ("; shall not suspend the
enforcement of the tax liability unless a
motion to that eCect shall have been
presented in court and granted by it on the
basis that such collection will 2eopardi$e
the interest of the taxpayer or the
.overnment (Pir,va%, v. CIR !(
SCRA 472 8!"'39)!
"he ("; is empowered to suspend the
collection of internal revenue taxes and
customs duties in cases pending appeal only
when: (4) in the opinion of the court the
collection by the AI> will 2eopardi$e the
interest of the .overnment andOor the
taxpayerD and (:) the taxpayer is willing to
deposit the amount being collected or to *le a
surety bond for not more than double the
amount of the tax to be *xed by the court
(,ection %% )$.A. No. %%&-).
Taxpayer: BI8 Au&it or In(estigation (1999)
; (o! a &hilippine corporation is a big
manufacturer of consumer goods and has
several suppliers of raw materi% als! "he
AI> suspects that some of the suppliers are
not properly reporting their income on
their sales to ; (o! "he (I> therefore:
4) Issued an access letter to ; (o! to
furnish the AI> information on sales
and payments to its suppliers!
:) Issued an access letter to a ban#
((@ Aan#) to furnish the AI> on
deposits of some suppliers of ; (o! on
the alleged ground that the
suppliers are committing tax evasion!
; (o! @ Aan# and the suppliers have not
been issued by the AI> letter of authority to
examine! ; (o! and @ Aan# believe that the
AI> is on a "*shing expedition" and come to
you for counsel! What is your advice? (41-)
SUGGESTED ANSWER*
I will advise ; (o! and A (o! that the AI> is
2usti*ed only in getting information from
the former but not from the latter! "he AI>
is authori$ed to obtain information from
other persons other than those whose
internal revenue tax liability is sub2ect to
audit or investigation! ?owever this power
shall not be construed as granting
the (ommissioner the authority to inEuire
into ban# deposits!
(,ection -. N6$!).
Taxpayer: !ity Boar& of Assessment 'ecision$ -#ere to
appea" (1999)
; (o! a &hilippine corporation is the owner
of machin% ery eEuipment and *xtures
located at its plant in <untinlupa (ity!
"he (ity ;ssessor characteri$ed all these
properties as real properties sub2ect to
the real property tax! ; (o! appealed the
matter to the <untinlupa Aoard of
;ssessment ;ppeals! "he Aoard ruled in
favor of the (ity! In accordance with >;
44:, (;n ;ct creating the (ourt of "ax
;ppeals)! ; (o! brought a petition for
review before the ("; to appeal the
decision of the (ity Aoard of ;ssessment
;ppeals! Is the &etition for >eview proper?
3xplain! (,-)
SUGGESTED ANSWER*
8o! "he (";Ss devoid of 2urisdiction to
entertain appeals from the decision of the
(ity Aoard of ;ssessment ;ppeals! /aid
decision is instead appealable to the (entral
Aoard of ;ssessment ;ppeals which under
the 5ocal .overnment (ode has appellate
2urisdiction over deci% sions of 5ocal Aoard
of ;ssessment ;ppeals! (Ca-/e>
P:i-+ 1,e. v. Ce%/ra- B,ard ,1
A++e++5e%/ A**ea-+ L; 3)('' Ma0 7!
!"42)!
Taxpayer: !"aim for 8efun&$ Proce&ure (22)
;!What must a taxpayer do in order to claim
a refund of or tax credit for taxes and
penalties which he alleges to have been
erroneously illegally or excessively
assessed
or collected? (+-)
SUGGESTED ANSWER*
"he taxpayer must comply with the following
procedures in claiming a refund of or tax
credit for taxes and penalties which he
alleges to have been erroneously illegally
or excessively assessed or collected:
:! ?e should *le a written claim for
refund with the (ommissioner within
two years after the date of payment of
the tax or penalty (/ec! :10 8I>()D
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+! "he claim *led must state a
categorical
demand for reimbursement (Ber5eM, v.
C,--ec/,r 4#
P:i-. "' 8!"3)9$.
0
!
"he suit or
proceeding for
recover
y must be
commenced in court within two years
from date of
payment of the tax or penalty
regardless of any
supervening event that will arise after
payment (/ec!
::J 8I>()!
ANote: 6f the answer given is only number % it
is suggested that the
same shall be given full credit considering
that this is the only
re7uirement for the !ommissioner to ac7uire
1urisdiction over the
claim.@
A! (an the (ommissioner grant a
refund or tax credit even without a
written claim for it? (:-)
SUGGESTED ANSWER*
A! 7es! When the taxpayer *les a return
which on its face shows an overpayment of
the tax and the option to refundO claim a
tax credit was chosen by the taxpayer the
(ommissioner shall grant the refund or tax
credit without the need for a written claim!
"his is so because a return *led showing
an overpayment shall be considered as a
written claim for credit or refund! (,ees.
'. and &(" N6$!)! <oreover the
law provides that the (ommissioner
may even without a written claim therefor
refund or credit any tax where on the face of
the return upon which payment was
made such payment appears clearly to
have been erroneously paid! (,ec. &&*
N6$!)!
Taxpayer: 'eficiency Income Tax (1999)
Ausinessman /tephen 7ang *led an income
tax return for 4JJ+ showing business net
income of &+,1111!11 on which he paid
an income tax of &H4111!11! ;fter *ling
the return he reali$ed that he forgot to
include an item of business income in 4JJ+
for &,1!111!11! Aeing an honest taxpayer
he included this income in his return for
4JJ0 and paid the corresponding income
tax thereon! In the examination of his
4JJ+ return the AI> examiner found that
/tephen 7ang failed to report this item of
&,1!111!11 and assessed him a de*ciency
income tax on this item plus a ,1- fraud
surcharge!
4) Is the examiner correct? 3xplain!
:) If you were the lawyer of /tephen
7ang what would you have advised
your client before he included in his
4JJ0 return the amount of
&,1!111!11 as 4JJ+ income to avoid
the fraud surcharge? 3xplain!
+) (onsidering that /tephen 7ang had
already been assessed a de*ciency
income tax for 4JJ+ for his failure
to report the &,1!111!11 income what
would you advise him to do to avoid
the penalties for tax delinEuency?
3xplain!
0) What would you advise /tephen 7ang
to do with regard to the income tax he
paid for the &,1!111!11 in his 4JJ0
return? In case your remedy fails what is
your other recourse? 3xplain!
SUGGESTED ANSWERS*
4) "he examiner is correct in assessing
a de*ciency income tax for taxable year
4JJ+ but not in imposing the ,1- fraud
surcharge! "he amount of all items of
gross income must be included in gross
income during the year in which received
or reali$ed (/ec! += 8I>()! "he ,1-
fraud surcharge attaches only if a false
or fraudulent return is willfully made by
<r! 7ang (/ec!:0= 8I>()! "he fact that <r!
7ang included the income in his 4JJ0 return
belies any claim of willfulness but is rather
indicative of an honest mista#e which
was sought to be recti*ed by a
subseEuent act that is the *ling of the 4JJ0
return!
:) <r! 7ang should have amended his 4JJ+
Income tax return to allow for the
inclusion of the &,1!111 income during
the taxable period it was reali$ed!
+) <r! 7ang should *le a protest
Euestioning the ,1- surcharge and as# for
the abatement thereof!
ALTERNATI1E ANSWER*
<r! 7ang should pay the de*ciency income
tax on or before the day prescribed for its
payment per notice of demand! ;fter
payment and within two years thereafter
he should *le a claim for refund of taxes
erroneously paid to recover the excessive
surcharge imposed!
0) <r! 7ang should *le a written claim for
refund with the (ommissioner of Internal
>evenue of the taxes paid on the &,1!111
income included in 4JJ0 within two years
from payment pursuant to /ection :10(+)
of the "ax (ode! /hould this remedy fail in
the administrative level a 2udicial claim
for refund can be instituted before the
expiration of the two year period!
Taxpayer: 2x#austion of A&ministrati(e 8eme&ies (199,)
(a) ; taxpayer received on 4, Manuary
4JJH an as% sessment for an internal
revenue tax de*ciency! On
41 Iebruary 4JJH the taxpayer
forthwith *led a petition for review
with the (ourt of "ax ;ppeals! (ould
the "ax (ourt entertain the petition?
(b) Fnder the above factual setting the
taxpayer instead of Euestioning the
assessment he received on 4, Manuary
4JJH paid on 14 <arch 4JJH the
"de*ciency tax" assessed! "he taxpayer
reEuested a refund from the
(ommissioner by submitting a written
claim on
4 <arch 4JJL! It was denied! "he
taxpayer on 4, <arch 4JJL *led a
petition for review with the (ourt of
;ppeals! (ould the petition still be
entertained?
SUGGESTED ANSWER*
(a) 8o! Aefore taxpayer can avail of Mudicial
remedy he must *rst exhaust administrative
remedies by *ling a protest within +1 days
from receipt of the assessment! It is the
(ommissionerBs decision on the protest that
give the "ax (ourt 2urisdiction over the case
provided that the appeal is *led within
+1 days from receipt of the
(ommissionerBs decision! ;n assessment by
the AI> is not the (ommissionerBs decision
from which a petition for review may be
*led with the (ourt of "ax ;ppeals! >ather
it is the action ta#en by the (ommissioner
in response to the taxpayerBs protest on the
assessment that would constitute the
appealable decision (/ection L >; 44:,)!
(b) 8o the petition for review can not be
entertained by
the (ourt of ;ppeals since
decisions of the
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(ommissioner on cases involving
claim for tax
refunds are within the exclusive and
primary 2urisdiction of the (ourt of "ax
;ppeals (/ection L!>;44:,)!
Taxpayer: Fai"ure to -it##e"& ; 8emit Tax (2)
; domestic corporation failed to withhold
and remit the tax on income received from
&hilippine sources by a non% resident
foreign corporation! In addition to
the civil penalties provided for under the
"ax (ode a compromise penalty was
imposed for violation of the withholding
tax provisions! <ay the (ommissioner
of Internal >evenue legally enforce the
collection of compromise penalty? (,-)
SUGGESTED ANSWER*
8o! "here is no showing that the compromise
penalty was imposed by the (ommissioner
of Internal >evenue with the agreement
and conformity of the taxpayer! (=,%der
Mec:a%ica- E%gi%eeri%g C,r*,ra/i,%
.. C,.r/ ,1 Ta> A**ea-+ e/. a-. '(
SCRA 333)!
Taxpayer: 7I8! (s) T!! 8eme&ies (1996)
(ompare the taxpayerBs remedies under
the 8ational Internal >evenue (ode and
the "ariC and (ustoms (ode!
SUGGESTED ANSWER*
"he taxpayerBs remedies under the
NTI$NL INTERNL RE#ENUE
C$DE may be categori$ed into remedies
before payment and remedies after
payment! "he remedy BEFORE PABMENT
consists of
(a) Ad5i%i+/ra/ive Re5ed0 which is
the *ling of protest within +1 days
from receipt of assessment and
(b) <.dicia- Re5ed0 which is the appeal
of the adverse decision of the
(ommissioner on the protest with the
(ourt of "ax ;ppeals and *nally with
the /upreme (ourt!
"he remedy AFTER PABMENT is availed of
(c) by paying the assessed tax within
+1 days from receipt of assessment
and
(d) the *ling of a claim for refund or tax
credit of these taxes on grounds
that they are erroneously paid
within two years from date of payment!
(e) 6f there is a denial of the claim appeal
to the ("; shall be made within +1
days from denial but within two years
from date of payment!
If the (ommissioner 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 (ommissioner as a denial and
elevate the case to the (";
before the expiration of the two%
year period!
Fnder the Tarif and Customs Code
taxpayerBs reme% dies arise only after
payment of duties!
0) "he administrative remedies consist of
*ling a claim for refund which may ta#e
the form of abatement or drawbac#!
,) "he taxpayer can also *le a protest
within 4, days from payment if he
disagrees with the ruling or decision
of the (ollector of (ustoms
regarding the legality or correctness
of the assessment of customs duties!
H) If the decision of the (ollector is
adverse to the taxpayer he can notify
the (ollector within 4, days from
receipt of said decision of his desire to
have his case reviewed by the
(ommissioner!
"he decision of the (ollector on
the taxpayerBs protest if adverse
to the .overnment is
automatically elevated to the
(ommissioner for reviewD and if
such decision is aCirmed by the
(ommissioner the same shall be
automatically elevated to and *nally
reviewed by the /ecretary of
Iinance!
>esort to 2udicial relief can be
had by the taxpayer by
appealing the decision of the
(ommissioner or of the /ecretary
of Iinance (for cases sub2ect to
automatic review) within +1 days
from the promulgation of the
adverse decision to the (";!
Taxpayer: %(er1it#o"&ing !"aim for 8efun& (1999)
; (o! is the wholly owned subsidiary of A
(o! a non% resident .erman company! ;
(o! has a trademar# licensing agreement
with A (o! On Ieb! 41 4JJ, ; (o! remitted
to A (o! royalties of & 41111111 which ; (o!
sub2ected to a withholding tax of :,- or
&:,11111! Fpon advice of counsel ; (o!
reali$ed that the proper withholding tax
rate is 41-! On <arch :1 4JJH ; (o!
*led a claim for refund of &:!,11!111 with the
AI>! "he AI> denied the claim on 8ov!
4, 4JJH! On 8ov! := 4JJH ; (o! *led a
petition for review with the (";! "he AI>
attac#ed the capacity of ; (o! as agent to
bring the refund case! 'ecide the issue! (,-)
SUGGESTED ANSWER*
; (o! the withholding agent of the non%
resident foreign corporation is entitled to
claim the refund of excess withholding tax
paid on the income of said corporation in the
&hilippines! Aeing a withholding agent it
is the one held liable for any violation of
the withholding tax law should such a
violation occur! In the same vein it should be
allowed to claim a refund in case of
overwitholding!
(CIR v. =a%der P:i-+. I%c. GR N,. '47#4
A*ri- !3 !"44
!') SCRA 3#7? CIR v. Pr,c/er @ Ga56-e
PMC 2O( SCRA 7##)!
Taxpayer: Prescripti(e Perio&: Suspen&e& (2)
<r! >eyes a Iilipino citi$en engaged in
the real estate business *led his 4JJ0
income tax return on <arch :1 4JJ,! On
'ecember 4, 4JJ, he left the &hilippines as
an immigrant to 2oin his family in
(anada! ;fter the investigation of said
returnOthe AI> issued a notice of de*ciency
income tax assessment on ;pril 4, 4JJ=! <r!
>eyes returned to the &hilippines as a
bali#bayan on 'ecember = 4JJ=! Iinding his
name to be in the list of delinEuent taxpayers
he *led a protest against the assessment
on the ground that he did not receive the
notice of assessment and that the
assessment had prescribed! Will the protest
prosper? 3xplain! (,-)
SUGGESTED ANSWER*
8o! &rescription has not set in because the
period of limitations for the Aureau of Internal
>evenue to issue an assessment was
SUSPENDED during the time that <r! >eyes
was out of the &hilippines or from the
period
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'ecember 4, 4JJ, up to 'ecember
= 4JJ=!
(,ec. &&5 in relation to ,ec. &(5 both of the
N6$! of %**')
Taxpayer: Prescripti(e Perio&$ !"aim for 8efun& (199,)
; corporation *les its income tax return
on a calendar year basis! Ior the *rst
Euarter of 4JJ+ it paid on +1 <ay 4JJ+ its
Euarterly income tax in the amount of
&+!1 million! On :1 ;ugust 4JJ+ it paid the
second Euarterly income tax of &1!, million!
"he third Euarter resulted in a net loss
and no tax was paid! Ior the fourth and
*nal return for 4JJ+ the company reported
a net loss for the year and the taxpayer
indicated in the income tax return that it
opted to claim a refund of the Euarterly
income tax payments! On 41 Manuary 4JJ0
the corporation *led with the Aureau of
Internal >evenue a written claim for the
refund of &+!, million!
AI> failed to act on the claim for
refundD hence on 1: <arch 4JJH the
corporation *led a petition for review
with the (ourt of "ax ;ppeals on its claim
for refund of the overpayment of its 4JJ+
Euarterly income tax! AI> in its answer to
the petition alleged that the claim for
refund was *led beyond the reglementary
period! 'id the claim for refund
prescribe?
SUGGESTED ANSWER*
"he claim for refund has prescribed! "he
counting of the /&,;0ear *re+cri*/ive
*eri,d 1,r F-i%g a c-ai5 1,r re1.%d is
counted not from the date when the
Euarterly income taxes were paid but on
the date when the *nal ad2ustment
return or annual income tax return was
*led
(CIR v. TMX Sa-e+ I%c. G.R. N,. 47#7'
<a%.ar0 !3 !""2?
CIR v. P:iNA5 Li1e I%+.ra%ce C,. I%c. G.R.
N,. !)32)4 Ma0 2" !""3)! It is obvious
that the annual income tax return was
*led before Manuary 41 4JJ0 because the
written claim for refund was *led with the
AI> on Manuary 41 4JJ0! /ince the two%
year prescriptive period is not only a
limitation of action in the administrative
stage but also a limitation of action for
bringing the case to the 2udicial stage the
petition for review *led with the ("; on
<arch 1: 4JJH is beyond the reglementary
period!
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (199*)
@(35 (orporation *led its Euarterly
income tax return for the *rst Euarter of
4J=, and paid an income tax of
&,11!111!11 on <ay 4, 4J=,! In the
subseEuent Euarters @(35 suCered losses so
that on ;pril 4, 4J=H it declared a net loss of
&4111111!11 in its annual income tax return!
;fter failing to get a refund @(35 *led on
<arch 4 4J== a case with the (ourt of
"ax ;ppeals to recover the &,11!111!11 in
taxes paid on <ay 4, 4J=,!
Is the action to recover the taxes *led timely?
SUGGESTED ANSWER*
"he action for refund was *led in the (ourt
of "ax ;ppeals on time! In the case of
C,55i++i,%er v. TMX Sa-e+ I%c. 2)3 SCRA
!4( which is similar to this case the /upreme
(ourt ruled that in the case of overpaid Euarterly
corporate income tax the two%year period for
*ling claims for refund in the AI> as well as
in the institution of an action for refund in
the ("; the two%year prescriptive period for
tax refunds (/ec! :+1 "ax (ode) is counted
from the *ling of the *nal ad2ustment return
under /ec! HL of the "ax (ode and not from
the *ling of the
Euarterly return and payment of the
Euarterly tax! "he ("; action on <arch 4
4J== was clearly within the reglementary
two%year period from the *ling of the *nal
ad2ustment return of the corporation on ;pril
4, 4J=H!
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (2*)
On <arch 4: :114 >38 paid his taxes!
"en months later he reali$ed that he
had overpaid and so he immediately
*led a claim for refund with the
(ommissioner of Internal >evenue!
On Iebruary :L :11+ he received the
decision of the (ommissioner denying
>38Bs claim for refund! On <arch :0
:11+ >38 *led an appeal with the
(ourt of "ax ;ppeals! Was his appeal *led
on time or not? >eason! (,-)
SUGGESTED ANSWER*
"he appeal was not *led on time! "he two%
year period of limitation for *ling a claim
for refund is not only a limitation for
pursuing the claim at the administrative
level but also a limitation for appealing the
case to the (ourt of "ax ;ppeals! "he law
provides that "no suit or proceeding shall
be *led after the expiration of two
years from the date of the payment of the
tax or penalty regardless of any
supervening cause that may arise after
payment (/ection ::J M6K>(M! /ince the
appeal was only made on <arch :0 :11+
more than two years had already elapsed
from the time the taxes were paid
on <arch 4: :11+! ;ccordingly >38
had lost his 2udicial remedy because of
prescription!
Taxpayer: Protest against Assessment (199=)
(IA (orporation a domestic corporation
engaged in food processing and other
allied activities received a letter from the
AI> assessing it for delinEuency income
taxes! (IA *led a letter of protest! One
month after a warrant of distraint and levy
was served on (IA (orporation! If you
were the lawyer engaged by (IA
(orporation to contest the assessment
made by the AI> what steps will you ta#e
to protect your client? (,-)
SUGGESTED ANSWER*
I shall immediately *le a motion for
reconsideration of the issuance of the warrant
of distraint and levy and see# from the AI>
(ommissioner a denial of the protest "in
clear and uneEuivocal language!" "his is so
because the issuance of a warrant of
distraint and levy is not considered as a
denial by the AI> of the protest *led by (IA
(orporation (CIR v. U%i,% S:i**i%g C,r*.
!43 SCRA 3(#)!
Within thirty (+1) days from receipt of
such denial "in clear and uneEuivocal
language" I shall then *le a petition for
review with the (ourt of "ax ;ppeals!
LTERNTI#E NS!ER:
Within thirty (+1) days from receipt of
the warrant of distraint and levy I shall *le
a petition for review with the (ourt of "ax
;ppeals with an application for issuance of a
writ of preliminary in2unction to en2oin
the Aureau of Internal >evenue from
enforcing the warrant!
"his is the action I shall ta#e because I shall
consider the issuance of the warrant as
a *nal decision of the (ommissioner of
Internal >evenue which could be the
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62 of 73
sub2ect of appeal to the (ourt of
"ax ;ppeals
(B,6e+ .. F-,M, !3 SCRA 2#4)! "he (";
may however remand the case to the AI>
and reEuire the (ommissioner to
speci*cally rule on the protest! "he
decision of the (ommissioner if
adverse to my client would then
constitute an appealable decision!
Taxpayer: Protest against Assessment (1999)
; (o! a &hilippine corporation received
an income tax de*ciency assessment from
the AI> on <ay , 4JJ,! On <ay +4 4JJ,
; (o! *led its protest with the AI>! On
Muly +1 4JJ, ; (o! submitted to the
AI> all relevant supporting documents! "he
(I> did not formally rule on the protest but
on Manuary :, 4JJH ; (o! was served a
summons and a copy of the complaint for
collection of the tax de*ciency *led by the
AI> with the >egional "rial (ourt (>"()!
On Iebruary :1 4JJH ; (o! brought a
&etition for >eview before the (";! "he AI>
contended that the &etition is premature
since there was no formal denial of the
protest of ; (o! and should therefore be
dismissed!
4! ?as the ("; 2urisdiction over the case?
SUGGESTED ANSWER6
7es the ("; has 2urisdiction over the case
because this Euali*es as an appeal from
the (ommissionerBs decision on disputed
assessment! When the (ommissioner decided
to collect the tax assessed without *rst
deciding on the taxpayerBs protest the
eCect of the (ommissionerSs action of *ling
a 2udicial action for collection is a
decision of denial of the protest in which
event the taxpayer may *le an appeal with
the (";! (Re*.6-ic v. Li5 Tia% Te%g @
S,%+ I%c. !' SCRA 34(? Da0ri/ v.
Cr.G L;7""!) Se*/. 2' !"44)!
:! ?as the >"( 2urisdiction over the
collection case *led by the AI>?
3xplain!
SUGGESTED ANSWER6
"he >"( has no 2urisdiction over the
collection case *led by the AI>! "he *ling of
an appeal with the ("; has the eCect of
divesting the >"( of 2urisdiction over
the collection case! ;t the moment the
taxpayer appeals the case to the (ourt
of "ax ;ppeals in view of the
(ommissionerBs *ling of the collection case
with the >"( which was considered as a
decision of denial it gives a 2usti*able
basis for the taxpayer to move for dismissal
in the >"( of the .overnmentBs action to
collect the tax liability under dispute!
(Ba6e+ v. F-,M, !3 SCRA 2#4? Sa% <.a% v.
Va+C.eG 7 SCRA "2)! "here is no *nal
executory and demandable assessment which
can be enforced by the AI> once a timely
appeal is *led!
Taxpayer: Protest against Assessment (1999)
; (o! a &hilippine corporation received
an income tax de*ciency assessment from
the AI> on 8ovember :, 4JJH! On
'ecember 41 4JJH ; (o! *led its protest with
the AI> On <ay :1 4JJL the AI> issued
a warrant of distraint to enforce the
assessment! "his warrant was served on ;
(o! on <ay :, 4JJL! In a letter dated Mune 0
4JJL and received by ; (o! , days later the
(I> formally denied ; (o!Bs protest stating
that it constitutes his *nal decision on the
matter! On Muly H 4JJL ; (o! *led a
&etition for >eview with the (";! "he AI>
moved to
dismiss the &etition on the ground that the
("; has no 2urisdiction over the case!
'ecide! (41-)
SUGGESTED ANSWER*
"he ("; has 2urisdiction over the case!
"he appealable decision is the one which
categorically stated that the
(ommissionerBs action on the disputed
assessment is *nal and therefore the
rec#oning of the +1%day period to appeal
was on Mune J 4JJJ! "he *ling of the petition
for review with the ("; was timely made!
"he /upreme (ourt has ruled that the (I>
must categorically state that his action on a
disputed assessment is *nalD otherwise the
period to appeal will not commence to
run! "hat *nal action cannot be implied
from the mere issuance of a warrant "of
distraint and levy! (CIR v. U%i,% S:i**i%g
C,r*,ra/i,% !43 SCRA 3(#)!
Taxpayer: Protest$ !"aim of 8efun& (1996)
Is protest at the time of payment of
taxes and duties a reEuirement to
preserve the taxpayersB right to claim a
refund? 3xplain!
SUGGESTED ANSWER*
Ior T%ES imposed under the NIRC+
protest at the time of payment is not
reEuired to preserve the taxpayersB right to
claim refund! "his is clear under ,ection &5(
of the N6$! which provides that a suit or
proceeding maybe maintained for the
recovery of national internal revenue tax
or penalty alleged to have been
erroneously assessed or collected whether
such tax or penalty has been paid under
protest or not!
Ior DUTIES imposed under the Tarif
and Customs Code a protest at the time
of payment is reEuired to preserve the
taxpayersB claim for refund! "he procedure
under the "(( is to the eCect that when
a ruling or decision of the (ollector of
(ustoms is made whereby liability for
duties is determined the party
adversely aCected may protest such ruling or
decision by presenting to the (ollector at
the time when payment is made or within
4, days thereafter a written protest
setting forth his ob2ections to the ruling or
decision in Euestion (/ec! :+1=! "(()!
Taxpayer$ Appea" to t#e !ourt of Tax Appea"s (29)
; taxpayer received a tax de*ciency
assessment of &4!: <illion from the AI>
demanding payment within 41 days
otherwise it would collect through
summary remedies! "he taxpayer
reEuested for a reconsideration stating
the grounds therefor! Instead of resolving
the reEuest for reconsideration the AI>
sent a Iinal 8otice before /ei$ure to
the taxpayer!
<ay this action of the (ommissioner of
Internal >evenue be deemed a denial of the
reEuest for reconsideration of the taxpayer
to entitle him to appeal to the (ourt of "ax
;ppeals? 'ecide with reasons! (,-)
SUGGESTED ANSWER*
7es the *nal notice before sei$ure was in
eCect a denial of the taxpayerBs reEuest for
reconsideration not only was the notice the
only response received its nature content
and tenor supports the theory that it was the
AI>Bs *nal act regarding the reEuest for
reconsideration! (CIR v.
I+a6e-a C.-/.ra- C,r*,ra/i,% G.R. N,.
!732!) <.-0 !! 2))!$
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73
Taxpayer$ !"aim for Tax !re&its (26)
(ongress enacts a law granting grade
school and high school students a 41-
discount on all school%prescribed
textboo#s purchased from any boo#store!
"he law allows boo#stores to claim in full
the discount as a tax credit!
4! If in a taxable year a boo#store has
no tax due on which to apply the tax
credits can the boo#store claim from
the AI> a tax refund in lieu of tax credit?
3xplain! (:!,-)
SUGGESTED ANSWER*
8o the boo#store cannot claim from
the AI> a tax refund in lieu of tax
credit! "here is nothing in the law that
grants a refund when the boo#store has no
tax liabil% ity against which the tax credit
can be used (CIR v. Ce%/ra- L.G,% Dr.g
G.R. N, !3"'(# A*ri- !3 2))3$! ; tax
credit is in the nature of a tax exemption
and in case of doubt the doubt should be
resolved in strictissimi 1uris against the
claimant!
:! (an the AI> reEuire the boo#stores
to deduct the amount of the discount from
their gross income? 3xplain! (:!,-)
SUGGESTED ANSWER*
8o! "ax credit which reduces the tax
liability is diCerent from a tax deduction
which merely reduces the tax base! /ince
the law allowed the boo#stores to claim in
full the discount as a tax credit the AI> is
not allowed to expand or contract the
legislative mandate (CIR v. Bic,-a%dia
Dr.g C,r*. G.R. N,. !(4)47 <.-0 2!
2))'? CIR v. Ce%/ra- L.G,% Dr.g C,r*.
G.R. N,. !3"'(# A*ri- !3 2))3$.
+! If a boo#store closes its business due
to losses with% out being able to recoup
the discount can it claim
reimbursement of the discount from the
government on the ground that without
such reimbursement the law constitutes
ta#ing of private property for public
use without 2ust compensation? 3xplain!
(,-)
SUGGESTED ANSWER*
; boo#store closing its business due to
losses cannot claim reimbursement of
the discount from the government! If
the business continues to operate at a loss
and no other taxes are due thus
compelling it to close shop the credit
can never be applied and will be lost
altogether (CIR v. Ce%/ra- L.G,% Dr.g G.R.
N,. !3"'(# A*ri- !3 2))3$. "he grant of the
discount to the taxpayer is a mere privilege
and can be revo#ed anytime!
Taxpayer$ !ompromise after !rimina" Action (199=)
;n information was *led in court for willful
non%payment of income tax the assessment
of which has become *nal! "he accused
through counsel presented a motion that he
be allowed to compromise his tax liability
sub2ect of the information! "he prosecutor
indicated his conformity to the motion! Is
this procedure correct? Q,-R
SUGGESTED ANSWER*
8o! (riminal violations if already *led in
court may not be compromised (,ec.
&("A3@ N6$!). Iurthermore the payment
of the tax due after apprehension shall
not constitute a valid defense in any
prosecution for violation of any provisions
of the "ax (ode (,ec. &"'(a) N6$!).
Iinally there is no showing that the
prosecutor in the problem is a legal
oCicer of the Aureau of Internal
>evenue to whom the conduct of
criminal actions are lodged by the "ax
(ode!
ALTERNATI1E ANSWER*
8o! If the compromise referred to is the civil
aspect the procedure followed is not
correct! (ompromise for the payment of any
internal revenue tax shall be made only by
the (ommissioner of Internal >evenue or in a
proper case the 3valuation Aoard of the
AI> (/ec! :10 8I>()! ;pplying the law
to the case at bar compromise
settlement can only be eCected by leave of
(ourt!
Taxpayer$ Protest against Assessment$ 'onor6s Tax
(1999)
<r! >odrigo an =1%year old retired
businessman fell in love with :1%year
old "etchie /onora a night club
hospitality girl! ;lthough she refused to
marry him she agreed to be his "live%in"
partner! In gratitude <r! >odrigo
transferred to her a condominium unit
where they both live under a deed of sale for
&41 <illion! <r! >odrigo paid the capital
gains tax of ,- of &41 <illion!
found that the property was transferred
to "etchie /onora by <r! >odrigo
because of the companionship she was
providing him! ;ccordingly the
(ommissioner made a determination
that /onora had compensation income of
&41 <illion in the year the
condominium unit was transferred to
her and issued a de*ciency income tax
assessment!
"etchie /onora protests the assessment
and claims that the transfer of the
condominium unit was a gift and
therefore excluded from income! ?ow will
you rule on the protest of "etchie /onora?
3xplain!
SUGGESTED ANSWER*
I will grant the protest and cancel the
assessment! "he transfer of the property
by <r! >odrigo to <s! /onora was
gratuitous! "he deed of sale indicating a
&41 million consideration was simulated
because <r! >odrigo did not receive
anything from the sale! "he problem
categorically states that the transfer was
made in gratitude to <s! /onoraBs
companionship! "he transfer being
gratuitous is sub2ect to donorBs tax! <r!
>odrigo should be assessed de*ciency
donorBs tax and a ,1- surcharge imposed
for fraudulently simulating a contract of sale
to evade donorBs tax! (,ec. *%(b) N6$!).
Taxpayer$ -it##o"&ing Agent$ !"aim of Tax 8efun& (29)
'oes a withholding agent have the
right to *le an application for tax refund?
3xplain!
SUGGESTED ANSWER*
7es! ; taxpayer is "any person sub2ect to tax!"
/ince the withholding tax agent who is
"reEuired to deduct and withheld any tax"
is made "personally liable for such tax"
should the amount of the tax withheld be
*nally found to be less than that reEuired to
be withheld by law then he is a taxpayer!
"hus he has suCicient legal interest to *le an
application for refund of the amount he
believes was illegally collected from him!
(C,55i++i,%er ,1 I%/er%a-
Reve%.e v. Pr,c/er @ Ga56-e G.R. N,. ''474
Dece56er 2 !""!$
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64 of 73
LOCAL - REAL PROPERTY
TAXES
/oca" Taxation: Actua" <se of Property (22)
"he real property of <r! and <rs
;ngeles situated in a commercial area
in front of the public mar#et was
declared in their "ax 'eclaration as
residential because it had been used by
them as their family residence from the time
of its construction in 4JJ1! ?owever since
Manuary 4JJL when the spouses left for the
Fnited /tates to stay there permanently
with their children the property has
been rented to a single proprietor engaged
in the sale of appliances and agri%products!
"he &rovincial ;ssessor reclassi*ed the
property as commercial for tax purposes
starting Manuary 4JJ=! <r! and <rs!
;ngeles appealed to the 5ocal Aoard of
;ssessment ;ppeals contending that the
"ax 'eclaration previously classifying
their property as residential is binding!
?ow should the appeal be decided?
(,-)
SUGGESTED ANSWER*
"he appeal should be decided against
<r! and <rs! ;ngeles! "he law focuses
on the actual use of the property for
classi*cation valuation and
assessment purposes regardless of
ownership! /ection :4L of the 5ocal
.overnment (ode provides that "real
property shall be classi*ed valued and
assessed on the basis of its actual use
regardless of where located whoever
owns it and whoever uses it"!
/oca" Taxation: !o(erage (22)
;side from the basic real estate tax
give three (+) other taxes which may
be imposed by provincial and city
governments as well as by
municipalities in the <etro <anila area!
(+-)
SUGGESTED ANSWER*
"he following real property taxes aside
from the basic real property tax may be
imposed by provincial and city
governments as well as by
municipalities in the <etro <anila area:
4! ;dditional levy on real property
for the /pecial 3ducation Iund
(/ec! :+, 5.()D
:! ;dditional ;d%valorem tax on Idle
lands (/ec! :+W 5.()D and
+! /pecial levy (/ec! :01)!
QNote: "he Euestion is susceptible to dual
interpretation because it is as#ing for
three other taxes and not three other
real property taxes! ;ccordingly an
alternative answer should be considered
and given full creditR ;! "he following
taxes aside from basic real estate tax may
be imposed by:
4! &rovincial .overnment
a! &rinterBs or publisherBs
tax
b!Iranchise "ax
c!&rofessional tax
:! (ity .overnment % may levy taxes which
the province or municipality are authori$ed to
levy (/ec! 4,4 5.()
a! &rinterBs or publisherBs tax
b! Iranchise tax
c! &rofessional tax
+! <unicipalities in the <etro <anila
;rea % may levy taxes at rates which
shall not exceed by ,1- the
maximum rates prescribed in the
5ocal .overnment (ode!
a! ;nnual *xed tax on manufacturers
assemblers repac#ers processors
brewers distillers recti*ers and
compounders of liEuors distilled spirits
and wines or manufacture of any article
of commerce of whatever #ind or
natureD
b! ;nnual *xed tax on wholesalers
distributors or dealers in any article
of commerce of whatever #ind or
natureD
c! &ercentage tax on retailers
Q8ote: Other taxes may comprise the
enumeration because many other taxes are
authori$ed to be imposed by 5.Fs!R
/oca" Taxation: 2xemption$ 8ea" Property Taxes (22)
Fnder the 5ocal .overnment (ode what
properties are exempt from real property
taxes? (,-)
SUGGESTED ANSWER*
"he following properties are exempt
from real property taxes: (/ec! :+0 5.()!
4! >eal property owned by the
>epublic of the &hilippines or any of
its political subdivisions except when
the bene*cial use thereof has been
granted for consideration or otherwise
to a taxable personD
:! ;ll lands buildings and
improvements actually directly and
exclusively used for religious charitable
or educational purposes by charitable
institutions churches parsonages or
convents appurtenant thereto
mosEues nonpro*t or religious
cemeteriesD
+! ;ll machineries and eEuipment that
are actually directly and exclusively
used by local water districts and
government%owned or controlled
corporations engaged in the supply
and distribution of water andOor
generation and transmission of
electric powerD
0! ;ll real property owned by duly
registered cooperatives as provided for
under >!;! 8o! HJ+=D and
,! <achinery and eEuipment used for
pollution control and environmental
protection!
/oca" Taxation: Imposition of A& Ca"orem Tax (2)
<ay local governments impose an annual
realty tax in addition to the basic real
property tax on idle or vacant lots
located in residential subdivisions within
their respective territorial 2urisdictions?
(+-)
SUGGESTED ANSWER*
8ot all local government units may do so!
Only provinces cities and municipalities
within the <etro <anila area (,ec. &5&
?ocal #overnment !ode) may impose an
ad va-,re5 /a> not exceeding *ve percent
(,-) of the assessed value (,ec. &5. 6bid.)
of idle or vacant residential lots in a
subdivision duly approved by proper
authorities regardless of area! (,ec.&5'
6bid.)
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6. of 73
/oca" Taxation: /ega"ityE !onstitutiona"ity$ Tax
%r&inance (24)
@ a taxpayer who believes that an
ordinance passed by the (ity (ouncil of
&asay is unconstitutional for being
discriminatory against him want to #now
from you his tax lawyer whether or not
he can *le an appeal! In the aCirmative
he as#s you where such appeal should
be made: the /ecretary of Iinance or the
/ecretary of Mustice or the (ourt of "ax
;ppeals or the regular courts! What would
your advice be to your client @? (=-)
SUGGESTED ANSWER*
"he appeal should be made with the
/ecretary of Mustice! ;ny Euestion on the
constitutionality or legality of a tax
ordinance may be raised on appeal with the
/ecretary of Mustice within +1 days from
the eCectivity thereof! (Sec.
!4# LGC? Hag,%,0 MarAe/ Ve%d,r
A++,cia/i,% v. M.%ici*a-i/0 ,1 Hag,%,0
7#' SCRA 7#' 82))29$!
/oca" Taxation: /ega"ity$ Imposition of 8ea" Property
Tax 8ate (22)
;n Ordinance was passed by the
&rovincial Aoard of a &rovince in the
8orth increasing the rate of basic real
property tax from 1!11H- to 4 - of the
assessed value of the real property
eCective Manuary 4 :111! >esidents of
the municipalities of the said province
protested the Ordinance on the ground
that no public hearing was conducted
and therefore any increase in the rate of
real property tax is void! Is there merit in
the protest? 3xplain your answer! (:-)
SUGGESTED ANSWER*
"he protest is devoid of merit! 8o
public hearing is reEuired before the
enactment of a local tax ordinance
levying the basic real property tax
(;rt! +:0 5.( >egulations)!
ALTERNATI1E ANSWER*
7es there is merit in the protest provided
that suCicient proof could be introduced
for the non%observance of public
hearing! Ay implication the /upreme
(ourt recogni$ed that public hearings
are reEuired to be conducted prior to
the enactment of an ordinance
imposing real property taxes! ;lthough it
was concluded by the highest tribunal
that presumption of validity of a tax
ordinance can not be overcome by bare
assertions of procedural defects on its
enactment it would seem that if the
taxpayer had presented evidence to
support the allegation that no public
hearing was conducted the (ourt should
have ruled that the tax ordinance is invalid!
(Be-e%
Fig.erre+ v. C,.r/ ,1 A**ea-+ GRN,.
!!"!#2 Marc: 23 !"""$!
/oca" Taxation: Po1er to Impose (24)
In order to raise revenue for the repair and
maintenance of the newly constructed
(ity ?all of <a#ati the (ity <ayor
ordered the collection of &4!11 called
"elevator tax" every time a person rides
any of the high%tech elevators in the city
hall during the hours of =:11 a!m! to 41:11
a!m! and 0:11 p!m! to H:11 p!m! Is the
"elevator tax" a valid imposition? 3xplain!
(=-)
SUGGESTED ANSWER*
8o! "he imposition of a tax fee or
charge or the generation of revenue under
the 5ocal .overnment (ode shall be exercised
by the /;8.F8I;8 of the local government
unit concerned through an appropriate
ordinance (,ection %5& of the ?ocal
#overnment !ode). "he city mayor alone
could not order the collection of the taxD as
such the "elevator tax" is an invalid
imposition!
/oca" Taxation: 8emissionE!on&onation of Taxes (2*)
>( is a law%abiding citi$en who pays his real
estate taxes promptly! 'ue to a series of
typhoons and adverse economic conditions
an ordinance is passed by << (ity granting a
,1- discount for payment of unpaid real
estate taxes for the preceding year and
the condonation of all penalties on *nes
resulting from the late payment! ;rguing
that the ordinance rewards delinEuent
taxpayers and discriminates against prompt
ones >( demands that he be refunded an
amount eEuivalent to one%half of the real
taxes he paid! "he municipal attorney
rendered an opinion that >( cannot be
reimbursed because the ordinance did not
provide for such reimbursement! >( *les
suit to declare the ordinance void on the
ground that it is a class legislation! Will his
suit prosper? 3xplain your answer brie)y!
(,-)
SUGGESTED ANSWER*
"he suit will not prosper! "he remission or
condonation of taxes due and payable to the
exclusion of taxes already collected does not
constitute unfair discrimination! 3ach set of
taxes is a class by itself and the law would be
open to attac# as class legislation only if all
taxpayers belonging to one class were not
treated ali#e ,<.a% L.%a S.6divi+i,%
I%c. v. Sar5ie%/, "! P:i-. 7#! 8!"329$.
/oca" Taxation: 8u"e of <niformity an& 23ua"ity (24)
"he (ity of <a#ati in order to solve the
traCic problem in its business districts
decided to impose a tax to be paid by the
driver on all private cars entering the city
during pea# hours from =:11 a!m! to J:11
a!m! from <ondays to Iridays but
exempts those cars carrying more than
two occupants excluding the driver! Is
the ordinance valid? 3xplain! (=-)
SUGGESTED ANSWER*
"he ordinance is in violation of the >ule
of Fniformity and 3Euality which reEuires
that all sub2ects or ob2ects of taxation
similarly situated must be treated ali#e in
eEual footing and must not classify the
sub2ects in an arbitrary manner! In the case
at bar the ordinance exempts cars
carrying more than two occupants from
coverage of the said ordinance!
Iurthermore the ordinance only imposes the
tax on private cars and exempts public
vehicles from the imposition of the tax
although both contribute to the traCic problem!
"here exists no substantial standard used in
the classi*cation by the (ity of <a#ati!
;nother issue is the fact that the tax is
imposed on the driver of the vehicle and
not on the registered owner of the same! "he
tax does not only violate the reEuirement of
uniformity but the same is also un2ust
because it places the burden on someone
who has no control over the route of the
vehicle! "he ordinance is therefore
invalid for violating the rule of uniformity
and eEuality as well as for being un2ust!
/oca" Taxation$ Situs of Professiona" Taxes (29)
<r! Iermin a resident of Nue$on (ity is
a (erti*ed &ublic ;ccountant%5awyer
engaged in the practice of his
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66 of 73
two professions!
?e
ha
s his
mai
n
oCic
e
i
n
<a#ati (ity and maintains a branch
oCice in &asig (ity! <r! Iermin pays his
professional tax as a (&; in <a#ati (ity
and his professional tax as a lawyer in
&asig (ity! (,-)
a) <ay <a#ati (ity where he has his main
oCice reEuire him to pay his professional
tax as a lawyer? 3xplain!
SUGGESTED ANSWER*
8o! <a#ati (ity where <r! Iermin has
his main oCice may not reEuire him to
pay his professional tax as a lawyer! <r!
Iermin has the option of paying his
professional tax as a lawyer in &asig (ity
where he practices law or in <a#ati
(ity where he maintains his principal
oCice! (,ec. %5*Ab@ ?ocal #overnment !ode)
b) <ay Nue$on (ity where he has his
residence and where he also practices his
two professions go after him for the
payment of his professional tax as a
(&; and a lawyer? 3xplain!
SUGGESTED ANSWER*
8o the situs of the professional tax is the
city where the professional practices
his profession or where he
maintains his principal oCice in case he
practices his profession in several
places! "he local government of Nue$on
(ity has no right to collect the
professional tax from <r! Iermin as the
place of residence of the taxpayer is not
the proper situs in the collection of the
professional tax!
/oca" Taxation$ Specia" /e(y on I&"e /an&s (29)
; city outside of <etro <anila
plans to enact an ordinance that will
impose a special levy on idle lands
located in residential subdivisions
within its territorial 2urisdiction in
addition to the basic real property tax! If
the lot owners of a subdivision located
in the said city see# your legal advice
on the matter what would your advice be?
'iscuss! (,-)
SUGGESTED ANSWER*
I would advise the lot owners that a city
even if it is outside <etro <anila may
levy an annual tax on idle lands at the rate
not exceeding *ve percent (,-) of the
assessed value of the property which
shall be in addition to the basic real
property tax! (,ec. &5. ?ocal #overnment
!ode) I would li#ewise advise them that
the levy may apply to residential lots
regardless of land area in subdivisions
duly approved by proper authorities the
ownership of which has been transferred to
individual owners who shall be liable for the
additional tax! (5ast par! /ec! :+L)
"he term "Idle 5ands" means land not
devoted directly to any crop or to any
de*nite purpose for at least one year prior
to the notice of expropriation except for
reasons other than force ma1eure or any
fortuitous event but used to be devoted or
is suitable to such crop or is contiguous to
land devoted directly to any crop and
does not include land devoted
permanently or regularly to other
essential and more productive purpose.
(9hilippine ?egal 4ncyclopedia by ,ibal
%*/. 4d.)
Iinally I would advise them to
construct or place improvements on their
idle lands by ma#ing valuable additions to
the property or ameliorations in the landBs
conditions so the lands would not be
considered as idle! (/ec! 4JJQmR) In this
manner their properties would not be
sub2ect to the ad valorem tax on idle lands!
8ea" Property Tax: <n&ergroun& 5aso"ine TanBs (24)
Fnder ;rticle 04, of the (ivil (ode
in order for machinery and eEuipment to
be considered real property the pieces must
be placed by the owner of the land and in
addition must tend to directly meet the
needs of the industry or wor#s carried on by
the owner! Oil companies install underground
tan#s in the gasoline stations located on land
leased by the oil companies from the owners
of the land where the gasoline stations
QareR located! ;re those underground tan#s
which were not placed there by the owner of
the land but which were instead placed there
by the lessee of the land considered real
property for purposes of real property
taxation under the local .overnment
(ode? 3xplain! (=-)
SUGGESTED ANSWER*
7es! "he properties are considered as
necessary *xtures of the gasoline station
without which the gasoline station would
be useless! <achinery and eEuipment
installed by the
lessee of leased land is not real property for
purposes of execution of a *nal 2udgment
only! "hey are considered as real property
for real property tax purposes as "other
improvements to aCixed or attached real
property under the ;ssessment 5aw and
the >eal &roperty "ax (ode!
,Ca-/e> v. Ce%/ra- B,ard ,1 A++e++5e%/
A**ea-+ !!( SCRA 2"' 8!"429-.
8ea" Property Tax$ 8e3uirements$ Auction Sa"es of
Property for Tax 'e"in3uency (26)
Nue$on (ity published on Manuary +1
:11H a list of delinEuent real property
taxpayers in : newspapers of general
circulation and posted this in the main
lobby of the (ity ?all! "he notice reEuires
all owners of real properties in the list to
pay the real property tax due within +1
days from the date of publication otherwise
the properties listed shall be sold at public
auction!
Moachin is one of those named in the list! ?e
purchased a real property in 4JJH but failed
to register the document of sale with the
register of 'eeds and secure a new real
property tax declaration in his name! ?e
alleged that the auction sale of his property is
void for lac# of due process considering that
the (ity "reasurer did not send him
personal notice! Ior his part the (ity
"reasurer maintains that the publication and
posting of notice are suCicient compliance
with the reEuirements of the law!
4! If you were the 2udge how will
you resolve this issue? (:!,-)
SUGGESTED ANSWER*
I will resolve the issue in favor of Moachin! In
auction sales of property for tax delinEuency
notice to delinEuent landowners and to the
public in general is an essential and
indispensable reEuirement of law the non%
ful*llment of which vitiates the same
(Ti,%gc, v. P:i-. Ve/era%+ Ba%A G.R. N,.
42#42 A.g. 3 !""2$. "he failure to give notice
to the right person i!e! the real owner will
render an auction sale void (Ta% v. Ba%/eg.i
G.R. N, !3()2# Oc/,6er 2(
2))3? Ci/0 Trea+.rer ,1 K.C. v. CA G.R. N,.
!2)"#( Dec. 22 !""#$.
73
:! ;ssuming Moachin is a registered
owner will your answer be the same?
(:!,-)
SUGGESTED ANSWER*
7es! "he law reEuires that a notice of
the auction sale must be properly sent to
Moachin and not merely through publication
(Ta% v. Ba%/eg.i G.R. N, !3()2#
Oc/,6er
2(2))3? E+/a/e ,1 Mercede+ <ac,6 v. CA
G.R. N,. !2)(73 Dec. 22 !""#$.
8ea" Property Taxation: !apita" Asset (s) %r&inary
Asset (1999)
In 4JJ1 <r! 8aval bought a lot for
&4111111!11 In a subdivision with the
intention of building his residence on it! In
4JJ0 he abandoned his plan to build his
residence on it because the surrounding
area became a depressed area and land
values in the subdivision went downD
instead he sold it for &=11!111!11! ;t the
time of the sale the $onal value was
&,11!111!11!
4) Is the land a capital asset or an ordinary
asset? 3xplain!
:) Is there any income tax due on the sale?
3xplain!
SUGGESTED ANSWERS*
4) "he land is a capital asset because it is
neither for sale in the ordinary course of
business nor a property used in the trade
or business of the taxpayer! (/ec! ++!
8I>()!
:) 7es <r! 8aval is liable to the ,-
capital gains tax imposed under /ection
:4(e) of the "ax (ode based on the
gross selling price of &=11!111!11 which is
an amount higher than the $onal value!
8ea" Property Taxation: !apita" 5ains (s) %r&inary
5ains (199=)
What is the diCerence between capital
gains and ordinary gains? Q+-R
SUGGESTED ANSWER*
(;&I";5 .;I8/ are gains reali$ed
from the sale or exchange of capital
assets while O>'I8;>7 .;I8/ refer
to gains reali$ed from the sale or
disposition of ordinary assets!
8ea" Property Taxation: !o(erage of %r&inary
Income (199=)
What does the term "ordinary income"
include? Q:-R
SUGGESTED ANSWER*
"he term ordinary income includes any gain
from the sale or exchange of property which
is not a capital asset! "hese are the gains
derived from the sale or exchange of
property such as stoc# in trade of the
taxpayer or other property of a #ind which
would properly be included in the inventory
of the taxpayer if on hand at the close of the
taxable year or property held by the taxpayer
primarily for sale to customers in the course
of his trade or business or property used in
trade or business of a character which is
sub2ect to the allowance for depreciation or
real property used in trade or business of
the taxpayer! (,ec. && AN@ in relation to
,ec. 5*AA@(%) both of the N6$!).
ALTERNATI1E ANSWER*
"he term ordinary income includes
income from performance of services
whether professional or per% sonal gains
accruing from business and pro*t arising
from the sale or exchange of ordinary assets!
8ea" Property Taxation: 2xc#ange of /ot$ !apita"
5ain Tax (199,)
; corporation engaged in real estateB
development executed deeds of sale on
various subdivided lots! One buyer after
going around the subdivision bought a corner
lot with a good view of the surrounding
terrain! ?e paid &4!: million and the title
to the property was issued! ; year later
the value of the lot appreciated to a
mar#et value of &4!H million and the buyer
decided to build his house thereon! Fpon
inspection however he discovered that a
huge tower antennae had been erected on
the lot frontage totally bloc#ing his view!
When he complained the realty company
exchanged his lot with another corner lot with
an eEual area but aCording a better view! Is
the buyer liable for capital gains tax on
the exchange of the lots?
SUGGESTED ANSWER*
7es the buyer is sub2ect to capital gains
tax on the exchange of lots on the basis
of prevailing fair mar#et value of the
property transferred at the time of the
exchange or the fair mar#et value of the
property received whichever is higher
(,ection &%(e) N6$!). >eal property
transactions sub2ect to capital gains tax are
not limited to sales but also exchanges of
property unless exempted by a speci*c
provision of law!
ALTERNATI1E ANSWER*
8o! "he exchange is not sub2ect to
capital gains tax because it is merely done
to comply with the intentions of the parties
to the previous contract regarding the sale
and acEuisition of a property with a
good view! "his is a simple substitution
of the ob2ect of sale and since the
previous transaction was already sub2ected
to tax no new tax should be imposed on
the exchange (36$ $uling No. &%(e) (-5-
/* ((/-*-).
8ea" Property Taxation: 2xemptionE'e&uctions$
'onor6s Tax (199=)
;ce "obacco (orporation bought a parcel of
land situated at &ateros and donated it to the
<unicipal .overnment of &ateros for the sole
purpose of devoting the said land as a
relocation site for the less fortunate
constituents of said municipality! In
accordance therewith the <unicipal .ov%
ernment of &ateros issued to the
occupantsObene*ciaries (erti*cates of ;ward
giving to them the respective areas where
their houses are erected! "hrough Ordinance
8o! : /eries of 4JJ= the said municipal
government ordained that the lots awarded
to the awardeesOdonees be *nally
transferred and donated to them!
'etermine the tax conseEuence of the
foregoing dispositions with respect to ;ce
"obacco (orporation the <unicipal
.overnment of &ateros and the
occupantsObene*ciaries! Q,-R
SUGGESTED ANSWER*
"he donation by ;ce "obacco (orporation
is e>e5*/ 1r,5 /:e d,%,rO+ /a> because it
Euali*es as a gift to or for the use of any
political subdivision of the 8ational
.overnment (/ection 414(:) 8I>()! "he
conveyance is li#ewise exempt from
documentary stamp tax because it is a
transfer without consideration!
/ince the donation is to be used as a relocation
site for the less fortunate constituents of the
municipality! It may be considered as an
underta#ing for human settlements
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64 of 73
hence the value of the land 5a0 6e
ded.c/i6-e
i% 1.-- 1r,5 /:e gr,++ i%c,5e of
;ce "obacco (orporation if in accordance
to a 8ational &riority &lan determined
by the 8ational 3conomic 'evelopment
;uthority! (,ec. 5"L=@(&)(a) N6$!). If the
utili$ation is not in accordance to a
8ational &riority &lan determined by the
8ational 3conomic 'evelopment ;uthority
then ;ce "obacco (orporation may deduct
the value of the land donated only to the
extent of *ve (,-) percent of its taxable
income derived from trade or business
as computed without the bene*t of the
donation! (,ec. 5"A=@(&)(a) in relation to
,ec. 5"A=@(%) N6$!).
"he <unicipality of &ateros is not sub2ect
to any donorBs tax on the value of land it
subseEuently donated it being exempt
from taxes as a political subdivision
of the 8ational .overnment!
"he occupantsObene*ciaries are sub2ect
to real property taxes because they now
own the land!
ALTERNATI1E ANSWER on Taxability of
8unicipality and Awardees:
"he awarding by the <unicipal
.overnment of lots to speci*c awardees
or donees is li#ewise exempt from the
donorBs tax because it is only an
implementation of the purpose for which
the property was given by ;ce
"obacco (orporation! "he purpose of the *rst
donation is to devote the land as a
relocation site for the less fortunate
constituents! If later on the <unicipality
gives out (erti*cates of ;ward over
speci*c lots occupied by the Euali*ed
occupantsObene*ciaries this is intended to
perpetuate the purpose of the previous
donor the <u% nicipality acting merely as
a conduit and not the true donor! "his is
simply a donation by the <unicipality in
form but not in substance!
"he receipt by the occupant
bene*ciaries of their respective lots
through the (erti*cate of ;ward has
no tax implications! "hey are however
liable for real prop% erty taxes!
8ea" Property Taxation: 2xemption: Ac3uiring
7e1 Principa" 8esi&ence (2)
5ast Muly 4: :111 <r! X <rs! &eter
(amacho sold their principal residence
situated in "andang /ora Nue$on (ity for
"en <illion &esos (&41111111!11) with the
intention of using the proceeds to
acEuire or construct a new principal
residence in ;urora ?ills Aaguio (ity!
What conditions must be met in order
that the capital gains presumed to have
been reali$ed from such sale may not
be sub2ect to capital gains tax? (,-)
SUGGESTED ANSWER*
"he conditions are:
4! "he proceeds are fully utili$ed in
acEuiring or constructing a new
principal residence within eighteen
(4=) calendar months from the
sale or disposition of the principal
residence or eighteen (4=) months from
Muly 4: :111!
&. "he historical cost or ad2usted basis
of the real property sold or disposed
shall be carried over to the new
principal residence built or acEuired!
5. "he (ommissioner of Internal >evenue
must have been informed by <r! X <rs!
&eter (amacho within thirty (+1) days
from the date of sale or disposition on
Muly 4: :111 through a prescribed return
of their intention to avail of the tax
exemption!
". "hat the said exemption can only be
availed of once every ten (41) years!
-. If there is no full utili$ation of the
proceeds of sale or disposition the
portion of the gain presumed to have
been reali$ed from the sale or
disposition shall be sub2ect to capital
gains tax A,ec. &" (B) (&) N6$! of
%**'@
8ea" Property Taxation: Fun&amenta" Princip"es (199,)
/tate the fundamental principles underlying
real property taxation in the &hilippines!
SUGGESTED ANSWER*
"he following are the fundamental
principles governing real property
taxation:
4) >eal property shall be appraised at
its current and fair mar#et valueD
:) >eal property shall be classi*ed
for assessment purposes on the basis
of its actual use:
+) >eal property shall be assessed on
the basis of a uniform classi*cation
within each local government unitD
0) "he appraisal assessment levy and
collection of real property tax shall
not be let to any private personD
and
,) "he appraisal and assessment of real
property shall be eEuitable!
8ea" Property Taxation: Princip"es ; /imitations: /5<
(2)
.ive at least two (:) fundamental principles
governing real property taxation which
are limitations on the taxing power of
local governments insofar as the levying of
the realty tax is concerned! (:-)
SUGGESTED ANSWER*
"wo (:) fundamental principles governing
real property taxation are:
4) "he appraisal must be at the current
and fair mar#et valueD and
:) (lassi*cation for assessment must be
on the basis
of actual use! (,ec. %*/ ?ocal
#overnment !ode)
ALTERNATI1E ANSWER*
"he examinee should be given credit if he
chooses the above two (:) or any two (:) of
those enumerated below:
%) ;ssessment must be on the basis
of uniform classi*cationD
&) ;ppraisal assessment levy and collection
shall not be let to private personsD and
5) ;ppraisal and assessment must be
eEuitable! (,ec. %*/ ?ocal #overnment
!ode)
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8ea" Property Taxation: Property So"& is an
%r&inary Asset (199=)
;n individual taxpayer who owns a ten
(41) door apart% ment with a monthly
rental of &41111 each residential unit
sold this property to another individual
taxpayer! Is the seller liable to pay the
capital gains tax? Q,-R
SUGGESTED ANSWER*
8o! "he seller is not liable to pay the
capital gains tax because the property
sold is an ordinary asset i!e! real
property used in trade or business! It is
apparent that the taxpayer is engaged in
the real estate business regularly renting
out the ten (41) door apartment!
8ea" Property Taxation: <n&ergroun& 5aso"ine
TanBs (21)
Fnder ;rticle 04, of the (ivil (ode
in order for machinery and eEuipment
to be considered real property they must
be placed by the owner of the land
and in addition must tend to directly
meet the needs of the industry or wor#s
carried on by the owner! Oil companies
such as (altex and /hell install
underground tan#s in the gasoline
stations located on land leased by
the oil companies from others! ;re
those underground tan#s which were not
placed there by the owner of the land but
which were instead placed there by the
lessee of the land considered real
property for purposes of real property
taxation under the 5ocal .overnment
(ode? 3xplain your answer! (,-)
SUGGESTED ANSWER*
7es! "he underground tan#s although
installed by the lessee /hell and (altex
are considered as real property for
purposes of the imposition of real
property taxes! It is only for purposes of
executing a *nal 2udgment that these
machinery and eEuipment installed by
the lessee on a leased land would not
be considered as real property! Aut in
the imposition of the real
property tax the underground tan#s
are taxable as necessary *xtures of the
gasoline station without which the
gasoline station would not be
operational! (Ca-/e> P:i-+. I%c v.
CBAA !!( SCRA. 2"')!
8ea" Property Taxation$ 2xempte& Properties (26)
What properties are exempt from the
real property tax? (,-)
SUGGESTED ANSWER*
"he following properties are exempt
from the real property tax (/ection :+0
5ocal .overnment (ode):
(4) >eal property owned by the
>3&FA5I( OI "?3 &?I5I&&I83/ or
any of its political subdivisions except
when the bene*cial use thereof has
been granted for consideration or
otherwise to a taxable personD
(:) (?;>I";A53 I8/"I"F"IO8/
churches parsonages or convents
appurtenant thereto mosEues non%
pro*t or religious cemeteries and all
lands buildings and improvements
actually directly and exclusively used
for religious charitable or educational
purposesD
(+) ;ll machineries and eEuipment that
are actually directly and exclusively
used by 5O(;5 W;"3> F"I5I"I3/ and
government%owned or controlled
corporations engaged in the supply and
distribution
of water andOor generation and
transmission of electric powerD
(") ;ll real property owned by duly
>3.I/"3>3' (OO&3>;"I63/ as
provided for under >!;! HJ+=D and
(-) <achinery and eEuipment used for
9C??FT6CN !CNT$C? and
4N26$CN84NTA? 9$CT4!T6CN.
TARI33 AND CUSTOMS DUTIES
!ustoms: IF"exi+"e Tariff !"auseG (21)
What do you understand by the term
")exible tariC clause" as used in the "ariC
and (ustoms (ode? (,-)
SUGGESTED NS!ER:
"he term "Pe>i6-e /ariD c-a.+e "refers to
the authority given to the &resident to ad2ust
tariC rates under /ection 014 of the "ariC
and (ustoms (ode which is the
enabling law that made eCective the
delegation of the taxing power to the
&resident under the (onstitution!
QNote: 6t is suggested that if the
examinee cites the entire provision
of ,ec. "(% of the TariO M !ustoms
!ode he should also be given full
credit!R
!ustoms: A&ministrati(e (s) Hu&icia" 8eme&ies (199,)
"he "ariC and (ustoms (ode allows the
Aureau of (ustoms to resort to the
administrative remedy of sei$ure such as by
enforcing the tax lien on the imported article
and to the 2udicial remedy of *ling an
action in court! When does the Aureau of
(ustoms normally avail itselfD
(a) of the administrative instead of the
2udicial remedy or
(b) of the latter instead of the former
remedy?
SUGGESTED ANSWER*
(a) "he Aureau of (ustoms normally avails
itself of the ;'<I8I/">;"I63 >3<3'7
of sei$ure such as by enforcing the tax
lien on the imported articles instead of the
2udicial remedy when the goods to which
the tax lien attaches regardless of
ownership is still in the custody or control
of the .overnment! In the case
however of importations which are
prohibited or undeclared the remedy of
sei$ure and forfeiture may still be exercised
by the Aureau of (ustoms even if the goods
are no longer in its custody!
(b) On the other hand when the goods
are properly released and thus beyond the
reach of tax lien the govern% ment can see#
payment of the tax liability through 2udicial
action since the tax liability of the importer
constitutes a personal debt to the
government therefore enforceable by action!
In this case 2udicial remedy is normally availed
of instead of the administrative remedy!
!ustoms: Importation (1999)
When does importation begin and when does
it end?
SUGGESTED ANSWER*
I<&O>";"IO8 begins from the time the
carrying vessel or aircraft enters &hilippine
territorial 2urisdiction with the intention to
unload therein and ends at the time the goods
are released or withdrawn from the
customhouse upon
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20 of 73
payment of the
customs
dutie
s or
wit
h
leg
al
permit to withdraw (Vid.0a v+.
Berdiag, #7 SCRA 337)!
!ustoms: Huris&iction$ Sei?ure ; Forfeiture
Procee&ings (1996)
On Manuary 4 4JJH armed with warrants of
sei$ure and detention issued by the Aureau
of (ustoms members of the customs
enforcement and security services
coordinated with the Nue$on (ity police
to search the premises owned by a
certain <r! ?o along Talayaan ;venue
Nue$on (ity which allegedly contained
untaxed vehicles and parts! While inside the
premises the member of the customs
enforcement and security services noted
articles which were not included in the
list contained in the warrant! ?ence on
Manuary 4, 4JJH an amended warrant
and sei$ure was issued!
On Manuary :, 4JJH the customs
personnel started hauling the articles
pursuant to the amended warrant! "his
prompted <r! ?o to *le a case for
in2unction and damages with a prayer for
a restraining order before the >egional
"rial (ourt of Nue$on (ity against the
Aureau of (ustoms on Manuary :L 4JJH! On
the same date the "rial (ourt issued a
temporary restraining order!
; motion to dismiss was *led by the
Aureau of (ustoms on the ground that the
>egional "rial (ourt has no 2uris% diction
over the sub2ect matter of the complaint
claiming that it was the Aureau of
(ustoms that has exclusive 2urisdiction
over it! 'ecide!
SUGGESTED ANSWER*
"he motion to dismiss should be granted!
/ei$ure and forfeiture proceedings are
within the exclusive 2urisdiction of the
(ollector of (ustoms to the exclusion of
regular (ourts! >egional "rial (ourts are
devoid of competence to pass upon the
validity or regularity of sei$ure and
forfeiture proceedings conducted by the
Aureau of (ustoms and to en2oin or
otherwise interfere with these proceedings
(Re*.6-ic v+. CFI ,1 Ma%i-a 8Bra%c:
XXII9 G.R. N,. (7#(# Se*/e56er 2
!""2? <a, v+. CA G.R. N,. !)(')(
Oc/,6er ' !""3)!
!ustoms: Jin&s of !ustom 'uties (1999)
Fnder the "ariC and (ustoms (ode what
are
a) dumping duties
b) countervailing duties
c) mar#ing duties
d) discriminatory duties?
SUGGESTED ANSWER*
H) D.5*i%g d./ie+ are special duties
imposed by the /ecretary of Iinance
upon recommendation of the "ariC
(ommission when it is found that the
price of the imported articles is
deliberately or continually *xed at less
than the fair mar#et value or cost of
production and the importation would
cause or li#ely cause an in2ury to local
industries engaged in the manufacture
or production of the same or
similar articles or prevent their
establishment!
L) C,.%/ervai-i%g d./ie+ are special
duties imposed by the /ecretary of
Iinance upon prior investigation and
report of the "ariC (ommission to
oCset an excise or inland revenue tax
upon articles of the same class
manufactured at home or subsidies to
foreign producers or manufacturers
by their respective governments!
=) MarAi%g d./ie+ are special duties
eEuivalent to ,- ad valorem
imposed on articles not properly
mar#ed! "hese are collected by the
(ommissioner of (ustoms except
when the improperly mar#ed
articles are exported or destroyed
under customs supervision and prior
to *nal liEuidation of the
corresponding entry! "hese duties
are designed to prevent possible
deception of the customers!
J) Di+cri5i%a/,r0 d./ie+ are special
duties collected in an amount not
exceeding 411- ad valorem
imposed by the &resident of the
&hilippines against goods of a
foreign country which discriminates
against &hilippine commerce or
against goods coming from the
&hilippines and shipped to a
foreign country!
!ustoms: Jin&s of !ustom 'uties (199,)
3xplain brie)y each of the special
customs duties authori$ed under the "ariC
and (ustoms (ode!
SUGGESTED ANSWER*
"he following are the S*ecia- D./ie+
imposed under the "ariC and (ustoms
(ode:
(a) D.5*i%g D./0 % "his is a duty levied
on imported goods where it appears
that a speci*c #ind or class of foreign
article is being imported into or sold
or is li#ely to be sold in the &hilippines
at a price less than its fair valueD
(b) C,.%/ervai-i%g D./0 % "his is a duty
eEual to the ascertained or estimated
amount of the subsidy or bounty or
subvention granted by the foreign country
on the production manufacture or
exportation into the &hilippines of any
article li#ely to in2ure an industry in the
&hilippines or retard or considerable
retard the establishment of such industryD
(c) MarAi%g D./0 % "his is a duty on an
ad valorem basis imposed for
improperly mar#ed articles! "he law
reEuires that foreign importations
must be mar#ed in any oCicial language
of the &hilippines the name of the country
of origin of the articleD
(d) Di+cri5i%a/,r0 ,r Re/a-ia/,r0 D./0 %
"his is a duty imposed on imported
goods whenever it is found as a fact that
the country of origin discriminates
against the commerce of the &hilippines
in such a manner as to place the
commerce of the &hilippines at a
disadvantage compared with the
commerce of any foreign country!
!ustoms: 8eme&ies of an Importer (1996)
'iscuss brie)y the remedies of an
importer during the pendency of sei$ure
proceedings!
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21 of 73
SUGGESTED ANSWER*
'uring the pendency of sei$ure
proceedings the importer may secure the
release of the imported property for
legitimate use by posting a bond in an
amount to be *xed by the (ollector
conditioned for the payment of the
appraised value of the article andOor
any *ne expenses and costs which may
be ad2udged in the caseD provided that
articles the importation of which is
prohibited by law shall not be released
under bond.
"he importer may also oCer to pay to the
collector a *ne imposed by him upon the
property to secure its release or in case of
forfeiture the importer shall oCer to pay
for the domestic mar#et value of the
sei$ed article which oCer sub2ect to
the approval of the (ommissioner may
be accepted by the (ollector in settlement
of the sei$ure case except when there is
fraud! Fpon payment of the *ne or
domestic mar#et value the property
shall be forthwith released and all
liabilities which may or might attach to the
property by virtue of the oCense which
was the occasion of the sei$ure and all
liability which might have been
incurred under any bond given by the
importer in respect to such property
shall thereupon be deemed to be
discharged!
!ustoms: 8eturning 8esi&ents: TouristETra(e"ers (24)
@ and his wife 7 Iilipinos living in the
&hilippines went on a three%month
pleasure trip around the world during
the months of Mune Muly and ;ugust :11:!
In the course of their trip they
accumulated some personal eCects
which were necessary appropriate and
normally used in leisure trips as well
as souvenirs in non%commercial
Euantities! ;re they "returning residents"
for purposes of /ection 41, of the "ariC
and (ustoms (ode? 3xplain! (=-)
SUGGESTED ANSWER*
8o! "he term "returning residents" refers
to nationals who have stayed in a
foreign country for a period of at least
six (H) months! (,ection %(-(f) of the TariO
and !ustoms !ode). 'ue to their limited
duration of stay abroad @ and 7 are not
considered as "returning residents" but they
are merely considered as travelers or
tourists who en2oy the bene*t of
conditionally free importation!
ANote: !redit must li>ewise be given if
the candidate answered in the
aOirmative considering that travelers or
tourists are given the same tax
treatment as that of returning
residents treating their personal
eOects not in commercial
7uantities as conditionally free
importation.@
!ustoms: Sei?ure ; Forfeiture: 2ffects (199*)
In smuggling a shipment of garlic the
smugglers used an eight%wheeler truc#
which they hired for the purpose of
ta#ing out the shipment from the customs
$one! 'anny the truc# owner did not
have a certi*cate of public convenience
to operate his truc#ing business! 'anny did
not #now that the shipment of garlic
was illegally imported!
(an the (ollector of (ustoms of the port
sei$e and forfeit the truc# as an instrument
in the smuggling?
SUGGESTED ANSWER*
7es the (ollector of (ustoms of the port
can sei$e and forfeit the truc# as an
instrument in the smuggling activity since
the same was used unlawfully in the
importation of
smuggled articles! "he mere carrying of
such articles on board the truc# (in
commercial Euantities) shall sub2ect the
truc# to forfeiture since it was not
being used as a duly authori$ed common
carrier which was chartered or leased as
such! (/ec! :,+1 QaR "(()
<oreover although forfeiture of the vehicle
will not be eCected if it is established that
the owner thereof had no #nowledge of or
participation in the unlawful act there
arises a prima facie presumption or
#nowledge or participation if the owner is
not in the business for which the conveyance
is generally used! "hus not having a
certi*cate of public convenience to operate
a truc#ing business he is legally deemed not
to have been engaged in the truc#ing
business! (,ec. &-5% TariO and !ustoms
!ode)
!ustoms: Steps in(o"(ing Protest !ases (199*)
"he (ollector of (ustoms instituted sei$ure
proceedings against a shipment of motor
vehicles for having been misdeclared as
second%hand vehicles! /tate the procedure for
the review of the decision up to the /upreme
(ourt of the (ollector of (ustoms adverse to
the importer!
SUGGESTED ANSWER*
"he procedure in sei$ure cases may be
summari$ed as follows:
(a) "he collector issues a warrant for
the detention or forfeiture of the
imported articlesD (/ec! :+14 "ariC
and (ustoms (ode)
(b) "he (ollector gives the importer a
written notice of the sei$ure and *xes
a hearing date to give the importer
an opportunity to be heardD (/ec!
:+1+ "(()
(c) ; formal hearing is conductedD (/ec!
:+4: "(()
(d) "he (ollector renders a declaration
of forfeitureD (/ec! :+4: "(()
(e) "he Importer aggrieved by the
action of the (ollector in any case
of sei$ure may appeal to the
(ommissioner for his review within
*fteen (4,) days from written notice of
the (ollectorBs decisionD (/ec! :+4+
"(()
(f) "he importer aggrieved by the action or
ruling of the (ommissioner in any
case of sei$ure may appeal to the
(ourt of "ax ;ppealsD (/ec! :01: "(()
(g) "he importer adversely aCected by the
decision of the (ourt of "ax ;ppeals
('ivision) may appeal to the (ourt of
"ax ;ppeals (en banc) within *fteen
(4,) days which may be extended
for another *fteen
(4,) days or such period as the
(ourt of "ax ;ppeals may decide!
!ustoms$ Basis of 'utia+"e Ca"ue$ Importe& Artic"e (29)
/tate and explain the basis of dutiable
value of an imported article sub2ect to
an ad valorem tax under the "ariC and
(ustoms (ode!
ALTERNATI1E ANSWER*
"he basis of dutiable value of an imported
article sub2ect to an ad valorem tax under the
"ariC and (ustoms (ode is its ">;8/;("IO8
6;5F3! (,ec. &(%AA@ TariO and !ustoms
!ode as amended by $.A. No. *%5-) If
such value could not be determined then the
following values are to be utili$ed in their
seEuence: Tra%+ac/i,% va-.e ,1 ide%/ica-
g,,d+ (,ec. &(%A3@): Tra%+ac/i,% va-.e ,1
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22 of 73
+i5i-ar g,,d+ (,ec.
&(%A!@):
Ded.c/ive
va-.e
(,ec. 66.4.% !A.C. No. "-&(("):
C,5*./ed va-.e (,ec. 66.<.l !.A.C.
No. %-&(("() and Fa--6acA va-.e!
(,ec. &(%A<@)
ALTERNATI1E ANSWER*
"he basis of dutiable value of an imported
article sub2ect to an ad valorem tax under
the "ariC and (ustoms (ode is its
transaction value which shall be the
price actually paid or payable for the
goods when sold for export to the
&hilippines ad2usted by adding certain
cost elements to the extent that they are
incurred by the buyer but are not included
in the price actually paid or payable
for the imported goods! (,ec. &(%AA@
TariO and !ustoms !ode as amended
by $.A. *%5-)
If such value could not be determined then
the following values are to be utili$ed in
their seEuence: "ransaction value of
identical goods (/ec! :14QAR)D "ransaction
value of similar goods (/ec! :14Q(R)D
'eductive value (/ec! II!3!4 (;!O! 8o! 0%
:110)D (omputed value (/ec! II!I!l (!;!O!
8o! 4%:1101) and Iallbac# value! (/ec!
:14QIR)
!ustoms$ !ounter(ai"ing 'uty (s) 'umping 'uty (29)
'istinguish countervailing duty from
dumping duty! (,-)
SUGGESTED ANSWER*
"he distinctions between
countervailing duty and dumping duty
are the following:
(4) Aasis: "he countervailing duty is
imposed whenever there is granted upon
the imported article by the country of
origin a speci*c subsidy upon its
production manufacture or exportation
and this results or threatens in2ury to
local industry while the basis for the
imposition of dumping duty is the
importation and sale of imported items at
below their normal value causing or
li#ely to cause in2ury to local industry!
(:) ;mount: "he countervailing duty
imposed is eEuivalent to the value of
the speci*c subsidy while the dumping
duty is eEuivalent to the margin of
dumping which is eEual to the diCerence
between the export price to the
&hilippines and the normal value of the
imported article!
!ustoms$ Taxa+i"ity$ Persona" 2ffects (29)
Macob after serving a ,%year tour of
duty as military attache in Ma#arta
returned to the &hilippines bringing with
him his personal eCects including a
personal computer and a car! Would
Macob be liable for taxes on these items?
'iscuss fully! (,-)
SUGGESTED ANSWER*
8o Macob is not liable for taxes on his
personal computer and the car because he
is tax%exempt by law! ?e has met the
following reEuirements for exemption under
&!'! 8o! J:: (4JLH):
a) ?e was a military attache assigned to
Ma#artaD
b) ?e has served abroad for not less than
two (:) yearsD
c) ?e is returning to the &hilippines after
serving his tour of dutyD and
d) ?e has not availed of the tax exemption
for the past four (0) years!
?e is entitled to tax exemption on his
personal and household eCects including a
carD provided
a) "he car must have been ordered or
purchased prior to the receipt by the
&hilippine mission or consulate in
Ma#arta of MacobBs recall orderD
b) the car is registered in MacobBs nameD
c) the exemption shall apply to the value of
the carD
d) the exemption shall apply to the
aggregate value of his personal and
household eCects (including the
personal computer) not exceeding thirty
per centum (+1-) of the total amount
received by Macob as salary and
allowances during his assignment in
Ma#arta but not to exceed four (0)
yearsD
e) Macob must not have availed of the
exemption more oftener than one every
four years! (?ast par. ,ec. %(- TariO
and !ustoms !ode)
OT/ER RELATED MATTERS
BI8: BanB 'eposits Secrecy Cio"ation (2)
; taxpayer is suspected not to have
declared his correct gross income in his
return *led for 4JJL! "he examiner
reEuested the (ommissioner to authori$e
him to inEuire into the ban# deposits of
the taxpayer so that he could proceed
with the net worth method of
investigation to establish fraud! <ay the
examiner be allowed to loo# into the
taxpayerBs ban# deposits? In what cases
may the (ommissioner or his duly
authori$ed representative be allowed to
inEuire or loo# into the ban# deposits of
a taxpayer? (,-)
SUGGESTED ANSWER*
8o! as this would be violative of >epublic
;ct 8o! 401, the Aan# 'eposits /ecrecy
5aw!
or his duly authori$ed representative
may be allowed to inEuire or loo# into
the ban# deposits of a taxpayer in the
following cases:
a) Ior the purpose of determining the
gross estate of a decedentD
b) Where the taxpayer has *led an
application for compromise of his tax
liability by reason of *nancial
incapacity to pay such tax liability!
(/ec! H (I) 8I>( of 4JJLR
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c) Where the taxpayer has signed a
waiver
authori$ing the (ommissioner or
his duly
authori$ed representatives to InEuire
into the ban#
deposits!
BI8: Secrecy of BanB 'eposit /a1 (24)
@ dies in year :111 leaving a ban#
deposit of &:111111!11 under 2oint account
with his associates in a law oCice! 5earning
of @Bs death from the newspapers the
(ommissioner of Internal >evenue wrote to
every ban# in the country as#ing them to
disclose to him the amount of deposits that
might be outstanding in his name or 2ointly
with others at the date of his death! <ay
the ban# holding the deposit refuse to comply
on the ground of the /ecrecy of Aan# 'eposit
5aw? 3xplain! (=-)
SUGGESTED ANSWER*
8o! "he (ommissioner of Internal
>evenue has the authority to inEuire
into ban# deposit accounts of a
decedent to determine his gross estate
notwithstanding the provisions of the Aan#
/ecrecy 5aw! ?ence the ban#s holding
the deposits in Euestion may not
refuse to disclose the amount of deposits
on the ground of secrecy of ban# deposits!
(/ection H(I) of the 4JJL "ax (ode)!
"he fact that the deposit is a 2oint
account will not preclude the
(ommissioner from inEuiring thereon
because the law mandates that if a ban# has
#nowledge of the death of a person who
maintained a ban# deposit account
alone or 2ointly with another it shall
not allow any withdrawal from the said
deposit account unless the (ommissioner
has certi*ed that the taxes imposed
thereon have been paid! (/ection JL of
the 4JJL "ax (ode)! ?ence to be able to
give the reEuired certi*cation the
inclusion of the deposit is imperative which
may be made possible only through the
inEuiry made by the (ommissioner!

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

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