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Accountancy Department

Preliminary Examination in INCOME TAXATION

Name of student: ____________________________________ Score: _______________


Class Schedule: ____________________________________ Date: _______________

Problems 1 and 2
This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes
imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the
threat to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-
McDuffe Act, and the "eventual loss of its preferential position in the United States market"; wherefore,
the national policy was expressed "to obtain a readjustment of the benefits derived from the sugar
industry by the component elements thereof" and "to stabilize the sugar industry so as to prepare it for
the eventuality of the loss of its preferential position in the United States market and the imposition of
the export taxes."

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme
Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the
estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that
such tax is unconstitutional and void, being levied for the aid and support of the sugar industry
exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be constitutionally
levied.

1. Rule on the constitutionality of the constitutionality of the law.


a. The law is unconstitutional for being violative of due process.
b. The law is unconstitutional as it favors a particular group of industry does violating the
requirement of equal protection clause.
c. The law is valid exercise of the power to tax.
d. The law is valid since inherent powers of the state are generally unlimited.

2. Following the same case, indeed, taxation may be made the implement of?
a. Police power
b. Eminent domain
c. Power of recall
d. People power

3. The Philippine Airlines (PAL) is a domestic corporation engaged in the transportation of passengers
and cargoes via commercial planes. According to its legislative franchise, the company is exempt
from paying all forms of local and national taxes, except some amount of franchise tax which is paid
in lieu of all taxes. Beginning 2018, the Commissioner of Internal Revenue sent a letter to PAL
requiring the latter to pay for motor vehicle registration fee before it can be allowed to operate
under its franchise. Is PAL liable for the motor vehicle registration fee?
a. No, PAL is exempt from all taxes.
b. Yes, PAL is liable to pay for registration fee as a consequence of police power to regulation.
c. No, PAL is granted blanket exemption from payment of all forms of assessments of the
Government.
d. Yes, the registration fee is not a tax but rather a license, hence, PAL is liable.

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

The cigarette company is __________


a. Wrong because taxes are the lifeblood of the government
b. Wrong because the law recognizes that the power to tax is the power to destroy
c. Correct because no government can deprive a person of his livelihood
d. Correct because congress, in this case, exceeded its power to tax

5. The municipality of San Isidro passed an ordinance imposing a tax on installation managers. At that
time, there was only one installation manager in the municipality; thus, only he would be liable for
the tax. Is the law constitutional?
a. It is unconstitutional because it clearly discriminates against this person.
b. It is unconstitutional for lack of legal basis.
c. It is constitutional as it applies to all persons in that class.
d. It is constitutional because the power to tax is the power to destroy.

6. In order to raise revenue for the repair and maintenance of the newly constructed City Hall of
Makati, the City Mayor ordered the collection of P1.00, called “elevator tax”, every time a person
rides any of the high-tech elevators in the City Hall during the hours of 8am to 10am and 4pm to
6pm. Is the elevator tax a valid imposition?
a. Yes, local government has the power to create its own source of income.
b. No, LGUs are not allowed to exercise power to tax.
c. No, mayors do not have the power to tax.
d. Yes, nothing prohibits the imposition of the tax.

7. In Philippine laws, double taxation is not expressly prohibited. However, in certain cases, its
imposition may be challenged in a proper proceeding raising as an argument that the imposition is
violative of the requirement of?
a. Due process clause c. non-impairment clause
b. Equal protection clause d. non-imprisonment clause

8. What is the strongest of the inherent powers?


a. Taxation power c. Power of eminent domain
b. Police power d. Power ranger

9. What is the most pervasive of the inherent powers?


a. Taxation power c. Power of eminent domain
b. Police power d. Power ranger

10. The government must not incur deficit


a. Doctrine of fiscal adequacy c. Doctrine of theoretical justice
b. Doctrine of administrative feasibility d. Doctrine of necessity

11. In PCGG v. Cojuanco the Supreme Court has the occasion to enumerate the elements of taxation.
Determine which is not included.
a. Enforced proportional contribution
b. Imposed by the State
c. For the support of the Government
d. An inherent power

12. The Philippines has adopted a comprehensive tax situs by using the following, except
a. Residence rule
b. Source rule
c. Nationality rule
d. Affiliation rule

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13. Tax rules on intangible personal properties follow the national or domiciliary law of the owner.
a. Mobilia Sequuntur Personam d. Lex loci celebrationis
b. Lex Rei Sitae c. Strictisimi juris

14. This is applied to examine the constitutionality of a law in the face of an equal protection challenge.
a. Rational basis test c. Realization test
b. Severance test d. Double taxation

15. What does the Constitution mean when it used the term “evolve” progressive tax system?
a. Mandatory c. Permissive
b. Restrictive d. None of the above

16. Which of the following statements is not correct?


a. Collections from taxes are public money.
b. Appropriation of taxes for the common good of the people is valid.
c. Construction of private road from taxes is a valid appropriation.
d. Allocation of taxes for the benefit of greater portion of population is considered for public
purposes.

17. All of the following statements are correct except one.


a. Taxation power is an absolute power.
b. Taxation power is the strongest of all inherent powers of the government.
c. Tax laws must not violate Constitutional restrictions.
d. Exercise of Taxation power is subject to restrictions.

18. One of the following is not among the fundamental theory for taxation.
a. Taxation is based on necessity.
b. Taxation is the lifeblood of the government.
c. Taxations is the bread and butter of the government.
d. Taxation is a voluntary contribution for the benefits received.

19. Pedro, a non-resident citizen, lent money to Shino, a resident Chinese. The indebtedness was
collateralized by a property located in Japan. The interest income is earned in
a. The Philippines c. Japan
b. China d. Japan, China and the Philippines

20. Julia died leaving as heirs her surviving spouse, Lorenzo and her five children. A settlement of the
estate was instituted in the CFI. The project partition was approved by the court however, there was
no attempt made to divide the properties listed. Instead, the properties remained under the
management of Lorenzo who used said properties by leasing or selling them and investing the
income derived therefrom. From said investments and properties, the heirs derived income. The BIR
decided that the heirs formed an unregistered partnership and therefore subject to corporate
income tax. They protested the assessment and asked for reconsideration alleging that they are co-
owners of the properties inherited and the profits derived from the transactions. Are the heirs of
the decedent subject to corporate income tax?

a. No, they are tax exempt.


b. No, they are subject to income tax on their personal capacities.
c. Yes, they are considered partners.
d. No, co-ownership is tax exempt.

21. On 2 Mar. 1973, Joe transferred his rights under contract with Ortigas Co. to his 4 children to enable
them to build residences on the lots. TCTs were issued. Instead of building houses, his children sold
them to Walled City Securities Corporation and Olga Cruz Canda. The BIR required the children to
pay corporate income tax under the theory that they formed an unregistered partnership or joint
venture. How should the taxpayers be classified under the tax code?
a. Co-owners c. Partners
b. Corporators d. Joint venturers

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22. A fundamental rule in taxation is that the property of one country may not be taxed by another
country. This is known as
a. International law c. Reciprocity
b. International comity d. International inhibition

23. Which of the following statements is not correct?


a. Collections from taxes are public money.
b. Appropriation of taxes for the common good of the people is valid.
c. Construction of private road from taxes is a valid appropriation.
d. Allocation of taxes for the benefit of greater portion of population is considered for public
purposes.
24. A taxpayer gives the following reasons in refusing to pay a tax. Which of his reasons is not
acceptable for legally refusing to pay the tax?
a. That he has been deprived of due process of law.
b. That there is lack of territorial jurisdiction.
c. That he drives no benefit from the tax.
d. That the prescriptive period for the tax has elapsed.

25. The following are the constitutional limitations on the power of taxation, except
a. Taxes are not subject to set-off or compensation.
b. Only Congress can exercise the power of taxation.
c. Non-impairment of the obligation of contracts.
d. The rule of taxation must be uniform.

26. Which of the following is/ are taxable only for income earned within the Philippines?
i. Nonresident citizen
ii. Nonresident alien
iii. Resident citizen
iv. Resident alien

Choices:
a. i, ii and iii only c. i, and iii only
b. i, ii and iv only d. iii and iv only

27. Which of the following are characteristics of taxes?


i. Voluntary contribution
ii. Imposed by legislative body
iii. Proportionate in character
iv. Used for public purpose
Choices:

a. i, ii and iii only. c. i, and iii only.


b. i, ii and iv only. d. ii, iii and iv only

28. What is the status of a Chinese who stays in the Philippines for 200 days in 2017?
a. Resident Alien c. Non-resident alien - ETB
b. Resident Citizen d. Non-resident alien - NETB

29. Suppose he stayed here for 100 days in 2016 and another 100 days in 2017?
a. Resident Alien c. Non-resident alien - ETB
b. Resident Citizen d. Non-resident alien - NETB

30. Suppose he stayed here for 100 days in the first half of 2016, went back abroad for 100 days in the
second half of 2016, and returned to the PH and stayed for another 100 days until the end of the
same year?
a. Resident Alien c. Non-resident alien - ETB
b. Resident Citizen d. Non-resident alien - NETB

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31. Suppose he stayed here for 200 days in 2016 and for only 100 days in 2017, what is his classification
in 2017?
a. Resident Alien c. Non-resident alien - ETB
b. Resident Citizen d. Non-resident alien - NETB

Problems 32 and 34
The Princess Kit-i & Co. reported the following items for the year 2018:

Statement of Financial Position as of July 31


(In Thousands)
2018 2017
Assets
Current assets
Cash 45 39
Trading securities 30 20
Accounts receivable (net) 68 48
Inventory 90 80
Prepaid expenses 22 30
Total current assets 255 216
Investments, at equity 38 30
Property, plant, and equipment (net) 375 400
Intangible assets (net) 80 45
TOTAL ASSETS 748 691
Liabilities and equity
Current liabilities
Notes payable 36 18
Accounts payable 70 42
Accrued expenses 5 4
Income taxes payable 15 16
Total current liabilities 125 80
Long-term debt 35 35
Deferred taxes 3 2
Total liabilities 163 117
Equity
Preferred stock, 6%, P100 par value 150 150
cumulative
Common stock, P10 par value 225 195
Additional paid-in capital common stock 114 100
Retained earnings 96 129
Total equity 585 574
TOTAL LIABILITIES AND EQUITY 748 691

Income Statement for the year ended July 31


(in thousands)
2018 2017
Net sales ? 460
Costs and expenses
Cost of goods sold 330 315
Selling, general and administrative 52 51
Interest expense 8 9
Income before taxes ? 85
Income taxes 36 34
Net income (round off to nearest thousand) ? 51

Additional information:
1. Princess Kit-i’s time-interest-earned ratio for the year ended July 31, 2018 was 12.25 times.
2. Princess Kit-i’s rate of return on assets for the year ended July 31, 2018 was 7.5%.

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Determine the following:
32. Net sales
33. Income before tax
34. Net income

Problems 35 and 37
A taxpayer reports the following items of income and expenses as of December 31, 2018.

Cash salary P302,000


Dividend from ABC Corporation 30,000
Cancellation of her debt from a friend 50,000
Gross income from business 400,000
Allowable expenses 250,000
Interest from insurance proceeds 18,000
Gambling winnings 20,000
Gambling losses 10,000
Household expenses 200,000
Donations from relatives 150,000
Winnings – US lottery 15,000
Cash dividends from Meralco - declared in New York 40,000
Property dividends from Bank of America – declared in Philippines 100,000

Assuming all income is subject to tax, determine total gross income, operating and non-operating, if
taxpayer is a:
35. Resident citizen
36. Non-resident citizen
37. Non-resident alien not engaged in trade or business

Problems 38 and 40
A manufacturing business reported the following for its first year of operation:
Purchases of raw materials P540,000
Freight in 20,000
Raw materials, ending inventory 10,000
Direct labor 400,000
Factory Overhead 200,000
Work-in process, ending inventory 100,000
Finished goods, ending inventory 50,000
Sales 1,275,000
Freight out 12,000
Sales return 25,000

Determine the following:


38. Net sales
39. Cost of sales
40. Gross business income

--- nothing follows ---

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