USJ-R LAW

TAXATION

Read each question very carefully and write your answer concisely.
Your answer should demonstrate your ability to analyze the facts
presented by the question, to select the material from the immaterial
facts, and to discern the points upon which the question turns. It should
show your knowledge and understanding of the pertinent principles and
theories of law involved and their qualifications and limitations. It
should demonstrate your ability to apply the law to the given facts, to
reason logically in a lawyer-like manner, and to form a sound
conclusion from the given premises.

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
Income 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?

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?

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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.

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.

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.

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 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?

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?

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?

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

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

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.

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 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.

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?

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

Answer briefly.

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.

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

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 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 advised 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 Lawyerasking clarifications as follows:

c) Wouldthe suggestion of the Accountant really free the Company of

any tax on its retained earnings?

d) 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?

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?

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

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 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.

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.

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

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.

b) reckoning date if the original return is amended.

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,

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 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?

17. 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?

18. Distinguish Final Withholding Tax and Creditable Withholding Tax.

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?

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.

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 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)

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.

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 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?

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.

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 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.

Was the trial court correct in issuing the writ of replevin?

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.

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).
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 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?

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.

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

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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?
(b) Is Mr. X correct in stating that the association dues are subject to
VAT? Explain.

27. Due to rising liquidity problems and pressure from its concerned suppliers, P
Corp. instituted a flash auction sale of its shares of stock. P Corp. was then
able to sell its treasury shares to Z, Inc., an unrelated corporation, for
Pl,000,000.00, which was only a little below the valuation of P Corp. 's
shares based on its latest audited financial statements. In connection
therewith, P Corp. sought a Bureau of Internal Revenue ruling to confirm
that, notwithstanding the price difference between the selling price of the
shares and their book value, the said transaction falls under one of the
recognized exemptions to donor's tax under the Tax Code.

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

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

28. A, a resident Filipino citizen, died in December 2018. A's only assets consist
of a house and lot in Alabang, where his heirs currently reside, as well as a
house in Los Angeles, California, USA. In computing A's taxable net estate,
his heirs only deducted: 1. ₱10,000,000.00 constituting the value of their
house in Alabang as their family home; and 2. ₱200,000.00 in funeral
expenses because no other expenses could be substantiated.

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

(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?

(c) In determining the gross estate of A, should the heirs include A's
house in Los Angeles, California, USA? Explain.

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29. XYZ Air, a 100% foreign-owned airline company based and
registered in Netherlands, is engaged in the international airline
business and is a member signatory of the International Air Transport
Association. Its commercial airplanes neither operate within the
Philippine territory nor are its service passengers embarking from
Philippine airports. Nevertheless, XYZ Air is able to sell its airplane
tickets in the Philippines through ABC Agency, its general agent in
the Philippines. As XYZ Air's ticket sales, sold through ABC Agency
for the year 2015, amounted to ₱5,000,000.00, the Bureau of Internal
Revenue (BIR) assessed XYZ Air deficiency income taxes on the
ground that the income from the said sales constituted income
derived from sources within the Philippines.

Aggrieved, XYZ Air filed a protest, arguing that, as a non-resident

foreign corporation, it should only be taxed for income derived from
sources within the Philippines. However, since it only serviced
passengers outside the Philippine territory, the situs of the income
from its ticket sales should be considered outside the Philippines.
Hence, no income tax should be imposed on the same.

Is XYZ Air's protest meritorious? Explain.

30. B transferred his ownership over a 1,000-square meter commercial land and
three-door apartment to ABC Corp., a family corporation of which B is a
stockholder. The transfer was in exchange of 10,000 shares of stock of ABC
Corp. As a result, B acquired 51 % ownership of ABC Corp., with all the
shares of stock having the right to vote. B paid no tax on the exchange,
maintaining that it is a tax avoidance scheme allowed under the law. The
Bureau of Internal Revenue, on the other hand, insisted that B's alleged
scheme amounted to tax evasion.

Should B pay taxes on the exchange? Explain.

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