1.

The BIR investigated Mister Pagu, an individual taxpayer, and discovered that he is a major stockholder of
at least ten (10) big corporations which are all earning millions of pesos annually. The BIR found out further,
that the Inome Tax Return filed by Mister Pagu for CY 2020 reported a gross income of only P400,000.00.

The BIR could not believe the apparent disparity and is planning to file a tax evasion case against Mister Pagu
based on best evidence obtainable for his failure to declare his correct income.

a) If you were the tax lawyer of Mister Pagu, how will you defend him under such case?

b) What is Best Evidence Obtainable Rule?

a)

ANSWER:

If I were the tax lawyer of Mister Pagu, I will raise the defense that the taxes alleged to have been evaded is
computed based on returns approved by the BIR and thus arise a presumption of regularity upon the return
and taxes paid are correct.

Taxpayers must be informed of the of their tax deficiency and the facts and law from which it is based.
Moreover, the crime of tax evasion for it to prosper it must be established that false or fraudulent entries in
the return or knowingly and deliberate refuse to pay the tax due availing any unlawful means to evade
payment.

In this case, the basis of filing a case of tax evasion was his disbelief upon the disparity on the return against
the fact of being a shareholder, thus merely speculations. Thus, until the BIR is able to substantiate factual
deficiency and bad faith upon the taxpayer in the filing of the returns, the case must be dismissed.

b)

Best Evidence Obtainable Rule provides when a report required by law as a basis for the assessment of any
national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there
is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the
proper tax on the best evidence obtainable.

In case a person fails to file a required return or other document at the time prescribed by law, or willfully or
otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the
return from his own knowledge and from such information as he can obtain through testimony or otherwise,
which shall be prima facie correct and sufficient for all legal purposes.

2. Ms. A is employed as a cashier in a general merchandise store owned by its sole proprietor Mr. B. She
had a cash advance from her employer amounting to P50,000.00 which she used to pay the hospital bill when
she gave birth to her 7th child. Since Ms. A had faithfully served her employer for ten (10) years as Cashier
without embezzling even a single centavo, Mr. B offered to condone her Cash Advance. Ms. A does not want
to owe gratitude to her boss, thus, she just offered to clean the house of Mr. B every Sunday for four (4)
consecutive Sundays in exchange for the condonation of her cash advance to which he agreed. Mr. B house is
being used at the same time as a warehouse of the store’s merchandise.
Upon examination by the BIR of Mr. B’s financial statements, it discovered that Advances to Employees
amounting to P50,000.00 were written off as bad debts. Upon knowing the reason of the write-off, the BIR
assessed Mr. B of 30% Donor’s Tax on its condonation of the Cash Advances. Is the BIR correct?

ANSWER:

Yes, the BIR is correct to treat the advances as a donation but the rate should only be 6%

The law provides that condonation of debt where a debtor did not render service in favor to the creditor
constitutes a donation, and where the transfer is for an insufficient consideration, it may be treated as a
donation.

In the present case, where the cash advance was intended to be condoned, it should be treated as a donation.
Even, granting that the advances be considered as a compensation for the subsequent service rendered by the
donee, such service is insufficient to treat it in a concept of a fee. Thus, the advances should treated as a
donation and subject to donor’s tax, under the new rules the rate is only 30%.

3. MDC Corporation, a VAT registered exporting company, filed its Quarterly VAT Return for the 4th quarter
of CY 2017 on January 25, 2018. The said return showed an Excess Input VAT in the amount of
P3,000,000.00. On December 01, 2020, MDC filed before the BIR an administrative claim for refund of its
excess input VAT. Thereafter, or on December 27, 2020, fearing that the period for filing a judicial claim for
refund was about to expire, MDC proceeded to file a petition for review before the CTA, without waiting for
the CIR’s action on the administrative claim.

The CIR questioned the claim for refund for being unsubstantiated. The CTA Second Division partially granted
MDC’s petition and awarded a refund for only P2,000,000.00. Both MDC and the CIR filed a motion for
reconsideration but were both denied prompting them to appeal to the CTA en banc which likewise affirmed
in toto the decision of the CTA Division. Feeling aggrieved by the decision of the CTA en banc, the CIR filed a
petition for review on certiorari before the Supreme Court and also raising for the first time the lack of
jurisdiction of the CTA to rule on the case.

a) Is MDC’s petition for review to the CTA Division even before the BIR acted on its claim procedurally
correct?

b) Did the CTA acquire jurisdiction over the case?

c) Explain briefly the 120+30-day periods (now 90+30-day periods) in claiming for refund of input taxes.

a) No. MDC’s petition for review to the CTA Division is not procedurally correct.

The prescribed period for a claim of VAT refund is 2 years after the close of the taxable quarter when sale was
made. Moreover, the 90 day period provided by law within which the BIR to act upon the an application for
VAT refund is jurisdictional and an appeal made prior the lapse of such period renders the filing of an appeal
premature.

In this case, an appeal to the Court of tax appeals was made before the expiration of the 90 period from the
filing of the claim with the BIR, thus the appeal was prematurely filed.

b)
No, the CTA did not acquire jurisdiction. The 90 day period provided by law within which the BIR may act upon
the claim for VAT refund is jurisdictional, the non-compliance thereof renders the appeal prematurely filed. In
this case, an appeal to the Court of tax appeals was made before the expiration of the 90 period from the filing
of the claim with the BIR, thus the appeal was prematurely filed.

c)

The 90 day period provided by law for the BIR to act upon the claim is jurisdictional. Thus, in case of an inaction
by the BIR, only upon the lapse of such period an appeal to the court of tax appeals may be validly made The
30 day period is the prescribed period within which the appeal should be made reckoned from the lapse of the
90 day period.

4. a) Distinguish Itemized Deductions and Optional Standard Deduction.

b) Discuss briefly the difference, if any, between the Optional Standard for individual taxpayers and for
corporations.

a)

In Itemized Deductions, it must be substantiated by receipts, whereas in Optional Standard Deduction, it

requires no proof of expenses incurred because the allowable deduction is a percentage not exceeding 40% of
gross sales or receipts or gross income as the case may be. The former is those allowed by the NIRC to be
deducted from the gross income before the income is subjected to tax (Sec. 34), while the latter is a fixed
percentage deduction without regard to any actual expenditure, in lieu of the itemized deductions. It is merely
a privilege that may be enjoyed by certain taxpayers Sec. 34 (L)

b)

The Optional Standard Deduction for individual taxpayers except non-resident aliens (NRA), it may be taken in
lieu of itemized deduction except those earning purely compensation income. If opted to use OSD, he is no
longer allowed to deduct cost of sales or cost of services. He is not required to submit final statements provided
he shall keep such records pertaining to his gross sales or gross receipts.

The Optional Standard Deduction for corporations applies to domestic and resident foreign corporations. They
are still required to submit their financial statements when they file their annual ITR and to keep such records
pertaining to its gross income.

5. Dani Alforx had filed his administrative protest on February 01, 2020 to the CIR on a disputed assessment
issued to him. On March 01, 2020, he submitted all relevant supporting documents. On September 27, 2020,
there was still no action from the BIR on his protest, thus he prepared his appeal to the CTA and plans to file
on or before October 27, 2020 thinking that it is the deadline for his appeal. Dani intimated his case to his
lawyer friend, Atty. Tingale Co, but Atty. Co said that Dani’s action is procedurally incorrect stressing that the
correct action is to wait for the CIR’s decision on his protest and file his appeal to the CTA within thirty (30)
days from his receipt of said decision. This, according to him, is in compliance with the principle of exhaustion
of administrative remedies and in order not to bypass the authority of the BIR. Dani Alforx however argued
that it is unfair and unjust for him to be made to wait forever the BIR’s decision and that taxpayers should not
suffer from the laziness and intentional inaction of the BIR, if such be the case. You are a new tax lawyer and
happened to pass by your two friend arguing with each other. If asked, how do you advise them of the correct
procedure to settle their argument on the matter?

When protest is not acted upon by the BIR. A taxpayer may either:

(a) appeal to the CTA within thirty (30) days from or after the expiration of the (180)-day period; or

(b) await the final decision of the BIR Commissioner’s duly authorized representative on the disputed
assessment. Then within 30 days from the receipt of such judgement he may appeal to the CTA in case there
is an adverse decision

It has been held that these remedies are mutually exclusive. In this case, the failure to file an appeal
to the CTA within 30 days from the lapse of 180-period reckoned from the submission of the documents, his
only choice is to wait for the decision of the BIR before filing an appeal to the CTA.

11. SANJO Inc., a closely-held corporation, is engaged in manufacturing and distributing of soft drinks. It
has 1,000,000 authorized shares with P100 par value, all of which are fully subscribed and paid. After the close
of the taxable year 2019, the Accountant of SANJO is very happy to inform the Board of Directors during a
board meeting that 2019 was their luckiest year ever as they posted an income of P100, 000,000.00 which
causes the Company’s accumulated earnings to exceed their paid-up capital by the same amount.

The Chairman asked the Accountant if it is okay to declare dividends this year.Trying to suggest a tax-saving
measure to impress her boss, the Accountant advice forgoing for now the dividend declaration, which is subject
to 10% dividends tax, to avoid any tax imposition on the said earnings.

Seeking confirmation, the Chairman hired you, a new bar passer, as their Tax Lawyer asking clarifications as
follows:

a) Would the suggestion of the Accountant really free the Company of any tax on its retained earnings?

A. Yes, it is possible to not declare tax dividends to save tax impositions to the said earnings.

Under the law, dividends can be used by the investors to determine the value of a stock using the
dividend discount model, by getting the present value of all future dividend payment and comparing it to the
current stock price. This can also be used as a regular source of income from stock investments, especially
when the company does well, and its dividend rate continue to grow. One of the reasons to invest in stocks is
for the potential dividend income, most especially if the investor intends to hold onto shares for the long term.

In the case at bar, the suggestion of the accountant to not declare the dividend to save tax imposition
can also be made. The distribution of cash dividends is anchored on the availability of cash reserves may not
be sufficient to cover the payout. This can be used to large capital expenditure to improve operations and
thereby fuel the company’s growth. It may also be due to the need to preserve liquidity, especially in uncertain
times during an economic downturn.

Wherefore, it is possible not to declare dividends to avoid tax imposition in order to promote company
growth.

b) Assuming the Company decided not to declare dividends and that it has plans of an immediate expansion
of business, what will be your advice to avoid any tax imposition on the said earnings?

My advice would be to use the dividends to improve operations for the growth. The deferment of
payment of the dividends, we believe that the corporation may do so provided that there are justifiable
reasons. And that they should be transparent with the shareholders and to make sure that the most viable
course of action that must be taken given the existing condition.

6. The mayor of Davao City had a personal grudge with a certain bank in its locality. Upon knowing that an
affiliate of said bank is planning to open at least ten (10) branches in the city in a couple of months, the City
Mayor immediately ordered the City Treasurer to charge an “Entry Tax” in the amount of P1,000,000.00 per
branch of bank that will do business in the city. In order not to make it obvious that he is singling out the said
bank and violate the equal protection of the laws, the Mayor made this applicable to all banks coming in the
city. Is the said “Entry Tax” a valid imposition?

SECTION 132. Local Taxing Authority - The power to impose a tax, fee, or charge or to generate revenue under
this Code shall be exercised by the Sanggunian of the local government unit concerned through an appropriate
ordinance. Way ordinance diri ditso ra gisugo si city treasurer.

7. Mr. Akira Akuymo is a newly promoted sales manager of ADITIV Corp., a big company selling feed
additives. Desiring to boost his sales and earn credit, he approached several feed manufacturing companies
to sell them their additives. Competition was stiff and after two (2) months, he still did not get any single
customer.

Mr. Akuymo then developed a new strategy, he befriended the Nutritionist and Quality Control Managers of
the manufacturing companies and offered each a monthly fee of P50,000.00 in the guise of “rebates” in
exchange for their acceptance of the feed additives of Mr. Akuymo that will eventually lead these companies
to buy the additives on a regular basis for their regular production needs. The strategy was successful boosting
the sales of Mr. Akuymo to new heights. The “rebates” were taken by Mr. Akuymo from his revolving fund and
ADITIV Corp. sanctioned his practice so long as the payees sign some Vouchers for BIR purposes.

a) If you were the BIR examiner and you think the above described expense cannot be allowed as an
itemized deduction of ADITIV Corp., what will be your basis?

I will not allow. Sales discounts and rebates. Estimation or accrual of sales discounts and rebates is
allowed in accounting, provided that the estimation is supported by a reasonable basis of calculation, which is
usually established from past experiences of customer claims from the company. However, only actual sales
discounts and rebates extended to or used by customers during the taxable period are considered allowable
deductions from gross sales for tax purposes.

b) If you were the tax lawyer of ADITIV CORP., how will you defend the deductibility of the said expense?
 . Sec. 106 TRAIN

XXX

(D) Sales discounts and rebates. Estimation or accrual of sales discounts and rebates is allowed in accounting,
provided that the estimation is supported by a reasonable basis of calculation, which is usually established
from past experiences of customer claims from the company. However, only actual sales discounts and rebates
extended to or used by customers during the taxable period are considered allowable deductions from gross
sales for tax purposes.

Xxx

c) If you were the justice of the tax court, how will you decide the issue?

I will rule in favor of BIR. Allowable deductions are confined to revenue expenditure wholly and
exclusively incurred in the production of gross income and are allowable against a particular income source
only. Non-allowable deductions are expenses of a private or capital nature (with certain exceptions)

8. CROCOCorporation, a corporation engaged in a pioneer business located in Mactan Economic Processing

Zone II (MEPZ II) in Lapu-Lapu City, Cebu, is enjoying indirect tax exemption under a special law. In 2019, it had
imported from Japan a hammer mill machinery worth P25,000,000.00. In 2020, CROCO decided to replace the
hammer mill it just bought and imported a new and more sophisticated machinery. The Company decided to
sell it’s the replaced machinery to BIRABIRA Inc., a vatable person based in Cebu City.

After an audit examination under a Letter of Authority conducted by the BIR, the latter immediately issued a
Final Assessment Notice (FAN) with a Formal Letter of Demand to BIRABIRA assessing the latter of the unpaid
VAT on its purchase of the hammer mill machinery from CROCO Corporation.

BIRABIRA timely filed a protest with the BIR raising the following arguments:

a) That it is not liable for VAT on the said purchase since it is the Seller, CROCO, who is the statutory
taxpayer for VAT, and BIRABIRA should not be faulted if the person statutorily liable did not shift the VAT to
the buyer.

b) That the BIR violated procedural due process when it issued FAN immediately without apprising first the
taxpayer of its findings through a Pre-Assessment Notice.

Rule on the above arguments.

A. Untenable. In the case of goods imported into the Philippines by persons, entities or agencies
exempt from tax that are subsequently sold, transferred or exchanged in the Philippines to non-
exempt persons or entities, the latter shall be liable for the VAT on purhcasers, including the excise
 tax imposable should there be any, because tax-exemptino is non-transferable. The tax due on such
importation shall constitute a lien on the goods superior to all charges or lines on the goods,
irrespective of the possessor thereof.

B. The second contention is meritorious. The law now requires that the taxpayer must be informed of
the facts and the law upon which the assessment is made through the sending of PAN. It is a
substantive, and not a mere formal requirement. Conversely, the only instances wherein a PAN shall
not be required include the following cases:

(a) when the finding for any deficiency tax is the result of mathematical error in the computation of the
tax as appearing on the face of the return; or

(b) when a discrepancy has been determined between the tax withheld and the amount actually remitted
by the withholding agent;

(c) when a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over and automatically applied the same amount
claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or

(d) when the excise tax due on excercseable articles has not been paid; or

(e) when the article locally purchased or imported by an exempt person -- such as, but not limited to,
vehicles, capital equipment, machineries and spare parts -- has been sold, traded or transferred to
non-exempt persons.

Accordingly, both the sending of the PAN and the FAN is required to inform the taxpayer of his liability for
deficiency taxes. If only the FAN is issued, the requirements of due process are deemed unsatisfied and the
assessment shall be deemed void ab initio. The case before us does not fall under the exception, thus,

9. As per study, there are lot of properties, both personal and real, inherited by heirs that remain unutilized,
stagnant and undeveloped and cannot be completely transferred due to non-payment of estate taxes either
because of illiquidity or simply because of the lack of ample knowledge of the estate tax law. Thus, the current
administration has passed a Tax Amnesty for estate taxes. They hope that such measure will spur economic
activity due to the ease of transferring ownership of properties after the estate tax problems are hurdled.

One of your clients asked the following questions:

a) What is tax amnesty?

b) How does tax amnesty differ from tax exemption?

c) What’s the difference between estate tax and donor’s tax when both are imposed to
gratuitous transfers for property?

Answer briefly.
a.) Tax amnesty is a general pardon or intentional overlooking by the state of its authority to impose penalties
on persons otherwise guilty of tax evasion or violation of a tax law. The purpose is to give the erring taxpayer
a chance to reform and become part of the society with a clean slate.

b.) In tax exemption, there is immunity from tax. Tax amnesty connotes condonation from payment of an
existing tax liability. In the former, the grantee does not need to pay anything. In the latter, the grantee pays a
portion. Further, in tax exemption, tax liability does not attach to one enjoying a privilege of tax exemption.
However, in tax amnesty, the tax liability attaches to a taxpayer who wants to avail of tax amnesty. Tax
exemption requires no payment of tax, but a tax amnesty requires the payment of certain percentage of unpaid
taxes. Finally, amnesty covers immunity from civil liability only, but tax amnesty covers criminal, civil and
administrative liability.

c.) The following are distinctions between estate tax and donor’s tax when both are imposed to gratuitous
transfers for property: In the former, it is imposed upon transfer of property made thru succession; the latter
accrues at the time the gift or donation is made. In the former, the first sum exempted is Php 200,000.00, while
in donor’s tax the first sum exempted is only Php 100,000.00. Only natural persons are subject to estate tax,
however, natural and juridical persons are subject to donor’s tax in case of donation. In estate tax, it is the
transferor’s death that determines the acquisition or the right to the property. In donation inter vivos, it is
made without such consideration but out of the donor’s generosity of liberality. In estate tax, there must be
notice of death to BIR required, but the same is not required in the case of donation. Estate tax is payable
within 6 months from death that may be extended to 5 years if estate is judicially settled and 2 years if
extrajudicially settled. In donor’s tax, it is payable within 30 days from date of donation which may not exceed
6 months from date of donation. Estate tax is imposed on the net estate at the time of death. But donor’s tax
is based on the net value of the gift itself without deduction. Donations mortis causa are subject to estate tax,
on the other hand, donations inter vivos are subject to donor’s tax. Further, donations mortis causa in the form
of a will is never accepted by the done during the donor’s lifetime. But acceptance is a requirement for donation
inter vivos given out of generosity. Lastly, transfers mortis causa should be embodied in a valid will, otherwise
the disposition is void. On the other hand, donations inter vivos are not embodied in a will but in a deed of
donation in case of real property or of personal properties valued more than Php 5,000.00.

10. Mr. Aco Raca is very wealthy with lots of real properties and cars. Last February 14, Valentines Day, he
wanted to give a small parcel of land and one of his cars to his beloved and very beautiful Josenian girlfriend.
However, his girlfriend denied it as she did not want to owe so much gratitude to Aco Raca and she doesn’t
know what to do with those properties in case they break up in the future. Thus, Mr. Aco Raca just sold it to
his girlfriend at a very cheap price to which the latter agreed. The fair market value and zonal value of the land
and the car are the same at P1,000,000.00 EACH, but Aco Raca sold the land and the car to his girlfriend for
only P200,000.00 and P100,000.00 respectively. No taxes had been paid on these transactions.

Come the BIR investigation on Mr. Aco Raca and at this time, Aco Raca and his girlfriend had already broken up
and this pained him so much. The BIR assessed the latter of 6% Capital Gains Tax for the sale of the land which
is a capital asset of Aco Raca and Donor’s Tax on the P800,000.00 price difference versus the Zonal Value, all
plus interests and penalties. Also, the price difference of the car amounting to P900,000.00 is subjected by the
BIR to Donor’s Tax plus interests and penalties.

Aco Raca protested to these assessments arguing as follows: 1)that it should be his Ex-girlfriend who will be
liable for the taxes since he who earns the income must be the one to pay the tax. That he even suffered
significant losses when he sold those properties at a very lower amount; and 2)there is no donation to speak
of because both the two transactions had valuable considerations and that settled is the rule that gross
inadequacy of the price does not affect the validity of the sale.
 a) Is the sale of the land in the instant case subject to Donor’s Tax?

b) Was there donation in the sale of the car?

c) Is Aco Raca correct in saying that it should be his girlfriend who must pay the taxes on the said
transactions? Explain.

a NO. The law explicitly says that real property will not be subject to donor’s tax. Where property, other than
real property under Sec 24(d), is transferred for less than an adequate and full consideration in money or
money’s worth, then the amount by which the fair market value of the property exceeded the value of the
consideration shall be deemed gift, and shall be included in computing the amount of gifts made during the
calendar year.

b. YES. Where property, other than real property under Sec 24(d), is transferred for less than an adequate and
full consideration in money or money’s worth, then the amount by which the fair market value of the property
exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount
of gifts made during the calendar year.

c. Aco Raca is liable. Donor’s tax is not a property tax but an excise tax imposed on the privilege of the owner
to give or donate.

12. One Hundred Eighty (180) days had expired when taxpayer Jose Reco had filed his administrative protest
to the CIR on a disputed assessment, but still the Commissioner did not act on it. He fully knows that he has
two (2) options after such expiry as to when to file a petition for review with the Court of Tax Appeals (CTA),
thus, he took his time and just wait for the perfect timing to file his petition. Forty (40) days had already elapsed
after the expiration of the 180-day period, but still the Commissioner did not act on his protest. Hence, Jose
Reco became impatient and decided finally to file a petition for review with the CTA as he can no longer tolerate
the blatant inaction of the CIR.

Is the action of Jose Reco procedurally correct?

ANSWER:

No, Jose Reco is not procedurally correct.

Under the law, if the tax protest is not acted upon by the CIR within the 180 days from the date of
filing, the taxpayer may appeal to the CTA within 30 days from the expiry of the 180-day period or wait for the
final decision of the CIR and then appeal said decision to the CTA within 30 days after the receipt thereof.

In the case at bar, 40 days had already lapsed after the expiration of the 180-day period. As what the
law provides the appeal shall be filed within 30 days after the expiration of the said period, however there was
already a lapse of 10 days from the expiry thereof. The remedy of an appeal can no longer be availed. The only
remedy that Jose can avail of is to wait for the decision of the CIR and go from there.

Thus, the period to file an appeal had already lapsed and Jose failed to avail it. His only remedy now is
to wait for the CIR to render a decision.
13. Ms. SisaSwerte is an employee of a private company earning a monthly basic pay of P15,000.00. One day,
her philanthropist neighbor give her by way of gift money amounting to P1,000,000.00. The corresponding
donor’s tax for said donation is, however, not paid by the donor.

One day, the BIR issued a deficiency assessment to SisaSwerte for her failure to file an income tax return
declaring the P1 Million donation and to pay income tax thereon. The BIR maintained that the donation is not
exempt from income tax for two (2) reasons. First, the donor’s tax is not paid for such donation, and second,
the Tax Code provides that gross income subject to tax means all income derived from whatever
source. Decide.

ANSWER:

The contention of the Bureau of Internal Revenue is incorrect.

The law provides compensation income earners, self-employed and professional taxpayers whose
annual taxable income are 250,000 or less exempt from the personal income tax. And that in donors’ tax, it is
the donor or giver who is bound to pay the tax and not the done. The agreement in the deed of donation that
the done or recipient of the property will be the one to pay the donor’s tax is not binding with respect to the
tax is not binding with respect to the tac authority. Section 13 of Revenue Regulation No. 2-2003 explicitly
provides that the person making a donation shall be the one required to accomplish and file a donor’s tax
return. This is in line with Section 98 of the Tax Code, which provides that the donor’s tax shall be levied on the
transfer by any person, resident or nonresident, of a property by gift. Thus, it is clear under the law, as well as
the BIR’s regulations, that the donor’s tax is a direct tax that can only be imposed on, and paid by, the donor.
Consequently, the liability for donor’s tax falls on the donor’s shoulders and is, therefore, not transferable.

In the case at the bar, Miss SisaSwerte is exempt from income tax because her income is less than
250,000. The BIR is incorrect to say that there is a deficiency assessment. The 1 million donated by her
philanthropist neighbor should not be Miss. SisaSwerte’s liability to pay taxes. The law is clear that the taxes
should be paid by the donor.

Wherefore, Miss SisaSwerte is not liable for the tax of the 1 million donated by her neighbor.

14. A tax law was passed granting tax exemptions to certain activities as enumerated in the said law.
MUGIWARA Corp. is uncertain whether its business activities are included in the tax exemption, thus, it
requested a ruling from the BIR to clarify the matter. The BIR asked MUGIWARA to submit relevant documents
and to state all material facts related to the issue. Months later, the BIR issued a ruling that the applicant’s
business activities are covered by the exemption. Relying on the said ruling, MUGIWARA did not pay the
corresponding tax on said activities.

Two years later, the BIR discovered that MUGIWARA failed to disclose some material documents and that the
facts are materially different from the facts on which the ruling was based. Consequently, the BIR reversed its
previous ruling and issued a new one stating that MUGIWARA’s activities are not exempt from tax. BIR now
assessed the company of taxes from the last two years but MUGIWARA refused citing the principle of non-
retroactivity of rulings.

a) Discuss briefly the principle of non-retroactivity of rulings.

As provided for under Section 246 of the Tax Code, there is a non-retroactivity of rulings. Any
revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the
preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except
where the taxpayer deliberately misstates or omits material facts from his return or any document required of
him by the Bureau of Internal Revenue, where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which ruling is based or where the taxpayer acted in bad
faith.

It is clear that there shall be no retroactive effect for the rulings provided for by the BIR. Unless there
is deliberate misrepresentation, or one omits material facts that would mislead the BIR to issue a ruling which
shall be in favor of a natural person or juridical person to be exempted from paying taxes. The BIR is not left
without recourse, they shall have the power to look into matters and reverse such rulings when it is clear that
there was misrepresentation and deliberately omits material facts just to excuse himself of the payment of
taxes.

b) Can the BIR validly assess the company for back taxes relating to the unpaid years?

Yes, the Bureau of Internal Revenue can assess the company for the back taxes relating to the unpaid
years.

The law provides that under Section 246 of the Tax Code, there is a non-retroactivity of rulings. Any
revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the
preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except
where the taxpayer deliberately misstates or omits material facts from his return or any document required of
him by the Bureau of Internal Revenue, where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which ruling is based or where the taxpayer acted in bad
faith.

In the case at bar, the BIR discovered that MUGIWARA failed to disclose some material documents and
that facts are materially different from the facts on which the ruling was based. The retroactive application can
be applied in this case, there was a failure on the part of MUGIWARA to disclose material documents that is
important for the BIR to render ruling. By this, MUGIWARA shall be liable for the failure to state everything
that is required for them to prove that they shall be exempted for the payment of taxes of certain activities.

Wherefore, MUGIWARA shall be held liable for the unpaid years because of the failure to submit all
the relevant documents and to state all material facts related to the issue.

15. Discuss briefly the period for the BIR to make an assessment of internal revenue taxes as to the
following:

a) reckoning date of the statute of limitations.

Answer:

3 YEARS- Prescription of assessment AND collection from: (a) the prescribed last day of filing of returns
(even if the return was filed earlier than the deadline); OR (b) the day when the return was actually filed if filed
later than the last day of filing [Sec. 203, NIRC], whichever comes later.

10 YEARS -Prescription of assessment in cases of: (a) false or fraudulent return with intent to evade
tax; OR (b) failure or omission to file a return [Sec. 222, NIRC] Counted from the discovery of the fraud, falsity,
or omission.
 5 YEARS -Prescription of collection of tax if: (1) assessed within the 3-year and 10-year prescriptive
periods; (2) assessed within the extended period agreed upon by the Commissioner and taxpayer (waiver of
the prescriptive period); and (3) Collected by distraint, levy, or by a proceeding in court. [Sec. 222, NIRC]

b) reckoning date if the original return is amended.

Answer:

Amend the return within three years from the date of filing, provided that the taxpayer has not
received any notice for audit or investigation of such return from the BIR. The three-year statute of limitations
for the BIR to issue an assessment on any tax return is reckoned from whichever is the later date between: (1)
the deadline for filing, or (2) the date of actual filing, whether it is an original return or an amended one.

16. HAYAG KAUGMAON Foundation is a newly formed non-stock, non-profit association organized for
charitable and social welfare purposes. Having limited funds, it just rented a one-hectare property owned by
YUTAAN Leasing, Inc. situated in San Nicolas, Cebu Cityto be used solely and exclusively to carry out the
purposes of the foundation. Later, YUTAAN received two assessment notices, one from the BIR on the unpaid
income tax on the rental income of the property leased to HAYAG, and the other from the City Treasurer on
the unpaid real property taxes also on the same property, him being the owner thereof. YUTAAN refused to
pay and protested both assessments citing constitutional provisions granting tax exemption to the said
property.

If you are the tax lawyer of YUTAAN, how will you advise your client on the issue?

Answer:

I will advise Yutaan not he cannot avail of the tax exemptions under the Constitution.

Section 28 (3), ARTICLE VI of the 1987 Constitution states that Charitable institutions, churches and parsonages
or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.

Jurisprudence also cites that real-property owners are primarily responsible in the payment of real-
property taxes. This holds true even if the use of the property is granted to a third party. A non-tax-exempt
owner cannot escape its responsibility under the beneficial use doctrine. In the given case, YUTAAN Leasing
Inc, is not-tax -exempt because it is a non- charitable institution. The contention that it is exempt from income
tax on the rental income paying and the real property tax because they leased the property to HAYAG
KAUGMAON Foundation is a newly formed non-stock, non-profit association organized for charitable and social
welfare purposes is without legal basis. They can only invoke the exemption only if the registered owner is tax
exempt. As with tax-exempt property owners whose property is used by a taxable person, the owner or the
actual/beneficial user can be made liable for the payment of the tax.

Hence, Yutaan does not fall under the exempt corporations under the constitution.

17. 1. Mr. Deadna Reyes died in January 2020 leaving only his wife, Mrs. Buhipa Reyes, as the sole heir. They
were married 40 years ago. While in the process of preparing the estate tax return for Mr. Deadna’s estate,
Mrs. Buhipa approached you, a newly-passed Josenian lawyer whom she confidently thinks could answer her
concern, and seeks your legal advice whether or not to include in the computation of the gross estate of her
husband their 10-hectare farmland. This farmland, with a current fair market value of P25,000,000.00, was
inherited by Mrs. Buhipa from her parents while she was still single.

What will be your advice?

Answer:

I will advise Mrs. Buhipa to not include 10-hectare farmland in the computation of the gross estate of
her husband.

Under Section 85 of the NIRC, provides that in computing the gross estate of the decedent, the value
of the gross estate of the decedent shall be determined by including the value at the time of his death of all
property, real or personal, tangible or intangible, wherever situated. The law also provides that , it is all of the
property owned by the decedent to the extent of his interest therein at the time of his death. This includes any
interest, having value or capable of being valued or transferred, in property owned or possessed by the
decedent at the time of his death., This also includes those transferred by the decedent at the time of his
death.

In the case at bar, being married for 40 years, the marriage was prior to the effectivity of the civil
code. The property relation applicable is conjugal partnership of gains. When the land is acquired by the
spouse during the marriage by gratuitous title (through pure liberality, as in donation and testate/intestate
succession) falls under the exclusive property of the wife. The farmland, with a current fair market value of
P25,000,000.00, was inherited by Mrs. Buhipa from her parents while she was still single should be excluded
in the computation of the gross estate.

Therefore, the farmland inherited by Mrs. Buhipa does not form part of the decedent’s interest.

18. Distinguish Final Withholding Tax and Creditable Withholding Tax.

Answer:

Final withholding tax is 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 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.

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. Taxes withheld on income payments covered by the expanded withholding tax and
compensation income are creditable in nature.

23.The Province of Cebu assessed Strong Foundation with unpaid real property taxes for its buildings. Strong
Foundation is a not-for-profit charitable institution with a mission to provide support to persons suffering
depression and schizophrenia, to increase awareness on psychological ailments, and to provide counselling to
family members and friends of those suffering from these conditions. Strong Foundation wants to contest the
assessment on the ground that its buildings are exempt from real property taxes. The treasurer of Strong
Foundation approached you for advice on how to question the real property tax assessment.

What is the remedy available to Strong Foundation? Detail the whole remedial procedure, up to the Supreme
Court, assuming all the government offices/tribunals will find Strong Foundation’s “exempt” position
unmeritorious.

ANSWER:

19. ATTY. Daugdaug is practicing his legal profession and registered with the BIR as professional. While
preparing for his Income Tax Return to catch up with the upcoming deadline, he discovered that all his receipts
and invoices evidencing his deductions and expenses were left in the taxi he just rode. As he did not remember
any mark or lead that would help him locate the taxi, he just accepted that those receipts are already beyond
recovery. He got very sad thinking that he will be paying high income tax as he cannot claim any single
deduction for his professional expenses.

You happened to drop by his office and he shared to you his predicament. Being a new bar passer with very
high marks on Taxation, what advice can you offer him regarding his income tax reporting in order to lighten
his day?

Appling the Cohan Rule, Atty. need not present evidence of such invoice for the BIR official will have to conduct
his estimation for the deductions.

In the law, The rule that tax deductions, being in the nature of tax exemptions, are to be construed in strictissimi
juris against the taxpayer is well settled. Corollary to this rule is the principle that when a taxpayer claims a
deduction, he must point to some specific provision of the statute in which that deduction is authorized and
must be able to prove that he is entitled to the deduction which the law allows.

Answer:

Applying the Cohan Rule, where it is certain from the evidence adduced that the taxpayer did incur
expenses but the actual amount thereof has not been established, the Commissioner should make a close
approximate thereof, and his determination thereof shall bear heavily on the taxpayer for his own inexactitude.
In the case Atty. Daugdaug needs to prove that the deductions it was claiming as an expense was an ordinary
and necessary expense, it proved that it had paid. Atty. Daug need not have to to submit receipts along with
his tax return. The BIR accepts the numbers including in the form unless the BIR official has a reason to suspect
otherwise or they randomly flag the return for audit

20. On January 26, 2017, the Regional Director of Revenue Region No. 13, Cebu City, issued a Letter of Authority
for the examination of Nine Tails Corporation’s books of accounts and other accounting records for income tax
and other internal revenue taxes for the taxable year 2015.

For Nine Tails Corporation’s failure to comply with several requests for the presentation of records and
Subpoena Duces Tecum, the OIC of BIR Legal Division issued an Indorsement dated September 26, 2017
informing the Revenue District Officer to proceed with the investigation based on the best evidence obtainable
preparatory to the issuance of assessment notice.
On November 8, 2017, the Revenue District Officer issued a Preliminary 15-day Letter, which Nine Tails
Corporation received on November 9, 2017. The said letter stated that a post audit review was held and it was
ascertained that there was deficiency value-added and withholding taxes due from Nine Tails Corporation in
the amount of PhP 292,874.16.

On April 11, 2018, Nine Tails Corporation received a Formal Letter of Demand (FLD) assessing it the amount of
Two Hundred Ninety Two Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (PhP 292,874.16.)
for deficiency value-added and withholding taxes for the taxable year 2009. The FLD also required Nine Tails
Corporation to pay the deficiency tax liabilities within ten (10) days from receipt thereof, otherwise the BIR will
be constrained to serve and execute Warrants of Distraint and/or Levy and Garnishment to enforce collection.

On February 6, 2020, Nine Tails Corporation received from the BIR a Warrant of Distraint and/or Levy
demanding payment of deficiency value-added tax and withholding tax payment in the amount of PhP
292,874.16.

On July 30, 2020, Nine Tails Corporation filed with the Office of the BIR Commissioner a Motion for
Reconsideration. On February 8, 2021, the BIR Commissioner issued a Decision denying Nine Tails Corporation’s
Motion for Reconsideration.

Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not accorded due
process, Nine Tails Corporation filed a petition for review with the Court of Tax Appeals.

Should the Petition for Review of Nine Tails Corporation be granted by the CTA? (3pts)

Yes.

In the law, it is clear that the sending of a PAN to taxpayer to inform him of the assessment made is
but part of the "due process requirement in the issuance of a deficiency tax assessment," the absence of which
renders nugatory any assessment made by the tax authorities. The use of the word "shall" in subsection 3.1.2
describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due process reaches
both substantial and procedural rights and the failure of the CIR to strictly comply with the requirements laid
down by law and its own rules is a denial of Metro Star’s right to due process.15 Thus, for its failure to send
the PAN stating the facts and the law on which the assessment was made as required by Section 228 of R.A.
No. 8424, the assessment made by the CIR is void.

21. On January 2020, the City Treasurer of Angeles City issued a Notice of Assessment to Gyarados Corporation
for payment of business tax, license fee and other charges for the period of 1998 to 2020. Gyarados
Corporation protested the assessment claiming that it is exempt from paying local tax under Republic Act No.
4079 since it is already paying franchise tax on business; hence, the payment of business tax would result in
double taxation. The City Treasurer denied the protest for lack of merit and requested Gyarados Corporation
to settle its tax liabilities.

Aggrieved, Gyarados Corporation appealed the denial of its protest to the Regional Trial Court of Angeles City.

On April 5, 2020, the City Treasurer levied on the real properties of Gyarados Corporation. A Notice of Auction
Sale was published and posted announcing that a public auction of the levied properties of Gyarados
Corporation would be held on May 7, 2020.

This prompted Gyarados Corporation to file with the same branch of the Regional Trial Court an Urgent Motion
for Issuance of Temporary Restraining Order and/or Writ of Preliminary Injunction to enjoin Angeles City and
the City Treasurer from levying, annotating the levy, seizing, confiscating, garnishing, selling and disposing at
public auction the properties of Gyarados Corporation.
After due notice and hearing, the Regional Trial Court issued a Temporary Restraining Order, followed by an
Order, granting the issuance of a Writ of Preliminary Injunction, conditioned upon posting of bond.

Angeles City and the City Treasurer filed a Motion for the Dissolution of Preliminary Injunction and Motion for
Reconsideration for the Order.

Finding no compelling reason to disturb and reconsider its previous finings, the Regional Trial Court denied the
joint motion of Angeles City and the City Treasurer.

Did the Regional Trial Court gravely abused its discretion in issuing the Writ of Preliminary Injunction?

No.

Jurisprudence provides that taxes being the lifeblood of the government should be collected promptly
without any hindrance or delay. The Tax Code expressly provides that no court shall have the authority to grant
an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the code.
However, in the collection of local taxes, there is no such express provision in the Local Government Code.

In the case at bar, the auction sale enjoined was due to nonpayment of business tax imposed by the
local government of Angeles City, thus, local tax. Since there is no express provision in the LGC prohibiting
courts from enjoining the collection of local taxes, it follows that courts can grant injunction. Furthermore, the
injunction pertains to enjoin the public auction sale and not the collection of taxes. Hence, the Regional Trial
Court did not gravely abuse its discretion in issuing the Writ of Preliminary Injunction.

22. Section 1 of Republic Act No. 8506 provides that it shall be unlawful for any person to import, cause the
importation of, register, cause the registration of, use or operate any vehicle with its steering wheel right hand
side thereof in any highway, street or road whether private or public xxx xxx.

Sometime in May 2014, Aiza Calzado, a duly licensed importer of vehicles, imported 72 secondhand right-hand
drive buses from Japan. When the shipment arrived at the South Harbor, Port of Manila, the District Collector
of Customs impounded the vehicles and ordered them stored at a customs-bonded warehouse. Conformably
with the Tariff and Customs Code, the District Collector of Customs issued Warrants of Distraint against the
shipment and set the sale at public auction on September 2014.

In the meantime, on October 28, 2014, the Secretary of Justice rendered Opinion No. 127, series of 2014,
stating that shipments of right hand wheel vehicles loaded and exported at the port of origin before the
effectivity of RA No. 8506 were not covered by it unless the same were loaded and imported after said date.

On November 2014, Aiza Calzado filed a complaint with the RTC of Paranaque City against the Secretary of
Finance and Customs Commissioner for replevin with prayer for the issuance of a writ of preliminary and
mandatory injunction and damages. Aiza Calzado averred that there was no factual and legal basis for the
seizure of her shipment and storage thereof with the customs-bonded warehouse.

The RTC granted the application for a writ of replevin upon posting of bond.

When the Sheriff was about to take custody of the vehicles, the Chief of Customs Police and four customs
policemen prevented him from doing so. The Chief of Customs Police claimed the District Collector of Customs
had jurisdiction over the vehicles.

No, the trial court is not correct in issuing the writ of replevin since the RTC has no jurisdiction.
 Under the Tariff and Customs Code, the Bureau of Customs exercise the exclusive jurisdiction over the
seized and forfeited cars. It is the Collector of Customs, sitting in seizure and forfeiture proceedings, who has
exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable
goods.

In case at bar, the vehicles were impounded by the District Collector of Customs, thus, any issues
should be raised to the Collector of Customs having exclusive jurisdiction for that matter and not to the RTC.
Hence, the order granting the issuance of writ of replevin by the RTC is void.

24.Moltres Leafeon Company (MLC) was assessed deficiency customs and duties and taxes to the Republic of
the Philippines. For the immediate release of its importations, MLC contracted Articuno Insurance and Surety
Corporation (AISC) to execute a customs bond in favor of the Bureau of Customs (BOC).

AISC is an insurance company which issues customs bonds to its clients in favor of the BOC. These bonds secure
the release of imported goods in order that the goods may be released from the BOC without prior payment
of the corresponding customs duties and taxes. Under these bonds, AISC and its clients jointly and severally
bind themselves to pay the BOC the face value of the bonds, in the event that the bonds expire without either
the imported goods being re-exported or the proper duties and taxes being paid.

MLC failed to pay the proper duties and taxes.

On December 9, 2019, the Republic filed a Complaint against AISC for Collection of Money with Damages before
the Regional Trial Court, Branch 20 in Manila. The case was docketed as Civil Case No. 03-108583, entitled
Republic of the Philippines represented by the Bureau of Customs v. Articuno Insurance and Surety
Corporation. It was alleged in the Complaint that AISC had outstanding unliquidated customs bonds with the
BOC.

After hearing, the trial court issued a Decision ordering AISC to pay the Republic the unpaid/unliquidated
customs bonds plus legal interest from the finality of its Decision.

From such Decision, AISC filed a motion for reconsideration which the trial court denied.

Thus, AISC appealed the Decision to the Court of Appeals. The Court of Appeals thereafter issued a Resolution
dismissing the case for lack of jurisdiction.

Did the Court of Appeals commit serious error of law when it ruled that it has no jurisdiction over the appeal?

ANSWER:

No, the Court of Appeals did not commit serious error of law when it ruled that it has no jurisdiction over the
appeal. The Court of Appeals' principal mandate is to exercise appellate jurisdiction on all cases not falling
within the original and exclusive jurisdiction of the Supreme Court. The jurisdiction of the Court of Appeals
does not cover tax cases decided by the RTC. It is the Court of Tax Appeals who has jurisdiction. Under, Section
7 of Republic Act No. 9282 the CTA shall exercise exclusive appellate jurisdiction in criminal offenses:
a. Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally
decided by them, in their respected territorial jurisdiction.
25.On October 5, 2019, the Bureau of Internal Revenue (BIR) sent KLM Corp. a Final Assessment Notice (FAN),
stating that after its audit pursuant to a Letter of Authority duly issued therefor, KLM Corp. had deficiency
value- added and withholding taxes. Subsequently, a warrant of distraint and/or levy was issued against KLM
Corp. KLM Corp. opposed the actions of the BIR on the ground that it was not accorded due process because
it did not even receive a Preliminary Assessment Notice (PAN) after the BIR' s investigation, which the BIR
admitted.

(a) Distinguish a PAN from a FAN.

ANSWER:

PRELIMINARY ASSESSMENT NOTICE(PAN)

If after review and evaluation by the Commissioner or his duly authorized representative, as the case may be,
it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said
Office shall issue to the taxpayer a PAN for the proposed assessment. It shall show in detail the facts and the
law, rules and regulations, or jurisprudence on which the proposed assessment is based. The taxpayer has 15
days from receipt of PAN to file a written reply contesting the proposed assessment.

FINAL ASSESSMENT NOTICE (FAN)

The CIR or his duly authorized representative may issue FLD/FAN:

1. If there is no need to issue a PAN, because the circumstances show that it fall within the exceptions for
the issuance of PAN;

2. If the taxpayer is in default for failure to respond to a PAN within a period of 15 days from the receipt of
PAN; or

3. If the CIR or his duly authorized representative does not agree with the justifications stated by the taxpayer
in his reply to the PAN

If the taxpayer, within 15 days from date of receipt of the PAN, responds that he/it disagrees with the findings
of deficiency tax or taxes, an FLD/FAN shall be issued within 15 days from filing/submission of the taxpayer’s
response, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties.

(b) Are the deficiency tax assessment and warrant of distraint and/or levy issued against KLM Corp. valid?
Explain.

No, the deficiency tax assessment and warrant of distraint and/or levy issued against KLM Corp. was invalid.

GR: There must be a PAN issued by the BIR before issuing a Formal Letter of Demand (FLD)/ Final Assessment
Notice (FAN).

XPN: PAN is not required in the following instances:

1. When the finding for any deficiency tax is the result of Mathematical error in the computation of the
tax appearing on the face of the tax return filed by the taxpayer; or
2. When the Excise tax due on excisable articles has not been paid; or
3. When a Discrepancy has been determined between the tax withheld and the amount actually remitted
by the withholding agent; or
 4. When an article locally purchased or imported by an Exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-
exempt persons (Sec. 228, NIRC); or
5. When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a
taxable period was determined to have Carried over and automatically applied the same amount
claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year (Sec. 3.1.2, R.R. No. 18-2013).

26. All the homeowners belonging to ABC Village Homeowners' Association elected a new set of members of
the Board of Trustees for the Association effective January 2019. The first thing that the Board looked into is
the need to increase the prevailing association dues. Mr. X, one of the trustees, proposed an increase of 100%
to account for the payment of the 12% value- added tax (VAT) on the association dues which were being
collected for services allegedly rendered "in the course of trade or business" by ABC Village Homeowners'
Association.

(a) What constitutes transactions done "in the course of trade or business" for purposes of applying VAT?

In the course of trade or business (Rule of Regularity)

It means the regular conduct or pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-
profit private organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity (Sec. 105, NIRC).

This includes incidental transactions. Thus, the sale of a VAT taxpayer (engaged in catering business) of its
delivery van or vehicle, while an isolated event, is considered an incidental transaction in the course of trade
or business. In the course of its business, MKI bought and eventually sold its delivery van. Prior to the sale, the
van was part of MKI’s property, plant, and equipment (Mindanao II Geothermal Partnership v. CIR, G.R. No.
193301, March 11, 2013).

Two conditions of “in the ordinary course of trade or business”

There should be:

1. Commercial or economic activity - It implies that a transaction is conducted for profit; and

2. Regularity or habituality in the action - Regularity involves more than one isolated transaction and involves
repetition and continuity of action (Ingles, 2015).

XPNs to regularity:

1. Non-resident alien who perform services in the Philippines are deemed to be making sales in the course of
trade or business, even if the performance of services is not regular (Sec. 4.105-3, RR 16-2005).

2. Importations are subject to VAT whether in the course of trade or business or not.

3. Any business where the gross sales or receipts do not exceed P100,000 during the 12-month period shall be
considered principally for subsistence or livelihood and not in the course of trade or business.

(b) Is Mr. X correct in stating that the association dues are subject to VAT? Explain.
 No, Mr. X is not correct because association dues are not subject to VAT.

Under the Train Law, association dues, membership fees, and other assessments and charges collected on a
purely reimbursement basis by homeowners’ associations and condominium corporations established under
RA 9904 (Magna Carta for Homeowners and Homeowners’ Association) and RA 4726 (The Condominium Act),
respectively, are exempt from VAT.

27.

(a) Cite the instances under the Tax Code where gifts made are exempt from donor's tax.

Section 30 of RA 10963 provides:

(A) In the Case of Gifts Made by a Resident -

"(1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which
is not conducted for profit, or to any political subdivision of the said Government; and

"(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, accredited nongovernment organization, trust or philanthropic organization or research institution
or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such
donee for administration purposes. For the purpose of this exemption, a ‘non-profit educational and/or
charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization
and/or research institution or organization’ is a school, college or university and/or charitable corporation,
accredited nongovernment organization, trust or philanthropic organization and/ or research institution or
organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no
compensation, and devoting all its income, whether students’ fees or gifts, donation, subsidies or other forms
of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of
Incorporation.

(B) In the Case of Gifts Made by a Nonresident not a Citizen of the Philippines. –

(1) Gifts made to or for the use of the National Government or any entity created by any of its agencies
which is not conducted for profit, or to any political subdivision of the said Government.

(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation,
institution, foundation, trust or philanthrophic organization or research institution or organization:
Provided, however, That not more than thirty percent (30% of said gifts shall be used by such donee for
administration purposes.

(C) Tax Credit for Donor’s Taxes Paid to a Foreign Country. –

(1) In General. – The tax imposed by this Title upon a donor who was a citizen or a resident at the time of
donation shall be credited with the amount of any donor’s tax of any character and description imposed
by the authority of a foreign country.

(2) Limitations on Credit. – The amount of the credit taken under this Section shall be subject to each of the
following limitations:
(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion
of the tax against which such credit is taken, which the net gifts situated within such country taxable
under this Title bears to his entire net gifts; and

(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit
is taken, which the donor’s net gifts situated outside the Philippines taxable under this title bears to his
entire net gifts.

(b) Does the above transaction fall under any of the exemptions? Explain.

No, the transaction above does not fall under any of the exemptions provided for by law.

Section 30 of RA 10963 provides the instances where the gifts made are exempt from donor’s tax and the
present case does not fall under any of the exemptions. Tax exemptions are strictly construed against the
taxpayer, they being highly disfavored and may almost be said “to be odious to the law.”

28. (a) Are both deductions claimed by A's heirs correct? Explain.

Only the deduction as to the family home is correct.

Deduction as to actual funeral expenses has already been repealed by RA 10963. The law provides that for
the family home to be deductible, the following requisites must be present:

1. The family home must be the actual residential home of the decedent and his family at the time of his
death, as certified by the barangay captain of the locality.

2. The total value of the family home must be included as part of the gross estate of the decedent

3. Allowable deduction must be in an amount equivalent to the current Fair Market Value of the family home.
If the FMV exceeds P10.0 million, the excess shall be subjected to estate tax.

In the case at bar, since A is a resident Filipino citizen, properties that are within and outside the
Philippines shall be included in computing the taxable net estate. The law however provides that the allowable
deduction as to family home shall not exceed P10.0 million. A’s heirs’ deduction as to the value of the house in
Alabang is correct but the house in Los Angeles, California, USA and the funeral expenses shall not be included
as deductions.

Thus, only the P10.0 million deduction as to the family home in Alabang is correct.

(b) May a standard deduction be claimed by A's heirs? If so, how much and what proof needs to be presented
for the same to be validly made?

Yes, a standard deduction may be claimed by A’s heirs.

Section 23 of RA 10963 provides that a citizen or resident of the Philippines is allowed a standard deduction
an amount equivalent to five million pesos (P5, 000, 000.00).

In the present case, an amount equivalent to P5, 000, 000.00 shall be deducted from A’s gross estate
without need of substantiation
(c) In determining the gross estate of A, should the heirs include A's house in Los Angeles, California, USA?
Explain.

Yes, the heirs should include A’s house in Los Angeles, California, USA.

Section 85 of the NIRC provides that the value of the gross estate of the decedent shall be determined
by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever
situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not
a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be
included in his taxable estate.

In the case at bar, since A is a resident citizen, his real properties wherever situated shall form part of
his gross estate. Thus, his house in Los Angeles, California shall be included.

29. Is XYZ Air's protest meritorious? Explain.

No, the protest of XYZ Air is not meritorious.

Under the law, an international air carrier with no landing rights in the Philippines is a resident foreign
corporation if its local sales agent sells and issues tickets in its behalf. An offline international carrier selling
passage tickets in the Philippines through a local general sales agent, is considered a resident foreign
corporation doing business in the Philippines. As such, it is taxable on income derived from sources within the
Philippines and not on Gross Philippine Billings, subject to any applicable tax treaty. (Air Canada vs.
Commissioner of Internal Revenue G.R. No. 169507, January 11,2016).

In the case at bar, XYZ Air was able to sell its airplane tickets in the Philippines through ABC Agency, it’s general
agent in the Philippines. As such, it is taxable on income derived from sources within the Philippines and not
on Gross Philippine Billings, subject to any applicable tax treaty.

30. Should B pay taxes on the exchange? Explain.

No, B should not pay taxes on the said exchange.

As a general rule, upon the sale or exchange of property, the entire amount of the gain or loss, as the
case may be, shall be recognized. One of the accepted exceptions to th said rule is when a 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 persons,
gains control of said corporation: provided, that stocks issued for services shall not be considered as issued in
return for property (NIRC. Sec. 40 C (6)(c)). Moreover, control, in the said case, means ownership of stocks in
a corporation possessing at least (51%) of the total voting power of all classes of stocks entitled to vote.

In the case, B transferred his ownership over a 1,000-square meter commercial land and three-door.
As a result, B acquired 51% ownership of ABC Corp., with all the shares of stock having the right to vote.