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University of Santo Tomas

Faculty of Civil Law

TAXATION LAW
Questions Asked More
Than Once
(QuAMTO 2017)

*QUAMTO is a compilation of past bar questions with answers as suggested by


UPLC and other distinct luminaries in the academe, and updated by the UST
Academics Committee to fit for the 2017 Bar Exams.

*Bar questions are arranged per topic in accordance with the bar syllabus
released by the Supreme Court and were selected based on their occurrence
on past bar examinations from 1987 to 2016.
ACADEMICS COMMITTEE
CAMILLE ANGELICA B. GONZALES SECRETARY GENERAL

EMNIE VALERIE B. DURAN


IRVIN L. PALANCA
EXECUTIVE COMMITTEE
LARA NICOLE T. GONZALES
MARIELLA A. MARASIGAN

CAMILLE ANGELICA B. GONZALES LAYOUT AND DESIGN

QUAMTO COMMITTEE MEMBERS

JACKIELYN KRYSTYL NIHAMA BANA


KARL ANTHONY BULAONG
MERVIN MARCOS
KELLY ANN RUBIN
NESTOR FERNANDO SIAZON

ATTY. AL CONRAD B. ESPALDON


ADVISER
QUAMTO (1987-2016)
occupation or business to be taxed provided these are
TAXATION QUAMTO
all within the States territorial jurisdiction. It can also
finally determine the amount or rate of tax, the kind of
tax to be imposed and the method of collection. (1
GENERAL PRINCIPLES OF TAXATION Cooley 176184)
3. Taxation is territorial Taxation may be exercised only
within the territorial jurisdiction of the taxing authority
NATURE AND CHARACTERISTICS OF TAXATION (1996, (61 Am. Jur. 88). Within the territorial jurisdiction, the
2003, 2005) taxing authority may determine the place of taxation
Q: Describe the power of taxation. May a legislative or tax situs."
body enact laws to raise revenues in the absence of a 4. Taxation is subject to international comity This is a
constitutional provision granting said body the power limitation which is founded on reciprocity designed to
to tax? Explain. (2005 Bar) maintain a harmonious and productive relationships
among the various states. Under international comity, a
A:The power of taxation is inherent in the State being an state must recognize the generally-accepted tenets of
attribute of sovereignty. As an incident of sovereignty, the international law, among which are the principles of
power to tax has been described as unlimited in its range, sovereign equality among states and of their freedom
acknowledging in its very nature no limits, so that security from suit without their consent, that limit the authority
against its abuse is to be found only in the responsibility of of a government to effectively impose taxes on a
the legislature which imposes the tax on the constituents sovereign state and its instrumentalities, as well as on
who are to pay it. (Mactan Cebu International Airport its property held, and activities undertaken in that
Authority v. Marcos, 261 SCRA 667) capacity.

Being an inherent power, the legislature can enact laws to Public Purpose (1989, 1991)
raise revenues even without the grant of said power in the
Constitution. It must be noted that Constitutional Q: An ordinance of Quezon City on the operation of
provisions relating to the power of taxation do not operate market stalls and the collection of market stall fees
as grants of the power of taxation to the Government, but created a market committee to formulate, recommend
instead merely constitute limitations upon a power which and adopt subject to the ratification of the
would otherwise be practically without limit. (Cooley, SangguniangPanglungsod regulations in the operations
Constitutional Limitations, 1927 8th Ed., p. 787) of the market stalls. It also entrusted the collection of
the market stall fees to a private corporation. Does the
Power of Taxation as distinguished from Police Power entrusting of the collection of the market stall fees
and Eminent Domain (1989, 1991, 2003) destroy the public purpose of the ordinance? (1989
Bar)
Q: The City of Manila passed an ordinance imposing an
annual tax of P5,000.00 to be paid by an operator of a A: Yes, because a portion of the fees collected would be
massage clinic and an annual fee of P50.00 to be paid by diverted as fees to private corporation. Entrusting of the
every attendant or helper in the said clinic. Is the collection of the market stall fees violates the limitation that
imposition a tax or a license fee? (1989 Bar) local government units shall in no case let to any private
person the collection of local taxes, fees, charges and other
A:The imposition on the operator of the massage clinic is impositions. [Sec. 130 (c), R.A. No. 7160, The Local
both a tax and a license fee. The amount of P5,000.00 Government Code] As a result of this prohibition, public
exceeds the cost of regulation, administration and control funds are therefore utilized for a private purpose, which is
but it is likewise imposed to regulate a non-useful business to pay the private corporation for its services.
in order to protect the health, safety and morals of the
citizenry in general. The P50.00 impositions on the helpers CONSTITUTIONAL LIMITATIONS
or attendants are license fees sufficient only for regulation,
administration and control. Equality and Uniformity (1988, 2000, 2003, 2004)

Theory and Basis of Taxation (1991, 2016) Q: RC is a law-abiding citizen who pays his real estate
taxes promptly. Due to a series of typhoons and adverse
Q: Briefly explain the following doctrines: lifeblood economic conditions, an ordinance is passed by MM
doctrine xxx (2016 Bar) City granting a 50% discount for payment of unpaid
real estate taxes for the preceding year and the
A: Lifeblood doctrine. Taxes are the lifeblood of the condonation of all penalties on fines resulting from the
government [Chamber of Real Estate and Builders late payment.
Associations, Inc. v. Romulo, 614 SCRA 605 (2010)] for
without taxes, the government can neither exist nor endure. Arguing that the ordinance rewards delinquent
(National Power Corporation v. City of Cabanatuan, G.R. No. taxpayers and discriminates against prompt ones, RC
149110, April 9, 2003 citing various cases) demands that he be refunded an amount equivalent to
one-half of the real taxes he paid. The municipal
INHERENT LIMITATIONS attorney rendered an opinion that RC cannot be
Q: Enumerate the four (4) inherent limitations on reimbursed because the ordinance did not provide for
taxation. Explain each item briefly. (2009 Bar) such reimbursement. RC files suit to declare the
ordinance void on the ground that it is a class
A: The inherent limitations on the power to tax are: legislation. Will his suit prosper? Explain your answer
briefly. (2004 Bar)
1. Taxation is for a public purpose The proceeds of the
tax must be used (a) for the support of the State or (b) A: The suit will not prosper. The remission or condonation
for some recognized objective of the government or to of taxes due and payable to the exclusion of taxes already
directly promote the welfare of the community. collected does not constitute unfair discrimination. Each set
2. Taxation is inherently legislative Only the legislature of taxes is a class by itself and the law would be open to
has full discretion as to the persons, property, attack as class legislation only if all taxpayers belonging to

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TAXATION LAW
one class were not treated alike. [Juan Luna Subdivision, Inc., transferred or exchanged in the Philippines to non-exempt
v. Sarmiento, 91 Phil 371 (1952)] persons or entities, the purchasers, transferees or
recipients shall be considered the importer thereof, who
Non Impairment of Obligations of Contracts (1997, shall be liable for any internal revenue tax on such
2004) importation. Tax exemptions are to be construed strictly
Q: A law was passed granting tax exemption to certain and are not considered transferable in character.
industries and investments for a period of five years. DOUBLE TAXATION (1996, 1997, 2004, 2015)
But three years later, the law was repealed. With the
repeal, the exemptions were considered revoked by the Q: Differentiate between double taxation in the strict
BIR, which assessed the investing companies for unpaid sense and in a broad sense and give an example of each.
taxes effective on the date of the repeal of the law. (2015 Bar)
NPC and KTR companies questioned the assessments A: Double taxation in the strict sense pertains to the direct
on the ground that, having made their investments in double taxation. This means that the taxpayer is taxed twice
full reliance with the period of exemption granted by by the same taxing authority, within the same taxing
the law, its repeal violated their constitutional right jurisdiction, for the same property and same purpose.
against the impairment of the obligations and Example: Imposition of final withholding tax on cash
contracts. Is the contention of the companies tenable or dividend and requiring the taxpayer to declare this tax-paid
not? Reason briefly. income in his income tax returns.
A: The contention is not tenable. The exemption granted is On the other hand, double taxation in the broad sense
in the nature of a unilateral tax exemption. Since the pertains to indirect double taxation. This extends to all
exemption given is spontaneous on the part of the cases in which there is a burden of two or more impositions.
legislature and no service or duty or other remunerative It is the double taxation other than those covered by direct
conditions have been imposed on the taxpayers receiving double taxation (CIR v.Solidbank Corp., 436 SCRA 416).
the exemption, it may be revoked at will by the Example: Subjecting the interest income of banks on their
legislature.[Manila Railroad Company v. Insular Collector of deposits with other banks to the 5% gross receipts tax
Customs, 12 PhiL 146 (1915)] (GRT) despite of the same income having been subjected to
20% final withholding tax (FWT), is only a case of indirect
KINDS OF TAXES double taxation. The GRT is a tax on the privilege of
Direct and Indirect Taxes (1994, 2000, 2001, 2006) engaging in business while the FWT is a tax on the privilege
of earning income.
Q: Distinguish direct taxes from indirect taxes". Give
examples. (2006 Bar) Q: X, a lessor of a property, pays real estate tax on the
premises, a real estate dealers tax based on rental
A: Direct taxes are demanded from the very person who, as receipts and income tax on the rentals. X claims that
intended, should pay the tax which he cannot shift to this is double taxation. (1996 Bar)
another; while an indirect tax is demanded in the first
instance from one person with the expectation that he can A: There is no double taxation. Double taxation means
shift the burden to someone else, not as a tax, but as part of taxing for the same tax period the same thing or activity
the purchase price. (Maceda v. Macaraig, Jr., 223 SCRA 217 twice, when it should be taxed but once, by the same taxing
[1993]) Examples of direct taxes are income tax, estate tax authority for the same purpose and with the same kind or
and donors tax. Examples of indirect taxes are value-added character of tax. The real estate tax is a tax on property; the
tax, percentage tax and excise tax on excisable articles. real estate dealers tax is a tax on the privilege to engage in
business; while the income tax is a tax on the privilege to
CONSTRUCTION AND INTERPRETATION OF TAX LAWS earn an income. These taxes are imposed by different taxing
authorities and are essentially of different kind and
Tax Exemption and Exclusion (1996,2005, 2007) character (Villanueva v. City of Iloilo, 26 SCRA 578).
Q: Why are tax exemptions strictly construed against ESCAPE FROM TAXATION (TAX AVOIDANCE V. TAX
the taxpayer? (1996 Bar) EVASION)
A: Tax exemptions are strictly construed against the Tax avoidance and Tax Evasion (1989, 1996, 2000,
taxpayer because such provisions are highly disfavored and 2005, 2008, 2014, 2016)
may almost be said to be odious to the law (Manila Electric
Company vs. Vera, 67 SCRA351). The exception contained in Q: Distinguish tax evasion from tax avoidance. (1996
the tax statutes must be strictly construed against the one Bar)
claiming the exemption because the law does not look with
favor on tax exemptions, they being contrary to the life- A: Tax evasion is a scheme used outside of those lawful
blood theory which is the underlying basis for taxes. means to escape tax liability and, when availed of, it usually
subjects the taxpayer to further or additional civil or
Q: An alien employee of the Asian Development Bank criminal liabilities. Tax avoidance, on the other hand, is a tax
(ADB) who is retiring soon has offered to sell his car to saving device within the means sanctioned by law, hence
you which he imported tax-free for his personal use. legal.
The privilege of exemption from tax is granted to
qualified personal use under the ADB Charter which is Q:Maria Suerte, a Filipino citizen, purchased a lot in
recognized by the tax authorities. If you decide to Makati City in 1980 at a price of P1 million. Said
purchase the car, is the sale subject to tax? Explain. property has been leased to MAS Corporation, a
(2005 Bar) domestic corporation engaged in manufacturing paper
products, owned 99% by Maria Suerte. In October
A: Yes. The sale is subject to tax. Section 107 (B) of the NIRC 2007, EIP Corporation, a real estate developer,
provides that: "In the case of tax-free importation of goods expressed its desire to buy the Makati property at its
into the Philippines by persons, entities or agencies exempt fair market value of P300 million, payable as follows:
from tax where such goods are subsequently sold, (a) P60 million down payment; and (b) balance,

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QUAMTO (1987-2016)
payable equally in twenty four (24) monthly liabilities than for legitimate business purpose constitutes
consecutive installments. Upon the advice of a tax one of tax evasion.
lawyer, Maria Suerte exchanged her Makati property
for shares of stock of MAS Corporation. A BIR ruling, EXEMPTION FROM TAXATION
confirming the tax-free exchange of property for shares Constitutional Limitation to the power of Congress in
of stock, was secured from the BIR National Office and a granting tax exemptions (1989, 1992)
Certificate Authorizing Registration was issued by the
Revenue District Officer (RDO) where the property was 1) The President of the Philippines and the Prime
located. Subsequently, she sold her entire Minister of Japan entered into an executive
stockholdings in MAS Corporation to EIP Corporation agreement in respect of a loan facility to the
for P300 million. In view of the tax advice, Maria Suerte Philippines from Japan whereby it was stipulated
paid only the capital gains tax of P29,895,000 that interest on loans granted by private Japanese
(P100,000x 5% plus P298,900,000 x 10%), instead of financial institutions to private financial
the corporate income tax of P104,650,000 (35% on Institutions in the Philippines shall not be subject
P299 million gain from sale of real property). After to Philippine income taxes. (1992 Bar)
evaluating the capital gains tax payment, the RDO
wrote a letter to Maria Suerte, stating that she Is this tax exemption valid? Explain.
committed tax evasion. A: Yes. The tax exemption is valid because an executive
Is the contention of the RDO tenable? Or was it tax agreement has the force and effect of a treaty under the
avoidance that Maria Suerte had resorted to? provision of the Revenue Code. Taxation is subject to
Explain.(2008 Bar) International Comity.

A: The contention of the RDO is not tenable. Maria Suerte ALTERNATIVE ANSWER:
resorted to tax avoidance and not tax evasion. Tax a) The act of tax exemption is an act of taxation which is
avoidance is the use of legal means to reduce tax liability inherently legislative. Therefore, a mere executive
and it is the legal right of a taxpayer to decrease the amount agreement cannot provide for a tax exemption.
of what otherwise would be his taxes by means which the
law permits. (Heng Tong Textiles Co., Inc. v. Commissioner).
There is nothing illegal about transferring first the property
to a corporation in a tax free exchange and later selling the COMPENSATION AND SET-OFF (1990, 1992, 1996,
shares obtained in the exchange at a lower tax than what 2001, 2005)
could have been imposed if the property was sold directly.
Q: May taxes be the subject of set-off or compensation?
Q: Lucky V Corporation (Lucky) owns a 10-storey Explain. (2005 Bar)
building on a 2,000 square meter lot in the City of
A: No. Taxes cannot be the subject of set-off or
Makati. It sold the lot and building to Rainier for P80
compensation for the following reasons: (1) taxes are of
million. One month after, Rainier sold the lot and
distinct kind, essence and nature, and these impositions
building to Healthy Smoke Company (HSC) for P200
cannot be classed in merely the same category as ordinary
million, Lucky filed its annual return and declared its
obligations; (2) the applicable laws and principles
gain from the sale of the lot and building in the amount
governing each are peculiar, not necessarily common, to
of P750, 000.00.
each; and (3) public policy is better subserved if the
An investigation conducted by the BIR revealed that integrity and independence of taxes are maintained.
two months prior to the sale of the properties to [Republic v. Mambulao Lumber Company, 4 SCRA 622
Rainier, Lucky received P40 million from HSC and not (1962)].
from Rainier. Said amount of P40 million was debited
However, if the obligation to pay taxes and the taxpayers
by HSC and reflected in its trial balance as other inv.
claim against the government are both overdue,
Lucky Bldg. The BIR concluded that there is tax
demandable, as well as fully liquidated, compensation takes
evasion since the real buyer of the properties of Lucky
place by operation of law and both obligations are
is HSC and not Rainier. It issued an assessment for
extinguished to their concurrent amounts. [Domingo v.
deficiency income tax in the amount of P79 million
Garlitos, 8 SCRA 443 (1963)].
against Lucky. Lucky argues that it resorted to tax
avoidance or a tax saving device, which is allowed by Q: Can an assessment for a local tax be the subject of set-
the NIRC and BIR rules since it paid the correct taxes off or compensation against a final judgment for a sum
based on the sale to Rainier. On the other hand, Rainier of money obtained by the taxpayer against the local
and HSC also paid the prescribed taxes arising from the government that made the assessment? Explain. (2005
sale by Rainier to HSC. Is the BIR correct in assessing Bar)
taxes on Lucky? Explain. (2016 Bar)
A: No. Taxes and debts are of different nature and character;
A: Yes. The BIR is correct in assessing the taxes on Lucky. hence, no set-off or compensation between these two
different classes of obligations is allowed. The taxes
There was no tax avoidance, instead there was tax evasion
assessed are the obligations of the taxpayer arising from
on the part of Lucky because of the simulated sale to Rainier
law, while the money judgment against the government is
which had its apparent purpose to reduce the income tax to
an obligation arising from contract, whether express or
be paid by Lucky on the sale to HSC.
implied. Inasmuch that taxes are not debts, it follows that
The sale to Rainier was simulated as evidenced by the fact the two obligations are not susceptible to set-off or legal
that two months prior to the sale of the properties to compensation. [Francia v. Intermediate Appellate Court, 162
Rainier, Lucky received P40 million from HSC and not from SCRA 753 (1988)].
Rainier.
It is only when the local tax assessment and the final
The intermediary transaction (the simulated sale to judgment are both overdue, demandable, as well fully
Rainier), was prompted more on the mitigation of tax

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TAXATION LAW
liquidated may set-off or compensation be allowed. unless and until he waives in writing his privilege under
[Domingo v. Garlitos, 8 SCRA 443 (1963)]. R.A. No. 1405, and such waiver shall constitute the authority
of the Commissioner to inquire into the bank deposits of the
TAXPAYERS SUIT (1990, 1996) taxpayer.
Q: When may a taxpayers suit be allowed? (1996)
A: A taxpayer's suit may only be allowed when an act NATIONAL TAXATION
complained of, which may include a legislative enactment,
directly involves the illegal disbursement of public funds
REALIZATION AND RECOGNITION OF INCOME (1989,
derived from taxation. (Pascual vs. Secretary of Public
1993, 2009, 2010, 2012)
Works, 110 Phil. 331)
Q: What is the all event test? Explain Briefly. (2010
Q: A law imposes a tax of 1/5 of 1% if the export price
Bar)
of prawns produced in the Philippines. The law
provides that the proceeds of the tax shall be turned A: The all events test is a test applied in the realization of
over to the Philippine Prawn Growers Association, Inc. income and expense by an accrual-basic taxpayer. The test
(PPGA), a non-profit private corporation registered requires (1) the fixing to the right to the income or liability
with the Securities and Exchange Commission to be to pay; and (2) the availability of reasonably accurate
used by PPGA exclusively to undertake activities that determination of such income or liability, to warrant the
promote the growth of the Philippine prawns industry, inclusion of the income or expense the gross income or
such as undertaking research on how to improve the deductions during the taxable year. (CIR v. Isabela Cultural
productivity of prawn farms in the Philippines, Corporation, GR No. 172231, Feb 12, 2007)
undertaking marketing activities that will directly
further the growth of the industry. Q: Mr. Jose Castillo is a resident Filipino Citizen. He
purchased a parcel of land in Makati City in 1970 at a
The members of PPGA constitute 90% of all the Prawn consideration of P1 Million. In 2011, the land, which
growers in the country representing 100% of the remained undeveloped and idle, had a fair market
countrys prawn exports. JN, a practicing lawyer and value of P20Million. Mr. Antonio Ayala, another Filipino
taxpayer, filed a suit with the Supreme Court citizen, is very much interested in the property and he
questioning the constitutionality of the law on the offered to buy the same for P20 Million. The Assessor of
ground that the funds raised through taxation will be Makati City re-assessed in 2011 the property at P10
used for a private purpose. Will said suit prosper? Million. Is Mr. Castillo liable for income tax in 2011
Explain. (1990 Bar) based on the offer to buy by Mr. Ayala? Explain your
answer. (2012 Bar)
A: No, because Atty. JN is not prejudiced by the law. It is not
his tax money that is being used. In short, he has no locus A: No. Mr. Castillo is not liable for income tax in 2011
standi. Furthermore, assistance to the prawn industry is for because no income is realized by him during that year. Tax
a public purpose because the industry is one of the pillars of liability for income tax attaches only if there is a gain
the economy contribution to employment and foreign realized resulting from a closed and complete transaction
exchange (Domondon, Remedies, pg 815) (Madrigal v. Rafferty, G.R. No. L-12287, August 7, 1918)
POWERS AND FUNCTIONS OF THE COMMISSIONER OF CLASSIFICATION OF INCOME SUBJECT TO TAX
INTERNAL REVENUE
Taxable Income
Power to inquire into bank deposits (1998, 1999, 2000,
2003, 2012) Fringe Benefits (1991, 1993, 1995, 2001, 2003, 2016)

Q: Can the Commissioner of Internal Revenue inquire Q: A fringe benefit is defined as being any good,
into the bank deposits of a taxpayer? If so, does this service or other benefit furnished or granted in cash or
power of the Commissioner conflict with RA 1405 in kind by an employer to an individual employee.
(Secrecy of Bank Deposits Law) (1998 Bar) Would it be the employer or the employee who is legally
required to pay an income tax on it? Explain. (2003 Bar)
A: The Commissioner of Internal Revenue is authorized to
inquire into the bank deposits of: A: It is the employer who is legally required to pay an
income tax on the fringe benefit. The fringe benefit tax is
1. any taxpayer upon his written consent; imposed as a final withholding tax placing the legal
2. a decedent to determine his gross estate; obligation to remit the tax on the employer, such that, if the
3. any taxpayer who has filed an application for tax is not paid the legal recourse of the BIR is to go after
compromise of his tax liability by means of financial theemployer. Any amount or value received by the
incapacity to pay his tax liability; employee as a fringe benefit is considered tax paid hence,
4. A specific taxpayer or taxpayers subject of a request for net of the income tax due thereon. The person who is legally
the supply of tax information from a foreign tax required to pay (same as statutory incidence as
authority pursuant to an international convention or distinguished from economic incidence) is that person who,
agreement on tax matters to which the Philippines is a in case of non-payment, can be legally demanded to pay the
signatory. [Sec. 6(F), NIRC] tax.
The limited power of the Commissioner does not conflict Q: In 2011, Solar Computer Corporation (Solar)
with R.A. No. 1405 because the provisions of the Tax Code purchased a proprietary membership share covered by
granting this power is an exception to the Secrecy of Bank Membership certificate No. 8 from the Mabuhay Golf
Deposits Law as embodied in a later legislation. Club, Inc. for P500, 000.00. On December 27, 2012, it
transferred the same to David, its American consultant,
Furthermore, in case a taxpayer applies for an application
to enable him to avail of the facilities of the Club. David
to compromise the payment of his tax liabilities on his claim
executed a Deed of Declaration of Trust and
that his financial position demonstrates a clear inability to
Assignment of Shares wherein he acknowledged the
pay the tax assessed, his application shall not be considered
absolute ownership of Solar over the share; that the

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QUAMTO (1987-2016)
assignment was without any consideration; and that revenues. Capital gains are generally taxed at a lower rate
the share was placed in his name because the Club to prevent, among others, the bunching of income in one
required it to be done. In 2013, the value of the share taxable year which is a liberality in the law begotten from
increased to P800,000.00. motives of public policy (Rule on Holding Period). It stands
to reason therefore, that if the transaction results in loss, the
Is the said assignment a gift and, therefore, subject to same should be allowed only from and to the extent of
gift tax? Explain. (2016 Bar) capital gains and not to be deducted from ordinary gains
A: No. The assignments are not gratuitous, and there is no which are subject to a higher rate of income tax.
intent to transfer ownership hence not subject to gift tax. Q: In 1990, Mr. Naval bought a lot for P1, 000, 000.00 in
The value of the right to avail of the privileges attendant to a subdivision with the intention of building his
Mabuhay Golf Club, Inc. Membership Certificate is due to residence on it. In 1994, he abandoned his plan to build
Davids merits or services as a computer consultant. It is a his residence on it because the surrounding area
fringe benefit taxable to the employer. [NIRC of 1997, Sec. became a depressed area and land values in the
33 (B) (6)] subdivision went down; instead, he sold it for P800,
000.00. At the time of the sale, the zonal value was
INCOME FROM DEALINGS IN PROPERTY (1987, 1988, P500, 000.00.
1989, 1991, 1992, 1993, 1994, 1997, 1998, 2001, 2003,
2005, 2007, 2008, 2009, 2012, 2014, 2015) 1. Is the land a capital asset or an ordinary asset?
Explain.
Q: Distinguish a capital asset" from an ordinary
asset". (2003 Bar) A: The land is a capital asset because it is neither for sale in
the ordinary course of business nor a property used in the
A: The term capital asset regards all properties not trade or business of the taxpayer. (Sec. 33. NIRC).
specifically excluded in the statutory definition of capital
assets, the profits or loss on the sale or the exchange of 2. Is there any income tax due on the sale? Explain.
which are treated as capital gains or capital losses. (1994 Bar)
Conversely, all those properties specifically excluded are A: Yes. Mr. Naval is liable to the 6% capital gains tax
considered as ordinary assets and the profits or losses imposed under the Tax Code based on the gross selling
realized must have to be treated as ordinary gains or price of P800, 000.00 which is an amount higher than the
ordinary losses. Accordingly, capital assets includes zonal value.
property held by the taxpayer whether or not connected
with his trade or business, but the term does not include any Q: In January 1970, Juan Gonzales bought one hectare
of the following, which are consequently considered of agricultural land in Laguna for P100, 000. This
ordinary assets: property has a current fair market value of P10 million
in view of the construction of a concrete road traversing
1. stock in trade of the taxpayer or other property of a the property. Juan Gonzales agreed to exchange his
kind which would properly be included in the inventory agricultural lot in Laguna for a one-half hectare
of the taxpayer if on hand at the close of the taxable residential property located in Batangas, with a fair
year; market value of P10 million, owned by Alpha
2. property held by the taxpayer primarily for sale to Corporation, a domestic corporation engaged in the
customers in the ordinary course of trade or business; purchase and sale of real property. Alpha Corporation
3. property used in the trade or business of a character acquired the property in 2007 for P9 million.
which is subject to the allowance for depreciation
provided in Section 34 (F) of the Tax Code; or What is the nature of the real properties exchanged for
4. real property used in trade or business of the taxpayer. tax purposes - capital asset or ordinary asset? Explain.
The statutory definition of capital assets practically A: The one hectare agricultural land owned by Juan
excludes from its scope, it will be noted, all property held by Gonzales is a capital asset because it is not a real property
the taxpayer if used in connection with his trade or used in trade or business. The one-half hectare residential
business. property owned by Alpha Corporation is an ordinary asset
because the owner is engaged in the purchase and sale of
Q: What is the rationale for the rule prohibiting the real property. (Section 39, NIRC, Revenue Regulations No. 7-
deduction of capital losses from ordinary gains? 03)
Explain. (2003 Bar)
Is Juan Gonzales subject to income tax on the exchange
A: It is to insure that only costs or expenses incurred in of property? If so, what is the tax base and rate? Explain.
earning the income shall be deductible for income tax
purposes consonant with the requirement of the law that A: Yes. The tax base in a taxable disposition of a real
only necessary expenses are allowed as deductions from property classified as a capital asset is the higher between
gross income. The term necessary expenses presupposes two values: the fair market value of the property received
that in order to be allowed as deduction, the expense must in exchange and the fair market value of the property
be business connected, which is not the case insofar as exchanged. Since the fair market value of two properties are
capital losses are concerned. This is also the reason why all the same, the said fair market value should be taken as the
nonbusiness connected expenses like personal, living and tax base which is P10 million. The income tax rate is 6%.
family expenses, are not allowed as deduction from gross [Section 24(D) (1), NIRC].
income. [Section 36(A)(1) of the 1997 Tax Code]
Is Alpha Corporation subject to income tax on the
ALTERNATIVE ANSWER: exchange of property? If so, what is the tax base and
rate? Explain. (2008 Bar)
The prohibition of deduction of capital losses from ordinary
gains is designed to forestall the shifting of deductions from A: Yes. The gain from the exchange constitutes an item of
an area subject to lower taxes to an area subject to higher gross income, and being a business income, it must be
taxes, thereby unnecessarily resulting in leakage of tax reported in the annual income tax return of Alpha

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Corporation. From the pertinent items of gross income, PASSIVE INVESTMENT INCOME (1994, 1995, 1997,
deductions allowed by law from gross income can be 2000, 2003, 2005, 2015)
claimed to arrive at the net income which is the tax base for
the corporate income tax rate of 35%. (Section 27 (A) and Q: BBB, Inc., a domestic corporation, enjoyed a
Section 31, NIRC) particularly profitable year in 2014. In June 2015, its
Board of Directors approved the distribution of cash
Exemptions from capital gains tax dividend to its stockholders. BBB, Inc. has individual
and corporate stockholders. What is the tax treatment
Q: Mr. H decided to sell the house and lot wherein he of the cash dividends received from BBB, Inc. by the
and his family have lived for the past 10 years, hoping following stockholders:
to buy and move to a new house and lot closer to his
childrens school. Concerned about the capital gains tax 1. A resident citizen
that will be due on the sale of their house, Mr. H
approaches you as a friend for advice if it is possible for A: A final withholding tax for ten percent (10%) shall be
the sale of their house to be exempted from capital imposed upon the cash dividends actually or constructively
gains tax and the conditions they must comply with to received by a resident citizen from BBB, Inc. (Sec. 24 (b)(2),
avail themselves of said exemption. (2015 Bar) NIRC).

A: I would advise Mr. H that he may be exempted from the 2. Non-resident alien engaged in trade or business
payment of the capital gains tax on the sale or disposition of A: A final withholding tax of twenty percent (20%) shall be
the house and lot where his family lives because the sale of imposed upon the cash dividends actually or constructively
principal residence by a natural person is exempt provided received by a non-resident alien engaged in trade or
the following conditions are complied with: business from BBB, Inc. (Sec. 25 (a)(2), NIRC).
1. The proceeds of the sale is fully utilized in acquiring or 3. Non-resident alien not engaged in trade or business
construction new principal residence within 18
calendar months from the date of the sale or A: A final withholding tax equal to twenty-five percent
disposition; (25%) of the entire income received from all sources within
2. The historical cost or adjusted basis of the real property the Philippines, including the cash dividends received from
sold or disposed will be carried over to the new BBB, Inc. (Sec. 25(b), NIRC).
principal residence built or acquired;
3. The Commissioner has been duly notified, through a 4. Domestic corporation
prescribed return, within 30 days from the date A: Dividends received by a domestic corporation from
of sale or disposition of the persons intention to avail another domestic corporation, such as BBB, Inc., shall not
of the tax exemption; and be subject to tax (Sec. 27(d)(4), NIRC).
4. The exemption was availed only once every 10 years.
[Sec 24 (d)(2), NIRC] 5. Non-resident foreign corporation
Q: Cebu Development Inc. (CDI) has an authorized A: Dividends received by a non-resident foreign
capital stock of P5, 000, 000.00 divided into 50,000 corporation from a domestic corporation are generally
shares with a par value of One Hundred Pesos subject to an income tax of 30% to be withheld at source
(P100.00) per share. Of the authorized capital stock, (Sec. 28(b)(1), NIRC). However, a final withholding tax of
twenty-five thousand (25,000) shares have been fifteen percent (15%) is imposed on the amount of cash
subscribed. Mr. Juan Legaspi is a stockholder of CDI dividends received from a domestic corporation like BBB,
where he has subscription amounting to 13,000 shares. Inc. if the tax sparing rule applies (Sec. 28(B)(5)(b), NIRC).
To fully pay his unpaid subscription in the amount of Pursuant to this rule, the lower rate of tax would apply if the
P950, 000.00, Mr. Legaspi transferred to the country in which the non-resident foreign corporation is
corporation a parcel of land that he owns by virtue of a domiciled would allow as tax credit against the tax due from
Deed of Assignment. Upon investigation, the BIR it, taxes deemed paid in the Philippines of 15% representing
discovered that Mr. Legaspi acquired said property for the difference between the regular income tax rate and the
only P500,000.00. Is Mr. Legaspi liable for any taxable preferential rate.
gain? (1991 Bar)
Q: Mr. Javier is a non-resident senior citizen. He
A: The transfer by Mr. Legaspi to the corporation of the receives a monthly pension from the GSIS which he
parcel of land in payment of his unpaid subscription did not deposits with the PNB-Makati Branch. Is he exempt
increase his stockholdings in the corporation. It cannot be from income tax and therefore not required to file an
said that he acquired control of the corporation by virtue of income tax return? (2000 Bar)
the transfer of the land. His percentage of stockholdings in
the capital stock of the corporation remains the same after A: Mr. Javier is exempt from income tax on his monthly GSIS
the transfer as before. Therefore, Mr. Legaspi derived pension [Sec. 32(B)(6)(f). NIRC of 1997] but not on the
taxable gain for his economic gain which was realized by interest income that might accrue on the pensions
virtue of the exchange of the land for the liability for the deposited with PNB which are subject to final withholding
subscription. tax.

ALTERNATIVE ANSWER: Mr. Legaspi is not liable for any Consequently, since Mr. Javiers sole taxable income would
taxable gain. The transaction amounted to an exchange of have been subjected to a final withholding tax, he is not
shares of property for shares of stock as a result of which required anymore to file an income tax return. [Sec. 51 (A)
the property transferor acquired control of the corporation. (2) (c)NIRC].
The 13,000 shares of stock acquired in exchange of
Q: What are disguised dividends in income taxation?
property was more than fifty percent (50%) of the total
Give an example. (1994 Bar)
subscribed capital stock of Cebu Development, Inc. (CDI)
that qualified the transaction as a tax-exempt under the A: Disguised dividends are those income payments made by
provisions of Sec. 34 (c) (2) of the National Internal a domestic corporation, which is a subsidiary of a non-
Revenue Code. resident foreign corporation, to the latter ostensibly for

UST BAR OPERATIONS 6


QUAMTO (1987-2016)
services rendered by the latter to the former, but which b. May Mr. As prize money qualify as an exclusion
payments are disproportionately larger than the actual from his gross income? Why?
value of the services rendered. In such case, the amount
over and above the true value of the service rendered shall A: No. Under the law, all prizes and awards granted to
be treated as a dividend, and shall be subjected to the athletes in local and international sports competitions and
corresponding tax of 35% on Philippine sourced gross tournaments whether held in the Philippines or abroad and
income, or such other preferential rate as may be provided sanctioned by their national sports associations are
under a corresponding Tax Treaty. excluded from gross income. The exclusion find application
only to amateur athletes where the prize was given in an
Example: Royalty payments under a corresponding event sanctioned by the appropriate national sports
licensing agreement. association affiliated with the Philippine Olympic
Committee and not to professional athletes like Mr. A.
ANNUITIES, PROCEEDS FROM LIFE INSURANCE OR Therefore, the prize money would not qualify as an
OTHER TYPES OF INSURANCE (1988, 1991, 2003, exclusion from Mr. As gross income. [SEC 32 B (7)(d), NIRC]
2005, 2007)
c. The US already imposed and withheld income taxes
Q: Noel Santos is a very bright computer science from Mr. As prize money. How may Mr. A use or
graduate. He was hired by Hewlett Packard. To entice apply the income taxes he paid on his prize money
him to accept the offer of employment, he was offered to the US when he computes his income tax liability
the arrangement that part of his compensation would in the Philippines for 2013? (2015 Bar)
be an insurance policy with a face value of P20 Million.
The parents of Noel are made the beneficiaries of the A: The income taxes withheld and paid to the US
insurance policy. government maybe claimed by Mr. A, either as a deduction
from his gross income or as a tax credit from the income tax
Will the proceeds of the insurance form part of the due when he computes his Philippine income tax liability
income of the parents of Noel and be subject to income for taxable year 2013. [Sec. 34 (C) (1) (b), NIRC]
tax? Reason briefly. (2007 Bar)
PENSIONS, RETIREMENT BENEFIT OR SEPARATION
A: No. The proceeds of life insurance policies paid to the PAY (1988, 1991, 1994, 1995, 1996, 1999, 2000, 2005,
heirs or beneficiaries upon the death of the insured are not 2007)
included as part of the gross income of the recipient.
[Section 32(B)(1), NIRC] There is no income realized Q: Z is a Filipino immigrant living in the United States
because nothing flows to Noels parents other than a mere for more than 10 years. He is retired and he came back
return of capital, the capital being the life of the insured. to the Philippines as a balikbayan. Every time he comes
to the Philippines, he stays here for about a month. He
Q: Born of a poor family on 14 February 1944. Mario regularly receives a pension from his former employer
worked his way through college. After working for in the United States, amounting to US$1,000 a month.
more than 2 years in X Manufacturing Corporation, While in the Philippines, with his pension pay from his
Mario decided to retire and avail of the benefits under former employer, he purchased three condominium
the very reasonable retirement plan maintained by his units in Makati which he is renting out for P15, 000 a
employer. He planned to invest whatever retirement month each.
benefits he would receive in a business that will
provide his employer with the needed raw materials. Does the US$1,000 pension become taxable because he
On the day of his retirement on 30 April 1985, he is now residing in the Philippines? Reason briefly.
received P400, 000.00 as retirement benefit. In (2007 Bar)
addition, his endowment insurance policy, for which he
was paying an annual premium of P1, 520.00 since A: No. The provisions of any existing law to the contrary
1965 also matured. He was then paid the face value of notwithstanding, social security benefits, retirement
his insurance policy in the amount of P50, 000.00. gratuities, pensions and other similar benefits received by a
resident citizens of the Philippines , such as Z, from a foreign
Is his P50, 000.00 insurance proceeds exempt from private institutions, is excluded from income taxation. [Sec.
income taxation? (1991 Bar) 32 (B) (6) (c), NIRC]
A: The P50, 000.00 insurance proceeds is not totally exempt Q: X, an employee of ABC Corporation died. ABC
from income tax. The excluded amount is only that portion Corporation gave Xs widow an amount equivalent to
which corresponds to the premiums that he had paid since Xs salary for one year. Is the amount considered
1965. At the rate of P1,520.00 per year multiplied by twenty taxable income to the widow? Why? (1996)
(20) years which was the period of the policy, he must have
paid a total of P30, 400.00. Accordingly, he will be subject to A: No. The amount received by the widow from the
report as taxable income the amount of P 19,600.00. decedents employer may either be a gift or a separation
benefit on account of death. Both are exclusions from gross
PRIZES AND AWARDS (1993, 1996, 2000, 2015) income pursuant to provisions of Section 28(b) of the Tax
Code.
Q: Mr. A, a citizen and resident of the Philippines is a
professional boxer. In a professional boxing match held ALTERNATIVE ANSWER: No. Since the amount was given
in 2013, he won prize money in United States (US) to the widow and not to the estate, it becomes obvious that
dollars equivalent to P300, 000.00. the amount is more of a gift. In one U.S. tax case (Estate of
Hellstrom vs. Commissioner, 24 T.C. 916), it was held that
a. Is the prize money paid to and received by Mr. A in payments to the widow of the president of a corporation of
the US taxable in the Philippines? Why? the amount the president would have received in salary if
A: Yes. Under the Tax Code, the income within and without he lived out the year constituted a gift and not an income.
of a resident citizen is taxable. Since Mr. A is a resident The controlling facts which would lead to the conclusion
Filipino citizen, his income worldwide is taxable in the that the amount received by the widow is not an income are
Philippines. [Sec. 23 (A), NIRC] as follows:

7
TAXATION LAW
a. the gift was made to the widow rather than the estate: A: No. Section 50 of Rev. Regs. No. 2, otherwise known as
b. there was no obligation for the corporation to make Income Tax Regulations, provides that if a debtor performs
further payments to the deceased; services for a creditor who cancels the debt in consideration
c. the widow had never worked for the corporation; for such services, the debtor realizes income to that amount
d. the corporation received no economic benefit; and as compensation for his services. In the given problem, the
e. the deceased had been fully compensated for his cancellation of Mr. Gipits indebtedness up to the amount of
services. [Estate of Sydney Carter us. Commissioner, 453 Php 75,000.00 gave rise to compensation income subject to
F. 2d 61 (2d Cir. 1971)] income tax, since Mr. Maunawain condoned such amount as
consideration for the general cleaning services rendered by
Q: A, an employee of the Court of Appeals, retired upon Mr. Gipit.
reaching the compulsory age of 65 years. Upon
compulsory retirement, A received the money value of Q: In 2010, Mr. Platon sent his sister Helen $1, 000 via a
his accumulated leave credits in the amount of P500, telegraphic transfer through the Bank of PI. The bank's
000.00. Is said amount subject to tax? Explain. (1996 remittance clerk made a mistake and credited Helen
Bar) with $1,000,000 which she promptly withdrew. The
bank demanded the return of the mistakenly credited
A: No. The commutation of leave credits, more commonly excess, but Helen refused. The BIR entered the picture
known as terminal leave pay, ie., the cash equivalent of and investigated Helen. Would the BIR be correct if it
accumulated vacation and sick leave credits given to an determines that Helen earned taxable income under
officer or employee who retires, or separated from the these facts? (2013 Bar)
service through no fault of his own, is exempt from income
tax. (BIR Ruling 238-91 dated November 8, 1991; (A) No, she had no income because she had no right to
Commissioner v. CA and Efren Castaneda, GR No. 96016, the mistakenly credited funds.
October 17, 1991) (B) Yes, income is income regardless of the source.
(C) No, it was not her fault that the funds in excess of
Q: Under what conditions are retirement benefits $1,000 were credited to her.
received by officials and employees of private firms (D) No, the funds in excess of$1,000 were in effect
excluded from gross income and exempt from taxation? donated to her.
(2000 Bar)
A: Retirement benefits received under R.A. No. 7641 and A: (B) Yes, income is income regardless of the source.
those received by officials and employees of private firms, Section 32 of the NIRC defines gross income as all income
whether, individual or corporate, in accordance with the derived from whatever source. Consequently, the flow of
employers reasonable private benefit plan approved by the wealth, without any distinction as to the lawfulness of its
BIR, are excluded from gross income and exempt from source, is subject to income tax. In other words, the phrase
income taxation if the retiring official or employee was: income from whatever source discloses a legislative
1. In service of same employer for at least 10 years; policy to include all income not expressly exempted within
2. Not less than fifty years of age at time of retirement; the class of taxable income under the law
3. Availed of the benefit of exclusion only once. [Sec. 32 EXCLUSIONS FROM GROSS INCOME
(B) (6) (a), NIRC]
4. The retiring official or employee should not have EXCLUSIONS UNDER THE TAX CODE
previously availed of the privilege under the retirement
plan of the same or another employer [RR 2-98, Section Proceeds of life insurance policy (1988, 1991, 2003,
2.78 (B) (1), 1st par.] 2005, 2007)
INCOME FROM ANY SOURCE WHATSOEVER (1989, Q: State with reasons the tax treatment of the following
1995, 2001, 2005) in the preparation of annual income tax returns:
Q: Explain briefly whether the following items are a. Proceeds of life insurance received by a child as
taxable or non- taxable: irrevocable beneficiary;
a) Income from jueteng b. xxx (2005 Bar)
b) xxx (2005 Bar) A: The proceeds of life insurance received by a child as
A: It is taxable. The law imposes a tax on income from any irrevocable beneficiary are not to be reported in the annual
source whatever which means that it includes income income tax returns, because they are excluded from gross
whether legal or illegal. [Sec. 32(A), NIRC] income. This kind of receipt does not fall within the
definition of income Many wealth which flows into the
TAXABLE INCOME taxpayer other than a mere return of capital. Since
insurance is compensatory in nature, the receipt is merely
Gross Income (2012, 2013, 2014, 2015) considered as a return of capital. [Section 32(B)(1), NIRC;
Fisher v. Trinidad, 43 Phil. 73 (1922)]
Q: Mr. Gipit borrowed from Mr. Maunawain
P100,000.00, payable in five (5) equal monthly Gifts, bequests and devises (1988, 1995, 1996, 1997,
installments. Before the first installment became due, 2008)
Mr. Gipit rendered general cleaning services in the
entire office building of Mr. Maunawain, and as Q: Mr. Rodrigo, an 80-year old retired businessman, fell
compensation therefor, Mr. Maunawain cancelled the in love with 20-year old Tetchie Sonora, a night club
indebtedness of Mr. Gipit up to the amount of hospitality girl. Although she refused to marry him she
P75,000.00. Mr. Gipit claims that the cancellation of his agreed to be his live-in" partner.
indebtedness cannot be considered as gain on his part
which must be subject to income tax, because according In gratitude Mr. Rodrigo transferred to her a
to him, he did not actually receive payment from Mr. condominium unit, where they both live, under a deed
Maunawain or the general cleaning services. Is Mr. Gipit of sale for P10 Million. Mr. Rodrigo paid the capital
correct? Explain. (2014 Bar) gains tax of 5% of P10 Million.

UST BAR OPERATIONS 8


QUAMTO (1987-2016)
The Commissioner of Internal Revenue found that the equivalent of ten (10) days unutilized vacation leave credits
property was transferred to Tetchie Sonora by Mr. which is not taxable. Amounts of vacation allowances or
Rodrigo because of the companionship she was sick leave credits which are paid to an employee constitutes
providing him. Accordingly, the Commissioner made a compensation. [Sec. 2.78(A)(7), RR No. 2-98, as amended by
determination that Sonora had compensation income RR No. 10-2000]
of P10 Million in the year the condominium unit was
transferred to her and issued a deficiency income tax The amounts that JR received from the airline are excluded
assessment. from gross income and not subject to income tax because
they are compensation for personal injuries suffered from
Tetchie Sonora protests the assessment and claims that an accident as well as damages received as a result of an
the transfer of the condominium unit was a gift and agreement (negotiation) on account of such injuries. [Sec.
therefore excluded from income. 32(B)(4), NIRC]
How will you rule on the protest of Tetchie Sonora? Retirement benefits, gratuities, pensions etc. (1988,
Explain. (1995 Bar) 1991, 1994, 1995, 1996, 1999, 2000, 2005, 2007)
A: I will grant the protest and cancel the assessment. The Q: A Co., a Philippine corporation, has two divisions
transfer of the property by Mr. Rodrigo to Ms. Sonora was manufacturing and construction. Due to the economic
gratuitous. The deed of sale indicating a P10 million situation, it had to close its construction division and
consideration was simulated because Mr. Rodrigo did not lay-off the employees in that division. A Co. has a
receive anything from the sale. The problem categorically retirement plan approved by the BIR, which requires a
states that the transfer was made in gratitude to Ms. minimum of 50 years of age and 10 years of service in
Sonoras companionship. The transfer being gratuitous is the same employer at the time of retirement.
subject to donors tax. Mr. Rodrigo should be assessed
deficiency donors tax and a 50% surcharge imposed for There are 2 groups of employees to be laid off:
fraudulently simulating a contract of sale to evade donors a. Employees who are at least 50 years of age and has
tax. [Sec. 91(b), NIRC] at 10 years of service at the time of termination of
Awards and agreements for damages paid on account of employment.
or resulting from injuries or sickness (1995, 2003, b. Employees who do not meet either the age or length
2005, 2007) of service, A Co. plans to give the following:

Q: Mr. Infante was hit by a wayward bus while on his For category (A) employees the benefits under the BIR
way to work. He survived but had to pay P400, 000.00 approved plan plus an ex gratia payment of one month
for his hospitalization. He was unable to work for six of every year of service.
months which meant that he did not receive his usual For category (B) employees one month for every year
salary of P10,000.00 a month or a total of P60, 000.00. of service. For both categories, the cash equivalent of
He sued the bus company and was able to obtain a final unused vacation and sick leave credits.
judgment awarding him P400, 000.00 as
reimbursement for his hospitalization, P60, 000 for the A Co. seeks your advice as to whether or not it will
salaries he failed to receive while hospitalized, P200, subject any of these payments to WT. Explain your
000.00 as moral damages for his pain and suffering, and advice. (1999)
P100,000.00 as exemplary damages. He was able to
collect in full from the judgment. A: For category A employees, all the benefits received on
account of their separation are not subject to income tax,
How much income did he realize when he collected on hence no withholding tax shall be imposed. The benefits
the judgment? Explain. (1995 Bar) received under the BIR-approved plan upon meeting the
service requirement and age requirement are explicitly
A: None. The P200.000 moral and exemplary damages are excluded from gross income. The ex gratia payment also
compensation for injuries sustained by Mr. Infante. The qualifies as an exclusion from gross income being in the
P400, 000.00 reimbursement for hospitalization expenses nature of benefit received on account of separation due to
and the P60, 000.00 for salaries he failed to receive are causes beyond the employees' control. [Section 32(B), NIRC]
amounts of any damages received whether by suit or The cash equivalent of unused vacation and sick leave
agreement on account of such injuries. Section 28(b)(5) of credits qualifies as part of separation benefits excluded
the Tax Code specifically exclude these amounts from the from gross income. (CIR v. Court of Appeals, GR No. 96016,
gross income of the individual injured. [Section 28(b), NIRC; October 17, 1991)
Sec. 63 Rev. Reg. No. 2]
For category B employees, all the benefits received by them
Q: JR was a passenger of an airline that crashed. He will also be exempt from income tax, hence not subject to
survived the accident but sustained serious physical withholding tax. These are benefits received on account of
injuries which required hospitalization for 3 months. separation due to causes beyond the employees' control,
Following negotiations with the airline and its insurer, which are specifically excluded from gross income. [Section
an agreement was reached under the terms of which JR 32(B), NIRC]
was paid the following amounts: P500, 000.00 for his
hospitalization; P250, 000.00 as moral damages; P300, ALTERNATIVE ANSWER: All of the payments are not
000.00 for loss of income during the period of his subject to income tax and should not also be subject to WT.
treatment and recuperation. In addition, JR received The employees were laid off, hence separated for a cause
from his employer the amount of P200,000.00 beyond their control. Consequently, the amounts to be paid
representing the cash equivalent of his earned vacation by reason of such involuntary separation are excluded from
and sick leaves. Which, if any, of the amounts he gross income, irrespective of whether the employee at the
received are subject to income tax? Explain. (2005 Bar) time of separation has rendered less than ten years of
service and/or is below fifty years of age. [Section 32(B),
A: The amount of P200,000.00 that JR received from his NIRC]
employer is subject to income tax except the money

9
TAXATION LAW
Prizes and awards (1993, 1996, 2000, 2015) advertising expense, of such nature does not qualify as an
ordinary business expense, because the benefit to be
Q: Onyoc, an amateur boxer, won in a boxing enjoyed by the taxpayer goes beyond one taxable year. [CIR
competition sponsored by the Gold Cup Boxing Council, v. General Foods Inc., 401 SCRA 545 (2003)]
a sports association duly accredited by the Philippine
Boxing Association. Onyoc received the amount of Losses (1993, 1998, 1999, 2010)
P500,000 as his prize which was donated by Ayala Land
Corporation. The BIR tried to collect income tax on the Q: Give the requisites for deductibility of a loss. (1998
amount received by Onyoc and donors tax from Ayala Bar)
Land Corporation, which taxes, Onyoc and Ayala Land A:
Corporation refuse to pay. Decide. (1996 Bar)
1. They must be ordinary losses that are incurred by a
A: The prize will not constitute a taxable income to Onyoc, taxable entity as a result of its day to day operations
hence the BIR is not correct in imposing the income tax. RA. conducted for profit or otherwise, or casualty losses.
No. 7549 explicitly provides that All prizes and awards 2. They must have been losses that are actually sustained
granted to athletes in local and International sports during the taxable year.
tournaments and competitions held in the Philippines or 3. Must not have been compensated for by insurance or
abroad and sanctioned by their respective national sports other forms of indemnity.
associations shall be exempt from income tax". 4. If they are casualty losses, they are of property
Neither is the BIR correct in collecting the donors tax from connected with trade, business, or profession and the
Ayala Land Corporation. The law is clear when it lose arises from fires, storms, shipwreck, or other
categorically stated That the donors of said prizes and casualties, or from robbery, theft or embezzlement.
awards shall be exempt from the payment of the donors 5. Must not have been claimed as a deduction for estate
tax." tax purposes in the estate tax return.

DEDUCTIONS FROM GROSS INCOME Q: A is a travelling salesman working full time for Nu
Skin Products. He receives a monthly salary plus 3%
ITEMIZED DEDUCTIONS commission on his sales in a Southern province where
he is based. He regularly uses his own car to maximize
Ordinary and necessary trade, business or professional his visits even to far flung areas. One fine day a group of
expenses (1988, 1989, 1990, 1993, 2006, 2009, 2016) militants seized his car. He was notified the following
QPeter is the Vice-President for Sales of Golden Dragon day by the police that the marines and the militants had
Realty Conglomerate, Inc. (Golden Dragon). A group of a bloody encounter and his car was completely
five (5) foreign investors visited the country for destroyed after a grenade hit it.
possible investment in the condominium units and A wants to file a claim for casualty loss. Explain the legal
subdivision lots of Golden Dragon. After a tour of the basis of your tax advice. (2010 Bar)
properties for sale, the investors were wined and dined
by Peter at the posh Conrad's Hotel at the cost of A: A is not entitled to claim a casualty loss because all of his
P150,000.00. Afterward, the investors were brought to income partake the nature of compensation income.
a party in a videoke club which cost the company Taxpayers earning compensation income arising from
P200,000.00 for food and drinks, and the amount of personal services under an employer-employee
P80,000.00 as tips for business promotion officers. relationship are not allowed to claim deduction except that
Expenses at Conrad's Hotel and the videoke club were allowed under Section 34(M) referring only to the P2,400
receipted and submitted to support the deduction for health and/or hospitalization insurance premium; perforce,
representation and entertainment expenses. Decide if the claim of casualty loss has no legal basis. (Sec. 34, NIRC)
all the representation and entertainment expenses
claimed by Golden Dragon are deductible. Explain. Bad Debts (1999, 2004, 2016)
(2016 Bar) Q: Rakham operates the lending company that made a
A: Not all of the representation and entertainment expenses loan to Alfonso in the amount of P120,000.00 subject of
claimed by Golden Dragon are deductible. Only those that a promissory note which is due within one (1) year
are reasonable in amount and nature should be deductible. from the notes issuance. Three years after the loan
It should be noted that the total expenses is P430,000.00 for became due and upon information that Alfonso is
the five (5) investors or P86,000.00 each. nowhere to be found, Rakham asks you for advice on
how to treat the obligation as bad debt. Discuss the
I would allow only a deduction in such amounts as are requisites for deductibility of a bad debt. (2016 Bar)
reasonable under the circumstances but in no case shall all
deductions for representation and entertainment expenses, A: I shall advise Rakham to treat the obligation as bad debt
including those above enumerated, exceed 0.50% of net by deducting the same from his income tax return, and
sales. [NIRC of 1997, Sec. 34 (A) (1) (iv); RR 10-2002] proving compliance with the following requisites for the
(Domondon) deductibility of a bad debt.

Q: Masarap Food Corporation (MFC) incurred The requisites for the deductibility of a bad debt are:
substantial advertising expenses in order to protect its a. There must be an existing indebtedness due to the
brand franchise for one of its line products. In its taxpayer which must be valid and legally demandable.
income tax return, MFC included the advertising b. The same must be connected with the taxpayers trade,
expense as deduction from gross income, claiming it as business or practice of profession.
an ordinary business expense. Is MFC correct? Explain. c. The same must not be sustained in a transaction
(2009 Bar) entered into between related parties.
A: No. The protection of taxpayers brand franchise is d. The same must be actually charged off the books of
analogous to the maintenance of goodwill or title to ones accounts of the taxpayer as of the end of the taxable
property which is in the nature of a capital expenditure. An year.

UST BAR OPERATIONS 10


QUAMTO (1987-2016)
e. The debt must be actually ascertained to be contribution to the crippled girl cannot be claimed as a
worthless and uncollectible during the taxable year. deduction.
f. The debts are uncollectible despite diligent effort
exerted by the taxpayer. [NIRC of 1997, Sec. 34 (E) (1), ALTERNATIVE ANSWER:
arrangement and numbering supplied; RR No. 5-99, Sec. a. The P100,000.00 donation may properly be deducted
3, reiterated in RR No. 25-2002; Philippine Refining from Xs gross income, but not the P5, 000.00 donated
Corporation v. Court of Appeals, et al., 256 SCRA 667] to the crippled girl, as charitable and other
g. Must have been reported as receivables in the income contributions that may be deducted from taxable
tax return of the current or prior years. (RR No. 2, Sec. income do not contemplate those given to individuals.
103) While it may be that Xs son is a patient in the hospital,
Depreciation (1989, 1998, 1999) it cannot be said that part of its net income inures to the
benefit of X as to be disallowed as a deduction from
Q: Explain if the following items are deductible from taxable income.
gross income for income tax purposes. Disregard who b. Assuming X is a self-employed individual, he may not
is the person claiming the expense. deduct the donations made because under Section 29 of
the NIRC as amended by RA 7496 better known as
xxx SNITS, only contribution to the government or to an
b. Depreciation of goodwill. (1999 Bar) accredited relief organization for the rehabilitation of
calamity stricken areas declared by the President may
A: Depreciation for goodwill is not allowed as deduction be deducted for income tax purposes. Clearly, the
from gross income. While intangibles maybe allowed to be donees do not qualify as relief organizations.
depreciated or amortized, it is only allowed to those c. Assuming X is receiving purely compensation income,
intangibles whose use in the business or trade is definitely he can only deduct from gross compensation income
limited in duration. (Basilan Estates, Inc. v. CIR, 21 SCRA 17) personal exemption, additional personal exemption
Such is not the case with goodwill. and special additional personal exemption. (Section 29,
NIRC as amended)
ALTERNATIVE ANSWER: Depreciation of goodwill is
allowed as a deduction from gross income if the goodwill is OPTIONAL STANDARD DEDUCTION (2009, 2015)
acquired through capital outlay and is known from
experience to be of value to the business for only a limited Q: In 2012, Dr. K decided to return to his hometown to
period. (Section 107, Revenue Regulations No. 2) In such start his own practice. At the end of 2012, Dr. K found
case, the goodwill is allowed to be amortized over its useful that he earned gross professional income in the amount
life to allow the deduction of the current portion of the of P1,000,000.00. While he incurred expenses
expense from gross income, thereby paving the way for a amounting to P560,000.00 constituting mostly of his
proper matching of costs against revenues which is an office space rent, utilities, and miscellaneous expenses
essential feature of the income tax system. related to his medical practice. However, to Dr. Ks
dismay, only P320,000.00 of his expenses were duly
Charitable and other contributions (1993, 1996, 1998) covered by receipts. What are the options available for
Dr. K so he could maximize the deductions from his
Q: The Filipinas Hospital for Crippled Children is a gross income? (2015 Bar)
charitable organization. X visited the hospital, on his
birthday, as was his custom. He gave P100, 000.00 to A: In order to maximize his deductions, Dr. K may avail of
the hospital and P5, 000.00 to a crippled girl whom he the optional standard deduction (OSD) which is an amount
particularly pitied. A crippled son of X is in the hospital not exceeding forty percent (40%) of his gross sales or
as one of its patients. X wants to exclude both the P100, gross receipts. The OSD can be claimed without being
000.00 and the P5, 000.00 from his gross income. required to present proof or evidence of expenses paid or
Discuss. (1993 Bar) incurred Sec. 34 (L), NIRC; Rev. Regs. 16-08, as amended by
him. []
A: Under the National Internal Revenue Code, charitable
contributions to be deductible must be: PERSONAL AND ADDITIONAL EXEMPTIONS (1993,
1998, 2004, 2006, 2012, 2014, 2015)
a. actually paid or made to domestic corporations or
associations organized and operated exclusively for Q: Mr. E and Ms. F are both employees of AAA Corp. They
religious, charitable, scientific, youth and sports got married on February 14, 2011. On December 29,
development, cultural or educational purposes or for 2011, the couple gave birth to triplets. On June 25,
rehabilitation of veterans or to social welfare 2013, they had twins. What were the personal
institutions no part of which inures to the benefit of any exemptions/deductions which Mr. E and Ms. F could
private individual; claim in the following taxable years? (2015 Bar)
b. made within the taxable year;
c. not more than 10% (for individuals) of 5% (for a. For 2010
corporations) of the taxpayers taxable income to be A: For 2010, Mr. E and Ms. F are each entitled to personal
computed without including the contribution. exemptions of P50,000.00. [Sec. 35 (A), NIRC]
Applying the above-provisions of law to the case at bar, it is b. For 2011
clear therefore that only the P100,000.00 contribution of X
to Filipinas Hospital for Crippled Children qualified as a A: For 2011, Mr. E and Ms. F are each entitled to basic
deductible contribution. personal exemption of P50,000.00. In addition to his basic
personal exemption, Mr. E could claim additional personal
The NIRC expressly provides that the same must be actually exemptions for three qualified dependent children in the
paid to a charitable organization to be deductible. Note that amount of P25, 000.00 for each child. [Sec. 35 (B), NIRC]
the law accorded no privilege to similar contributions
extended to private individuals. Hence, the P5,000.00 c. For 2013

11
TAXATION LAW
A: For 2013, Mr. E and Ms. F are each entitled basic personal May Freezy Corporation claim the payment to the
exemptions of P50,000.00. Mr E could claim additional officer as deduction from its gross income? Explain.
personal exemptions for four qualified dependent children (Bar)
in the amount of P25,000.00 for each child. [Sec 35 (B),
NIRC] A: No. The payments made in exchange for the revelation of
a competitors trade secrets is considered as an expense
ITEMS NOT DEDUCTIBLE which is against law, morals, good customs or public policy,
which is not deductible. (3M Philippines, Inc. v. CIR, GR No.
Premiums paid on life insurance policy(1989, 2004, 82833, 1988) Also, the law will not allow the deduction of
2007) bribes, kickbacks and other similar payments. Applying the
Q: OXY is the president and chief executive officer of principle of ejusdem generis, payment made by Freezy
ADD Computers Inc. When OXY was asked to join the Corporation would fall under other similar payments
government service as director of a bureau under the which are not allowed as deduction from gross income.
Department of Trade and Industry, he took a leave of [Section 34(A)(1)(c). NIRC]
absence from ADD. Believing that its business outlook, INCOME TAX ON INDIVIDUALS
goodwill and opportunities improved with OXY in the
government, ADD proposed to obtain a policy of Income tax on Resident Citizens, Non-resident Citizens
insurance on his life. On ethical grounds, OXY objected and Resident Aliens(1997, 1999, 2000, 2001, 2002,
to the insurance purchase but ADD purchased the 2007, 2015, 2016)
policy anyway. Its annual premium amounted to
P100,000. Is said premium deductible by ADD Q: Patrick is a successful businessman in the United
Computers, Inc.? Reason. (2004 Bar) States and he is a sole proprietor of a supermarket
which has a gross sales of $10 million and an annual
A: No. The premium is not deductible because it is not an income of $3 million. He went to the Philippines on a
ordinary business expense. The term "ordinary is used in visit and in a party, he saw Atty. Agaton who boasts of
the income tax law in its common significance and it has the being a tax expert. Patrick asks Atty. Agaton: if he
connotation of being normal, usual or customary. (Deputy v. (Patrick) decides to reacquire his Philippine
Du Pont, 308 US 48) Paying premiums for the insurance of a citizenship under RA 9225, establish residence in this
person not connected to the company is not normal, usual country, and open a supermarket in Makati City, will
or customary. the BIR tax him on the income he earns from his U.S.
business? If you were Atty. Agaton, what advice will you
Another reason for its non-deductibility is the fact that it give Patrick? (2016 Bar)
can be considered as an illegal compensation made to a
government employee. This is so because if the insured, his A: I will advise Patrick that if he reacquires his Philippine
estate or heirs were made as the beneficiary (because of the citizenship and establish residence in the Philippines, he
requirement of insurable interest), the payment of shall be considered as a resident citizen subject to tax on
premium will constitute bribes which are not allowed as incomes derived from sources within or without the
deduction from gross income. [Section 34(A)(1)(c), NIRC] Philippines. [NIRC of 1997, Sec. 23 (A)]
On the other hand, if the company was made the Consequently, the BIR could now tax him on his income
beneficiary, whether directly or indirectly, the premium is derived from sources without the Philippines which is the
not allowed as a deduction from gross income. [Section income he earns from his U.S. business. (Domondon)
36(A)(4), NIRC]
Q: Mr. Sebastian is a Filipino seaman employed by a
Q: Noel Santos is a very bright computer science Norwegian company which is engaged exclusively in
graduate. He was hired by Hewlett Packard. To entice international shipping. He and his wife, who manages
him to accept the offer of employment, he was offered their business, filed a joint income tax return for 1997
the arrangement that part of his compensation would on March 15,1998. After an audit of the return, the BIR
be an insurance policy with a face value of P20 Million. issued on April 20, 2001 a deficiency income tax
The parents of Noel are made the beneficiaries of the assessment for the sum of P250,000.00, inclusive of
insurance policy. interest and penalty. For failure of Mr. and Mrs.
Sebastian to pay the tax within the period stated in the
xxx notice of assessment, the BIR issued on August 19,2001
b. Can the company deduct from its gross income the warrants of distraint and levy to enforce collection of
amount of the premium? Reason briefly. (2007 Bar) the tax.

A: Yes. The premiums paid are ordinary and necessary What is the rule of income taxation with respect to Mr.
business expenses of the company. They are allowed as a Sebastian's income in 1997 as a seaman on board the
deduction from gross income so long as the employer is not Norwegian vessel engaged in international shipping?
a direct or indirect beneficiary under the policy of Explain your answer. (2002 Bar)
insurance. [Section 36(A)(4), NIRC] Since the parents of the A: Mr. Sebastians income as seaman on board the
employee were made the beneficiaries, the prohibition for Norwegian vessel engaged in international shipping shall
their deduction does not exist. not be subjected to income tax. An individual citizen of the
Bribes (1993, 1998, 2014) Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on
Q: Freezy Corporation, a domestic corporation engaged income derived from sources within the Philippines:
in the manufacture and sale of ice cream, made Provided, That a seaman who is a citizen of the Philippines
payments to an officer of Frosty Corporation, a and who receives compensation for services rendered
competitor in the ice cream business, in exchange for abroad as a member of the complement of a vessel engaged
said officers revelation of Frosty Corporations trade exclusively in international trade shall be treated as an
secrets. overseas contract worker. [Sec. 23(C), NIRC] Mr. Sebastian
shall be considered as an overseas contract worker. His
income as seaman, which is an income from without the

UST BAR OPERATIONS 12


QUAMTO (1987-2016)
Philippines, shall not be liable for income tax in the 8. Employees achievement awards, e.g., for length of
Philippines. service or safety achievement, which must be in the
form of a tangible personal property other than cash or
EXCLUSIONS gift certificate, with an annual monetary value not
De minimis benefits (1994, 2005, 2015, 2016) exceeding P10,000 received by the employee under an
established written plan which does not discriminate in
Q: Mapagbigay Corporation grants all its employees favor of highly paid employees;
(rank and file, supervisors, and managers) 5% discount 9. Gifts given during Christmas and major anniversary
of the purchase price of its products. During an audit celebrations not exceeding P5,000 per employee per
investigation, the BIR assessed the company the annum
corresponding tax on the amount equivalent to the 10. Daily meal allowance for overtime work and
courtesy discount received by all the employees, night/graveyard shift not exceeding 25% of the basic
contending that the courtesy discount is considered as minimum wage on a per region basis;
additional compensation for the rank and file 11. Benefits received by an employee by virtue of a
employees and additional fringe benefit for the collective bargaining agreement (CBA) and
supervisors and managers. In its defense, the company productivity incentive schemes combined do not
argues that the discount given to the rank and file exceed P10,000 per employee per taxable year (Rev.
employees is a de minimis benefit and not subject to Regs. 2-98, as amended).
tax. As to its managerial employees, it contends that the
discount is nothing more than a privilege and its Leave Credits (1991, 1996)
availment is restricted. Q: A, an employee of the Court of Appeals, retired upon
Is the BIR assessment correct? Explain. (2016 Bar) reaching the compulsory age of 65 years. Upon
compulsory retirement, A received the money value of
A: No. The 5% discount of the purchase price of its products, his accumulated leave credits in the amount of
so-called courtesy discounts on purchases, granted by P500,000.00.
Mapagbigay Corporation to all its employees (rank and file,
supervisors, and managers) otherwise known as de A: No. The accumulated leave credits in the amount of
minimis benefits, furnished or offered by an employer to P500,000.00 is not subject to tax. The monetized value of
his employees merely as a means of promoting the health, leave credits paid to government officials and employees
goodwill, contentment, or efficiency of his employees, are shall not be subject to income tax and consequently to
not considered as compensation subject to income tax and withholding tax. [RR No. 3-98, Sec. 2.78.1 (A) (7), 3rd sentence,
consequently to withholding tax. [Rev. Regs. 2-98, Sec. 2.78.1 as amended by RR No. 10-2000]
(A) (3), as amended by RR No. 8-2000, RR No. 5-2008, RR No. INCOME TAX ON CORPORATIONS
10-2008, RR No. 5-2011, and RR No. 8-2012]
Minimum Corporate Income Tax (2001, 2015)
As such, de minimis benefits, if given to supervisors and
managerial employees, they are also exempt from the fringe Q: KKK Corp. secured its Certificate of Incorporation
benefits tax. from the Securities and Exchange Commission on June
3, 2013. It commenced business operations on August
Q: What are de minimis benefits and how are these 12, 2013. In April 2014, Ms. J, an employee of KKK Corp.
taxed? Give three (3) examples of de minimis benefits. in charge of preparing the annual income tax return of
(2015) the corporation for 2013, got confused on whether she
A: De minimis benefits are facilities and privileges should prepare payment for the regular corporate
furnished or offered by an employer to his employees, oncome tax or the minimum corporate income tax.
which are not considered as compensation subject to a. As Ms. Js supervisor, what will be your advice?
income tax and consequently to withholding tax, if such
facilities or privileges are of relatively small value and are A: As Ms. Js supervisor, I will advise that KKK Corp. should
offered or furnished by the employer merely as means of prepare payment for the regular corporate income tax and
promoting the health, goodwill, contentment, or efficiency not the minimum corporate income tax. Under the Tax
of his employees. If received by rank-and-file employees, Code, minimum corporate income tax is only applicable
they are exempt from income tax on wages; if received by beginning on the fourth taxable year following the
supervisory or managerial employees, they are exempt commencement of business operation. [Sec. 27 (e) (1),
from the fringe benefits tax (RR No. 2-98, as amended by RR NIRC]
No. 8-2000).
b. What are the distinctions between regular
The following shall be considered as de minimis benefits: corporate income tax and minimum corporate
income tax? (2015 Bar)
1. Monetized unused vacation leave credits of private
employees not exceeding 10 days during the year; A: As to taxpayer: Regular corporate income tax applies to
2. Monetized value of vacation and sick leave credits paid all corporate taxpayers; while minimum corporate income
to government officials and employees; tax applies to domestic corporations and resident foreign
3. Medical cash allowance to dependents of employees, corporations.
not exceeding P750 per employee per semester or
P125 per month; As to tax rate: Regular corporate income tax is 30%; while
4. Rice subsidy pf P1,500 or 1 sack of 50 kg rice per month minimum corporate income tax is 2%.
amounting to not more than P1,500; As to tax base: Regular corporate income tax is based on the
5. Uniform and clothing allowance not exceeding P5,000 net taxable income; while minimum corporate income tax is
per annum; based on gross income.
6. Actual medical assistance not exceeding PP10,000 per
annum; As to period of applicability: Regular corporate income tax
7. Laundry allowance not exceeding P300 per month is applicable beginning on the fourth taxable year following

13
TAXATION LAW
the commencement of business operation, while minimum A: Yes. the assessments were justified because for income
corporate income tax is applicable beginning on the fourth tax purposes, the co-ownership of inherited property is
taxable year following the commencement of business automatically converted into an unregistered partnership
operation. from the moment the said properties are used as a common
fund with intent to produce profits for the heirs In
As to imposition: The minimum corporate income tax is proportion to their shares in the inheritance.
imposed whenever it is greater than the regular corporate
income tax of the corporation [Sec. 27 (A) and (E), NIRC; RR From the moment of such partition, the heirs are entitled
No. 9-98] already to their respective definite shares of the estate and
the income thereof, for each of them to manage and dispose
Off-line International carriers (1987, 1990, 1994, 2005, of as exclusively his own without the intervention of the
2009) other heirs, and, accordingly, he becomes liable individually
Q: Kenya International Airlines (KIA) is a foreign for all taxes in connection therewith. If after such partition,
corporation, organized under the laws of Kenya. It is he allows his shares to be held in common with his co-heir
not licensed to do business in the Philippines. Its under a single management to be used with the intent of
commercial airplanes do not operate within Philippine making profit thereby in proportion to his share, there can
territory, or service passengers embarking from be no doubt that, even if no document or instrument were
Philippine airports. The firm is represented in the executed for the purpose, for tax purposes, at least, an
Philippines by its general agent, Philippine Airlines unregistered partnership is formed (Lorenzo Ona, et al v.
(PAL), a Philippine corporation. CIR, 45 SCRA 74).

KIA sells airplane tickets through PAL, and these tickets ALTERNATIVE ANSWER: No, the assessments are not
are serviced by KIA airplanes outside the Philippines. justified. The mere sharing of income does not of itself
The total sales of airline tickets transacted by PAL for establish a partnership absent any clear intention of the co-
KIA in 1997 amounted to P2,968,156.00. The owners who are only awaiting liquidation of the estate.
Commissioner of Internal Revenue assessed KIA Tax on General Professional Partnerships (1988, 1989,
deficiency income taxes at the rate of 35% on its taxable 1990, 2013, 2014)
income, finding that KIAs airline ticket sales
constituted income derived from sources within the Q: A, B, and C, all lawyers, formed a partnership called
Philippines. ABC Law Firm so that they can practice their profession
as lawyers. For the year 2012, ABC Law Firm
KIA filed a protest on the ground that the P2,968,156.00 received earnings and paid expenses, among which
should be considered as income derived exclusively are as follows:
from sources outside the Philippines since KIA only
serviced passengers outside Philippine territory. Earnings:
Is the position of KIA tenable? Reasons. (2009 Bar) 1. Professional/legal fees from various clients;
2. Cash prize received from a religious society in
A: KIAs position is not tenable. The revenue it derived in recognition of the exemplary service of ABC Law
1997 from sales of airplane tickets in the Philippines, Firm;
through its agent PAL, is considered as income from within 3. Gains derived from sale of excess computers and
the Philippines, subject to the 35% tax based on its taxable laptops.
income pursuant to the Tax Code. The transacting of
business in the Philippines through its local sales agent, Payments:
makes KIA a resident foreign corporation despite the
absence of landing rights, thus, it is taxable on income 1. Salaries of office staff;
derived from within. The source of an income is the 2. Rentals for office space;
property, activity or service that produced the income. In 3. Representation expenses incurred in meetings
the instant case, it is the sale of tickets in the Philippines with clients.
which is the activity that produced the income. KIAs
income being derived from within, is subject to Philippine a. What are the items in the above mentioned
income tax. [CIR v. British Overseas Airways Corporation, 149 earnings which should be included in the
SCRA 395, (1987)] computation of ABC Law Firms gross income?
Explain.
Tax on Co-ownerships (1990, 1991, 1994, 1997)
A: The three (3) items of earnings should be included in the
Q: Mr. Santos died Intestate in 1989 leaving his spouse computation of ABC Law Firms gross income. The
and five children as the only heirs. The estate consisted professional/legal fees from various clients is included as
of a family home and a four-door apartment which was part of gross income being in the nature of compensation
being rented to tenants. Within the year, an for services. [Section 32(A)(1), NIRC] The cash prize from a
extrajudicial settlement of the estate was executed religious society in recognition of its exemplary services is
from the heirs, each of them receiving his/her due also included there being no law providing for its
share. The surviving spouse assumed administration of exclusion. This is not a prize in recognition of any of the
the property. Each year, the net income from the rental achievements enumerated under the law hence, should
property was distributed to all, proportionately, on form part of gross income. [Section 32(B)(7)(c), NIRC]
which they paid respectively, the corresponding The gains from sale of excess computers and laptops
income tax. should also be included as part of the firms gross
income because the term gross income specifically
In 1994, the income tax returns of the heirs were includes gains derived from dealings in property. [Section
examined and deficiency income tax assessments were 32(A)(3), NIRC]
is-sued against each of them for the years 1989 to 1993,
inclusive, as having entered into an unregistered b. What are the items in the above-mentioned
partnership. Were the assessments justified? (1997 payments which may be considered as
Bar)

UST BAR OPERATIONS 14


QUAMTO (1987-2016)
deductions from the gross income of ABC Law Firm? A: The correct value to use for estate tax purposes is P20
Explain. million which is the current fair market value of the
property at the time of the decedent's death. [Section 88(B),
A: The law firm being formed as general professional NIRC]
partnership is entitled to the same deductions allowed to
corporation. (Section 26, NIRC) Hence, the three (3) items of CLASSIFICATION OF DECEDENT FOR PURPOSES OF
deductions mentioned in the problem are all deductible, DETERMINING COMPOSITION OF GROSS ESTATE
they being in the nature of ordinary and necessary expenses (1987, 1990, 1994, 2010)
incurred in the practice of profession. [Section 34(A), NIRC]
However, the amount deductible for representation Q: Cliff Robertson, an American citizen, was a
expenses incurred by a taxpayer engaged in sale of services, permanent resident of the Philippines. He died in
including a law firm, is subject to a ceiling of 1% of net Miami, Florida. He left 10, 000 shares of Meralco, a
revenue. (RR No. 10-2002) condominium unit at the Twin Towers Building at
Pasig. Metro Manila and a house and lot in Los Angeles,
c. If ABC Law Firm earns net income in 2012, what, if California.
any, is the tax consequence on the part of ABC Law
Firm insofar as the payment of income tax is What assets shall be included in the Estate Tax Return
concerned? What, if any, is the tax consequence on to be filed with the BIR? (1994 Bar)
the part of A, B, and C as individual partners, A: All of Mr. Robertsons assets consisting of 10, 000 shares
insofar as the payment of income tax is concerned? in the Meralco, a condominium unit in Pasig, and his house
(2014 Bar) and lot in Los Angeles, California are taxable. The properties
A: The net income having been earned by the law firm of a resident alien decedent like Mr. Robertson are taxable
which is formed and qualifies as a general professional wherever situated.
partnership, is not subject to income tax because the earner ITEMS TO BE INCLUDED AS PART OF GROSS ESTATE
is devoid of any income tax personality. Each partner shall
report as gross income his distributive shares, actuality or Transfers in Contemplation of Death (2001, 2013)
constructively received, in the net income of the
partnership. The partnership is merely treated for income Q: A, aged 90 years and suffering from incurable cancer,
tax purposes as a pass-through entity so that its net income on August 1, 2001 wrote a will and, on the same day,
is not taxable at the level of the partnership but saidnet made several inter-vivos gifts to his children. Ten days
income should be attributed to the partners, whether or not later, he died. In your opinion, are the inter-vivos gifts
distributed to them, and they are liable to pay the income considered transfers in contemplation of death for
tax based on their respective taxable income as individual purposes of determining properties to be included in
taxpayers. (Section 26, NIRC) his gross estate? Explain your answer. (2001 Bar)
A: Yes. When the donor makes his will within a short time
TRANSFER TAXES of, or simultaneously with, the making of gifts, the gifts are
considered as having been made in contemplation of death.
(Roces v. Posadas, 58 Phil. 108) Obviously, the intention of
TIME AND TRANSFER OF PROPERTIES (DATE OF the donor in making the inter-vivos gifts is to avoid the
DEATH VALUATION RULE) (1994, 2007, 2008,) imposition of the estate tax and since the donees are
likewise his forced heirs who are called upon to inherit, it
Q: Jose Cernan, Filipino citizen, married to Maria will create a presumption juris tantum that said donations
Ceman, died in a vehicular accident in NLEX on July 10, were made mortis causa, hence, the properties donated
2007. The spouses owned, among others, a 100-hectare shall be included as part of A's gross estate.
agricultural land in Sta. Rosa, Laguna with current fair
market value of P20 million, which was the subject Proceeds of Life Insurance Policy(2003, 2005, 2007)
matter of a Joint Venture Agreement about to be
Q: Antonia Santos, 30 years old, gainfully employed, is
implemented with Star Land Corporation (SLC), a well-
the sister of Eduardo Santos. She died in an airplane
known real estate development company. He bought
crash. Edgardo is a lawyer and he negotiated with the
the said real property for P2 million fifty years ago. On
airline company and insurance company and they were
January 5, 2008, the administrator of the estate and SLC
able to agree to a total settlement of P10 Million. This is
jointly announced their big plans to start conversion
what Antonia would have earned as somebody who was
and development of the agricultural lands in Sta. Rosa,
gainfully employed. Edgardo was her only heir.
Laguna, into first-class residential and commercial
centers. As a result, the prices of real properties in the Is the P10 Million subject to estate tax? Reason briefly.
locality have doubled. (2007 Bar)
The Administrator of the Estate of Jose Cernan filed the A: No. The estate tax is a tax on the privilege enjoyed by an
estate tax return on January 9,2008, by including in the individual in controlling the disposition of her properties to
gross estate the real property at P2 million. After 9 take effect upon her death. The P10M is not a property
months, the BIR issued deficiency estate tax existing as of the time of decedents death; hence, it cannot
assessment, by valuing the real property at P40 million. be said that she exercised control over its disposition. Since
the privilege to transmit the property is not exercised by the
a. Is the BIR correct in valuing the real property at
decedent, the estate tax cannot be imposed thereon.
P40 million? Explain.
(Definition of Estate Tax p. 184, Vitug, Compendium of Tax
A: No. The value of the property for estate tax purposes Law and Jurisprudence, Third Revised Edition).
shall be the fair market value thereof at the time of death.
DEDUCTIONS FROM GROSS ESTATE
[Section 88(B), NIRC]
Vanishing Deduction (2008, 2009)
b. If you disagree, what is the correct value to use for
estate tax purposes? Explain. (2008 Bar)

15
TAXATION LAW
Q: In 1999, Xavier purchased from his friend, Yuri, a A: The conditions for the allowance of medical expenses as
painting for P500,000.00. The fair market value (FMV) deductions from the gross estate of a citizen or resident
of the painting at the time of the purchase was P1 alien are:
million. Yuri paid all the corresponding taxes on the
transaction. In 2001, Xavier died. In his last will and 1. The medical expenses must have been incurred within
testament, Xavier bequeathed the painting, already one (1) year before the death of the decedent;
worth P1.5 million, to his only son, Zandro. The will also 2. That the medical expenses are duly substantiated with
granted Zandro the power to appoint his wife, Wilma, receipts; and
as successor to the painting in the event of Zandros 3. The total amount thereof, whether paid or unpaid, does
death. Zandro died in 2007, and Wilma succeeded to the not exceed P500, 000.00. [Sec. 86A(6), NIRC]
property. Claims against the Estate (2010, 2015)
xxx Q: State the Conditions for allowing the following as
c. May a vanishing deduction be allowed in either or deductions from the gross estate of a citizen or resident
both of the estates? Explain. (2009 Bar) alien for the purpose of imposing estate tax:

A: Vanishing deduction shall be allowed to the estate of a. Claims against the estate (2015 Bar)
Xavier but only to the extent of the property which is the A: In order that claims against the estate may be allowed as
portion acquired by gift. (Section 100, NIRC) The donation deductions from the gross estate of a citizen or resident
took place within 5 years (1999 to 2001) from the death of alien for purposes of imposing the estate tax, the law
Xavier; hence, there is a vanishing deduction. However, requires at the time the indebtedness was incurred, the
Zandros estate will not be entitled to claim vanishing debt instrument was duly notarized. In addition, if the loan
deduction because, first and foremost, the property was contracted within three (3) years before the death of
previously taxed is not includable in his gross estate and the decedent, the executor or administrator shall submit a
second, even if it is includable, the present decedent died statement showing the disposition of the proceeds of the
more than 5 years from the death of the previous decedent, loan. [Sec. 86 (a) (1) (c), NIRC]
and that a vanishing deduction is already claimed by the
previous estate involving the same property. Period for Filing of Estate Tax Return, Payment and
Extension (2000, 2007, 2010)
Standard Deduction (2000, 2008)
Q: Mr. Felix de la Cruz, a bachelor resident citizen
Q: While driving his car to Baguio last month, Pedro suffered from a heart attack while on a business trip to
Asuncion, together with his wife Assunta, and only son, the USA. He died intestate on June 15, 2013 in New York
Jaime, met an accident that caused the instantaneous City, xxx xxx where shall the return be filed and estate
death of Jaime. The following day, Assunta also died in tax be paid? (2000 Bar)
the hospital. The spouses and their son had the
following assets and liabilities at the time of death: A: The estate tax return shall be filed within six (6) months
from the decedents death [Sec. 90 (B), NIRC of 1997],
Assunta Jaime provided that the Commissioner of Internal Revenue shall
Exclusive Conjugal Exclusive have authority to grant in meritorious cases, a reasonable
extension not exceeding thirty (30) days for filing the
Cash P 10,000,000 P 1,200,000 return. [Sec. 90 (c) Ibid]
Cars P 2,000,000 500,000 Except in cases where the Commissioner of Internal
Revenue otherwise permits, the estate tax return shall be
Land P 5,000,000 2,000,000 filed with an authorized agent bank, or Revenue District
Residential house 4,000,000 Officer, Collection Officer, or duly authorized Treasurer of
Pasig City, the City in which the decedent Mr. de la Cruz was
Mortgage payable 2,500,000 domiciled at the time of his death. [Sec. 90 (D), NIRC of 1997]

Funeral expenses 300,000 Q: Remedios, a resident citizen, died on November 10,


2006. She died leaving three condominium units in
a. Is the Estate of Jaime Asuncion liable for estate tax? Quezon City valued at P5 Million each. Rodolfo was her
Explain. (2008) only heir. He reported her death on December 5, 2006
and filed the estate tax return on March 30,2007.
A: No. The estate comprised of properties of only P1.2
million is not liable to any estate tax. The estate is entitled Because he needed to sell one unit of the condominium
to a standard deduction of P1 million deductible from the to pay for the estate tax, he asked the Commissioner of
gross estate without the benefit of substantiation, thereby Internal Revenue to give him one year to pay the estate
placing the net estate at only P200,000. Under the tax due. The Commissioner approved the request for
graduated tax rates of the estate tax, a net estate of P200, extension of time provided that the estate tax be
000 is exempt. [Section 86(A)(5) and Section 84, NIRC] computed on the basis of the value of the property at
the time of payment of the tax.
Medical Expenses (2010, 2015)
a. Does the Commissioner of Internal Revenue have
Q: State the conditions for allowing the following as the power to extend the payment of estate tax? If so,
deductions from the gross estate of a citizen or resident what are the requirements to allow such extension?
alien for the purpose of imposing estate tax: (2007 Bar)

xxx A: Yes. The Commissioner may allow an extension of time


to pay the estate tax if the payment on the due date would
b. Medical Expenses (2015 Bar) impose undue hardship upon the estate or any of the heirs.
The extension, in any case, will not exceed two years if the
estate is not under judicial settlement or five years if it is
under judicial settlement. The Commissioner may also

UST BAR OPERATIONS 16


QUAMTO (1987-2016)
require the posting of a bond to secure the payment of the Sale/exchange/transfer of property for insufficient
tax. [Section 91(B), NIRC] consideration (1989, 1991, 1993, 1995, 1996, 1999)
ALTERNATIVE ANSWER: Yes. The requirements to be Q: The employees of Travellers, Inc. staged a strike. X,
complied with so that an extension may be allowed are: (1) a non-union member joined the strike and volunteered
a request for extension must be filed before the expiration to picket the company premises from 8:00 A.M. to 12:00
of the original period to pay which is within 6 months from P.M., Monday to Friday. Six months into the strike, X ran
death; (2) there must be a finding that the payment on the out of money and asked financial aid from the union
due date of the estate tax would impose undue hardship since he has no other source of income and needed
upon the estate or any of the heirs; (3) the extension must financial assistance in order to live. The union gave him
be for a period of not exceeding 5 years if the estate is P1, 000.00 a month to take care of his food
settled judicially or 2 years if settled extrajudicially; and (4) requirements plus P500.00 to take care of his monthly
the Commissioner may require the posting of a bond in an rent. When X filed his return, he excluded these benefits
amount not exceeding double the amount of tax to secure from his gross income. The exclusion was denied by the
the payment thereof. [Section 91(B), NIRC] BIR Decide. (1993 Bar)
Collection of Estate Taxes pending probate proceeding A: The P1, 500.00 is not compensation income because
(1998, 2004, 2005) compensation income arises out of employer-employee
relationship as payment for services without compensation.
Q: Is the approval of the court, sitting as probate or The P1, 500.00 is a gift from the labor union. According to
estate settlement court, required in the enforcement Section 28 (b) (3) of the NIRC, gifts are to be excluded from
and collection of estate tax? Explain. (2005 Bar) gross income. Thus, the BIR's denial is not valid.
A: No. The approval of the court, sitting in probate, is not a ALTERNATIVE ANSWER: Under the law, gross income
mandatory requirement in the collection of estate tax. On consists of all gains, profits, and income of the taxpayer
the contrary, under Section 94 of the NIRC, it is the probate during a taxable year of whatever kind and in whatever
or settlement court which is forbidden to authorize the form derived from any source, whether legal or illegal,
executor or judicial administrator of the decedents estate, except items of gross income subject to final income tax and
to deliver any distributive share to any party interested in income exempt from taxation under Sec. 28 (b) of the NIRC.
the estate, unless a certification from the Commissioner of
Internal Revenue that the estate tax has been paid is shown. Moreover, in the case of Gutierrez vs. Collector of Internal
[Marcos II v. Court of Appeals, 273 SCRA 47 (1997)]. Revenue, CTA Case No. 65, 31 August 1965, it was held that
the phrase income from whatever source derived covers all
Power of the Commissioner of Internal Revenue to other forms of income. It discloses a legislative policy to
inquire into bank accounts for purposes of determining include all income not expressly exempted, as within the
the Gross Estate of a Decedent (1992, 2003) class of taxable income under our laws, irrespective of the
Q: X dies in year 2000 leaving a bank deposit of P2, voluntary or involuntary action of the taxpayer in
000,000.00 under joint account with his associates in a producing the gain.
law office. Learning of Xs death from the newspapers, Therefore based on the foregoing considerations, the
the Commissioner of Internal Revenue wrote to every benefits subject in the case at bar, not expressly exempted
bank in the country asking them to disclose to him the by law, are considered as income.
amount of deposits that might be outstanding in his
name or jointly with others at the date of his death. May Q: A, an individual, sold to B, his brother-in-law, his lot
the bank holding the deposit refuse to comply on the with a market value of P1, 000.000 for P600.000. As
ground of the Secrecy of Bank Deposit Law? Explain. cost in the lot is P100, 000. B is financially capable of
(2003 Bar) buying the lot.
A: No. The Commissioner of Internal Revenue has the A also owns X Co., which has a fast growing business. A
authority to inquire into bank deposit accounts of a sold some of his shares of stock in X Co. to his key
decedent to determine his gross estate notwithstanding the executives in X Co. These executives are not related to
provisions of the Bank Secrecy Law. Hence, the banks A. The selling price is P3, 000.000, which is the book
holding the deposits in question may not refuse to disclose value of the shares sold but with a market value of
the amount of deposits on the ground of secrecy of bank P5,000,000. As cost in the shares sold is P1 , 000, 000.
deposits. [Section 6(F) of the 1997 Tax Code] The fact that The purpose of A in selling the shares is to enable his
the deposit is a joint account will not preclude the key executives to acquire a propriety interest in the
Commissioner from inquiring thereon because the law business and have a personal stake in its business.
mandates that if a bank has knowledge of the death of a
person, who maintained a bank deposit account alone, or Explain if the above transactions are subject to donor's
jointly with another, it shall not allow any withdrawal from tax. (1999)
the said deposit account, unless the Commissioner has A: The first transaction where a lot was sold by A to his
certified that the taxes imposed thereon have been paid. brother-in-law for a price below its fair market value will
(Sec. 97, 1997 Tax Code) Hence, to be able to give the not be subject to donor's tax if the lot qualifies as a capital
required certification, the inclusion of the deposit is asset. The transfer for less than adequate and full
imperative, which may be made possible only through the consideration, which gives rise to a deemed gift, does not
inquiry made by the Commissioner. apply to a sale of property subject to capital gains tax.
(Section 100, NIRC). However, if the lot sold is an ordinary
asset, the excess of the fair market value over the
DONORS TAX
consideration received shall be considered as a gift subject
to the donor's tax.
TRANSFERS WHICH MAY BE CONSTITUTED AS The sale of shares of stock below the fair market value
DONATION thereof is subject to the donor's tax pursuant to the

17
TAXATION LAW
provisions of the Tax Code. The excess of the fair market totally relieve the donor from the donors tax because the
value over the selling price is a deemed gift. first Php100,000 donation in the graduated brackets is
exempt. (Section 99, NIRC) While the donors tax is
ALTERNATIVE ANSWER: The sale of shares of stock below computed on the cumulative donations, the aggregation of
the fair market value will not give rise to the imposition of all donations made by a donor is allowed only over one
the donor's tax. In determining the gain from the transfer, calendar year.
the selling price of the shares of stocks shall be the fair
market value of the shares of stocks transferred. (Section 6, Donations in favor of the government, educational,
RR No. 2- 82). In which case, the reason for the imposition charitable, religious etc. insitutions (1992, 1994, 2000,
of the donor's tax on sales for inadequate consideration 2002, 2007, 2014)
does not exist.
Q: On December 06, 2001, LVN Corporation donated a
CLASSIFICATION OF DONORS (1992, 1996, 2009) piece of vacant lot situated in Mandaluyong City to an
accredited and duty registered non-stock, non-profit
Situs of Donors Tax educational institution to be used by the latter in
Q: Mr. Bill Morgan, a Canadian citizen and a resident of building a sports complex for students.
Scarborough, Ontario, sends a gift check of A. May the donor claim in full as deduction from its
$20,000.00to his future Filipino daughter-in-law who is gross income for the taxable year 2001 the amount
to be married to his only son in the Philippines. of the donated lot equivalent to its fair market
Is the donation by Mr. Morgan subject to tax? Explain. value/zonal value at the time of the donation?
(1992 Bar) Explain your answer.

A: Yes. While the gift has been made on account of marriage, A: No. Donations and/or contributions made to qualified
to qualify for exemption to the extent of the first P10, 000.00 donee institutions consisting of property other than money
(now P50, 000.00) of the value thereof, such gift should shall be based on the acquisition cost of the property. The
have been given to a legitimate, recognized natural or donor is not entitled to claim as full deduction the
adopted child of the donor. fairmarket value/zonal value of the lot donated. [Sec. 34(H),
NIRC]
ALTERNATIVE ANSWER: It is not subject to tax because
the gift was made outside the Philippines. B. In order that donations to non-stock, non-profit
educationalinstitution may be exempt from the
DETERMINATION OF GROSS GIFT donors gift tax, what conditions must be met by the
donee? (2002 Bar)
Renunciation of share of surviving spouse (2010, 2013)
A: In order that donations to non-stock, non-profit
Q: In the settlement of the estate of Mr. Barbera who educational institution may be exempt from the donors gift
died intestate, his wife renounced her inheritance and tax, it is required that not more than 30% of the said gifts
her share of the conjugal property in favor of their shall be used by the donee-institution for administration
children. The BIR determined that there was a taxable purposes. [Sec. 101(A)(3), NIRC]
gift and thus assessed Mrs. Barbera as a donor.
Was the BIR correct? (2013 Bar) VALUE ADDED TAX
A: The BIR is correct that there was a taxable gift but only
insofar as the renunciation of the share of the wife in the
CONCEPT, NATURE AND CHARACTERISTICS OF VAT
conjugal property is concerned. This is a transfer of
(1988, 1996, 2015)
property without any consideration which takes effect
during the lifetime of the transferor/wife and thus qualifies Q: In June 2013, DDD Corp., a domestic corporation
as a taxable gift (RR No. 2-2003). engaged in the business of leasing real properties in the
Philippines, entered into a lease agreement of a
But the renunciation of the wifes share in the inheritance
residential house and lot with EEE, Inc., a non-resident
during the settlement of the estate is not a taxable gift
foreign corporation. The residential house and lot will
considering that the property is automatically transferred
be used by officials of EEE, Inc. during their visit to the
to the other heirs by operation of law due to her repudiation
Philippines. The lease agreement was signed by
of her inheritance (BIR Ruling DA No. 333-07)
representatives from DDD Corp. and EEE, Inc. in
EXEMPTION OF GIFTS FROM DONORS TAXES Singapore. DDD Corp. did not subject the said lease to
VAT believing that it was not a domestic service
Gift Splitting (1995, 2001, 2008) contract. Was DDD Corp. correct? Explain. (2015 Bar)
Q: Your bachelor client, a Filipino residing in Quezon A: DDD Corp. is not correct. Lease of properties shall be
City, wants to give his sister a gift of Php200, 000.00. He subject to VAT irrespective of the place where the contract
seeks your advice, for purposes of reducing if not of lease was executed if the property is leased or used in the
eliminating the donors tax on the gift, on whether it is Philippines [Sec. 108(A), NIRC].
better for him to give all of the Php200, 000.00 on
Christmas 2001 or to give Php100, 000.00 on Christmas Q: What are the characteristics of the Value-Added Tax?
2001 and the other Php100,000.00 on January 1, 2002. (1996)
Please explain your advice. (2001 Bar)
A: The value-added tax is an indirect tax and the amount of
A: I would advice him to split the donation. Giving the tax may be shifted or passed on to the buyer, transferee or
Php200, 000 as a one-time donation would mean that it will lessee of the goods, properties or services.
be subject to a higher tax bracket under the graduated tax
ALTERNATIVE ANSWER: The value-added tax has the
structure thereby necessitating the payment of donor's tax.
following characteristics:
On the other hand, splitting the donation into two equal
amounts of Php100, 000 given on two different years will

UST BAR OPERATIONS 18


QUAMTO (1987-2016)
a. It is an indirect tax where tax shifting is always the coverage of its telecommunications services
presumed; throughout the country, MMM, Inc. entered into various
b. It is consumption-based; interconnection agreements with local carriers. The
c. It is imposed on the value-added in each stage of non-resident foreign corporations pay MMM, Inc. in US
distribution; dollars inwardly remitted through Philippine banks, in
d. It is a credit-invoice method value-added tax; and accordance with the rules and regulations of the
e. It is not a cascading tax. Bangko Sentral ng Pilipinas.
VAT on Sale of Properties (1988, 1998, 2014) MMM, Inc. filed its Quarterly VAT Returns for 2000.
Subsequently, MMM, Inc. timely filed with the BIR an
Q: MasarapKumain, Inc. (MKI) is a Value-Added Tax administrative claim for the refund of the amount of
(VAT)-registered company which has been engaged in P6,321,486.50, representing excess input VAT
the catering business for the past 10 years. It has attributable to its effectively zero-rated sales in 2000.
invested a substantial portion of its capital on flat The BIR ruled to deny the claim for refund of MMM, Inc.
wares, table linens, plates, chairs, catering equipment, because the VAT official receipts submitted by MMM,
and delivery vans. MKI sold its first delivery van, Inc. to substantiate said claim did not bear the words
already 10 years old and idle, to Magpapala Gravel and "zero-rated" as required under Section 4.108-1 of
Sand Corp. (MGSC) a corporation engaged in the Revenue Regulations (RR) No. 7-95. On appeal, the CTA
business of buying and selling gravel and sand. The division and the CT A en bane affirmed the BIR ruling.
selling price of the delivery van was way below its
acquisition cost. MMM, Inc. appealed to the Supreme Court arguing that
the NIRC itself did not provide for such a requirement.
Is the sale of the delivery van by MKI to MGSC subject to RR No. 7-95 should not prevail over a taxpayer's
VAT? (2014 Bar) substantive right to claim tax refund or credit. (2015)
A: Yes, the sale of the delivery van is subject to VAT being a 1. Rule on the appeal of MMM, Inc.
transaction incidental to the catering business which is a
VAT-registered activity of MKI. Transactions that are A: The appeal of MMM, Inc. must be denied. MMM, Inc.s
undertaken incidental to the pursuit of a commercial or position that the requirements under RR No. 7-95 should
economic activity are considered entered into in the course not prevail over a taxpayers substantive right to claim tax
of trade or business. (Sec 105, NIRC) A sale of a fully refund or credit is unmeritorious. The Secretary of Finance
depreciated vehicle that has been used in business is has the authority to promulgate the necessary rules and
subject to VAT as an incidental transaction, although such regulations for the effective enforcement of the provisions
sale may be considered isolated. (Mindanao II Geothermal of the National Internal Revenue Code (NIRC). Such rules
Partnership v. CIR) and regulations are given weight and respect by the courts
in view of the rule-making authority given to those who
VAT ON SERVICES formulate them and their specific expertise in their
Zero-rated Sale of Services (1998, 2010, 2013, 2015 respective fields.
2016) An applicant for a claim for tax refund or tax credit must not
Q: Pursuant to Sec. 11 of the "Host Agreement" between only prove entitlement tot eh claim, but also compliance
the United Nations and the Philippine government, it with all the documentary and evidentiary requirements.
was provided that the World Health Organization Consequently, the Court of Tax Appeal (CTA), and the CTA
(WHO), "its assets, income and other properties shall en banc correctly ruled that the failure to indicate the words
be: a) exempt from all direct and indirect taxes." zero-rated on the invoices and receipts issued by a
Precision Construction Corporation (PCC) was hired to taxpayer, would result in the denial of the claim for refund
construct the WHO Medical Center in Manila. Upon or tax credit (Eastern Telecommunications Philippines, Inc.
completion of the building, the BIR assessed a 12% VAT v. CIR, G.R. No. 183531, March 25, 2015).
on the gross receipts of PCC derived from the 2. Will your answer in (a) be any different if MMM, Inc.
construction of the WHO building. The BIR contends was claiming refund of excess input VAT
that the 12% VAT is not a direct nor an indirect tax on attributable to its effectively zero-rated sales in
the WHO but a tax that is primarily due from the 2012?
contractor and is therefore not covered by the Host
Agreement. The WHO argues that the VAT is deemed an A: No, my answer will not be different if the claim for refund
indirect tax as PCC can shift the tax burden to it. Is the is for effectively zero-rated sales in 2012. The requirement
BIR correct? Explain. (2016 Bar) to print the word zero-rated is no loinger by mere
regulations, but is now clearly provided by law as follows
A: No. The BIR is not correct. If the sale is subject to zero percent (0%) value-added tax,
While it is true that the VAT is an indirect tax, it is clear from the term zero-rated sale shall be written or printed
the agreement that WHO is exempt from all direct and prominently on the invoice or receipt. Failure to comply
indirect taxes. Since the 12% VAT is an indirect tax whose with this invoicing requirement is fatal to a claim for refund
burden was shifted by PCC to WHO then it is evident that of input taxes attributable to the zero-rated sale (Sec.
the BIR is not correct. [CIR v. John Gotamco & Sons, Inc., G.R. 113B)(2)(c), NIRC).
No. L-31092, Feb. 27, 1987, 148 SCRA 36 (1987)] Moreover, as recently ruled by the Supreme Court, the
To allow the shifting of the burden to WHO would negate its subsequent incorporation of Sec. 4.108-1 of RR 7-95 in Sec.
exemption and in violation of the international agreement 113 of the NIRC as introduced in R.A. No. 9337, actually
entered into by the Philippines. (Domondon) confirmed the validity of the imprinting requirement on
VAT invoices or official receipts a case falling under the
Q: MMM, Inc., a domestic telecommunications company, principle of legislative approval of administrative
handles incoming telecommunications services for interpretation by reenactment (Northern Mindanao Power
non-resident foreign companies by relaying Corp. v. CIR, G.R. No. 185115, February 18, 2015).
international calls within the Philippines. To broaden

19
TAXATION LAW
Q: State whether the following transactions are: a) VAT owns. The monthly rental for each unit ranges from P8,
exempt; b) subject to VAT at 12%; or c) subject to VAT 000.00 to P10, 000.00. His gross rental income for one
at 0%: year is P1, 650,000.00. He consults you on whether it is
necessary for him to register as a VAT taxpayer. What
xxx xxx xxx legal advice will you give him, and why? (2009 Bar)
b. Services rendered by Jakes Construction Company, A: I will advise Emiliano that he is not required to register
a contractor to the World Health Organization in as a VAT taxpayer. His transactions of leasing residential
the renovation of its offices in Manila. (1998 Bar) units for an amount not exceeding P12,800.00 per unit per
A: VAT at 0%. Since Jake's Construction Company has month are exempt from VAT irrespective of the aggregate
rendered services to the World Health Organization, which amount of rentals received annually.
is an entity exempted from taxation under international Q: Greenhills Condominium Corporation incorporated
agreements to which the Philippines is a signatory, the in 2001 is a non-stock, non-profit association of unit
supply of services is subject to zero percent (0%) rate. owners in Greenhills Tower, San Juan City. To be able to
VAT EXEMPT TRANSACTIONS reduce the association dues being collected from the
unit owners, the Board of Directors of the corporation
Sale or importation of agricultural and marine food agreed to lease part of the ground floor of the
products in their original state and certain kinds of condominium building to DEF Savings Bank for
livestock, poultry, breeding stock and genetic materials P120,000 a month or P1.44 million for the year, starting
(1998, 2010) January 2007.

Q: State whether the following transactions are: a) VAT a. Is the non-stock, non-profit association liable for
Exempt; b) subject to VAT at 10%; or c) subject to VAT value added tax in 2007? If your answer is in the
at 0%: negative, is it liable for another kind of business
tax?
a. Sale of fresh vegetables by AlingIning at the
Pamilihang Bayan ngTreceMartirez. (1998 Bar) A: No. Since the associations annual gross receipts do not
exceed P1, 919,500.00, it is exempt from the VAT. It is,
A: VAT exempt. Sale of agricultural products, such as fresh however, liable to the 3% percentage tax which is imposed
vegetables, in their original state, of a kind generally used on persons exempt from value-added tax on account of
as, or producing foods for human consumption is exempt failure to reach the P1, 919, 500 threshold.
from VAT.
b. Will the association be liable for value added tax in
Sale of certain Real Estate (1996, 2009) 2008 if it increases the rental to P150,000 a month
Q: Melissa inherited from her father a 300-square- beginning January 2008? Explain. (2008 Bar)
meter lot. At the time of her fathers death on March 14, A: Yes. When it increased the rentals to P150,000 per
1995, the property was valued at P720, 000.00. On month, its gross annual receipts will now exceed
February 28, 1996, to defray the cost of the medical P1,919,500.00. It is liable to the VAT beginning January
expenses of her sick son, she sold the lot for P600, 2008.
000.00, on cash basis. The prevailing market value of
the property at the time of the sale was P3, 000.00 per Refund or tax credit of excess input tax (2014, 2015,
square meter. 2016)

xxxxxxxxx Q: Amor Powers, Inc. (API) is a domestic corporation


registered with the BIR as a value-added taxpayer. API
b. Is Melissa liable to pay Value Added Tax (VAT) on incurred excess input VAT in the amount of
the sale of the property? If so, how much and why? P500,000,000.00 on August 3, 2008. Hence, it filed with
If not, why not? (2009 Bar) the BIR an administrative claim for the refund or credit
A: No. The real property sold, being in the nature of a capital of these input taxes on August 15, 2010. Without
asset, is not subject to VAT. The sale is subject to VAT only waiting for the CIR to act on its claim, API filed a Petition
if the real property sold is held primarily for sale to for Review with the CTA on September 15, 2010 before
customers or held for lease in the ordinary course of trade the lapse of two years after the close of the taxable
quarter concerned.
or business. A real property classified as a capital asset does
not include a real property held for sale or for lease, hence, In its Comment on the Petition, the CIR argues that API's
its sale is not subject to VAT. (Section 39 and Section 106, Petition should be dismissed as it was filed before the
NIRC) lapse of the 120-day period given to the CIR by Sec.
Q: Give at least three (3) real estate transactions which 112(D) of the NIRC, which became effective on January
are not subject to the Value-Added Tax. (1996 Bar) 1, 1998. For the CIR, the 120-day period is mandatory
and jurisdictional so that any suit filed before its
A: Real estate transactions which are exempt from the expiration is premature and, therefore, dismissible.
value-added tax are:
API, on the other hand, invokes BIR Ruling No. DA-489-
a. Sale of real property not primarily held for sale or lease 03 issued by the CIR on December 10, 2003 in answer
in the ordinary course of trade or business; to a query posed by the Department of Finance
b. Sale of real property utilized for socialized housing regarding the propriety of the actions taken by Lazi Bay
under RA. No. 7279; Resources Development, Inc., which filed an
c. Sale of real property utilized under the low-cost administrative claim for refund with the CIR and,
housing under BP Big. 220. before the lapse of the 120-day period from its filing,
filed a judicial claim with the CTA. BIR Ruling No. DA-
Lease of residential unit (1998, 2008, 2009) 489-03 stated that the taxpayer-claimant need not wait
for the lapse of the 120-day period before it could seek
Q: Emiliano Paupahan is engaged in the business of
judicial relief with the CTA.
leasing out several residential apartment units he

UST BAR OPERATIONS 20


QUAMTO (1987-2016)
Will API's Petition for Review prosper? Decide with Q: Describe separately the procedures on the legal
reasons. (2016 Bar) remedies under the Tax Code available to an aggrieved
taxpayer both at the administrative and judicial levels.
A: Yes. APIs petition for review will prosper. Since APIs (Bar)
petition for review was filed on September 15, 2010, it is an
exception to the general rule. The premature filing is A: The legal remedies of an aggrieved taxpayer under the
allowed because it was filed between 10 December 2003 Tax Code, both at the administrative and judicial levels, may
and 5 October 2010, when BIR Ruling No. DA-489-03 was be classified into those for assessment, collection and
still in force. (Mindanao II Geothermal Partnership v. refund.
Commissioner of Internal Revenue, G.R. No. 193301, March
11, 2013 and companion case) The procedures for the administrative remedies for
assessment are as follows:
Q: For calendar year 2011, FFF, Inc., a VAT-registered
corporation, reported unutilized excess input VAT in a. After receipt of the Pre-Assessment Notice, he must
the amount of Pl ,000,000.00 attributable to its zero- within fifteen (15) days from receipt explain why no
rated sales. Hoping to impress his boss, Mr. G, the additional taxes should be assessed against him.
accountant of FFF, Inc., filed with the Bureau of Internal b. If the Commissioner of Internal Revenue issues an
Revenue (BIR) on January 31, 2013 a claim for tax assessment notice, the taxpayer must administratively
refund/credit of the Pl,000,000.00 unutilized excess protest or dispute the assessment by filing a motion for
input VAT of FFF, Inc. for 2011. Not having received any reconsideration or reinvestigation within thirty (30)
communication from the BIR, Mr. G filed a Petition for days from receipt of the notice of assessment. (4th par.,
Review with the CTA on March 15, 2013, praying for the Sec. 228, NIRC of 1997)
tax refund/credit of the Pl,000,000.00 unutilized c. Within sixty (60) days from filing of the protest, the
excess input VAT of FFF, Inc. for 2011. (2015) taxpayer shall submit all relevant supporting
documents.
1. Did the CTA acquire jurisdiction over the Petition of
FFF, Inc.? The judicial remedies of an aggrieved taxpayer relative to
an assessment notice are as follows:
A: The CTA has not acquired jurisdiction over the Petition
of FFF, Inc. because the judicial claim has been prematurely a. Where the Commissioner of Internal Revenue has not
filed on March 15, 2013. The Supreme Court ruled that the acted on the taxpayers protest within a period of one
30-day period after the expiration of the 120-day period hundred eighty (180) days from submission of all
fixed by law for the Commissioner of Internal Revenue to relevant documents, then the taxpayer has a period of
act on the claim for refund is jurisdictional and failure to thirty (30) days from the lapse of said 180 days within
comply would bar the appeal and deprive the Court of Tax which to interpose a petition for review with the Court
Appeals of its jurisdiction to entertain the appeal (CIR v. of Tax Appeals.
Aichi Forgin Company of Asia, Inc., G.R. No. 183421, October b. Should the Commissioner deny the taxpayer's protest,
22, 2014, 632 SCRA 422). then he has a period of thirty (30) days from receipt of
said denial within which to interpose a petition for
In this case, Mr. G filed the administrative claim on January review with the Court of Tax Appeals.
31, 2013. The petition for relief should have been filed on
June 30, 2013. Filing the judicial claim on March 15, 2013 is In both cases the taxpayer must apply with the Court of Tax
premature, this the CTA did not acquire jurisdiction. Appeals for the issuance of an injunctive writ to enjoin the
Bureau of Internal Revenue from collecting the disputed tax
2. Discuss the proper procedure and applicable time during the pendency of the proceedings.
periods for administrative and judicial claims for
refund/credit of unutilized excess input VAT. The adverse decision of the Court of Tax Appeals is
appealable to the Court of Appeals by means of a petition
A: The administrative claim must be filed with the for certiorari within a period of fifteen (15) days from
Commissioner of Internal Revenue (CIR) within two years receipt of the adverse decision, extendible for another
from the close of the taxable quarter when the zero-rated period of fifteen (15) days for compelling reasons, but the
sales were made. The CIR has 120 days from the date of extension is not to exceed a total of thirty (30) days in all.
submission of the complete documents in support of the
claim to decide. If the CIR decides within the 120-day period The adverse decision of the Court of Appeals is appealable
or the 120-day period expires without the CIR rendering a to the Supreme Court by means of a petition for review on
decision, the taxpayer has 30 days to file a petition for certiorari within a period of fifteen (15) days from receipt
review with the CTA reckoned from the receipt of adverse of the adverse decision of the Court of Appeals.
decision or from the lapse of the 120-day period. The employment by the Bureau of Internal Revenue of any
As a general rule, the 30-day period to appeal is both of the administrative remedies for the collection of the tax
mandatory and jurisdictional. As an exception to the like distraint, levy, etc. may be administratively appealed by
general rule, premature filing is allowed only if filed the taxpayer to the Commissioner whose decision is
between December 10, 2003 and October 5, 2010, when BIR appealable to the Court of Tax Appeals under other matter
Ruling No. DA-489-03 was still in force prior to the reversal arising under the provisions of the National Internal
of the aforesaid ruling by the CTA in the Aichi case on Revenue Code. The judicial appeals starts with the Court of
October 6, 2010 (Mindanao II Geothermal Partnership v. Tax Appeals, and continues in the same manner as shown
CIR, G.R. No. 204745, December 8, 2014, 713 SCRA 645). above.
Should the Bureau of Internal Revenue decide to utilize Its
judicial tax remedies for collecting the taxes by means of an
TAX REMEDIES
ordinary suit filed with the regular courts for the collection
of a sum of money, the taxpayer could oppose the same by
REMEDIES AVAILABLE TO TAXPAYERS UNDER THE going up the ladder of judicial processes from the Municipal
NIRC, IN GENERAL (1992, 2000)

21
TAXATION LAW
Trial Court (as the case may be) to the Regional Trial Court, warrants of distraint and levy to enforce collection of
to the Court of Appeals, thence to the Supreme Court. the tax.
The remedies of an aggrieved taxpayer on a claim for refund a. xxx
is to appeal the adverse decision of the Commissioner to the b. If you are the lawyer of Mr. and Mrs. Sebastian, what
CTA in the same manner outlined above. possible defense or defenses will you raise in behalf
of your clients against the action of the BIR in
ASSESSMENT enforcing collection of the tax by the summary
Requisites of a valid assessment (2008, 2013) remedies of warrants of distraints and levy?
Explain your answer. (2002 Bar)
Q:After examining the books and records of EDS
Corporation, the 2004 final assessment notice, showing A: I will raise the defense of prescription. The right of the
basic tax of P1,000,000., deficiency interest of BIR to assess prescribes after three years counted from the
P400,000, and due date for payment of April 30, 2007 last day prescribed by law for the filing of the income tax
but without the demand letter, was mailed and released returns when the said return is filed on time. (Section 203,
by the BIR on April 15, 2007. The registered letter, NIRC) The last day for filing the 1997 income tax return is
containing the tax assessment, was received by the EDS April 15,1998. Since the assessment was issued only on
Corporation on April 25, 2007. April 20, 2001, the BIRs right to assess has already
prescribed.
a. What is an assessment notice? What are the
requisites of a valid assessment? Explain. False or fraudulent returns and non-filing of returns
(1989, 1996, 1998, 2002, 2009)
A: An assessment notice is a formal notice to the taxpayer
stating that the amount thereon is due as a tax and Q: Distinguish a false return from a fraudulent return.
containing a demand for the payment thereof. [Alhambra (1996 Bar)
Cigar and Cigarette Mfg. Co. v. Collector, 105 PR 1337 (1959); A: The distinction between a false return and a fraudulent
CIR v. Pascor Realty and Development Corp., 309 SCRA 402 return is that the first merely implies a deviation from the
(1999)] To be valid, the taxpayer must be informed in truth or fact whether intentional or not, whereas the second
writing of the law and the facts on which the assessment is is intentional and deceitful with the sole aim of evading the
made. (Section 228, NIRC) correct tax due. (Aznar vs. Commissioner, L-20569. August
ANOTHER SUGGESTED ANSWER: An assessment is a 23, 1974)
written notice and demand made by the Bureau on the ALTERNATIVE ANSWER: A false return contains
taxpayer for the settlement of a tax liability that is due, deviations from the truth which may be due to mistakes,
definitely set and fixed therein. The requisites of a valid carelessness or ignorance of the person preparing the
assessment are: return. A fraudulent return contains an intentional
1. It must be made within the prescriptive period to wrongdoing with the sole object of avoiding the tax and it
assess; (Section 203, NIRC) may consist in the intentional under declaration of income,
2. There must be a preliminary assessment previously intentional over declaration of deductions or the
issued, except in those instances allowed by law; recurrence of both. A false return is not necessarily tainted
(Section 228, NIRC) with fraud because the fraud contemplated by law is actual
3. The taxpayer must be informed in writing about the law and not constructive. Any deviation from the truth on the
and facts on which the assessment is based; (Section other hand, whether intentional or not, constitutes falsity.
228, NIRC) and (Aznar vs. Commissioner, L-20569, August 23, 1974)
4. It must be served upon the taxpayer or any of his Q: Mr. Castro inherited from his father, who died on
authorized representatives. [Estate of Juliana Diezvda. June 10, 1994, several pieces of real property in Metro
De Gabriel v. CIR, 421 SCRA 266(2004)] Manila. The estate tax return was filed and the estate
b. As tax lawyer of EDS Corporation, what legal tax due in the amount of P250, 000.00 was paid on
defense(s) would you raise against the assessment? December 06, 1994. The Tax Fraud Division of the BIR
Explain. (2008 Bar) investigated the case on the basis of confidential
A: I will question the validity of the assessment because of information given by Mr. Santos on January 06, 1998
the failure to send the demand letter which contains a that the return filed by Mr. Castro was fraudulent and
statement of the law and the facts upon which the that he failed to declare all properties left by his father
assessment is based. If an assessment notice is sent without with intent to evade payment of the correct tax. As a
informing the taxpayer in writing about the law and facts on result, a deficiency estate tax assessment for P1, 250,
which the assessment is made, the assessment is void. 000.00, inclusive of 50% surcharge for fraud, interest
[Section 228, NIRC; Azucena T. Reyes v. CIR, 480 SCRA 382 and penalty, was issued against him on January 10,
(2006)]. 2001. Mr. Castro protested the assessment on the
ground of prescription.
Prescriptive Period for Assessment
Decide Mr. Castros protest. (2002 Bar)
General Rule (1989, 1997, 1999, 2000, 2002, 2006)
A: The protest should be resolved against Mr. Castro. What
Q: Mr. Sebastian is a Filipino seaman employed by a was filed is a fraudulent return making the prescriptive
Norwegian company which is engaged exclusively in period for assessment ten (10) years from discovery of the
international shipping. He and his wife, who manages fraud. (Section 222, NIRC) Accordingly, the assessment was
their business, filed a joint income tax return for 1997 issued within the prescriptive period to make an
on March 15, 1998. After an audit of the return, the BIR assessment based on a fraudulent return.
issued on April 20, 2001 a deficiency income tax
assessment for the sum of P250, 000.00, inclusive of Issuance of Preliminary Assessment Notice (2002,
interest and penalty. For failure of Mr. and Mrs. 2014)
Sebastian to pay the tax within the period stated in the
notice of assessment, the BIR issued on August 19, 2001

UST BAR OPERATIONS 22


QUAMTO (1987-2016)
Q: Mr. Tiaga has been a law-abiding citizen diligently of 30 days from the expiration of such 180 day period
paying his income taxes. On May 5, 2014, he was while for a request for reinvestigation the period is the
surprised to receive an assessment notice from the expiration of the 180 day period from the submission
Bureau of Internal Revenue (BIR) informing him of a of the complete supporting documents.
deficiency tax assessment as a result of a mathematical
error in the computation of his income tax, as Effect of failure to file protest (1997, 2009)
appearing on the face of his income tax return for the Q: A final assessment notice was issued by the BIR on
year 2011, which he filed on April 15, 2012. Mr. Tiaga June 13, 2000, and received by the taxpayer on June 15,
believes that there was no such error in the 2000. The taxpayer protested the assessment on July
computation of his income tax for the year 2011. 31, 2000. The protest was initially given due course, but
Based on the assessment received by Mr. Tiaga, may he was eventually denied by the Commissioner of Internal
already file a protest thereon? (2014 Bar) Revenue in a decision dated June 15, 2005. The
taxpayer then filed a petition for review with the Court
A: Yes. Mr. Tiaga may consider the assessment notice as a of Tax Appeals (CTA), but the CTA dismissed the same.
final assessment notice and his right to protest within 30
days from receipt may now be exercised by him. When the a. Is the CTA correct in dismissing the petition for
finding of a deficiency tax is the result of mathematical error review? Explain your answer. (2009)
in the computation of the tax appearing on the face of the A: Yes. The protest was filed out of time, hence the CTA does
return, a pre-assessment notice shall not be required, hence not acquire jurisdiction over the matter. [CIR v. Atlas Mining
the assessment notice is a final assessment notice. and Development Corp. (2000)]
COLLECTION Q:
Prescriptive Periods (1994, 1997, 2001, 2002, 2009) a. A taxpayer received, on 15 January 1996, an
Q: A final assessment notice was issued by the BIR on assessment for an internal revenue tax deficiency.
June 13, 2000, and received by the taxpayer on June 15, On 10 February 1996, the taxpayer forthwith filed
2000. The taxpayer protested the assessment on July a petition for review with the Court of Tax Appeals.
31, 2000. The protest was initially given due course, but Could the Tax Court entertain the petition?
was eventually denied by the Commissioner of Internal A: No. Before taxpayer can avail of judicial remedy he must
Revenue in a decision dated June 15, 2005. The first exhaust administrative remedies by filing a protest
taxpayer then filed a petition for review with the Court within 30 days from receipt of the assessment. It is the
of Tax Appeals (CTA), but the CTA dismissed the same. Commissioner's decision on the protest that give the Tax
Assume that the CTAs decision dismissing the petition Court jurisdiction over the case provided that the appeal is
for review has become final. May the Commissioner filed within 30 days from receipt of the Commissioners
legally enforce collection of the delinquent tax? Explain. decision. An assessment by the BIR is not the
(2009 Bar) Commissioner's decision from which a petition for review
may be filed with the Court of Tax Appeals. Rather, it is the
A: No. The protest was filed out of time and, therefore, did action taken by the Commissioner in response to the
not suspend the running of the prescriptive period for the taxpayer's protest on the assessment that would constitute
collection of the tax. Once the right to collect has prescribed, the appealable decision.
the Commissioner can no longer enforce collection of the
tax liability against the taxpayer. (CIR v. Atlas Mining and b. Under the above factual setting, the taxpayer,
Development Corp., February 14, 2000) instead of questioning the assessment he received
on 15 January 1996, paid on 01 March 1996 the
"deficiency tax" assessed. The taxpayer requested a
TAXPAYERS REMEDIES refund from the Commissioner by submitting a
written claim on 01 March 1997. It was denied. The
taxpayer, on 15 March 1997, filed a petition for
PROTESTING AN ASSESSMENT review with the Court of Appeals. Could the petition
still be entertained? (1997 Bar)
Forms of Administrative Protest (1992, 2012)
A: No, the petition for review cannot be entertained by the
Q: What are the differences between a request for Court of Appeals, since decisions of the Commissioner on
reconsideration and a request for reinvestigation? cases involving claim for tax refunds are within the
(2012 Bar) exclusive and primary jurisdiction of the Court of Tax
A: Appeals.

1. A request for reinvestigation suspends the running of Decision/Inaction of the Commissioner on the protest
the prescriptive period for collection of taxes while a filed (1987, 1999, 2005, 2009, 2012, 2014)
motion for reconsideration does not. Q: In the examination conducted by the revenue
2. A request for reinvestigation requires the presentation officials against the corporate taxpayer in 2010, the BIR
of newly discovered or additional evidence while a issued a final assessment notice and demand letter
motion for reconsideration does not. which states: It is requested that the above deficiency
3. The period of 60 days for submission of the relevant tax be paid immediately upon receipt hereof, inclusive
supporting documents finds application only to a of penalties incident to delinquency. This is our final
request for reinvestigation and not to a request for decision based on investigation. If you disagree, you
reconsideration. may appeal this final decision within 30 days from
4. The failure of the Commissioner of Internal Revenue to receipt hereof, otherwise said deficiency tax
act on the request for reconsideration after a period of assessment shall become final, executory and
180 days from filing thereof authorizes the taxpayer to demandable. The assessment was immediately
file a petition for review with the CTA within a period appealed by the taxpayer to the Court of Tax Appeals,

23
TAXATION LAW
without filing its protest against the assessment and A: The Commissioner of Internal Revenue may be
without a denial thereof by the BIR. If you were the authorized to compromise the payment of any internal
judge, would you deny the petition for review filed by revenue tax where:
the taxpayer and consider the case as prematurely
filed? Explain you answer. (2012 Bar) 1. A reasonable doubt as to the validity of the claim
against the taxpayer exists; or
A: No, the Petition for Review should not be denied. The 2. The financial position of the taxpayer demonstrates a
case is an exception to the rule on exhaustion of clear inability to pay the assessed tax.
administrative remedies. The BIR is estopped from claiming
that the filing of the Petition for Review is premature Tax cases which may be subject of compromise (1998,
because the taxpayer failed to exhaust all administrative 2002, 2005)
remedies. The statement of the BIR in its Final Assessment Q: State and discuss briefly whether the following cases
Notice and Demand Letter led the taxpayer to conclude that may be compromised or may not be compromised:
only a final judicial ruling in his favor would be accepted by
the BIR. The taxpayer cannot be blamed for not filing a a. Delinquent accounts;
protest against the Formal Letter of Demand with b. Cases under administrative protest, after issuance
Assessment Notices since the language used and the tenor of the final assessment notice to the taxpayer,
of the demand letter indicate that it is the final decision of which are still pending;
the respondent on the matter. The CIR should indicate, in a c. Criminal tax fraud cases;
clear and unequivocal language, whether his action on a d. Criminal violations already filed in court;
disputed assessment constitutes his final determination e. Cases where final reports of reinvestigation or
thereon in order for the taxpayer concerned to determine reconsideration have been issued resulting in the
when his or her right to appeal to the tax court accrues. reduction of the original assessment agreed to by
Although there was no direct reference for the taxpayer to the taxpayer when he signed the required
bring the matter directly to the CTA, it cannot be denied that agreement form. (2005 Bar)
the word appeal under prevailing tax laws refers to the
filing of a Petition for Review with the CTA. (Allied Bank vs A:
CIR, GR No 175097, February 5, 2010) a. Delinquent accounts may be compromised if either of
Q: On March 27, 2012, the Bureau of Internal Revenue the two conditions is present: (1) the assessment is of
(BIR) issued a notice of assessment against Blue Water doubtful validity, or (2) the financial position of the
Industries Inc. (BWI), a domestic corporation, taxpayer demonstrates a clear inability to pay the tax.
informing the latter of its alleged deficiency corporate [Sec. 204(A), NIRC; Sec. 2 of Revenue Regulations No. 30-
income tax for the year 2009. On April 20, 2012, BWI 2002]
filed a letter protest before the BIR contesting said b. These may be compromised, provided that it is
assessment and demanding that the same be cancelled premised upon doubtful validity of the assessment or
or set aside. financial incapacity to pay. (ibid)
c. These may not be compromised, so that the taxpayer
However, on May 19, 2013, that is after more than a may not profit from his fraud, thereby discouraging its
year from the filing of the letter protest, the BIR commission. (ibid)
informed BWI that the latters letter protest was denied d. These may not be compromised in order that the
on the ground that the assessment had already become taxpayer will not profit from his criminal acts. (ibid)
final, executory and demandable. The BIR reasoned e. Cases where final reports of reinvestigation or
that its failure to decide the case within 180 days from reconsideration have been issued resulting in the
filing of the letter protest should have prompted BWI to reduction of the original assessment agreed to by the
seek recourse before the CTA by filing a petition for taxpayer when he signed the required agreement form,
review within 30 days after the expiration of the 180- cannot be compromised. By giving his conformity to the
day period as mandated by the provisions of the last revised assessment, the taxpayer admits the validity of
paragraph of Section 228 of the NIRC. Accordingly, the assessment and his capacity to pay the same. (Sec. 2
BWIs failure to file a petition for review before the CTA of Revenue Regulations No. 30-2002)
rendered the assessment final, executory and
demandable. ABATEMENT OF TAXES

Is the contention of the BIR correct? Explain. (2014 Bar) Authority and Conditions to abate taxes (1989, 1996,
2000)
A:No, the contention of BIR is not correct. The right of BWI
to consider the inaction of the Commissioner on the protest Q: Under what conditions may the Commissioner of
within 180 days as an appealable decision is only optional Internal Revenue be authorized to:
and will not make the assessment final, executory and a. Xxx
demandable. (Sec 228, NIRC; Lacsona Land Co., Inc. v. CIR, GR b. Abate or cancel a tax liability (2000 Bar)
No. 171251, March 5 2012)
A: The Commissioner of Internal Revenue may abate or
COMPROMISE OF TAXES cancel a tax liability when:
Authority, Grounds and Conditions to Compromise 1. The tax or any portion thereof appears to be unjustly or
taxes (1989, 1996, 2000, 2009) excessively assessed; or
Q: Under what conditions may the Commissioner of 2. The administration and collection costs involved do not
Internal Revenue be authorized to: justify the collection of the amount due. [Sec. 204 (B).
NIRC of 1997]
a. Compromise the payment of any internal revenue
tax? (2000 Bar) RECOVERY OF TAX ERROUNEOUSLY OR ILLEGALY
COLLECTED

UST BAR OPERATIONS 24


QUAMTO (1987-2016)
Conditions for the grant of a refund or credit (2002, Q: ABCD Corporation (ABCD) is a domestic corporation
2005) with individual and corporate shareholders who are
residents of the United States. For the 2nd quarter of
Q: State the conditions required by the Tax Code before 1983, these U.S.-based individual and corporate
the Commissioner of Internal Revenue could authorize stockholders received cash dividends from the
the refund or credit of taxes erroneously or illegally corporation. The corresponding withholding tax on
received. (2005 Bar) dividend income 30% for individual and 35% for
A: The conditions are: corporate non-resident stockholders was deducted
at source and remitted to the BIR.
1. A written claim for refund is filed by the taxpayer with
the Commissioner of Internal Revenue. (NIRC); On May 15,1984, ABCD filed with the Commissioner of
2. The claim for refund must be a categorical demand for Internal Revenue a formal claim for refund, alleging
reimbursement. [Bermejo v. Collector of Internal that under the RP-US Tax Treaty, the deduction
Revenue, 87 Phil. 96 (1950)]; withheld at source as tax on dividends earned was fixed
3. The claim for refund or tax credit must be filed with the at 25% of said income. Thus, ABCD asserted that it
Commissioner, or the suit or proceeding therefore must overpaid the withholding tax due on the cash dividends
be commenced in court within 2 years from date of given to its non-resident stockholders in the U.S. the
payment of the tax or penalty regardless of any Commissioner denied the claim.
supervening cause (NIRC). On January 17, 1985, ABCD filed a petition with the
OPTION TO CARRY OVER EXCESS QUARTERLY INCOME Court of Tax Appeals (CTA) reiterating its demand for
TAX PAID(2012, 2013) refund.

Q: In its final adjustment return for the 2010 taxable a. Does ABCD Corporation have the legal personality
year, ABC Corp. had excess tax credits arising from its to file the refund on behalf of its non-resident
overwithholding of income payments. It opted to carry stockholders? Why or why not? (2009 Bar)
over the excess tax credits to the following year. A: Yes, withholding agents is not only an agent of the
Subsequently, ABC Corp. changed its mind and applied government but is also an agent of the taxpayer/income
for a refund of the excess tax credits. earner. Hence, ABCD is also an agent of the beneficial owner
Will the claim for refund prosper? (2013 Bar) of the dividends with respect to the actual payment of the
tax to the government, such authority may reasonably be
A: No. The claim for refund will not prosper. While the law held to include the authority to file a claim for refund and to
gives the taxpayer an option whether to carry-over or claim bring an action for recovery of such for refund and to bring
as refund the excess tax credits shown on its final an action for recovery of such claim [CIR v. Procter& Gamble,
adjustment return, once the option to carry over has been 204 SCRA 377, (1991)]
made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed (Sec. 76, GOVERNMENT REMEDIES
NIRC; CIR v. PL Management International Phils, Inc., GR No.
160949, April 4, 2011)
Non-availability of injunction to restrain collection of
Period for filing claim for refund or credit (1992, 1994, tax (1996, 1998, 2001)
1997, 2008)
Q: May the courts enjoin the collection of revenue
Q: DEF Corporation is a wholly owned subsidiary of taxes? Explain your answer. (2001 Bar)
DEF, Inc., California, USA. Starting December 15, 2004.
A: As a general rule, the courts have no authority to enjoin
DEF Corporation paid annual royalties to DEF, Inc., for
the collection of revenue taxes. (NIRC) However, the Court
the use of the latter's software, for which the former, as
of Tax Appeals is empowered to enjoin the collection of
withholding agent of the government, withheld and
taxes through administrative remedies when collection
remitted to the BIR the 15% final tax based on the gross
could jeopardize the interest of the government or
royalty payments. The withholding tax return was filed
taxpayer. (RA 1125)
and the tax remitted to the BIR on January 10 of the
following year. On April 10, 2007, DEF Corporation filed
a written claim for tax credit with the BIR, arising from JUDICIAL REMEDIES
erroneously paid income taxes covering the years 2004
and 2005. The following day, DEF Corporation filed a
petition for review with the Court of Tax Appeals
JURISDICTION OF THE COURT OF TAX APPEALS (1989,
involving the tax credit claim for 2004 and 2005.
1997, 1998, 2004, 2006, 2014, 2015, 2016)
a. As a BIR lawyer handling the case, would you raise
Q: State At least five (5) cases under the exclusive
the defense of prescription in your answer to the
appellate jurisdiction of the Court of Tax Appeals (CTA)
claim for tax credit? Explain. (2008 Bar)
(2016 Bar)
A: YesThe claim for refund for the 2004 erroneously paid
A: Exclusive original or appellate jurisdiction to review by
income tax was filed out of time because the claim was only
appeal the following:
filed after more than two years had elapsed from the
payment thereof. [Section 204 (c) and 229, NIRC] 1. Decisions of the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of
WITHHOLDING AGENT AS A PROPER PARTY TO FILE A
internal revenue taxes, fees or other charges, penalties
CLAIM FOR REFUND OR CREDIT (1992, 1999, 2995,
in relation thereto, or other matters arising under the
2008, 2009)
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;

25
TAXATION LAW
2. Inaction by the Commissioner of Internal Revenue in c. Decisions, resolutions or orders of the Regional Trial
cases involving disputed assessments, refunds of Courts in tax collection cases decided or resolved by
internal revenue taxes, fees or other charges, penalties them in the exercise of their appellate jurisdiction;
in relation thereto, or other matters arising under the d. Decisions, resolutions or orders on motions for
National Internal Revenue Code or other laws reconsideration or new trial of the Court in division in
administered by the Bureau of Internal Revenue where the exercise of its exclusive original jurisdiction over
the National Internal Revenue Code or other applicable tax collection cases;
law provides a specific period for action: Provided, that e. Decisions of the Central Board of Assessment Appeals
in case of disputed assessments, the inaction of the (CBAA) in the exercise of its appellate jurisdiction over
Commissioner of Internal Revenue within the one cases involving the assessment and taxation of real
hundred eighty day-period under Section 228 of the property originally decided by the provincial or city
National Internal Revenue Code shall be deemed a board of assessment appeals;
denial for purposes of allowing the taxpayer to appeal f. Decisions, resolutions or orders on motions for
his case to the Court and does not necessarily constitute reconsideration or new trial of the Court in Division in
a formal decision of the Commissioner of Internal the exercise of its exclusive original jurisdiction over
Revenue on the tax case; Provided, further, that should cases involving criminal offenses arising from
the taxpayer opt to await the final decision of the violations of the National Internal Revenue Code or the
Commissioner of Internal Revenue on the disputed Tariff and Customs Code and other laws administered
assessments beyond the one hundred eighty day- by the Bureau of Internal Revenue or Bureau of
period abovementioned, the taxpayer may appeal such Customs;
final decision to the Court under Section 3 (a),Rule 8 of g. Decisions, resolutions or orders on motion for
these Rules; and Provided, still further, that in the case reconsideration or new trial of the Court in Division in
of claims for refund of taxes erroneously or illegally the exercise of its exclusive appellate jurisdiction over
collected, the taxpayer must file a petition for review criminal offenses mentioned in the preceding
with the Court prior to the expiration of the two-year subparagraph; and
period under Section 229 of the National Internal h. Decisions, resolutions or orders of the Regional Trial
Revenue Code. Courts in the exercise of their appellate jurisdiction
3. Decisions, resolutions or orders of the Regional Trial over criminal offenses mentioned in subparagraph (f).
Courts in local tax cases decided or resolved by them in (RRCTA, Rule 4, Sec. 2)
the exercise of their original jurisdiction;
4. Decisions of the Commissioner of Customs in cases Q: On May 15, 2013, CCC, Inc. received the Final Decision
involving liability for customs duties,fees or other on Disputed Assessment issued by the Commissioner of
money charges, seizure, detention or release of Internal Revenue (CIR) dismissing the protest of CCC,
property affected, fines, forfeitures or other penalties in Inc. and affirming the assessment against said
relation thereto or other matters arising under the corporation. On June 10, 2013, CCC, Inc. filed a Petition
Customs Law or other laws administered by the Bureau for Review with the Court of Tax Appeals (CTA) in
of Customs; division. On July 31, 2015, CCC, Inc. received a copy of
5. Decisions of the Secretary of Finance on customs cases the Decision dated July 22, 2015 of the CT A division
elevated to him automatically for review from decisions dismissing its Petition. CCC, Inc. immediately filed a
of the Commissioner of Customs adverse to the Petition for Review with the CT A en banc on August 6,
Government under Section 2325 of the Tariff and 2015. Is the immediate appeal by CCC, Inc. to the CTA en
Customs Code; and banc of the adverse Decision of the CTA division the
6. Decisions of the Secretary of Trade and Industry, in the proper remedy? (2015 Bar)
case of nonagricultural product, commodity or article, A: No. CCC, Inc. should first file a motion for reconsideration
and the Secretary of Agriculture, in the case of or motion for new trial with the CTA Division. Before the
agricultural product, commodity or article, involving CTA en banc could take cognizance of the petition for review
dumping and countervailing duties under Sections 301 concerning a case falling under its exclusive appellate
and 302, respectively, of the Tariff and Customs Code, jurisdiction, the litigant must sufficiently show that it
and safeguard measures under Republic Act No. 8800, sought prior reconsideration or moved for a new trial with
where either party may appeal the decision to impose the concerned CTA Division (Commissioner of Customs v.
or not to impose said duties. [RRCTA, Rule 4, Sec. 3 (a)] Marina Sale, G.R. No. 183868, November 22, 2010, 635
The Court en banc shall exercise exclusive appellate SCRA 606; Rule 8, Sec. 1 of the Revised Rules of Court of Tax
jurisdiction to review by appeal the following: Appeals).

a. Decisions or resolutions on motion for reconsideration Q: GGG, Inc. offered to sell through competitive bidding
or new trial of the Court in Divisions in the exercise of its shares in HHH Corp., equivalent to 40% of the total
its exclusive appellate jurisdiction over: outstanding capital stock of the latter. JJJ, Inc. acquired
1. Cases arising from administrative agencies the said shares in HHH Corp. as the highest bidder.
Bureau of Internal Revenue, Bureau of Customs, Before it could secure a certificate authorizing
Department of Finance, Department of Trade and registration/tax clearance for the transfer of the shares
Industry, Department of Agriculture; of stock to JJJ, Inc., GGG, Inc. had to request a ruling from
2. Local tax cases decided by the Regional Trial Courts the BIR confirming that its sale of the said shares was at
in the exercise of their original jurisdiction; and fair market value and was thus not subject to donor's
3. Tax collection cases decided by the Regional Trial tax. In BIR Ruling No. 012-14, the CIR held that the
Court in the exercise of their original jurisdiction selling price for the shares of stock of HHH Corp. was
involving final and executory assessments for lower than their book value, so the difference between
taxes, fees, charges and penalties, where the the selling price and the book value of said shares was
principal amount of taxes and penalties claimed is a taxable donation. GGG, Inc. requested the Secretary of
less than one million pesos; Finance to review BIR Ruling No. 012-14, but the
b. Decisions, resolutions or orders of the Regional Trial Secretary affirmed said ruling. GGG, Inc. filed with the
Courts in local tax cases decided or resolved by them in Court of Appeals a Petition for Review under Rule 43 of
the exercise of their appellate jurisdiction; the Revised Rules of Court. The Court of Appeals,

UST BAR OPERATIONS 26


QUAMTO (1987-2016)
however, dismissed the Petition for lack of jurisdiction liabilities of the erring taxpayer. The corporation filed
declaring that it is the CTA which has jurisdiction over a motion to dismiss the criminal complaint on the
the issues raised. Before which Court should GGG, Inc. ground that there has been, as yet, no assessment of its
seek recourse from the adverse ruling of the Secretary tax liability; hence, the criminal complaint was
of Finance in the exercise of the latter's power of premature. The DOJ denied the motion on the ground
review? (2014) that an assessment of the tax deficiency of the
corporation is not a precondition to the filing of a
A: GGG, Inc. should seek recourse with the Court of Tax criminal complaint and that in any event, the joint
Appeals (CTA) which has jurisdiction. affidavit of the BIR examiners may be considered as an
There is no provision in law that expressly provides where assessment of the tax liability of the corporation.
exactly the adverse ruling the Secretary of Finance under Is the ruling of the DOJ correct? Explain. (2005 Bar)
Section 4 of the NIRC is appealable. However, RA No. 1125,
as amended, addresses the seeming gap in the law as it vests A: Yes. The ruling of the DOJ in denying the motion is
upon the CTA, albeit impliedly, with jurisdiction over the correct. The issuance of the deficiency assessment notice
case as other matters arising under the NIRC or other laws prior to prosecution is not necessary because the facts of
administered by the BIR. Furthermore, the Supreme Court the case show that the crime of evasion is complete since
held that the jurisdiction to review the rulings of the the violator has knowingly and willfully filed a fraudulent
Secretary of finance on the issues raised against a ruling of return with intent to evade/defeat a part or all of the tax.
the Commissioner of Internal Revenue, pertains to the [Ungab v.Cusi, Jr., 97 SCRA 877 (1980)] What is involved here
Court of Tax Appeals in the exercise of its appellate is not the collection of taxes but a criminal prosecution for
jurisdiction (Philamlife v. The Sec. of Finance and CIR, G.R. violation of the National Internal Revenue Code.
No. 210987, November 24, 2014).
However, the contention that the joint affidavit of the BIR
Q: Mr. Abraham Eugenio, a pawnshop operator, after examiners showing the computation of tax liabilities maybe
having been required by the Revenue District Officer to considered an assessment is erroneous. It is not an
pay value-added tax pursuant to a Revenue assessment which may entitle the taxpayer to protest. [CIR
Memorandum Order (RMO) of the Commissioner of v. Pascor Realty 81 Development Corp., 309 SCRA402 (1999)]
Internal Revenue, filed with the Regional Trial Court an An assessment is a formal notice to the taxpayer stating that
action questioning the validity of the RMO. the amount thereon is due as a tax and containing a demand
for the payment thereof. [Alhambra Cigar & Cigarette Mfg.
If you were the judge, will you dismiss the case? (2006 Co. v. Collector, 105 Phil. 1337 (1959)]
Bar)
A: Yes. A RMO is in reality a ruling or an opinion issued by
LOCAL GOVERNMENT CODE OF 1991
the Commissioner in implementing the provisions of the
Tax Code dealing with the taxability of pawnshops. The
power to review rulings issued by the Commissioner is NATURE AND SOURCE OF TAXING POWER
lodged with the Court of Tax Appeals (CTA) and not with the
Regional Trial Court. A ruling falls within the purview of Grant of Local Taxing power under the local
other matters arising under the Tax Code, appealable government code (1987, 1998, 2001, 2003, 2007)
only to the CTA. [CIR v. Leal, 392 SCRA 9 (2002)]
Q: What is the nature of the taxing power of the
CRIMINAL ACTIONS provinces, municipalities and cities? How will the local
government units be able to exercise their taxing
Q: After filing an Information for violation of Section powers? (2007 Bar)
254 of the National Internal Revenue Code (Attempt to
Evade or Defeat Tax) with the CTA, the Public A: The taxing power of the provinces, municipalities and
Prosecutor manifested that the People is reserving the cities is directly conferred by the Constitution by giving
right to file the corresponding civil action for the them the authority to create their own sources of revenue.
recovery of the civil liability for taxes. As counsel for the The local government units do not exercise the power to tax
accused, comment on the People's manifestation. as an inherent power or by a valid delegation of the power
(2015) by Congress, but pursuant to a direct authority conferred by
the Constitution. (Mactan Cebu International Airport
A: The manifestation is not proper. The criminal action and Authority v. Marcos, 261 SCRA 667 [1996]; NPC v. City of
the corresponding civil action for the recovery of the civil Cabanatuan, 401 SCRA 259 [2003])
liability for taxes and penalties shall at all times be
simultaneously instituted with, and jointly determined in The local government units exercise the power to tax by
the same proceeding before the Court of Tax Appeals (CTA). levying taxes, fees and charges consistent with the basic
The filing of the criminal action is deemed to necessarily policy of local autonomy, and to assess and collect all these
carry with it the filing of the civil action, and no right to taxes, fees and charges which will exclusively accrue to
reserve the filing of such civil action separately from the them. The local government units are authorized to pass tax
criminal action shall be recognized (Sec. 7(b)(1) of Republic ordinances (levy) and to pursue actions for the assessment
Act No. 9282; Judy Ann Santos v. People, G.R. No. 173176, and collection of the taxes imposed in said ordinances.
August 26, 2008, 563 SCRA 341). (Section 129, and 132, Local Government Code)

Necessity of an assessment in criminal prosecution Q: May Congress, under the 1987 Constitution, abolish
(1998, 2005) the power to tax of local governments? (2003 Bar)

Q: In 1995, the BIR filed before the Department of A: No. Congress cannot abolish what is expressly granted by
Justice (DOJ) a criminal complaint against a the fundamental law. The only authority conferred to
corporation and its officers for alleged evasion of taxes. Congress is to provide the guidelines and limitations on the
The complaint was supported by a sworn statement of local governments exercise of the power to tax. (Sec. 5, Art
the BIR examiners showing the computation of the tax X, 1987 Constitution)

27
TAXATION LAW
CHALLENGING LOCAL TAX ORDINANCES (1991, 2003, practice his profession in any part of the Philippines
2015) without being subjected to any other national or local tax,
license, or fee for the practice of such profession. (Sec. 139
Q: What is the proper procedural remedy and in relation to 151, Local Government Code)
applicable time periods for challenging a tax
ordinance? (2015 Bar) b. May Quezon City, where he has his residence and
where he also practices his two professions, go
A: Any question on the constitutionality or legality of tax after him for the payment of his professional tax as
ordinances may be raised on appeal within 30 days from the a CPA and a lawyer? Explain. (2005 Bar)
effectivity to the Secretary of Justice. The Secretary of
Justice shall render a decision within 60 days from the date A: No. The professional tax shall be paid only once for every
of receipt of the appeal. Thereafter, within 30 days after taxable year and the payment shall be made either in the
receipt of the decision or the lapse of the sixty-day period city where he practices his profession or where he
without the Secretary of Justice acting upon the appeal, the maintains his principal office. The city of residence cannot
aggrieved party may file the appropriate proceedings with require him to pay his professional taxes. (Sec. 139 in
the Regional Trial Court. (Section 187, LGC) relation to Sec. 151, Local Government Code)
TAXING POWER OF PROVINCES TAXING POWERS OF MUNICIPALITIES
Tax on transfer of real property ownership (1991, Fees and charges for regulation and licensing (2008,
2016) 2009)
Q: The City of Maharlika passed an ordinance imposing Q: The Sangguniang Bayan of the Municipality of
a tax on any sale or transfer of real property located Sampaloc, Quezon, passed an ordinance imposing a
within the city at a rate of fifty percent (50%) of one storage fee of ten centavos (P0.10) for every 100 kilos
percent (1%) of the total consideration of the of copra deposited in any bodega within the
transaction. Jose sold a parcel of land in the city, which Municipalitys jurisdiction. The Metropolitan
he inherited from his deceased parents, and refused to Manufacturing Corporation (MMC), with principal
pay the aforesaid tax. He instead filed a case asking that office in Makati, is engaged in the manufacture of soap,
the ordinance be declared null and void since the tax it edible oil, margarine, and other coconut oil-based
imposed can only be collected by the national products. It has a warehouse in Sampaloc, Quezon, used
government, as in fact he has paid the Bureau of as storage space for the copra purchased in Sampaloc
Internal Revenue (BIR) the required capital gains tax. If and nearby towns before the same is shipped to Makati.
you were the City Legal Officer of Maharlika, what MMC goes to court to challenge the validity of the
defenses would you raise to sustain the validity of the ordinance, demanding the refund of the storage fees it
ordinance? (2016 Bar) paid under protest.
A: The defenses I would raise are the following: Is the ordinance valid? Explain your answer. (2009)
a. Cities like the City of Maharlika have the power to pass A: Yes. The municipality is authorized to impose reasonable
an ordinance imposing a tax on the sale, donation, fees and charges as a regulatory measure in an amount
barter, or on any other mode of transferring ownership commensurate with the cost of regulation, inspection and
of title to real property located within its territorial licensing. (Section 147, LGC) In the case at bar, the storage
boundaries; (LGC, Sec. 135, in relation to Secs. 142 and of copra in any warehouse within the municipality can be
151) the proper subject of regulation pursuant to the police
b. The required capital gains tax collected by the national power granted to municipalities under the Revised
government is different from the tax that is imposable Administrative Code or the general welfare clause. A
by the local government units such as the City of warehouse used for keeping or storing copra is an
Maharlika; establishment likely to endanger the public safety or likely
c. The transfer tax imposed and collected by cities are not to give rise to conflagration because the oil content of the
among those included in the common limitations on the copra, when ignited, is difficult to put under control by
power of taxation which are reserved solely for the water and the use of chemicals is necessary to put out the
exercise by the national government; fire. It is, thus, reasonable that the Municipality impose
d. There is no direct duplicate taxation because there are storage fees for its own surveillance and lookout (Procter &
two different taxing authorities, the national Gamble Philippine Manufacturing Corporation v.
government and a local government unit. (Domondon) Municipality of Jagna, Province of Bohol, 94 SCRA 894
[1979]).
PROFESSIONAL TAX (1991, 2005)
COMMON LIMITATIONS ON THE TAXING POWERS OF
Q: Mr. Fermin, a resident of Quezon City, is a Certified LGUS
Public Accountant-Lawyer engaged in the Practice of
his two professions. He has his main office in Makati Levy upon goods carried into, leaving or passing
City and maintains a branch office in Pasig City. Mr. through and LGUs territorial boundaries (1987, 2015)
Fermin pays his professional tax as a CPA in Makati City
and his professional tax as a lawyer in Pasig City. Q: In 2014, M City approved an ordinance levying
customs duties and fees on goods coming into the
a. May Makati City, where he has his main office, territorial jurisdiction of the city. Said city ordinance
require him to pay his professional tax as a lawyer? was duly published on February 15, 2014 with
Explain. effectivity date on March 1, 2014.
A: No. Mr. Fermin is given the option to pay either in the city Is there a ground for opposing said ordinance? (2015
where he practices his profession or where he maintains his Bar)
principal office in case he practices his profession in several
places. The professional tax paid as a lawyer in Pasig City, a A: Yes, on the ground that the ordinance is ultra vires. The
place where he practices his profession, will entitle him to taxing powers of local government units such as M City,
cannot extend to the levy of taxes, fees and charges already

UST BAR OPERATIONS 28


QUAMTO (1987-2016)
imposed by the national government, and this includes, assessments, rates and other charges, in respect of the
among others, the levy of customs duties under the Tariff power barges, shall be for the account of RPC.
and Customs Code (Sec. 133 (e), LGC)
In 2007, JEC received an assessment of real property
taxes on the power barges from the Assessor of
REAL PROPERTY TAXATION Batangas City. JEC sought reconsideration of the
assessment on the ground that the power barges are
exempt from real estate taxes under Section 234 [c] of
Actual Use Principle (1988, 1990, 2000, 2005) R.A. 7160 as they are actually, directly and exclusively
used by RPC, a government-owned and controlled
Q: The Roman Catholic Church owns a 2-hectare lot in a corporation. Furthermore, even assuming that the
town in Tarlac province. The southern side and middle power barges are subject to real property tax, RPC
part are occupied by the Church and a convent, the should be held liable therefore, in accordance with the
eastern side by a school run by the Church itself, the terms of the lease agreement. Is the contention of JEC
southeastern side by some commercial establishments, correct? Explain your answer. (2009 Bar)
while the rest of the property, in particular the
northwestern side, is idle or unoccupied. A: The contention of JEC is not correct. The owner of the
power barges is JEC which is required to operate, manage
May the Church claim tax exemption on the entire land? and maintain the power barges for the purpose the claim
Decide with reasons. (2005 Bar) that RPC, a government-owned and controlled corporation
A: No. The portions of the land occupied and used by the engaged in the supply, generation and transmission of
church, convent and school run by the church are exempt electric power, is the actual, direct and exclusive user of the
from real property taxes while the portion of the land barge, hence, does not fall within the purview of the
occupied by commercial establishments and the portion, exempting provision of Section 234[c] of R.A. 7160.
which is idle, are subject to real property taxes. The usage Likewise, the argument that RPC should be liable to the real
of the property and not the ownership" is the determining property taxes consonant with the contract is devoid of
factor whether or not the property is taxable. [Lung Center merit. The liability for the payment of the real estate taxes
of the Philippines v. Q.C., 433 SCRA 119 (2004)]. is determined by law and not by the agreement of the
parties. [FELS Energy Inc. v. The Province of Batangas, 516
Real properties for purposes of taxation (2001, 2003, SCRA 186 (2007)]
2009)
EXEMPTION FROM REAL PROPERTY TAX
Q: Under Article 415 of the Civil Code, in order for
machinery and equipment to be considered real Constitutional Exemptions (1987, 1988, 1990, 1996,
property, the pieces must be placed by the owner of the 2000, 2005, 2006)
land and, in addition, must tend to directly meet the Q: The Constitution exempts from taxation charitable
needs of the industry or works carried on by the owner. institutions, churches, parsonages or convents
Oil companies install underground tanks in the appurtenant thereto, mosques and non-profit
gasoline stations located on land leased by the oil cemeteries and lands, buildings and improvements
companies from the owners of the land where the actually, directly and exclusively used for religious,
gasoline stations [are] located. Are those underground charitable and educational purposes.
tanks, which were not placed there by the owner of the
land but which were instead placed there by the lessee Mercy Hospital is a 100-bed hospital organized for
of the land, considered real property for purposes of charity patients. Can said hospital claim exemption
real property taxation under the local Government from taxation under the above-quoted constitutional
Code? Explain. (2003 Bar) provision? Explain.
A: Yes. The properties are considered as necessary fixtures A: Yes. Mercy Hospital can claim exemption from taxation
of the gasoline station, without which the gasoline station under the provision of the Constitution, but only with
would be useless. Machinery and equipment installed by respect to real property taxes provided that such real
the lessee of leased land is not real property for purposes of properties are used actually, directly and exclusively for
execution of a final judgment only. They are considered as charitable purposes.
real property for real property tax purposes as other
improvements to affixed or attached real property under Exemptions under the LGC (1987, 1990 2002, 2006,
the Assessment Law and the Real Property Tax Code. 2009, 2015, 2016)
[Caltex v. Central Board of Assessment Appeals, 114 SCRA 296 Q: Philippine National Railways (PNR) operates the rail
(1982)] transport of passengers and goods by providing train
Q: Republic Power Corporation (RPC) is a government- stations and freight customer facilities from Tutuban,
owned and controlled corporation engaged in the Manila to the Bicol Province. As the operator of the
supply, generation and transmission of electric power. railroad transit, PNR administers the land,
In 2005, in order to provide electricity to Southern improvements and equipment within its main station
Tagalog provinces, RPC entered into an agreement with in Tutuban, Manila.
Jethro Energy Corporation (JEC), for the lease of JECs Invoking Section 193 of the Local Government Code
power barges which shall be berthed at the port of
(LGC) expressly withdrawing the tax exemption
Batangas City. The contract provides that JEC shall own privileges of government-owned and controlled
the power barges and the fixtures, fittings, machinery, corporations upon the effectivity of the Code in 1992,
and equipment therein, all of which JEC shall supply at
the City Government of Manila issued Final Notices of
its own cost, and that JEC shall operate, manage and Real Estate Tax Deficiency in the amount of P624, 000,
maintain the power barges for the purpose of 000.00 for the taxable years 2006 to 2010. On the other
converting the fuel of RPC into electricity. The contract hand, PNR, seeking refuge under the principle that the
also stipulates that all real estate taxes and

29
TAXATION LAW
government cannot tax itself, insisted that the PNR reclaimed properties for the establishment and use
lands and buildings are owned by the Republic. of popular fastfood restaurants J Burgers, G Pizza,
and K Chicken? (2015 Bar)
Is the PNR exempt from real property tax? Explain your
answer. (2016 Bar) A: No. As a rule, properties owned by the Republic of the
Philippines are exempt from real property tax except when
A: Yes. The Philippine National Railways (PNR) was the beneficial use thereof has been granted, for
created as a corporation to serve as an instrumentality of consideration or otherwise, to a taxable person. When LLL
the Government of the Philippines (Rep. Act No. 10638, leased out portions of the reclaimed properties to taxable
amending Sec. 1 of Rep. Act No. 4156) upon which the local entities, such as the popular fast food restaurants, the
governments are not allowed to levy taxes, fees or other reclaimed properties are subject to real property tax. [Sec.
charges including real property taxes. [Manila 234(a), LGC; GSIS v. City Treasurer and City Assessor of the
International Airport Authority v. Court of Appeals, et al., G. City of Manila]
R. No. 155650, July 20, 2006; Manila International Airport
Authority v. City of Pasay, G. R. No. 163072, April 2, 2009, 583 Q: The Philippine-British Association, Inc. (Association)
SCRA 234 (2009) citing Philippine Fisheries Development is a non-stock, non-profit organization which owns the
Authority v. Court of Appeals, G.R. No. 150301, 2 October St. Michael's Hospital (Hospital). Sec. 216 in relation to
2007, 534 SCRA 490] Sec. 215 of the LGC classifies all lands, buildings and
other improvements thereon actually, directly, and
PNR is not a government and controlled corporation but an exclusively used for hospitals as "special." A special
instrumentality of the government hence it is not included classification prescribes a lower assessment than a
in the withdrawal of exemptions. Finally, under the commercial classification.
common limitations on local government units power of
taxation, it shall not extend to the levy of taxes, fees or Within the premises of the Hospital, the Association
charges of any kind on the National Government, its constructed the St. Michael's Medical Arts Center
agencies and instrumentalities, and local government (Center) which will house medical practitioners who
units. [LGC, Sec. 133 (o), paraphrasing supplied) will lease the spaces therein for their clinics at
prescribed rental rates. The doctors who treat the
The railroad tracks, train stations, freight customer patients confined in the Hospital are accredited by the
facilities, land improvements, and equipment within its Association.
main station in Tutuban, Manila are properties of public
dominion intended for public use, and as such are exempt The City Assessor classified the Center as "commercial"
from real property tax under Section 234 (a) of the Local instead of "special" on the ground that the Hospital
Government Code (LGC). (Manila International Airport owner gets income from the lease of its spaces to
Authority v. City of Pasay, supra) doctors who also entertain out-patients. Is the City
Assessor correct in classifying the Center as
Q: LLL is a government instrumentality created by "commercial?" Explain. (2016 Bar)
Executive Order to be primarily responsible for
integrating and directing all reclamation projects for A: No. The City Assessor is not correct in classifying the
the National Government. It was not organized as a Center as commercial.
stock corporation, nor was it intended to operate
commercially and compete in the private market. The fact alone that the separate St. Michaels Medical Arts
Center will house medical practitioners who shall treat the
By virtue of its mandate, LLL in 2008 reclaimed several patients confined in the Hospital and are accredited by the
portions of the foreshore and offshore areas of the Association takes away the said Medical Arts Center from
Manila Bay, some of which were within the territorial being categorized as commercial since a tertiary hospital
jurisdiction of Q City. Certificates of titles to the is required by law to have a pool of physicians who
reclaimed properties in Q City were issued in the name comprise the required medical departments in various
of LLL in 2008. In 2014, Q City issued warrants of Levy medical fields. [City Assessor of Cebu City v Association of
on said reclaimed properties of LLL based on the Benevola de Cebu, Inc., 524 SCRA 128 (2007)] (Domondon)
assessment for delinquent property taxes for the years
2010 to 2013. REFUND OR CREDIT OF REAL PROPERTY TAX

a. Are the reclaimed properties registered in the Payment under protest (1988, 1991, 1993, 2014)
name of LLL subject to real property tax? Q: Madam X owns real property in Caloocan City. On July
A: The reclaimed properties are not subject to real property 1, 2014, she received a notice of assessment from the
tax because LLL is a government instrumentality. Under the City Assessor, informing her of a deficiency tax on her
law, real property owned by the Republic of the Philippines property. She wants to contest the assessment.
is exempt from real property tax unless the beneficial use a. What are the administrative remedies available to
thereof has been granted to a taxable person. (Sec 234, LGC) Madam X in order to contest the assessment and
When the title of the real property is transferred to LLL, the their respective prescriptive periods? (2014 Bar)
Republic remains the owner of the real property. Thus, such
arrangement does not result in the loss of the tax A: The administrative remedies available to Madam X to
exemption. (Republic of the Philippines, represented by The contest the assessment and their respective prescriptive
Philippine Reclamation Authority v. City of Paranaque) periods are as follows:
ALTERNATIVE ANSWER: No. LLL is an instrumentality of 1. Pay the deficiency real property tax under protest (Sec
the national government which cannot be taxed by local 252, LGC);
government units. LLL is not a government-owned or 2. File the protest with the local treasurer The protest in
controlled corporation taxable for real property taxes. (City writing must be filed within 30 days from payment of
of Lapu-Lapu v. PEZA, GR No. 184203, Nov. 26, 2014) the tax to the provincial, city or municipal treasurer, in
the case of municipality within Metro Manila Area, who
b. Will your answer be the same in (a) if from 2010 to shall decide the protest within 60 days from receipt
the present time, LLL is leasing portions of the (Sec. 252, LGC)

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QUAMTO (1987-2016)
3. Appeal to the LBAA If the protest is denied or upon a. xxx
the lapse of the 60-day period for the treasurer to b. xxx
decide, the taxpayer may appeal to the LBAA within 60 c. marking duties
days and the case decided within 120 days (Sec. 226 and
229) A: Marking duties are special duties equivalent to 5% ad
4. Appeal to the CBAA If not satisfied with the decision valorem imposed on articles not properly marked. These
of the LBAA, appeal to the CBAA within 30 days from are collected by the Commissioner of Customs except when
receipt of a copy of the decision. [Sec. 229 (c), LGC] the improperly marked articles are exported or destroyed
under customs supervision and prior to final liquidation of
b. May Madam X refuse to pay the deficiency tax the corresponding entry. These duties are designed to
assessment during the pendency of her appeal? prevent possible deception of the customers.
(2014 Bar) Discriminatory duties (1995, 1997)
A: No. The payment of the deficiency tax is a condition Q: Under the Tariff and Customs Code, what are:
before she can protest the deficiency assessment. It is the
decision on the protest or inaction thereon that gives her a. xxx
the right to appeal. This means that she cannot refuse to pay b. xxx
the deficiency tax assessment during the pendency of the c. xxx
appeal because it is the payment itself which gives rise to d. discriminatory duties
the remedy. The law provides that no protest (which is the
beginning of the disputation process) shall be entertained A: Discriminatory duties are special duties collected in an
unless the taxpayer first pays the tax. (Section 252, LGC) amount not exceeding 100% ad valorem, imposed by the
President of the Philippines against goods of a foreign
country which discriminates against Philippine commerce
TARIFF AND CUSTOMS CODE or against goods coming from the Philippines and shipped
to a foreign country.

Basis of dutiable value (1989, 2005, 2008) FLEXIBLE TARIFF CLAUSE (1991, 2001)

Q: What are the bases for and purposes of computing Q: What do you understand by the term flexible tariff
customs duties and VAT? (2008 Bar) clause" as used in the Tariff and Customs Code? (1991
Bar)
A: The tax base for the customs duties is the transaction
value while for VAT purposes, the tax base is the value used A: The term "flexible tariff clause "refers to the power of the
in computing customs duties plus customs duties, excise President upon recommendation of the NEDA to increase,
taxes and other charges incident to importation. [Section reduce or remove existing protective tariff rates of import
107 (A), NIRC] These taxes on importation must be paid to duty, but in no case shall be higher than 100% ad valorem,
the Bureau of Customs before the Authority to Release to establish import quota or to ban importation of any
Imported Goods will be issued by the BIR. (Revenue commodity as may be necessary and to impose additional
Regulations No. 16-2005) duty on all import not exceeding 10% ad valorem whenever
necessary. (Sec. 102, CMTA)
SPECIAL DUTIES
Q: In view of the unfavorable balance of payment
Dumping Duties (1995, 1997, 2005) condition and the increasing budget deficit, the
President of the Philippines. upon recommendation of
Q: Under the Tariff and Customs Code, what are: the National Economic and Development Authority,
a. dumping duties issues during a recess of Congress an Executive Order
imposing an additional duty on all imports at the rate
A: Dumping duties are special duties imposed by the of ten (10%) percent ad valorem. The Executive Order
Secretary of Finance upon recommendation of the Tariff also provides that the same shall take effect
Commission when it is found that the price of the imported immediately. Ricardo San Miguel, an importer,
articles is deliberately or continually fixed at less than the questions the legality of the Executive Order on the
fair market value or cost of production, and the importation grounds that only Congress has the authority to fix the
would cause or likely cause an injury to local industries rates of import duties and, in any event, such an
engaged in the manufacture or production of the same or Executive Order can take effect only thirty (30) days
similar articles or prevent their establishment. after promulgation and the President has no authority
to shorten said period.
Countervailing Duties (1995,1997, 2005)
Are the objections of Mr. San Miguel tenable? (2001
Q: Under the Tariff and Customs Code, what are: Bar)
a. xxx A: No. Under the Flexible Tariff clause, any order issued by
b. countervailing duties the President pursuant to the provision shall take effect
A: Countervailing duties are special duties imposed by the thirty (30) days after promulgation, except in the
Secretary of Finance upon prior investigation and report of imposition or additional duty not exceeding ten (10)
the Tariff Commission to offset an excise or inland revenue percent ad valorem which shall take effect at the discretion
tax upon articles of the same class manufactured at home or of the President. [Section 1608 (d), CMTA]
subsidies to foreign producers or manufacturers by their BEGINNING AND ENDING OF IMPORTATION (1995,
respective governments. 2015)
Marking duties (1995, 1997) Q: Under the Tariff and Customs Code, as amended,
Q: Under the Tariff and Customs Code, what are: when does importation begin and when is it deemed
terminated? (2015 Bar)

31
TAXATION LAW
A: Importation begins when the carrying vessel or aircraft
enters the jurisdiction of the Philippines with intention to
unload therein. (Sec. 103, 1st par., CMTA) Importation is
deemed terminated upon payment of the duties, taxes and
other charges due upon the articles or secured to be paid at
a port of entry and the legal permit for withdrawal shall
have been granted [Sec. 103 (a), CMTA], or in case said
articles are free of duties, taxes and other charges, until they
have legally left the jurisdiction of Customs. [Sec. 103 (b),
CMTA]

UST BAR OPERATIONS 32