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TAXATION
(MOCK BAR EXAMINATION 2018)

I.
a. Can you deduct capital losses from ordinary gains? Explain. (2%)

Suggested Answer:

No. Capital losses can be deducted only from or to the extent of


Capital gains. Section 39[C]
Losses incurred from the sale, exchange or other dispositions of capital
assets are not allowed as deductions from gross income. The reason is
that capital losses are not allowed to be deducted from ordinary
income because the capital assets did not help earn the ordinary
income.

b. Can you deduct ordinary losses from capital gains? Explain. (2%)

Suggested Answer:

Ordinary losses are deductible from capital gains but net capital loss
cannot be deducted from ordinary gain or income. This rule applies to
both individual and corporate taxpayers. Sec. 39.

c. Enumerate and discuss the statute of limitations under the following


tax
statutes: (6%)

(1) RA 8424 NIRC, (2) RA 7160 Local Government Code (3) PD 1464
Tariff and Customs Code.
Suggested Answers:

The general rule is that: taxes do not prescribe.

Exception: when the tax law provide for prescription

a) RA 8424 NIRC

Three (3) year period for assessment and collection or within three (3)
years without assessment.

Sec. 203 and 222 provide for three (3) years prescriptive period for
assessment and collection in the case where the return filed is not
false, fraudulent but with deficiency and also within three (3) years to
collect in case of no prior assessment has been made. The three (3)
year period is reckoned from the last day prescribed by law for the
filing of the return, which is April 15 every year. In case where the
return is filed beyond the period prescribed by law, the three–year
period shall be counted from the day the return was filed. A return filed
before the last day prescribed by law shall be considered as filed on
such last day.

Caveat: No proceeding in court without assessment for the collection of


such taxes shall begin after the expiration of such period.
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b) As far as local taxes are concern, refer to RA 7160 Local


Government Code.

Sections 194 and 270 provide for Collection and Assessment of local
taxes.

Local taxes, fees, or charges shall be assessed within five (5) years
from the date they became due; 10 years from the discovery in case of
fraud or intent to evade the payment of taxes, fees or charges. No
action for collection of such taxes, fees or charges, whether
administrative or judicial shall be instituted after the expiration of such
period

Local taxes, fees or charges may be collected within five (5) years fro
the date of assessment by administrative or judicial action. No such
action shall be instituted after the expiration of said period.

The running of prescriptive periods shall be suspended for the time


during which;

1. The treasurer is legally prevented from making the assessment


or collection;
2. taxpayer requests for a reinvestigation and executes a waiver in
writing before expiration of the period within which to assess or
collect; and
3. taxpayer is out of the country or otherwise cannot be located.

Custom duties under the Tariff and Customs Code PD 1464

Sec. 1603 provides for one (1) year statute of limitations as far as
custom duties.

Additional instructions:

When does importation begin and terminate?

Importation begins when the carrying vessel or aircraft enters the


jurisdiction of the Philippines with the intention to unload therein.
Importation is deemed terminated upon payment of the duties, taxes
and other charges due upon the articles, or secured to the paid, at a
port of entry and the legal permit for withdrawal shall been granted, or
in case said articles are free of duties, taxes and other charges, until
they have legally left the jurisdiction of the customs. (Sec. 1202) The
duties , taxes fees and pother fees must be paid in full.

Is protest required?

RA 8424, No protest is required for filling a written claim for refund,


protested or not claim for refund may be made. Read Sec, 229.

Custom duties – Yes, it is required under 2308 within 15 days from a


ruling or decision of the Collector of Customs at a port of entry. Protest
must be in writing, setting forth the objection to the ruling or decision
in question together with the reasons thereof.
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No protest shall be considered unless payment of the amount due after


final liquidation has first been made.
CJH DEVELOPMENT CORPORATION, vs.BUREAU OF INTERNAL REVENUE,
BUREAU OF CUSTOMS, and DISTRICT COLLECTOR OF CUSTOMS
EDWARD O. BALTAZAR, G.R. No. 172457 December 24, 2008

Local Government Code

Local tax – No protest required

Real Property tax- Protest in writing is required within 30 days from


payment

II.
What is the importance of prior assessment? (2%)
Suggested Answer:

The rule is that, if prior assessment has been made, the BIR may resort
to the administrative or judicial remedies in the collection of taxes. If
no prior assessment has been made, the BIR may only resort to judicial
remedies.

Define Willful blindness Doctrine in Taxation. (3%)


Suggested Answers:

“Willful blindness” is defined in Black’s Law Dictionary as


“deliberate avoidance of knowledge of a crime, especially by failing to
make a reasonable inquiry about suspected wrongdoing, despite being
aware that it is highly probable.” A “willful act” is described as one
done intentionally, knowingly and purposely, without justifiable excuse.

“Willful” in tax crimes means voluntary, intentional violation of a


known legal duty, and bad faith or bad purpose need not be shown. It
is a state of mind that may be inferred from the circumstances of the
case; thus, proof of willfulness may be, and usually is, shown by
circumstantial evidence alone. Therefore, to convict the accused for
willful failure to file ITR or submit accurate information, it must be
shown that the accused was (1) aware of his/her obligation to file
annual ITR or submit accurate information, but that (2) he/she, or
his/her supposed agent, nevertheless voluntarily, knowingly and
intentionally failed to file the required returns or submit accurate
information. Bad faith or intent to defraud need not be shown.

People v. Gloria Kintanar (CTA EB Crim. No. 006, Dec. 3, 2010)

III.
Define Cross Border Doctrine and Destination Principle in VAT
System. (3%)

Cross Border Doctrine and Destination Principle, the VAT


implications are that "no VAT shall be imposed to form part of the
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cost of goods destined for consumption outside of the territorial


border of the taxing authority" Sec.2 RMC No. 74-99, cited in the
case of Coral Bay Nickel Corp. v. CIR , G.R. No. 190506 March 29,
2009.

IV.
Explain the principle of mobilia sequuntur personam in income
taxation? (2%)

Suggested answer:

The principle of mobilia sequuntur persnam( Lat. Property follows


the person) in income taxation refers to the principle that situs of
taxation of intangible personal property follows the domicile of the
owner who shall be subject to the tax.

This rule proceeds from the theory that intangibles do not admit
of an actual location and may easily be transferred from one place
to another so that the possibility of escaping taxes is great, thus
needing a fixed situs for taxation. Wells Fargo v. Collector 40 OG
159.

V.
What are the remedies for the collection of delinquent taxes? (2%)

Suggested answer:

a) by distraint of all personal property or levy of real property


belonging to the taxpayer; and
b) by civil or criminal action

VI.
What is an assessment? (2%)

Suggested answer:

With special reference to internal revenue taxes, an assessment


is merely a notice to the effect that the amount stated therein is
due as tax and a demand for the payment thereof. It is not an
action or proceeding for the collection of taxes. It is a step
preliminary, but essential to warrant of distraint, if still feasible, and
also to establish a cause for judicial action as the phrase is used ub
Section 316 (now Section 218 1) of the revenue Code.

1
The right to collect the tax by judicial action is suspended once Warrant of Distraint or Levy (WDL’s) are
issued (or served) upon the taxpayer pursuant to the SC decision. ( Advertising Assoc. Inc. vs. CIR, G.R.
No. 59758 Dec 26, 1984)
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Alhambra Cigar & Cigarette Mfg. Co. vs. Collector, 105


Phil.1337; Estate of Maria Lim Vda. De Uy vs. Pacita Uy, O.G. 5261)

VIII.
What is the rule as to the grant, withdrawal or revocation of tax
exemption? Are tax exemptions revocable or irrevocable? (5%)

Suggested answer:

Since taxation is the rule and exemption is the exception, generally tax
exemptions granted to all persons can be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the
exemption was granted to private parties based on material
consideration of a mutual nature, which becomes contractual and is
thus covered by the non-impairment clause.

The genera rule is that tax exemptions are revocable, the only
exemption is that when it is granted for valuable consideration which
partakes of the nature of a contract.

Tax exemption granted for valuable consideration, is deemed to


partake of the nature of a contract and the obligation thereof is
protected against impairment. Read Casanova v. Hord 8 Phil.125.

Tax exemptions are either constitutional or statutory. The


constitutional exemption from taxes is provided in Article VI, Sections
22(3), and 28(3).

Statutory exemptions are granted in the discretion of the legislature,


subject to this constitutional restriction that “no law granting any tax
exemptions shall be passed without the concurrence of a majority of
all members of Congress.2

IX.
In the absence of, failure, or refusal of taxpayers to present their
accounting records, or when the records from taxpayer are not
forthcoming, records are lost or reports submitted are false,
incomplete, or erroneous, what is the remedy of the Commissioner in
assessing deficiency tax? (3%)

Suggested answer:

The Commissioner or revenue officer shall determine/assess the


deficiency tax using the best evidence obtainable.

[What is the presumption when the assessment of deficiency tax is


based on the Best Evidence Obtainable? Who has the burden of proof?]

“An assessment based on estimate is prima facie valid and lawful


where it does not appear to have been arrived at arbitrarily or
2
Art. VI, Sec.28(4)
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capriciously. The burden of proof is upon the complaining party to


show clearly that the assessment is erroneous.” Marcos vs. CA, G.R.
No. 120880, June 5, 1997.

X.

XYZ Corporation obtained two (2) life insurance policies for its
President and CEO Mr. Juan de la Cruz. In one policy, the designated
beneficiary is XYZ Corporation and in the other policy, the wife of Juan
de la Cruz was designated as revocable beneficiary. Premiums are paid
by XYZ Corporation.

While on a business trip, Mr. Juan de la Cruz met and accident and
died. At the time of his death he left the following properties:

1. Bank Deposits with ING Barings Bank in Singapore and Credit


Suisse in Switzerland;
2. Shares of stock of San Miguel Corp.;
3. Condominium Unit in Hilton Resort in Mactan Lapu-Lapu City,
Cebu, Philippines;
4. Residential houses in London and vacation house in Bahamas;
5. US Treasury bonds;

1. Are the insurance premiums paid by XYZ Corporation on the two


(2) insurance policies tax deductible?
2. Will the insurance proceeds received by XYZ Corp. be treated as
income? How about on the part of the wife?
3. Will insurance proceeds from part of the gross estate of Mr. de la
Cruz?
4. Determine the taxable gross estate of Mr. Juan de la Cruz? (10%)

Suggested Answers:
1.
The insurance premiums paid by XYZ Corp. on the policy that
designates the wife of Mr. de la Cruz as beneficiary is a deductible item
from the gross income as ordinary and necessary expenses.

The insurance premiums paid on the policy wherein the corporation


itself is designated as beneficiary are not deductible. (Sec.36[A]
[4],NIRC)

2.
The insurance proceeds will not form part of the beneficiaries’ income
subject to tax.

The rule is for purposes of exclusion from gross income of insurance


proceeds, the beneficiary designated is immaterial. Whether the
beneficiary designated is the family, estate of the employee or the
employer, insurance proceeds is excluded.

The insurance proceeds are in the form of indemnity and will not form
part of the gross income.
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Beneficiary designation is only material in determining whether the


proceeds of life insurance is to be included in the gross estate of the
decedent. The rule is that if beneficiary designated is revocable, the
proceeds is included as part of the gross estate, if irrevocable not
included.

3.

The insurance proceeds will form part of the gross estate of Mr. Juan de
la Cruz, the reason being that the designations of beneficiary 3 in both
cases were revocable.

4.

Properties 1 to 5 shall be included as part of the taxable gross estate


of Mr. del la Cruz.

XI.

A law granting 5 years tax holiday for certain industries and priority
investments, after three years later, the law was repealed. With the
repeal of the said law, the exemptions were considered revoked by
the BIR. Accordingly the BIR assessed all those companies covered
under the law for taxes, effective on the date of the repeal of the
law.

Contending that the repeal of the said law violated non-impairment


clause of the constitution, companies and corporations who used to
enjoy the said tax holiday questioned the repeal of the said law.

Decide the contention. (5%)

Suggested answer:

The contention is not tenable. The tax exemption granted is in the


nature of a unilateral tax exemption. Since the exemption is given
is spontaneous on the part of the legislature and no service or duty
or other remunerative conditions have been imposed on the
taxpayers receiving the exemption, it may be revoked at will by the
legislature. (Christ Church v.Philadelphia, 24 How.300 [1860])What
constitutes an impairment of the obligation of contracts is the
revocation of an exemption which is founded on a valuable
consideration because it takes the form and essence of a contract.
(Casanovas v. Hord, 8Phil.125); Manila railroad Co. vs. Insular
Collector of Customs, 12 Phil.146 [1915])

XII.

3
Albeit, the designation of beneficiary on the part of XZY Corp. is silent, the presumption is it is revocable.
Under the Insurance Code designation of irrevocable beneficiary must be expressly stated.
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A, B, C, & D, are co-owners of a 100-hectare agricultural land valued


at P50 million. Axle Corp. is a domestic corporation engaged in the
manufacture of diesel fuel using sugar cane as raw material.

Axle Corp. is interested to acquire the sugar plantation of A, B, C, &D.


To minimize cash outlay Axle Corp. offers to purchase the 100-hectare
land via exchange of stocks of the corporation for the value of the said
plantation. A,B,C & D are interested but apprehensive about the tax
consequence of the transfer of their plantation, especially that as seller
they will be liable for capital gains tax of 6% plus 1.5% of documentary
stamp tax and other transfer taxes.

What advise will you give to A, B, C & D, in order to save on taxes?


(5%)

Suggested answer:

I will advise A,B,C,& D to assign or transfer their agricultural land to


Axle Corp. in exchange of shares of stock which would give ABC&D
control of Axle Corp. or about 51% or more of the total voting power of
all classes of stocks entitled to vote of Axle Corp.

No gain or loss shall be recognized if property is transferred to a


corporation by a person in exchange for stock or unit of participation in
such a corporation of which as a result of such exchange said person,
alone or together with others, not exceeding four (4) persons, gains
control (51% up) of the said corporation. (Sec.4 ( C)2d.

XIII.

The 1987 Constitution provides that all lands, buildings and


improvements of charitable institutions, churches and parsonages or
covenants appurtenant thereto, mosques, non-profit cemeteries,
actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.

To what kind of tax does this exemption apply? (2%)


Is proof of actual use necessary to avail of the exemption? (3%)

Suggested answers:

The exemption applies only to property taxes. What is exempted is not


the institution but the lands, buildings and improvements actually,
directly and exclusively used for religious, charitable and educational
purposes. (CIR vs. CA et al., G.R. No. 124043, Oct.14,1998)

Proof is necessary. This is so because tax exemptions are strictly


construed against the taxpayer.
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XIV.

Upon audit of the income statement of ABC Corp. the auditor reported
a provision for bad debts in the amount of P150.000.00. The auditor
further noted that the likelihood of recovery of these bad debts is nil.
Acting on the said notation, ABC Corp. write-off the said bad debts and
subsequently claimed a deduction for bad debts written-off in its
income statement filed on the same year. The BIR, however, disallowed
the claimed deduction.

Five years after, the bad debts of P150,000.00 previously written off
were recovered and collected in full. On the same year, the BIR
charges ABC Corp. for income tax for recovery of bad debts previously
written-off. The BIR contended that the recovery of bad debts
previously written off shall be included as part of gross income in the
year of recovery.

Decide on the contention of the BIR. (5%)

Contention of the BIR is untenable. While it is true that recovery of bad


debts previously allowed, as deduction should be reported as a taxable
income in the year of the recovery. But in this case, the BIR disallowed
the bad debts when it was written- off. Thus ABC Corp. did not receive
any benefit of the said bad debts when it was written-off.

Under Section 34 E, 1, , the recovery of bad debts previously allowed


as deduction in the preceding years shall be included as part of the
gross income in the year of recovery to the extent of the income tax
benefit of said deduction. This is known as tax benefit rule.

XV.

Banks and Non-bank financial intermediaries are subject to 20% Final


Withholding Tax (FWT) on their passive income/interest income. In
addition, they are also subject to 5% Gross Receipt Tax (GRT) on their
gross receipts, which includes their passive income.

Contending that their passive income/interest income has already been


subjected to final withholding tax of 20% and as such ahs been
withheld and reported/paid directly to the government by entities from
which the banks derived the income, the said passive income/interest
income should no longer form part or included in the computation of
gross receipts subject to 5% gross receipt tax (GRT) otherwise there
exist a double taxation considering that both taxes (FWT and GRT) are
national taxes administered by the BIR, imposed on the same income
and on the same taxing period.

Is there double taxation? Decide. (5%)

Suggested answer:
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No there is no double taxation. In CIR vs. Solidbank Corp, G.R. No.


148191, Nov. 25,2003, 416 SCRA 436, this Court defined that a
percentage tax is a national tax measured by a certain percentage of
the gross selling price or gross value in money of goods sold, bartered
or imported; or of the gross receipts or earnings derived by any person
engaged in the sale of services. It is not subject t withholding. An
income tax, on the other hand, is a national tax imposed on the net or
gross income realized in a taxable year. It is subject to withholding.
This, there can be no double taxation here as the Tax Code imposes
two different kinds of taxes.4

Double Taxation

Double Taxation means taxing for the same tax period the same thing
or activity twice, when it should be taxed but once, for the same
purpose and with the same kind of character tax.5

Does the 20% final withholding tax (FWT) on a bank’s passive income 6
form part of the taxable gross receipts for the purpose of computing
the 5% gross receipts tax (GRT)? The answer is yes.

XIX

The City Assessor of Mandaue City issued an assessment, classifying as


real properties subject to property tax all the machineries and
equipments attached to the ground and used directly in business of an
export corporation. Aggrieved by such assessment, within 60 days
from receipt thereof, the export corporation filed an appeal to the City
Board of Assessment Appeal. The Board after 120 days from receipt of
the appeal ruled in favor of the City. Within 30 days after receipt of the
adverse ruling of the Board, the export corporation filed a petition for
review under a procedure analogous to Rule 42 at the Court of Tax
Appeal. The Court of Tax Appeals sustained the decision of Board.
Within 15 days from receipt, the export corporation filed a verified
petition for review on certiorari pursuant to Rule 45 with the Supreme
Court.

Comment on the petition. (11%)

Suggested answers:

The CTA is devoid of jurisdiction to entertain appeals from the decision


of the City Board of Assessment Appeals. Said decision is instead
appealable to the Central Board of Assessment Appeals (CBAA), which
under the Local Government Code, has appellate jurisdiction over
decisions of the Local Board of Assessment Appeals 7. ( Caltex Phils. vs.
CBAA,L-50466, May 31, 1982)

A party adversely affected by the decision of CBAA, in the exercise of


its appellate jurisdiction may appeal to the CTA within the 30 days
4
Cited in CIR vs. Citytrust Investment Phils. G.R. No. 139786, and Asianbank Corp. vs. CIR G.R> no.
140857, Sept. 27,2006
5
Tax Law and Jurisprudence, by Justice Jose C. Vitug and Judge Ernesto D. Acosta, 2nd Ed.2000
6
Also referred to as “ interest income” as it pertains to interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and form or trust funds and similar arrangements and royalties.
7
City or provincial Board of Assessment Appeals
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from receipt of the decision via petition for review under a procedure
analogous to that provided for under Rule 43.

A party adversely affected by a ruling, order or decision the decision of


a division of the CTA may file a motion for reconsideration or new trial
before the same Division of the CTA within 15 days from notice
thereof.8 A party adversely affected by a resolution of a Division of the
CTA on a motion for reconsideration or new trial may file a petition for
review with the CTA en banc.9 A party adversely affected by a decision
or ruling of CTA en banc may file with the Supreme Court a verified
petition for review on certiorari pursuant to Rule 45.10

XX

Philippine National Railways (PNR) operates the rail transport of


passengers and goods by providing train stations and freight customer
facilities from Tutuban, Manila to the Bicol Province. As the operator of
the railroad transit, PNR administers the land, improvements, and
equipment within its main station in Tutuban, Manila.

Invoking Section 193 of the Local Government Code (LGC) expressly


withdrawing the tax exemption privileges of government-owned and
controlled corporations upon the effectivity of the Code in 1992, the
City Government of Manila issued Final Notices of Real Estate Tax
Deficiency in the amount of P624,000,000.00 for the taxable years
2006 to 2010. On the other hand, PNR, seeking refuge under the
principle that the government cannot tax itself, insisted that the PNR
lands and buildings are owned by the Republic.

Is the PNR exempt from real property tax? Explain your answer. (5%)

Suggested Answer:

The general rule is that GOCC is not exempt from real estate tax. This
is the ruling in MCIAA v. Marcos and MIAA v. CA, City of Paranaque et
al. G.R. No. 155650, July 20, 2006 En Banc.

Real property owned by the Republic is Not taxable.


“Section 234(a) of the Local Government Code exempts from real
estate tax any "[r]eal property owned by the Republic of the
Philippines." Section 234(a) provides:

SEC. 234. Exemptions from Real Property Tax. — The following are
exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial use
thereof has been granted, for consideration or otherwise, to a
taxable person;

This exemption should be read in relation with Section 133(o) of the


8
Sec. 9 of RA 9262, amending Section 11 of RA 1125.
9
Sec.11 of RA 9262,amendeing Section 18 of RA 1125.
10
Sec.12 of RA 9262, amending Section 19 0f RA 1125.
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same Code, which prohibits local governments from imposing "[t]axes,


fees or charges of any kind on the National Government, its agencies
and instrumentalities x x x." The real properties owned by the
Republic are titled either in the name of the Republic itself or in the
name of agencies or instrumentalities of the National Government. The
Administrative Code allows real property owned by the Republic to be
titled in the name of agencies or instrumentalities of the national
government. Such real properties remain owned by the Republic and
continue to be exempt from real estate tax.

Accordingly, if the Republic indeed owns these lands and buildings


then PNR is exempt from real property tax.