SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

PREWEEK

TAXATION
1. Municipality X enacted an ordinance which imposes an occupation tax upon owners of fishponds. The validity of the ordinance is being challenged on the ground that it constitutes double taxation because the fishpond is already subject to land tax. Is the ordinance valid? YES, the ordinance is valid. There is no direct duplicate taxation in the case at bar because the purposes of the two (2) taxes are different. The objective of the land tax is to impose a charge on the ownership of the property, while the occupation tax is intended to impose a burden upon owners of fishponds for engaging in that line of business. (People v. Mendares, 97 PHIL 158) 2. A Deed of Sale of Real Property was acknowledged before a Notary Public and was presented to the Register of Deeds for registration. The said official required the payment and affixture of two (2) documentary stamps, one for the deed of sale and another for the acknowledgment. Is the said requirement against the principle of double taxation? Why? Considering that in the problem the Deed of Sale is a document separate and distinct from the acknowledgment, there can be no double taxation as there are two objects of taxation. Furthermore, even if the documents are considered as one, there will still be no double taxation in the strict sense since the requirements do not fall under the concept of double taxation. There will only be double taxation if the Registrar does not require the same requirements from others who will register the same kind of documents. 3. Kim Tong, owner of the Freemans Seafood Wharf Restaurant, borrowed from his friend Pit Jacson P 3,000,000. The said amount would finance his newly acquired Volvo car which he would be using while going to work. Their verbal agreement provided an annual interest of 24%. a. Could the interest paid on such loan be deducted from Gross Income as an expense? NO. The amount of interest on indebtedness paid or incurred within a taxable year must be incurred in connection with the taxpayers business to be allowed as a deduction from Gross Income. b. Granting that it was necessary in connection with the taxpayers business, could the deduction be allowed? It depends if the interest is legally due on the indebtedness. A payment of interest verbally agreed upon by the taxpayer and the lender will not be deductible since an agreement to pay interest must be in writing, otherwise it is void under Art. 1956 of the Civil Code.

TAXATION

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

4. Can interest paid on delinquent taxes be deductible? YES. The interest on taxes can be considered as interest on indebtedness. Although taxes already due are not the same as debts, they are however obligations that may be considered as debts. 5. Mr. Valeriano, a car repair shop owner, borrowed P5 million from Allied Bank in 2000 with annual interest of 21% to finance equipment needed in his shop. a. Can Mr. Valeriano yearly deduct the whole 21% interest as an expense? YES, provided it will be reduced by 38% of his interest income subject to final tax. b. In case he failed to deduct the 21% interest from his gross income in 2000, does he still have any other recourse? YES. The taxpayer has an option of either deducting the same as an interest expense for the taxable year or capitalizing the interest payment to increase the value of the asset in which depreciation expense can be allowed. 6. Mr. Lucky Tang, a stockholder of PNB, borrowed from the said bank P51,000,000 with an interest amounting to P1,000,000 to acquire a packaging equipment for his tobacco business. PNB decided to deduct in advance the interest of P1,000,000. a. Can Mr. Tang claim as a deduction the interest expense for that taxable year? It depends on whether Mr. Tang has more than 50% interest at PNB. IF he does, the interest cannot be claimed as a deduction from gross income, the transaction being between related parties (Sec. 34 (B) (2)(b) in relation to Sec. 36 (B) of the NIRC). Granting that Mr. Tang has a lesser equity interest at PNB, the interest cannot be deducted all together. If he is reporting income on the cash basis, the interest shall be allowed as a deduction in the year the indebtedness is paid. If the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. b. Would your answer be the same if it was his uncle who lent the money to Mr. Tang? NO. They are not related parties under Sec. 36B. The members of the family shall include only the taxpayers brothers and sisters ( whether by the whole blood or halfblood), spouse, ancestors, and lineal descendants. 7. Mystika bought 25,000 shares of Globe Telecom at P120 per share in 1993. Come 2001, the value of said shares increased to 220 per share. Can the P100 per share increase in value be assessed for income tax purposes? NO. As a general Rule, a mere increase in the value of property is not income for tax purposes but merely an unrealized increase in capital. No income is derived by the owner until after the actual sale or other disposition of the property in excess of its original cost. There is however an exception which applies only to depreciable properties. Even if there is no sale or disposition, if by reason of appraisal, the cost of depreciable property is increased and the appraised value is used as the new tax base for purposes of computing

TAXATION

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

the allowable depreciation, the difference between the original cost and the appraised value is taxable under the economic-benefit theory. 8. Is an award for damages arising from breach of contract considered taxable income? It is considered as taxable income to the extent that such damages constitute a loss of anticipated profits and non-taxable income to the extent that the same represent a return of capital or investment. 9. Karlo, a non-resident citizen, works as a cashier in ISETAN, Thailand. He receives a monthly income of 4000 baht (4,800 pesos) from his employer for the services rendered. a. Is the salary received by Karlo subject to withholding tax? b. What are the requisites for withholding tax on wages? a. NO. The withholding tax on wages does not apply to foreign sourced income of a non-resident citizen. It applies only to wages or income derived from sources within the Philippines. b. The requisites are: 1) there must exist an employer-employee relationship; 2) there must be payment (actual or constructive) of wages for services rendered; and, 3) there must be a payroll period. 10. Due to economic reverses, XYZ Co. Phil. retrenched some of its employees numbering 50 in all. One of the retrenched employees was A, a 45 year old machinist who had been in the employ of the company for 5 years. He was given by the company P50,000 as his separation pay. Would the amount received by A be subject to withholding tax on compensation? NO. Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee such as retrenchment, redundancy, or cessation of business are exempt from withholding tax on compensation. Amounts received by reason of involuntary separation remain exempt from income tax even if the official or employee, at the time of separation has rendered less than 10 years of service and/or is below 50 years of age. 11. Carrie, a Filipino composer has just received P20,000 as royalties for her outstanding composition Maalaala Mo Kaya, R&B version. She then later invested said amount to X Corp., a domestic corporation engaged in manufacturing by buying 1000 shares thereof. Last January, the company sent a P 5,000 cheque to Carrie as cash dividends. a. b. What income in the above problem is/are subject to final withholding tax? Give five income payments which are subject to final withholding tax.

a. The income payments of Carrie which are subject to final withholding tax are the royalties on musical compositions and the cash dividends actually received from a domestic corporation. b. 1) Royalties on books, as well as other literary works and musical compositions; 2) Interest income received by a resident individual taxpayer from a depository bank under the Foreign Currency Deposit System; 3) Interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form

TAXATION

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

prescribed by the BSP which was pre-terminated by the holder before the 5th year; 4) Cash and/or property dividends actually or constructively received from a domestic corporation, joint stock company, insurance or mutual fund companies or on the share of an individual partner in the distributable net income after tax of a partnership except general professional partnership) or on the share of an individual in the net income after tax of an association, a joint account or a joint venture or consortium of which he is a member or a co-venturer. 12. Dante Rivero was rushed to Makati Medical Center last night because of difficulty in breathing while doing a sexy scene with co-star de Rossi. Dr. XXX then gave Rivero proper medication at once. Five minutes later, Rivero got up in bed and went back immediately to the set of Purple Book. He tendered his payment directly with Dr. XXX as he was very happy of his instant recovery. a. Is the income received by Dr. XXX subject to creditable withholding tax? b. Will the answer be the same if Dr. XXX waived his professional fees? c. Give at least 3 income payments subject to creditable withholding tax. d. Who are the persons required to deduct and withhold for purposes of the creditable tax? a. YES. Any amount collected for and paid to medical practitioners by hospitals and clinics or paid directly to the medical practitioners by patients who were admitted and confined to such Hospitals or Clinics are income payments subject to creditable withholding tax.
b. NO.

The withholding tax prescribed by the Code shall not apply when no professional fee has been charged by the medical practitioner and paid by his patient. c. 1) Professional fees, talent fees for services rendered by individuals; Professional fees, talent fees for services of taxable juridical persons; 3) Rentals; 4) Cinematographic film rentals and other payments; 5) Income payments to certain contractors. etc. d. 1) In general, any juridical person, whether or not engaged in trade or business; 2) An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real property is concerned, individual buyers who are not engaged in trade or business are also constituted as withholding agents; 3) All government offices including government-owned or controlled- corporations, as well as provincial, city and municipal governments. 13. A, a professional Filipino dancer residing in Ermita, was employed by JLO as dancer in her new MTV Dance Mix 2001. He receives his salary weekly from JZ, an authorized representative of JLO in the Philippines. a. Is the salary received by A subject to withholding tax? b. What does compensation income constitute? a. YES. Remuneration for services performed outside the Philippines by a resident citizen for a domestic or a resident foreign corporation or partnership, or for a non-resident foreign corporation or partnership, or for a non-resident individual not engaged in trade or business in the Philippines shall be treated as compensation which is subject to tax. b. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions; fees including directors fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject

TAXATION

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

to the fringe benefits tax; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. 14. a. Is the prize of 1 Million pesos awarded by the Readers Digest subject to final tax? b. Who is responsible for withholding the tax? a. YES. Prizes are subject to final tax except those amounting to 10,000 pesos or less (subject to normal rate) and from PCSO and Lotto winnings (tax exempt). b. The responsibility of withholding the tax rests primarily on the payor as withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file an income tax return for this particular income. 15. A, a rank and file employee of PC Corp. Manila was sent by the latter to its newly opened branch in Batangas. PC provided a free board and lodging at the second floor of said establishment valued at P700.00 for him to serve as overseer of PCs property especially during nighttime. Free meal of P30.00 per day was likewise given when the employer discovered that most of the workers were buying food from nearby restaurants which have unsanitary facilities. Should the value of the free lodging and meal be included as part of the employees gross income? The value of the free lodging is not part of As compensation income because of the application of the convenience of the employer rule. The following however must be present: a. It must be furnished in the employers premises; and, b. Employee is required to accept such lodging as a condition of his employment. The value of the free meal forms part of the employees gross income. The free meal is not furnished by the employer for its convenience (i.e. to make the employees available for work during the meal period). 16. A, an employee of BANK-KO works continuously from 9:00 AM to 4:00PM daily. His work demands that whenever necessary he must render service even during lunch break from 12:00 nn to 1:00 pm. As such the company gives A meal coupons worth 330 pesos and a sack of rice every month. a. Do the meal coupons and the sack of rice form part of As compensation subject to withholding tax? b. What are de minimis benefits? Give examples thereof. a. Meal coupons worth P330 a month given by a bank need not be included as compensation subject to withholding tax since they are given for the convenience of the employer. The same is true with the subsidized cost of one sack of rice a month. As banking hours are continuous from 9:00AM to 4:00 PM, bank personnel are required to render service as may be necessary even during lunch break. b. De minimis benefits refer to facilities or privileges furnished or offered by an employer to his employees which are of relatively small value and are intended promote the health, goodwill, contentment, or efficiency of his employees. They are not subject to fringe benefit tax. The following are considered as de minimis benefits: monetized unused vacation leave credits of employees not exceeding 10 days during the year; medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month; rice subsidy of P350 per month granted by an employer to his employees; uniforms given to employees by the employer; medical benefits given to the employees; laundry allowance of P150 per month etc.

TAXATION

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

17. Capt. Sugod is a member of AFP. Aside from his salary, the government gives him free meals and living quarters inside the camp. Are these benefits included as compensation? NO. All these benefits are given for the convenience of the employer. Housing privilege and meal allowance of military officials of the AFP consisting of officials of the Philippine Army, Philippine Navy and Philippine Air Force shall not be treated as taxable fringe benefits. This is in accordance with the policy that the State shall provide its soldiers with necessary quarters which are within or accessible from the military camp so that they can be readily on call to meet the exigencies of the military service. 18. ABC, a non-stock, non-profit organization operating exclusively to promote social welfare, derives the following items of income during the taxable year: a. Assessment due from the members; b. Rentals from small stalls; and c. Parking fees Is ABC exempt from paying income taxes on the above items? ABC is exempt from paying tax only on income received by it as a non-stock, non-profit entity. Hence its exemption extends only to the assessment dues paid by its members. With respect to the rentals and parking fees, it is liable to pay income taxes thereon pursuant to the last paragraph of Sec. 30 of the Tax Code (CIR vs YMCA GR. No. 124043, Oct. 14, 1998). 19. When is there international double taxation? Enumerate the remedies which a taxpayer may avail to lessen the impact of international double taxation. International double taxation arises when there is a multiple tax situs making an income or activity taxable by more than one taxing jurisdiction. The remedies against international double taxation are: a. Reciprocal exemption; b. Allowance of tax reduction; and c. Allowance of tax credit for foreign taxes. 20. Gabriel, a painter, was asked to paint a replica of the Mona Lisa. He was to be paid P3,000.00. Thereafter Gabriel gratuitously assigned his rights under the contract to his friend Karlo. Karlo later on collected the P3,000.00. Is the P3,000.00 taxable to Gabriel? YES. The P3,000.00 is taxable to Gabriel as income derived by him from the practice of his profession. When he donated the same to Karlo, who accepted the same by collecting the amount, Gabriel likewise may be subject to donors tax if his net gifts for the calendar year exceed P100,000.00 (Sec. 99(a), NIRC of 1997). 21. A, an architect owes, Z, a businessman, the sum of P10,000.00. Z engaged the services of A to remodel his residence. The value of the services rendered by A is P100,000.00. Accordingly, Z cancelled the debt of A after paying the latter P100,000.00. Is the amount condoned considered income subject to tax? YES. When Z pays A P100,000.00 then the same is considered income from the exercise of As profession because of the physical receipt of money. The amount of P10,000.00 condoned is considered as a gift because the cancellation was without consideration.(Sec. 52 Rev. Regs.No. 2)

TAXATION

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

22. Is there any specific constitutional provision violated if a tax law contravenes any of the principles of sound tax system? The principles of sound taxation are not intended to make tax laws valid but merely to make them resonant to adequacy, justice and convenience. Generally, therefore, a violation of those principles will not render a tax measure invalid, except perhaps when the principle of theoretical justice is contravened to the extent that the particular tax law may no longer be equitable as mandated under Sec. 28(1), Art. VI of the Philippines Constitution. 23. a. May the national government impose a tax on local governments? b. May the local government impose a tax on the national government? a. There is no prohibition, constitutional or inherent in taxation, against the imposition of taxes by the State on its political subdivisions. Accordingly, although it would be unusual, the national government can validly impose taxes on local governments. b. In McCulloch vs. Maryland, the doctrine that the power to tax involves the power to destroy was, among other reasons, used to support the holding that states of the union are prohibited from taxing the U.S. Federal Government. If, indeed, taxation involves the power to destroy, then it cannot be exercised on the which the taxing authority has no power to destroy. Despite then the absence of any explicit statutory or constitutional prohibition, local governments may not impose any kind of tax on the national government. 24. In order to encourage investment, a law was passed exempting aliens who invest at least fifty million pesos in the Philippines from all taxes, national or local, except income tax. Ms. Chie makes such an investment and she desires to seek employment in the Philippines, particularly in the City of Makati. Subsequently the City of Makati made her pay a fee of five thousand pesos for the issuance of a Mayors permit required for aliens seeking employment within the city. Should Ms. Chie pay the said Mayors permit? YES. The tax exemption of Ms. Chie relates only to his investment. Tax exemptions are to be construed strictly against the grantee, and unless otherwise explicit in the law, the exception must be deemed to relate only, in this instance, to the investment. 25. The Philippine Bible Society (PBS) contended that the Value Added Tax (VAT) infringes on the freedom of religion clause as it imposes sales and use tax on the sale of religious materials. Is the contention proper? Why? NO. The Freedom of Religion clause does not prohibit imposing a generally applicable sales and use tax on the sale of religious materials by a religious organization. 26. A taxpayer questioned the validity of a law imposing a P100.00 tax for the support of the public educational system. He assailed that he does not send any of his children to public schools. Is his contention proper? NO. An individual need not derive direct benefits from the tax because the paramount consideration is the welfare of the greater portion of the population. The legislature has the right to select the subject of taxation because of the lifeblood doctrine, so long as there is valid classification. 27. Pilipinas Company is a domestic corporation which is engaged in the business of exporting Philippine handicrafts. In order to boost its business, it engaged an

TAXATION

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

American corporation to look for customers in the United States and to sell its products to those customers. Pilipinas Company will pay the American corporation a commission on the volume of sales in the United States. Pilipinas Company also entered into an agreement with the same American corporation whereby the latter will render technical assistance to Pilipinas Company to enable it to meet international export standards for which the corporation will receive a royalty fee. State whether the royalties and the commission payable to the American corporation are subject to Philippine tax. Explain. The royalties are subject to Philippine income tax. They are considered as income from sources within the Philippines, hence subject to income tax even if received by a nonresident foreign corporation. On the other hand, the commissions being earned from activities outside the Philippines are not subject to tax. 28. St. Peters Hospital is a charitable institution offering free hospital services. It also admits pay-patients. The income derived from said pay-patients is devoted to the improvement of the charity wards of the hospital. The BIR is now assessing said hospital for payment of income tax from income received from admission of paypatients. Rule on the case. The admission of pay-patients does not detract from the charitable character of a hospital, if all of its funds are devoted exclusively for the maintenance of the institution as a public charity. In other words, where rendering charity as its primary object, and the funds derived from the payments made by patients who are able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character. 29. Atty. Kitten suffered a heart attack rendering her unfit to discharge her duties as legal counsel of Waters Corporation. She thereafter applied for terminal leave. Atty. Kitten received an amount by way of commutation of her accumulated leave credits as a result of her compulsory retirement or terminal leave pay. Is said amount subject to tax? NO. Terminal leave is applied for by an employee or officer who retires, resigns, or is separated from the service through no fault of his own. Since terminal leave is applied for by an officer or an employee who has already severed connection with his employer and is no longer working, then it follows that the terminal leave pay, which is the cash value of his accumulated leave credits, is no longer compensation for services rendered. It cannot be viewed as a salary. Said amount falls within the enumerated exclusions from gross income and is therefore not subject to tax. 30. What are the conditions necessary to exempt retirement benefits from income tax? Under RA 4917, retirement benefits are exempt from income tax if the following conditions are present: a. The retiring official or employee has been in the service of the same employer for the last ten years; b. He is not less than fifty years old at the time of his retirement; and c. The official or employee avails of the benefits only once; and d. Under Revenue Regulation 2-98, the private benefit plan is approved by the BIR. 31. Are employees of private firms entitled to retirement benefits? income tax? Is it subject to

RA 7641 grants retirement benefits to employees of private firms if the following conditions concur:

TAXATION

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

a. The firm has no private retirement trust plan; and b. The retiring officer or employee is at least 60 yrs old. The retirement benefits received under the foregoing conditions are exclusions, and therefore exempt from income tax. 32. X Corp., a Canadian based foreign corporation, was hired by Pinoy Soap Inc. The former being an environmentalist expert and a shareholder in the latter was hired to conduct tests as to the effect of the latters product to the environment and to make improvements thereon. As such, Pinoy soap agreed to pay X corp. a cash dividend of P 5 Million for such services to be conducted for a period of 2 months. a. Define and/or explain the nature of a disguised dividend under the income tax law. b. Is there a disguised dividend in the present case? a. There is a disguised dividend when a dividend (whether cash or stocks) is given to a shareholder not as a return on investment but as payment for services rendered. It is taxable as part of compensation income or income derived from self-employment or exercise of a profession, but not as passive income. The income is given in the guise of a dividend in order to avail of a lower tax rate. b. YES. A disguised dividend includes the amount paid by a domestic corporation to a nonresident foreign corporation for services rendered by the latter to the former, when the amount paid exceeds the value of the services rendered. 33. Mr. Corpus borrowed P10,000.00 from his friend Mr. Lacson payable in one year without interest. When the loan became due, Mr. Corpus told Mr. Lacson that he was unable to pay because of business reverses. Mr. Lacson took pity on Mr. Corpus and condoned the loan. Mr. Corpus was solvent at the time he borrowed the P10,000.00 and at the time the loan was condoned. Did Mr. Corpus derive any income from the cancellation or condonation of his indebtedness? Explain. NO. The cancellation or condonation of Mr. Corpus indebtedness was not in exchange for services he rendered to Mr. Lacson. Since there was no consideration, the cancellation may be considered as a gift which is an exclusion from gross income. 34. Due to business reverses, Kawawa Corp. offered a voluntary redundancy program under which an employee who offered to resign would be given separation pay equivalent to 3 months basic salary for every year of service. A accepted the offer and received P300,000.00 as separation pay under the program. The firm adopted another redundancy program where various unprofitable departments were closed. As a result, B was separated from the service. He also received P300,000.00 as separation pay. Will the separation pay of A and B be subject to tax? As separation pay will be subject to tax because of the voluntary action on his part. He may, however, avail of the tax-free retirement provided that he is 50 years or over, that he has rendered at least 10 years of service with Kawawa Corp., and that he has not previously availed of the tax-free retirement. Bs separation pay will not be subject to tax because he was separated for a reason beyond his control. 35. Mr. Ador works for a construction firm in Saudi Arabia. He comes home for vacation once every two years for a period of 2 months. He earns an annual salary

TAXATION

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

of $25,000.00. He also derives an income of P12,000.00 annually from the rental of his apartment in Manila. a. To what classification of taxpayers does Mr. Ador belong? b. What part of his earnings should be considered as gross income for income tax purposes? a. Mr. Ador is a non-resident citizen, he being an overseas contract worker. He works and derives income abroad and his employment requires him to be thereat most of the time during the taxable year. b. Only the income derived from the rentals of his apartment should form part of Mr. Adors gross income. Under the NIRC, an individual citizen working and deriving income abroad as an overseas contract worker is taxable only on income received within the Philippines. 36. On April 25, 1995, Mr. Chua filed his income tax return for his 1994 income and paid the tax due thereon. In 1996, Mr. Chua hired a CPA to prepare his income tax return. He was informed by the latter that he made an overpayment in his income tax return filed in 1995. Consequently, Mr. Chua filed a written claim for refund of tax erroneously collected with the BIR Commissioner on December 15, 1996. On April 20, 1997, without any decision yet by the BIR Commissioner, Mr. Chua filed in the Court of Tax Appeals a petition for review on his claim for refund of tax erroneously collected. Did the Court of Tax Appeals acquire jurisdiction over the petition for review of Mr. Chua? YES. While the BIR Commissioner has not yet rendered a decision on said claim for refund, the prescriptive period of two years within which a claim for refund of taxes erroneously collected maybe filed is about to expire on April 25, 1997 and the failure of the Commissioner to act on the claim for refund is tantamount to denial of taxpayers claim, hence appealable to the Court of Tax Appeals. The reason is that the taxpayer is subject to the same two-year period to appeal to the CTA, which is also reckoned from the date of payment pursuant to RA 1125. 37. Basilio filed a suit for injunction before the RTC in order to enjoin the Government from collecting taxes from his businesses. The Solicitor General argued that such injunction cannot prosper because of the legal principle that no court can issue an injunction against the collection of taxes. Is the Solicitor Generals contention correct? Is there an instance when such injunction can prosper? YES. This is the general rule, the basis of which is the Lifeblood Theory. Such collection may only be suspended by means of an injunction issued by the Court of Tax Appeals during the pendency of the appeal in aid of its appellate jurisdiction. The collection of the tax and the corresponding prescriptive period thereon may be suspended only if there is proof that the collection of the tax will jeopardize the interests of the Government and/or the taxpayer, upon deposit of the amount of tax to be collected or upon filing of a surety bond by the taxpayer which is not more than double the amount of tax sought to be collected, and upon a showing that such appeal is not frivolous and dilatory. 38. Juan received an assessment of his income tax from the BIR on February 8, 1998. Thereafter, Juan filed a petition for reconsideration with the BIR on February 18, 1998. Documents supporting the petition were filed with the BIR on February 28, 1998. The BIR denied the said petition, which decision was received by Juan on March 11, 1998. Juan filed a second request for reconsideration. This time the BIR revised the assessment. Juan received the revised assessment on April 2, 1998. When is the last day for Juan to appeal to the Court of Tax Appeals?

TAXATION

10

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

Juan has until May 2, 1998 to file an appeal to the Court of Tax Appeals. The appealable decision is the revised assessment. 39. Marcelo was assessed for taxes by the BIR in 1998. Thereafter, he filed an administrative protest with the BIR questioning the same. During the pendency of the protest, the Government filed a criminal action against Marcelo for filing a fraudulent return. Marcelo sought the dismissal of the criminal action on the ground that the filing of the latter was premature in view of the pending administrative protest. Is Marcelos contention tenable? NO. The criminal action is legally proper. What is involved here in the criminal action is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals but a criminal prosecution for violations of the National Internal Revenue Code which is within the cognizance of the Regional Trial Court. While there can be no civil action to enforce collection before the assessment procedures in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution. The protest of the taxpayer against the assessment cannot stop his prosecution for violation of the National Internal Revenue Code (Ungab vs. Hon. Cusi, May 30, 1980). 40. A law was enacted imposing a tax on manufacturers of coconut oil, the proceeds of which were to be used exclusively for the protection and promotion of the coconut industry, namely; to improve the working conditions in coconut mills and to conduct research on the use of coconut oil for motor fuel. Some of the manufacturers of coconut oil challenge the validity of the law, contending that the tax is to be used for a private purpose and, therefore, the law violates the rule that public revenues shall not be appropriated for anything but for a public purpose. Decide with reasons. The law is valid under the stated circumstances. Taxation is for a public purpose when the proceeds of the tax are used not only to support the existence of the State but likewise for some recognized objects of government or directly to promote the welfare of the community. An intendment of the law to protect and promote the coconut industry may be considered as properly embraced within such organized objects of government along with like objectives as promoting social justice, the equitable distribution of wealth, economic progress, public welfare and similar goals or purposes. 41. A new law granted tax amnesty to those who had not paid income taxes for a certain year. Those who had paid their income taxes for the said year assailed the decree as violative of the constitutional guaranty on uniformity of taxation and for being tantamount to class legislation, since the law did not provide for the refund of taxes to those who had already paid them. Would you sustain the objection? NO, I will not sustain the objection. Uniformity in taxation, requiring all subjects or objects of taxation similarly situated to be treated alike, does not disallow a classification of such objects or subjects as long as the standards used therefor are not arbitrary, and germane to the intendment of the law, and are substantial (Pepsi-Cola Bottling Co. of the Phil. vs. City of Butuan, 24 SCRA79). These tests obviously met in the situation stated in the problem. 42. Mr. X inherited from his mother several tracts of land located in Sta.Ana, Manila. When the mother was still alive, she had the parcels subdivided into 29 lots, 28 of which were allocated to the occupants who had a lease contract with her, while the 29th lot was not leased to any person because of its very low elevation and kangkong were planted therein. Upon gaining possession thereof, he sold the 28 lots. In 1998 and 1999, Mr. X reported his income from the sale of lots as capital gains. Was Mr. correct? Decide with reasons.

TAXATION

11

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

The sale of several lots which formed part of the rental business of Mr. X cannot be characterized as sale of non-capital assets. When Mr. X inherited the parcels of land, transferred to him was not merely the duty to respect the terms of any contract thereon, but the correlative right to receive and enjoy the fruits of the business and property as well. Under Sec. 39 Tax Code, the term Capital Assets means property held by the taxpayer whether or not connected with his trade or business EXCEPT: a. stock in trade or other property included in the taxpayers inventory b. property primarily for sale to customers in the ordinary course of his trade or business c. property used in the trade and business of the taxpayer subject to depreciation allowance d. real property used in trade or business. Hence, in the sale or exchange of the above-mentioned properties, a gain or loss resulting therefrom is an ordinary gain or loss. The transaction is not subject to capital gains tax. 43. The BIRs assessment is usually embodied in a demand letter or in a BIR form known as assessment notice. If the issue dates are anterior to the date of actual release or mailing of the demand and/or notice, when does the prescriptive period start? It is not the issue date of demand and/or notice that is the reckoning point in prescription but rather it is the date when the demand letter is released, mailed or sent to the taxpayer that constitutes an actual assessment. (Republic vs. De Guzman, 5 SCRA 990) 44. Nin Uy and Mac Uy are partners. In the year 1999, they incurred a net loss of P160,000. The allowable deductions included accounts written off amounting to P20,000. In the year 2000, their business earned a net income of P300,000, including a bad debt recovery of P6,000. Is the P6,000 taxable? NO. According to the Equitable Doctrine of Tax Benefit, a recovery of bad debts previously deducted from gross income constitutes taxable income only if in the year the account was written off, the deduction resulted in a tax benefit. In the given problem, the P6,000 did not result in any tax benefit in the year it was written off i.e. in 1999 since even assuming that the P6,000 was not deducted, there would still be a net loss of P154,000. 45. On April 20, 1998, Mando Rogas filed his income tax return plus the corresponding penalty. After a year, he discovered that the penalty he paid was excessive. On February 9, 2000, he filed a claim for refund with the BIR. On May 2, 2000 the BIR denied his claim, but Mando was notified only on May 16, 2000. On June 7, 2000, he appealed the case to the CTA. Can his appeal prosper? NO. The law requires that the appeal to the CTA should be made within 30 days from receipt of denial by the BIR AND within two years after the payment of the tax or penalty. In the given problem, while the appeal to the CTA was made within 30 days from receipt of the notice of denial by the BIR, it was filed beyond the two-year period from date of payment. The law uses the conjunctive and, thus both requisites must concur. Mando should not have waited for the decision of the BIR, and should have treated its inaction as equivalent to denial of the claim. He could immediately file an appeal to the CTA even without the denial so as not to defeat his claim by the lapse of the two-year prescriptive period.

TAXATION

12

SAN BEDA COLLEGE OF LAW CENTRALIZED BAR OPERATIONS 2001

Any form of reproduction of this copy is strictly prohibited!!!

SAN BEDA COLLEGE OF LAW

2001 CENTRALIZED BAR OPERATIONS
Executive Committee
RHODALYN MONTEMAYOR, MARICAR MARQUEZ, LORALAINE SINGSON, RAFAEL OCAMPO JR., ERNESTO ISIP JR.,
MARIA FLORITA CRUZ, DIANNE AQUINO, JONATHAN ABAS,

Over-all Chairperson Over-all Vice Chair/VC-Academics Vice Chair Secretariat Vice Chair Finance Vice Chair EDP
Asst. Vice Chair for EDP Asst. Vice Chair for Secretariat Asst. Vice Chair for Finance

Subject Chairpersons
JOSE PANGANIBAN JR., JUBERT JAY ANDRION, ZULEIKA LOPEZ, ERIC RECALDE, MARICRIS PAHATE, NICEFORO AVILA JR., VERONICA LLADOC, DERELA DEVERA, Political Law Labor Law Civil Law Taxation Law Criminal Law Commercial Law Remedial Law Legal Ethics and Forms

LABOR LAW COMMITTEE

ERIC RECALDE, Chairperson VOLTAIRE EDP BAUTISTA,

SPECIAL THANKS TO:

ATTY. NICASIO CABANEIRO

That in All Things God May Be Glorified!

TAXATION

13