1. What are the two (2) aspects of taxation?

The (2) aspects of taxation are:

1. Levy-refers to the legislative act of imposing the tax and exercised by Congress;
and
2. Collection-refers to the administrative act of collecting tax and exercised by the
Executive branch of government, more particularly:
1. Bureau of Internal Revenue-national taxes;
2. Bureau of Customs-customs duties; and
3. Local Government Units-local taxes.

2. According to U.S. Chief Justice John Marshall, “the power to tax involves the power
to destroy.” But according to U.S. Justice Oliver Wendell Holmes, “the power to tax is
not the power to destroy while this court sits.” Reconcile these statements.

The power to tax involves the power to destroy because being an enforced contribution
the subject is not at liberty to free himself from burden. However, this power not
absolute since it is subject to certain inherent and constitutional limitations. If the
exercise of the taxing power exceeds these limitations, then the court has duty to
declare the same as invalid or unconstitutional, thereby preventing the destructive of the
power of taxation.

3. What is direct double taxation?

Double taxation is a taxation principle referring to income taxes paid twice on the same
source of earned income. It can occur when income is taxed at both the corporate level
and personal level. Double taxation also occurs in international trade when the same
income is taxed in two different countries.

4. What are the three (3) basic principles of a sound tax system?

1. Fiscal Adequacy- The sources (proceeds) of tax revenue should coincide with and
approximate needs of government expenditures. The sources of revenue should be
sufficient and elastic to meet the demands of public expenditures;
2. Theoretical Justice- The tax system should be fair to the average taxpayer and based
upon his ability to pay.
3. Administrative Feasibility- The tax system should be capable of being properly and
efficiently administered by the government and enforced with the least inconvenience to
the taxpayer.

5. Distinguish tax from customs duties.

The government earns revenues from various sources, and one of its principal means of
income is tax and duty. They help the government to provide public utility services to the
people of the country like medical, railway, postal, education, banking, food,
infrastructure, etc. Tax is the financial charged levied by the Government on the income,
activity or commodity. It is into two main categories Direct Tax and Indirect Tax. Direct
tax includes income tax or wealth tax.

On the other hand, Indirect Tax also has two divisions, i.e. taxes and duties, wherein
taxes include Goods and Services Tax, while duty includes custom duty or excise duty.
The main difference between tax and duty, is that the scope of tax is wider in
comparison to duty, i.e. the latter is the subtype of the former.

6. Shall the principle of tax exemption be applied without first applying the doctrine of
strict interpretation in the imposition of taxes?

No, it is obviously both illegal and impractical to determine who are exempted without
first determining who are covered by tax provision. The hornbook doctrine in the
interpretation of tax laws declares that a statute will not construed as imposing a tax
unless it does so clearly, expressly and unambiguously. As a consequence hereof, in
case of doubt, the statute is to be construed most strongly against the government and
in favor of the subjects or citizens (CIR vs CA, CTA &Ateneo de Manila University, G.R.
No. 115349).

7. Does the withdrawal of tax exemption contained in a special franchise constitute an

impairment of the obligation of contracts?

No, a tax exemption is granted in a special franchise is far being strictly contractual in
nature. Contractual tax exemptions, is the real sense of the term and where the non-
impairment clause of the Constitution can rightly be invoked, are those agreed by the
taxing authority in contracts, such as those contained in government bonds or
debentures, lawfully entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its governmental
immunity. Truly, tax exemptions of this kind maybe not be revoked without impairing the
obligation of contracts. These contractual exemptions, however, are not to be confused
with tax exemptions granted under franchises. A franchise partakes the nature of a
grant which is beyond the purview of the non-impairment clause of the Constitution.
(MERALCO vs Province of Laguna, G.R. No. 131359).

8. What is the test to be applied in determining whether or not real property that is
actually, directly and exclusively used for religious, charitable or educational purposes
shall be granted exemption from real property taxes under the Constitution?

Article VI, Section 28 of par. 3 of the 1987 Constitution, exempts "charitable institutions"

from the payment not only of property taxes but also of income tax from any source. In
support of its novel theory, it compares the use of the words "charitable institutions,"
"actually" and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in
Article VI, Section 22, par. 3 of the 1935 Constitution.
9. What are the requisites of a valid and reasonable classification that would not violate
the equal protection clause of the Constitution?

Requisites of a Valid Classification:

1. Must be based on Substantial Distinctions.

2. Germane to the purpose of law.
3. Classification must not be limited to existing conditions only but must also apply
to future conditions substantially identical to those of the present.
4. It must apply equally to all members of the same class.

10. What is meant by the phrase “situs of taxation”?

Situs of taxation literally means place of taxation. The general rule is that the taxing

power cannot go beyond the territorial limits of the taxing authority. Basically, the state
where the subject to be taxed has a situs may rightfully levy and collect the tax.

11. What is the doctrine of equitable recoupment?

Equitable recoupment doctrine is a legal principle that grants a right to a creditor to

recover debt. The debt diminishes to the extent s/he holds the debtor’s property in
violation of the debtor’s legal rights.

12. Are taxes subject to set-off or legal compensation?

Generally, no. Taxes cannot be the subject of compensation or set-off. Taxes are not
contractual obligations but one arising out of duty to the government.

13. The Congress of the Philippines, in its desire to broaden the scope of taxation,
enacted a law subjecting the Armed Forces’ legal minds opposed the imposition,
asserting that it directly exercises the sovereign powers of the State and is, therefore,
exempt as a government entity.

Is the law passed by Congress valid and constitutional? Explain briefly.

14. X College, a non-stock, non-profit educational institution rented an adjoining 20, 000
square-meter lot owned by Y, a wealthy businessman. X College utilized the area as
follows: 10, 000 square meters as a parking space for students who pay a minimal
parking fee of P50 per month, and the other 10, 000 square meters as a soccer field.

(a) Is the rented lot covered by the exemption on real property taxes under Article
VI, Sec. 28 (3) of the Constitution? Explain briefly. Yes, the rented lot is covered
by the exe,ption on real property taxes,
 (b) Are the rentals collected by Y from X College subject to income tax?
Explain Briefly.

(c) Are the parking fees collected by X College from its students subject to
income tax? Explain briefly.

15. Y, a Filipino permanently stationed for work in Singapore, met Z, a Brazilian tourist.
The two became acquainted with each other and Z offered to buy the gold watch of Y. Y
consented and the friends agreed that the payment and delivery of the item would be
made in the Philippines a week later when Y would go home and Z would tour the
islands. The sale was consummated as agreed.

Is the income derived from the sale a taxable transaction under Philippine tax law?
Explain briefly.

16. X Corporation was assessed by the BIR for back income taxes in the amount of
P1,000,000 inclusive of penalties. The assessment became final and executory due to
its failure to file a written protest within the prescribed period as provided by law. On the
other hand, a final decision rendered by the Supreme Court awarded X Corporation
P800, 000 for value-added tax erroneously collected by the BIR.

May the two (2) taxes be the subject of legal compensation or set-off? Explain briefly.

17. The BIR issued a Revenue Memorandum Circular (RMC) extending the period of
claims for refund from two (2) years as provided under the National Internal Revenue
Code to ten (10) years.

Is the above Revenue Memorandum Circular (RMC) valid? Explain briefly.

18. What is meant by “graduated income tax rates?”

8% Income Tax on Gross Sales/Receipts and Other Non-Operating Income in Lieu of

the Graduated Income Tax Rates and the Percentage Tax; Or. Income Tax Based
on Graduated Income Tax Rates.

19. Distinguish income subject to creditable withholding tax from income subject to final
withholding tax.

Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from
the payee on the said income. The liability for payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to withhold the tax or in case of
under-withholding, the deficiency tax shall be collected from the payor/withholding
agent. The payee is not required to file an income tax return for the particular income.
On the other hand, under the creditable withholding tax system, taxes withheld on
certain income payments are intended to equal or at least approximate the tax due of
the payee on said income. The income recipient is still required to file an income tax
return to report the income and/or pay the difference between the tax withheld and the
tax due on the income.

20. Are expenses for foreign travel paid by the employer for the employee for the
purpose of attending business meeting or conventions taxable?

Business conferences are tax-deductible within the boundaries of IRS travel rules. In

general, you can deduct "ordinary and necessary expenses" for attending business
meetings and conferences when the expenses directly relate to your business, job, or
profession, says the Internal Revenue Service.

21. “What is grossed-up monetary value?”

A Grossed-up monetary value consists of:

(a) The net amount of money or net monetary value of property received; and
(b) The amount of fringe benefit tax due and paid thereon by the employer for and in
behalf of the employee.

22. What is meant by the so-called “convenience of the employer rule” as applied to
meals and lodging furnished by the employer to the employee?

The ‘convenience of the employer’ rule is simply an administrative test to be applied

only in cases in which the compensatory character of ... benefits is not otherwise
determinable. It follows that the rule should not be applied in any case in which it
evident from the other circumstances is involved that the receipt of quarters or meals by
the employee represents compensation for services rendered. 

Your committee believes that the House provision is ambiguous in providing that meals
or lodging furnished on the employer’s premises, which the employee is required to
accept as a condition of his employment, are excludable from income whether or not
furnished as compensation. Your committee has provided that the basic test of
exclusion is to be whether the meals or lodging are furnished primarily for the
convenience of the employer (and thus excludable), or whether they were primarily for
the convenience of the employee (and therefore taxable). However, in deciding whether
they were furnished for the convenience of the employer, the fact that a State statute or
an employment contract fixing the terms of the employment indicate the meals or
lodging are intended as compensation is not to be determinative. This means that
employees of State institutions who are required to live and eat on the premises will not
be taxed on the value of the meals and lodging even though the State statute indicates
the meals and lodging are part of the employee’s compensation. 

23. Is terminal leave pay taxable?

In the case of Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al., G.R.
No. 96032, 31 July 1991, the Court explained the reason why terminal leave pay is
exempt from income tax.

The decision states “commutation of leave credits, more commonly known as terminal
leave, is applied for by an officer or employee who retires, resigns or is separated from
the service through no fault of his own. In the exercise of sound personnel policy,
the Government encourages unused leaves to be accumulated.
The Government recognizes that for most public servants, retirement pay is always less
than generous if not meager and scrimpy. A modest nest egg which the senior citizen
may look forward to is thus avoided. Terminal leave payments are given not only at the
same time but also for the same policy considerations governing retirement benefits.
Thus, not being part of the gross salary or income of a government official or
employee but a retirement benefit, terminal leave pay is not subject to income tax.

24. Are illegal gains taxable?

Income derived from illegal activities such as bookie/betting operations, theft,

embezzlement, and from other illegal resources. Regardless of the source of the
income, the money is still considered taxable and must be reported to the Internal
Revenue Service as income earned.

25. X, a Filipino who is married with three (3) dependent children, is a technical
consultant of multinational company in Dubai. His contract calls for his stay in the
foreign country during the months of March, April and May, and also during the months
of September, October and November of each calendar year. Other than these months,
X spends his time with his family in the Philippines. His total compensation income for
the current taxable year amounts P2,400,000.

Is X’s compensation income subject to Philippine income tax? Explain briefly.

26. A Chinese national came to the Philippines on January 1, 200A and stayed herein
until May 13, 200B

Determine the classification of the taxpayer for the taxable year 200A.

27. X, an Italian actor residing in his own country, was contracted by a Philippine movie
company to film here. The shooting period of the film commenced on the January 1 and
ended on May 31 of the same taxable year. The motion picture contract called for talent
fee of P4, 000, 000. The movie company sought your legal advice regarding the tax
implication of the talent fee payable to X.

What would your legal advice be to your client? Explain briefly.

28. X (Norwegian) and Y (Filipino) met each other in Japan while the two toured the
said county. Y became interested in the expensive diamond ring of X and so the former
offered to buy the same from the latter for P1,000,000. X accepted the offer. However,
X and Y agreed that payment and delivery would be done a month later in the
Philippines when X would tour the country for a week and Y would go back from his
vacation. When the two friends finally met in the Philippines, Y informed X that he (Y)
would only pay the sum of P750, 000 to X because as withholding agent, he is legally
obliged to remit the 25% final income tax of P250,000 to the BIR. X objected,
contending that as a non-resident alien he is not subject to Philippine income tax.

Resolve the conflict.

29. X, a regular customer of a supermarket, gets one raffle ticket for every P500 worth
of purchased merchandise. The grand draw has a first prize of one automobile valued at
P1 million. The advertisements displayed the familiar phrase “TAX FREE.” When the
draw date came, X won the grand prize.

Is the prize subject to income tax? Explain briefly.

30. The land of the taxpayer was expropriated by the government. Its acquisition cost
ten (10) years ago was only P1 million. However, the government paid him P3milion
representing the market value of the land at the time of expropriation. Upon discovering
that the taxpayer did not report his gain from the transaction, the BIR assessed
deficiency income tax against the taxpayer. The taxpayer objected, contending that his
property was acquired through the condemnation proceedings and so the forced sale
cannot be made subject to income tax.

Is the contention of the taxpayer tenable? Explain briefly.

31. X and Y are the best of friends. X is the sales manager of an appliance store while Y
is a filed employee of the Department of Agrarian Reform. Both employees receive
representation and traveling allowance (RATA) in addition to their basic salary, which
they no longer need to account or liquidate with their employers. They are now
consulting you as to whether or not their RATA shall be subject to income tax.

Are the RATA of X and Y taxable? Explain briefly.

32. X is the chief executive officer (CEO) of a multinational corporation in the country.
He attended a business convention in the United States for two days. As a high-ranking
officer, he was allowed to bring along his wife to the affair. The company paid the
following in connection with the foreign travel:

(1) Business-class airline tickets for X and his wife costing P50,000 each, or a
total of P100,000; and

(2) Hotel accommodations for the couple at $300 per day, or a total of $600 for
two (2) days for both spouses.

Are the above benefits for foreign travel subject to the final fringe benefits tax? Explain
briefly.

33. X figured in a vehicular accident. He sued the offending party and the court awarded
the following recovery of damages suffered:

(1) Moral damages, P50, 000.

(2) Reimbursement of medical expenses, P100, 000; and

(3) Loss of income during period of disability, P25, 000.

Is the above recovery of damages taxable for income tax purposes? Explain briefly.

34. X (lessor) leased his vacant lot to Y (lessee). The contract called for the construction
of a commercial building by Y on the lot, which improvement shall belong to X upon the
expiration of the lease. On January 1 of the current year, the building was completed at
a cost of P1 million with an estimated useful life of ten (10) years. As this date, the
remaining term of the lease was fifteen (15) years.

What is the tax implication of the leasehold improvement on both X and Y? Explain
briefly.

35. Who has the burden of proving the correctness of deductible expenses?

36. What is optional standard deduction?

37. What is itemized deduction?

38. Briefly explain the meaning of “net operating loss carry-over.”

39. Is a debt that is merely doubtful of collection allowable as deduction for tax
purposes?
40. Are worthless debts arising from unpaid wages, salaries, rents and similar items of
taxable income deductible?

41. X is practicing lawyer in Gingoog City. For the taxable year, his gross professional
fees amounted to P500, 000. However, since he maintains his office free of any rentals,
his receipted expenses in relation to his law practice amount to only P100, 000.

What tax avoidance scheme will you advise X to follow for income tax purposes?

42. X is practicing lawyer in Bacolod City. He owns an automobile which he uses 50% in
his law practice, 30% in his teaching job, and 20% in his personal trips. He now consults
you as to whether or not he can claim as deductible expenses the following: (a)
gasoline; (b) oil; and (c) maintenance and repair.

What legal advice would you give to X? Explain briefly.

43. X is a Canadian national who resides permanently in the Philippines. For the taxable
year, his taxable income amounted to P500, 000 of which he paid the corresponding
income tax of P125, 000 per the graduated income tax rates. On the same income, X
paid the Canadian government an income tax equivalent to P100, 000. X now consulted
you on the possibility of claiming the Canadian tax as a tax credit from his Philippine
income tax.

What is your advice to X?

44. B sold his personal automobile to his sister, S. The vehicle had a book value at the
time of the sale in the amount of P400, 000 but was sold for only P300, 000.

(a) May B claim the loss on the sale of P100,000 as a deduction from his gross
income? Explain briefly.

(b) Assuming that the automobile was instead sold for P450, 000 is the gain of
P50, 000taxable? Explain briefly.

45. A company is engaged in mining operations somewhere in the Palawan area. It has
recently purchased a vast area of mineral land and several heavy equipment for its
operations in the locality.

What tax avoidance scheme would you suggest in the claiming the deductible expenses
of the company? Explain briefly.

46. What is meant by the rule of “reciprocity” on personal exemptions as applied to non-
resident aliens engaged in trade or business in the Philippines?

47. What is the significance of Republic Act No. 7432 in relation to exemptions?
48. H (husband) and W (wife) had their marriage judicially annulled and the custody of
their 3-year old child (X) was awarded by the court to W. H earns about P850, 000 per
annum as a company executive while W, on the other hand, derives no sufficient
income of her own, relying solely on her mother who is living with her. However,
supporting X poses no problem because H regularly sends a monthly allowance of
P200, 000 for the child’s needs.

Who between H and W is entitled to claim the additional exemption for X? Explain
briefly.

49. H (husband) and W (wife) have been married for more than a decade with no
offspring to complete their union. Finally, luck seemed to favor the couple when W
became pregnant. On February 1, 200A, a vehicular accident prompted W to undergo
caesarian operation and she delivered a 6 ½ month baby at 10 a.m of the same day.
The doctors incubated the premature-born baby but unfortunately the latter was
pronounced dead at 7:00 a.m. on February 2, 200A.

May H claim an additional exemption of P25, 000 for the baby for the taxable year
200A? Explain briefly.

50. Distinguish the tax implication of shares of stock that are listed and traded at the
stock exchange from shares of stock that are not listed and traded at the stock
exchange.