`34NAME: SCORE:

SECTION: PROFESSOR:

I. True or False

1. In accounting for income of farmers under the accrual basis in contrast to cash basis, beginning and
ending inventories of livestock and farm products raised and purchased are considered
2. Income derived from illegal sources, such as gambling, extortion, theft, bribes, embezzlement, and
smuggling are not taxable.
3. The portion of each annuity payment that represents return of premium is not taxable while that portion
that represents interest is taxable.
4. In general, the situs of the income whether within or without the Philippines, is determined by the place
where the service is rendered.
5. Source of income is either within the Philippines, without the Philippines or partly within and partly
without the Philippines.
6. Amounts received, through accident or health insurance or under Workmen’s Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts of any damages received are exempt
from income tax.
7. Pensions are taxable to the extent of the amount of the received except if there is an approved pension
plan by the Bureau of Internal Revenue.
8. Payroll period means the period of services for which a payment of compensation is ordinarily made to
an employee by his employer.
9.The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured
are exempt from income tax and if such amounts are held by the insurer under the agreement to pay
interest thereon, the interest payments shall be excluded from gross income.
10. Gross income derived from interest is only such interest as arising from indebtedness, that is,
compensation for the loan or forbearance of money, goods, or credits.
11. Overtime pay and night shift differential are not subject to tax.
12. In addition to rent, other considerations which the lessee my pay third parties such as interest, taxes,
dividends and insurance premiums are taxable to the lessee.
13. Income of any kind, to the extent required by any treaty obligation binding upon the Government of
the Philippines, are exempt from the income tax.
14. A non-taxable stock dividend does not constitute income if the new certificates plus the old ones
change the proportionate interest of the stockholder in the assets of that corporation.
15. Facilities and privileges by an employer to his employees, are not considered as compensation if such
facilities or privileges are of relatively small value and furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or efficiency of his employees
16. Prizes and awards granted to athletes in local and international sports competitions and tournaments
held in the Philippines or abroad and sanctioned by their national sports associations are exempt from
income tax.
17. In the case of a manufacturing, merchandising, or mining business, gross income means total sales,
less cost of goods sold minus any income from investments and from incidental or outside operations or
sources.
18. Prizes and awards received in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievement are not taxable if the recipient was selected without any action on his part to
enter the contest or proceedings and the recipient is not required to render substantial future services as a
condition to receiving the prize or award.
19. Compensation from damages if it represents payment for loss of expected profits are taxable but
compensatory damages constituting returns of capital are not taxable.
20. There is employer-employee relationship when the person for whom services are performed has the
right to control and direct the individual who performs the services, not only as to the result to be
accomplished by the work but also as to the details and means by which the result is accomplished.
21. Dividends are distributions made by a corporation out of its earnings or profits accrued since March 1,
1913, and payable to its shareholders, whether in money or in other property.
22. Remuneration for services as employee of a nonresident alien individual, foreign partnership or
foreign corporation constitutes compensation only if such employer is engaged in trade or business within
the Philippines.
23. If services are paid for in a medium other than money, it is not to be included as compensation.
24. Holiday pay and hazard pay are exempt from income tax.
25. Crop year basis is used by farmers whose crop take more than one year from planting up to harvesting
and disposing- the entire cost of production under which is deducted from the gross income in the year it
was realized.
26. In general, individuals who follow an independent trade, business, or profession, in which they offer
their services to the public, are employees.
27. The tax benefit rule states that recovery of accounts previously written off constitutes a receipt of a
taxable income if in the year of recognition of its being worthless, the write-off resulted in reduction of
taxable income.
28. Compensation means all remuneration for services performed by an employee for his employer under
an employer-employee relationship.
29. Passive income subject to final tax shall form part of the gross income for purposes of computing the
normal income tax liability of individuals and corporations.
30. Employer is an individual performing services under an employer-employee relationship.
31. Thirteenth month pay and other benefits received by officials and employees of public and private
entities are exempt provided, however, that the total exclusion shall not exceed P82,000.
32. Remuneration for services performed outside the Philippines by a resident citizen for a domestic or
resident foreign corporation or partnership, or for a non-resident corporation or partnership, or for a non-
resident individual not engaged in trade or business in the Philippines shall be treated as compensation
which is subject to tax.
33. Tips or gratuities paid directly to an employee by a customer of the employer which are not accounted
by the employee to the employer are not considered as taxable income.
34. All GSIS, SSS, PHIC and HDMF contributions, and union dues of individuals are exempt from
income tax.
35. The timing or basis upon which the remuneration is paid is material in determining whether the
remuneration constitutes compensation.
36. Pensions, retirement and separation pay constitute compensation unless otherwise exempted by law.
37. Vacation allowances or sick leave credits which are paid to an employee constitute compensation
including the monetized value of unutilized vacation leave credits of 10 days or less.
38. As a general rule, the entire amount of the gain or loss arising from dealings in property is a taxable
gain or a deductible loss.

II. Multiple Choice Theory

1. The widow of your best friend has just been paid P1,000,000 on account of the life insurance policy of
her deceased husband. She asks you whether she should declare the amount for income tax purposes or
for estate tax purposes. Which statement is true?
a. The proceeds of life insurance paid to the beneficiary upon the death of the insured are exempt from
income tax and need not be declared for income tax purposes.
b. The proceeds of life insurance would have to be declared for estate tax purposes if the designation of
the beneficiary was irrevocable, otherwise it need not be declared.
c. Both of the above
d. None of the above

2. Retirement benefits, pensions and gratuities to be exempt must conform with the following conditions.
Which is not condition?
a. The retiree is not less than 50 years old at the time of retirement.
b. The benefit must be in accordance with a reasonable private benefit plan maintained by the employer.
c. The retiree’s separation from service, whether voluntary or involuntary, is not a consideration at all.
d. The retiring employee has been in the service of the same employer for atleast 10 years.
e. All of the above
f. None of the above

3. Which is not correct? The P82,000 limit on gross benefits of employees

a. include Christmas bonus.
b. include productivity incentive pay.
c. may be increased by the Secretary of Finance.
d. does not include employees of private entities.
e. all of the above.
f. none of the above

4. Which is not correct about source of income?

a. Source of royalties is place where the intangible is used.
b. Source of income from merchandising is place of business.
c. Source of income from farming is the place where farm is located.
d. All of the above
e. None of the above

A Co., a Philippine corporation, has a executive in the person of Mr. Juan, a Filipino citizen. A Co. has a
subsidiary in Hong Kong, HK Co,. and will assign Mr. Juan for an indefinite period to work full time for
HK Co. Mr. Juan will bring his family to reside in Hong Kong and will lease out his residence in the
Philippines. The salary of Mr. Juan will be shouldered 50% by A Co., while the other 50% plus housing,
cost of living and educational allowances of Mr. Juan’s dependent will be shouldered by HK Co. A Co.
will be credit the 50% of Mr. Juan’s salary to his Philippine bank account. Mr. Juan will sign the contract
of employment in the Philippines. Mr. Juan will also be receiving rental income for the lease of his
Philippine residence.

5. The rent income of Mr. Juan for the leas of his Philippine residence is
a. subject to the Philippine income tax Mr. Juan being a resident Filipino citizen earning income from
without.
b. not subject to Philippine income tax because Mr. Juan qualifies as a non- resident citizen earning
compensation from without.
c. subject to Philippine income tax because Mr. Juan qualifies as a non-resident citizen deriving income
from within.
d. not subject to Philippine income tax because Mr. Juan is considered a resident Filipino citizen.

6. The 50% salary of Mr. Juan to be shouldered by A Co. is

a. subject to Philippine income tax Mr. Juan being a resident Filipino citizen.
b. subject to Philippine income tax because although salary was earned in Hong Kong, the same is paid in
the Philippines.
c. not subject to Philippine income tax because Mr. Juan is considered a resident Filipino citizen
d. not subject to Philippine income tax because Mr. Juan qualifies as a non-resident citizen earning
compensation from without.

7. The 50% salary plus housing, cost of living and educational allowances granted by HK Co. to Mr. Juan
are
a. subject to Philippine income tax Mr. Juan being a resident Filipino citizen.
b. subject to Philippine income tax because although salary was earned in Hong Kong, the same is paid in
the Philippines.
c. not subject to Philippine income tax because Mr. Juan is considered a resident Filipino citizen
d. not subject to Philippine income tax because Mr. Juan qualifies as a non-resident citizen earning
compensation from without.

8. Which is not compensation?

a. non-exempt pensions, retirement and separation pay
b. living quarters and meals in addition to salary
c. tips and gratuities when not accounted for by the employee to the employer
d. all of the above
e. none of the above

9. Fixed or variable transportation, representation and other allowances are taxable

a. if the employee has accounted for the expenses according to substantiation requirements.
b. if received in addition to regular compensation fixed foe employee’s position or office
c. if it is for ordinary and necessary expenses incurred in the pursuit of profession.
d. all of the above
e. none of the above

10. Which of the following is taxable?

a. Lotto winnings
b. Price exceeding P10,000
c. Gain on sale of 10-year bond
d. Interest on long-term deposit or investment

11. Which of the following tax refunds is taxable?

a. income tax paid to a foreign counter if credited in the year claimed
b. estate or donor’s tax
c. stock transaction tax
d. fringe benefit tax
e. all of the above
f. none of the above

12. Which of the following does not receive the same tax treatment as a cash dividend?
a. liquidating dividend
b. property dividend
c. indirect dividend
d. scrip dividend
e. all of the above
f. none of the above

13. Which statement is false?

a. The term “use” as used in “b” above shall include the reselling or distribution of software.
b. “Software” is generally assimilated as a literary, artistic or scientific work protected by copyright laws.
c. Payments in consideration for the use of, or the right to use, a copyright or a copyrighted article relating
to software are generally royalties.
D. All of the above.

14. Income from whatever source include all other income not expressly exempt under the laws. Which
does not belong?
a. bad debts written off then recovered
b. moral damages for slander
c. income from gambling
d. all of the above
e. none of the above

15. FPG was retired by his employer corporation in 2013 and paid P1,000,000 as a retirement gratuity
without any deduction for withholding tax. The corporation became bankrupt in 2014. Can the BIR
subject the P1,000,000 retirement gratuity to income tax?
a. Yes, if the retirement gratuity was paid based on a reasonable pension plan where FPG was 50 years
old and has served the corporation..
b. No, if FPG was forced by the corporation to retire.
c. Both “a” and “b”
d. Neither “a” nor “b”

16. For purposed of computing the normal income tax liability of individuals and corporations, which is
not gross income item?
a. annuities
b. rent
c. compensation
d. intercorporate dividends

17. Which of the following items that reduce salaries of employees is not an exclusion from gross
income?
a. IOUs
b. PHIC contribution
c. HDMF contribution
d. GSIS or SSS contribution

III. Multiple Choice-Problems

In 2014, Mr. Pacino was employed as account officer in a non-life insurance company. He received
P8,000 basic monthly salary. In addition, he gets 5% of gross premium as commission on policies issued
under his account. In 2014, gross premiums under his account totaled P4.2 million. He is likewise entitled
to representation allowance of P1,000 a month.

1. How much is to be included as gross income in 2014?

a. P96,000 c.P318,000
b.P306,000 d. exempt

Mr. Buscemi, the Treasurer of Apollo Corp., receives P25,000 basic salary a month. For being one of the
five members of the board of the same corporation, he, in addition, receives P15,000 a month. In
December 2014, he received his 13th month pay of P40,000 and productivity incentive of P150,000.

2. Mr. Buscemi’s gross income in 2014 is

a. P480,000 c.P670,000
b. P520, 000 d.P640,000

Julia R., an employee, has the following details relative to her employment in 2014:
 She consulted the company physician due to headache. Had she consulted another physician, she
would have been charged P300 as consultation fee.
 She received cash from a customer for her efficient service, P5,000. She failed to account for it to
her employer.
 She claimed for the monetized value of hr unused leave credits for 8 days. Her daily basic salary
is P300.

3. How much is to be considered as compensation income?

a. P5,000 c. P7,700
b. P7,400 d. P5,600

Richard G., received the following benefits from his employer in December 2014.
Thirteenth month pay P50,000
Christmas bonus 10,000
Productivity incentives pay 16,000

4. The taxable compensation income is

a. P76,000 c. P16,000
b. P46,000 d. P2,000

Mr. Arnold S. was injured in a vehicular accident in 2013.He incurred and paid medical expenses of
P40,000 and legal fees of P20,000 during the year. In 2014, he received P140,000 as settlement from the
insurance company which insured the car owned by the other party involved in the accident.

5. From the above payments and transactions, the amount of taxable income to Mr. S in 2014 is
a. zero c.P140,000
b. P80,000 d.P100,000

Veteran Poultry, employs the cash basis of accounting for its poultry business. For the tyaxaable year
2014, it has the following data:

Cash sales on livestock raised P500,000

Sales of livestock purchased 250,000
Cost of sales 300,000
Other income 100,000

6. The gross income in 2014 is

a. P550,000 c.P750,000
b. P450,000 d.P850,000

Cameron D., a sole proprietor, has the following data in 2014, its first year of merchandising:

Gross sales P300,000

Cost of goods sold 150,000
Other income 50,000
Selling expenses 20,000
 Depreciation expense 4,000

7. How much is Cameron’s gross income?

a. P300,000 c. P200,000
b. P150,000 d. P224,000

In addition to the compensation being received by Ms. Lynn R. as employee, she leases out her 3-door
apartment for P10,000 a month each unit. Her compensation income for 2014 consists of P13,000 basic
salary a month, 13th month based basic salary plus P25,000 bonus. As royalties, she received P113,000 for
the book she wrote; and P80,000 for her property that is planted with pineapples.

8. The amount to be included as a gross income in 2014 is

a. P717,000 c. P604, 000
b. P747,000 d. 524,000

Mr. Ricky M. was insured under an endowment policy with a value of P1,000,000. Total premiums paid
by him during the term of premium payments on the policy was P980,000, from which there was a return
of premiums of P80,000. At the Maturity of the policy in 2014, Mr. M received P1,000,000

9. The income of Mr. M under the policy is

a. zero c. P20, 000
b. P1,000,000 d.P100,000

Ms. Ashley J. is an employee in a firm which gives fringe benefits to its rank-and-file employees. In a
retirement benefit plan, contributory on the part of both the employer and employees, but not registered
with the Bureau of Revenue, Ms. J. had the following data on the retirement pay she received in 2014:

Contributions by the employer P 120,000

Contributions by Ms. J 30,000
Interest income of the fund on the above contribution 10,000
Total amount received P160,000

10. The gross income of Ms. J. is

a. zero c. P120, 000
b. P160,000 d. P130,000

In the 2014 records of taxpayer Jennifer L., the following items relate to the different policies she
obtained:

Received by the tax payer under policies:

Proceeds of life insurance (as beneficiary of mother) P800,000
Proceeds of life insurance (as beneficiary of father) 1,200,000
Insurance purchased from the father at cost to taxpayer of 400,000
Additional premiums paid by the taxpayer to continue the policy 100,000
Amount received upon the death of the father 1,000,000
Proceeds of endowment policy, upon maturity, with premium
Payments made of P1,600,00 2,000,000
Proceeds of comprehensive car insurance 200,000
Crop insurance, from crop destroyed by typhoon 100,000
11. The income from the amounts received is:
a. P4,600,000 c. P1,200,000
b. P1,000,000 d. P100,000

The following are recoveries in 2014 of bad debt previously written off by Patrick S., the taxpayer:

No. 1: P40,000 from accounts written off in a year which had a net income of P400,000 before write off
(write off for the year was P40,000);
No. 2: P10,000 from accounts written off in a year which had a net loss before write off of P72,000
(write-off for the year was P10,000)
No. 3: P20,000 from accounts written off in a year which had a net income of P16,000 before write-off
and a write for P24,000

12. The income from the bad debt recovery is

a. P70,000 c. P52,000
b. P40,000 d. P60,000

IV. Problem- Retirement Plan

Faith Company, a Philippine corporation, has two divisions-manufacturing and construction. Due to the
economic situation, it had to close its construction division and lay off the employees in that division.
Faith has a retirement plan approved by the BIR which requires a minimum of 50 years of age and 10
years of service in the same employer at the time of retirement.

There are two (2) groups of employees to be laid off:

a. Employees who are at least 50 years of age and has 10 years of service at the time of termination of
employment.
b. Employees who do not meet either the age or length of service.

For category (a) employees- the benefits under the BIR approved plan plus a gratuitous payment of one
month for every year of service.

For category (b) employees- one month for every year of service.

Required: For each item in column 1 below, indicate (in column 2) whether the item is subject to (S) or is
exempt (E) from income tax. Justify your answer (column 3):

Item Subject to (S) Reason

or Exempt (E)

Category A Employees
1. Benefit under BIR
approved plan. ______________________ _____________________
2. Gratuitous pay
month for every year of
service ______________________ _____________________
3. Cash equivalent of
unused vacation leave
credits. ______________________ _____________________
4. Cash equivalent of
 unused sick leave
credits. ______________________ _____________________

Category B Employees
1. Gratuitous pay
month for every year of
service ______________________ _____________________
2. Cash equivalent of
unused vacation leave
credits. ______________________ _____________________
3. Cash equivalent of
unused sick leave
credits. ______________________ _____________________

Questions-2007 Bar Exams

Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard. To entice him
to accept the offer of employment, he was offered of the arrangement that part of his compensation would
be an insurance policy with a face value of P20 Million. The parents of Noel are made the beneficiaries of
the insurance policy

1. Will the proceeds of the insurance form part of the income of the parents of Noel and be subject to
income tax? Reason briefly.
2. Can the company deduct from its gross income the amount of the premium? Reason briefly.

Questions-2007 Bar Exams

Z is a Filipino immigrant living in the United States for more than 10 years. He is retired and he came
back to the Philippines as a balikbayan. Every time he comes to the Philippines, he stays here for a month.
He regularly receives a pension from his former employer in the United States, amounting to US$1,000 a
month. While in the Philippines, with his pension pay from his former employer, he purchased a
condominium unit in Makati which he is renting out for P15,000 a month.

1. Does the US$1,000 pension become taxable because he is now residing in the Philippines? Reason
briefly.
2. Is his purchase of the condominium unit subject to any tax? Reason briefly.
3. Will Z be liable to pay income tax on the P15,000 monthly income? Reason briefly.