QUAMTO (1987-2017) ‘TAXATION QUAMTO GENERAL PRINCIPLES OF TAXATION Q Describe the power of taxation. May a legislative bedy enact laws to ralse ‘revenues in the absence of a constitutional provision granting said body the power to tax? Explain. (2005 Bar) ArThe power of tazation Is neret lathe Stat Being ‘an attrhute of sovereignty. As an Sncidont of soverelgmty, the power to tax has been deseribed as unlimited Ia les range, acknowledging in ls very nature no limits, $0 ‘hat security agalast Ks abuse ts to be found only tn the responsibility of the legiststure ‘when imposes the taxon the constituents who fare to pay it. (Mactan Cebu international ‘AlrportAuiherteyv Marcos 261 SCRA667) Being an inherent power, the legislature can enact laws to alse revenues even without the {Fant of said power inthe Constitution. t must denoted that Constitutional provisors relating to the power of tration do not operate 28 grants Of the power of taraton 1 the Goverment, but instead merely constiute Limitations "upon a power which would otherwise be practically without limi. (Coley, Constitutional Limitations, 1927 8% Ed, p. 787} Power of Taxation as distinguished fom 1989, 1991,2008) Q The City of Manila passed an ordinance ‘maposiug an annual tax of PS,000.00 to be paid by an operator of a massage elie and an annual fee of F50.00 to be paid by every ‘attendant or helper i the sald ente ts the Imposition atax or allcense fee? (1989 Bai) 4AcThe imposition on the operstor of the rmarsoge clinic Is both a tax anda licence foo, ‘The amount ef P5000.00 exceeds the coxt of rogulation, administration and control batts Ikewise impozed to regulate a nonuseful ‘business in order to protect she health, safely ‘and morals of the cidzeny in genera, The P5000 Impasitions on the helpers or attendants are license fees suffeent only for ‘egulation, administration an control ‘Thsorvand Dasis of Tacation (1994, 2016) G: Briefly explain the following doctrines: Mfeblood doctrine xe (2016 Bar) 4: Lifeblood doctrine. Taxes are the lifeblood of the government [Charaer of Real Bstece and Builders” Associations, ine. Rovruo, 614 SCRA {605 2910) for without taees the government can neither exist nor endure. (National Pirer Corporation ¥. Oy of Cabanatuar, GR. No 149110, Apri 9, 2003 ching varios cases) ANAERENT LIMITATIONS Q Enumerate the four (4) inherent limitations on taxation, Explain each item briefly, (2009 Bar) he erent lmttations on the power to tax 41, Taxation is for a pubic purpose The proceeds of the tax must be used (6) for the support of the State or (b) for some recogetzed objecive of the government oF to direcly promote the welfare of the community. 2, Taxation sinbevendy legisative- Only the TegQslacure has full diseresion as to the persons, propery, eccupaton oF business fo be taxed provided these are all within the State's territoral Jurisdiction. It can also finaly determine the amount or rate of tax, the kind of tax to be imposed and the method of collection. (1 Cooley 176188) 5 Taxition is terrgorial Taxation may be erercised ony within the temitoral Jurisdiction of the taxing authority (61 Am. ‘Jur, 88), Within the territorial jurisdiction, ‘the taxing authority may determine the place of taxation” or “tax situs.” 4, Tasation is subject to international emily This Is 4 Umitauon which is founded on reciprocity designed co maintain 2 harmonious aad productive laionstips among the various states. Under international comity, 2 state must recognize the generally-accepted tenets of Incematlonal law, among which are the principles of sovereign equality among states and of thelr freedom from suit ‘without their consent, that limit the authority of a government to effecively Impose taxes on 2 sovereign state and Iss ingtromentalites, 2s well as on is property teld, and activites undertaken in thatcapadiy. Public Purpoxe (1989, 1994) @ An ordinance of Quezon Gty on the operation of market stalls and the collection of market stall feos created a Saarket committer "to formulate, recommend and adopt subject tw the stalls” Italso entrusted the collection of the ‘market stall fees to a private corporation. Does the entrusting ofthe collection of the nrarker stall fees destroy the “public purpose" ofthe ordinance? (1989 Bar} ‘Az Yes, Decause a portion ofthe fees collected would be diverted as fees to private ‘Univansisyor Santo Tonas Gh)TAXATION LAW. ‘orperation. Enirting ofthe collection of the marlat ctl fees vielates the limitation that local governmont une etal in na case let to any private person the collection of local tes fees, cherges ard other imposions. See. 130 (©, RA. Na 7160, The Local Government Code] AAS a resale ofthis prohibition, public Funds are therefore nized fora private purpese, which 15 to pay the private corperation for its TET (£988, 2000, 2003, 2008) @ RCis « law-abiding citizen who pays his real estate taxes promply. Due to a series of typhoons and adverse economic conditions, an ordinance Is passed by MM {ity granting 50% discount lor payment of. unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the Iate payment. Arguing thst the ordinance rewards delinquent taxpayers and. discriminates against prompt ones, RC demands that he be refunded an amount equivalent to one- ‘half ofthe real taxes he paid. The municipal attorney rendered an opinion that RC cannot be reimbursed because the ordinance didnot" provide for such reimbursement. RC files suit to declare the ordinance void on the ground that itis a class legislation. Will his. suit prosper? Explain your answer briefly. (2004 Bar) A: The sut will not prosper. The remission or condoration of taxes due and payable to the exclusion of taxes already collected does not constitute unfuir disedinination. Each set of taxes is a cass by self and the law would be ‘open to attack as lass legislation oaly if all taxpayers belonging 10 one clase wers not treated alike. Juan Luna Subdivision. Ine. ¥ Scrmients, 9 Phi 374 (29529) ‘Nom impairment of Obligations of Contracts (a997,2008) Alaw was passed granting tax exemption ‘to certain Industries and investments for 2 period of ve years. But three years tater, the law was repealed. With the repeal, the © exemptions were considered revoxed by ‘the BIR, which assessed the Investing ‘companies for unpaid taxes effective on the date ofthe repeal of thelaw. NPC and KTR companies questioned the assessments on the ground that, having ‘made thelr investments in full rellance with, ‘he period cf exemption granted hy the law, its repeal violated their constitutional right ‘against the impairment of the obligations and contracts. Is the contention of the ‘companies tenable or net? Reason briefly, ‘Ar The contention ig not tenable. ‘The exemption granted is In the nature of a tunlateral tax exemption. Since the exemption given Is sponiancoas on the part of the Teglslature and no service o duty er other Femunerauve contivions have been imposed on the taxpayers receiving the exemption, it may de revoked at will by the leg[slature Manila Rolroad Company v.Irsular Colector of Customs, 12 Phil. 146 (1915), ‘Tax Exemption Granted to NanStocks Non Profit Educational Institutions (2004,2017) V2 Collager ie 3 non-etock, non-profit eduestional institution run by. the Archdiocese of BP City. 1 collected a recelved the following: ©) Tution ove () Dormitory Fees (ORemals from canteen {@ tnwerest trom money-market plcements of thetuttion fees (© Donation of Byscheolaluent Which of these abovacited income and donation would not be exempt from toaation? Explain briefly 2004 Bar) 4s The fllowing are not exempt from takation, via: (exe Rental income is considered as Unrelated to. che scocl operations, hence, ‘taxzble (DOF rer Ne. 137-87, Dec. 16,1987) (dnc The imersston the placement's taxable (DOF Order No. 137-87). If however, the said Interest. is used actually, directly and ‘exclusively for educational purposes as preven by substantial evidence, the. same will be exempt from tation (CIR. CA, 298 SCRA 83 Tissep. ‘The other Items of income which were all derived from schoci-related acuvises will be erempt from tacation in the hands of the recipient if used actually, direaly and ‘exclusively for educational purposes (Section $ pr.3, Art XIV, 1987 Constitution). The domaton to a non-stock nomprott educatioral institution willbe exempt from the donor's tax if used actually, directly and exclusivey fer educations! purposes and provided, that, not more than 30% of the onation is used for administration purposes (Gection 4 par. 4, Art XIV, 1987 Constitution, in ‘elation to Section 103(A)(3] NIRC). San juan University is a non-stock, non- profit educational institution. It owns 2 Piece of land in Caloocan City on which its and butlding ‘three 2-storey school buildings stood. Two ——————————————————QUAMTO (1987-2017) of the bulldings are devoted to classrooms, Teboratories, a canteen, a dookstore, and administrative offices. The third building ts reserved as dormitory for student athletes who are granted scholarships for a given ‘academic year. ‘m 2017, San luan University earned income from tuition fees and from leasing a portion of its premises to various concessionaires ‘ffeod, bocks. and school supplies. 2. Can the City Treasurer of Caloocan City collact real property taxes on the Land and building of Sem Juan University? eplain your answer. b, Is the income earned by San Juan University for the year 2017 subject te income tax? Explain your answer. (2017 BAR) ‘Asa. Yes, bur only on tne leased poruion. rice XIV, Section 4(3) of the 1987 Consuruton provides thatthe assets of a non-stock, none profit educctional insututin stall be exempt from taxes and duties only ithe same are use actualy, direct, and excusively for educational purposes. The test of exemption from taxation is the use of the propery for purposes mentioned in the Constitution. The Teased portion af the building mag be subjec: to real property tax since such lease is for ‘commercial purposts, thereby, it removes the eat from the property tax exemption granted tinder the Coastitution. (CIR w: De La Sille Universi. Ine, GR Nos. 196595, 19884 198943, November 9, 2015) 1, No, provided that the revemies are used actual, direety, and exdusively for educational purposes ac provided under Artie KIV, "Sexton 4(3)" of tho 1987 Constitution, The requisites for avaling the tax ccemption under Article XIV, Seation 4 (3) are asfollows: (2) the Taxpayer GS under the classfcation nom Stock, non-profit educational instizution; and (@) the income seeks to be exempted fom (axation is used actually, direcly and fexelisively for educatoxal pUrpases. Thus, so Tong a: the requisites are met, the revenues may be exempt from tox (CIR De Le Salle Univerign Ine, GR. Nos. 196536, 158841, 198341, November §, 2016) ‘Dirsct_and_Indirect Taxes (1994, 2000, 2001, 2006) (Distinguish “direct taxes" from “indirect taxes." Give examples. (2006 Bar) ‘Az Direct taxes are demanded trom the very person who, 25 intended, should pay the tx Which he cannot shift to another; while an indirect tax is demanded in the first instance from one person with the expectation that be can shift the burden to someone else. not as a tax, but as part ofthe purchase price (Macede vaMecerd\, jr 223 SCRA 227 [2995)) Examples fof dire aes are income tax estate tax and donor's tax. Examples of moirect taxes are valueedded tar, perventege tax and excise tax onexcisablearticles. os ION, ‘Tax Exemption and Exclusion (1996,2005, 2007) @ Why are tax exemptions strictly construed against the taxpayer? (1996 Bar) ‘A; Tax exemptions are strictly construed agalast the taxpayer because such provisions are highly distivored and may almost be salé to be ofious to the law (Mania Elect Company vs. Vera 67 SCR4351), The exception contained In the tax statutes must be strictly Construed ageinst the cne claiming the feremption because the law does not look with favor on tax exemptions they being contrary to the lifebloed theory which is the undeclying basis for taxes. @ An atten employee of me Asan Development Hank (ADB) who is redring ‘s00n has offered to sell nis car co you which he imported tax-free for his personal use. ‘The privilege of exemption from tax is ‘granted to qualifel personal use under the ‘ADB Gharter whichis recognized by the tax ‘authorities. If you decide to purchase the earth sate blo x Ea, (205 a) ‘A: Yes. The sai is subject to tax. Section 107 (@) ofthe NIRC provides that “In the case of factree importation cf ggods into. the Philippines by persors, entities or agencies etempt fem tax where such goods are subsequently sold, ransferred or exchanged in ‘the Pallppines to nor-exerpt persons or entities, the purchasers. transferees or reciente chall be considered the importer ‘horeef, who shall be liable for any intemal Tovenue taxon such importation”. Tax ‘Scemptlonsars to be construed stictly and are rot considered tranefeablein character. Differentiate between double taxation in the strict sense and in a broad sense and ‘ive an example ofeach. (2015 Bar) ‘As Double taxation in the strict sonse pertains ‘p the direct double tration, Tie means that ‘the taxpayer is taxed swice by the same tacing ‘aithorty, within ehe same taxing jurisdiction, for the same property and same purpose. Buample: Impostion of final withelding toe ‘om cash dividend and requiring the taxpayer to dedlare this tx-pald mcome in his income tax returns. Wuvansireacuinte reais >TAXATION LAW. ‘On the other hand, double taxation In the broad sense pertains to indirect double texation. This etends to al cases in which there isa burden of to oF more impesition. It is the double tanation other than these covered by direct double taxation (CIR xSolidbank Core, 436 SCRA 415), Brample: Subjecting the interest inceme of harks on their deposits with other bhanks to the 5% gross receipts tax (GRT) despite of the some Income having been subjected to 20% final withhelding tax (EW), is only a case of indirect double toxation. The GRT ie a tae on tho privioge of angaeing {3 busines while the FWT ie atax on the privege of earring incems. QX, alessor of a property, pays real estate tax on the premises, a real estate dealer's tax based on rental recofpte and income tax fon the rentals, X claims that this Is double taxation, (1996 Bar) {As There ie no double taxation Double taation ‘means taxing for the ame ta peri the same ‘hing or activity wie, when it should be tated but ance, by the same tang autherity for ehe game purpose end with the same kd or ‘character of tax The real estate tar sata on property the real esate dealer'staxisasax on the privilege t engage in business; while the Income taxis a tax on the privilege wo earn an Income. These taxes are mpesed by dierent taxing authorities and are essentially of diferent kind and character (Vlanuevay. City of lll, 25 SCRA 578). eT TaMeNNONN) ‘Tax_avoidance_and_Tax_Evasion (1989, 1998, 2690, 2005, 2098, 2014, 2016) @ Distinguish tax evasion from tax avoidance. (1996 Zar) ‘A Tax evasion Is 2 scheme used oatside of those lawful means to escape tax lability and, when availed of, it. usually subjects the taxpayer to further or addition civil or criminal liabilities. Tax avotdance, on the other Ihand, is 2 toe saving device within the means sonetioned by aw, hence legal. QMaria Suerte, a Fillpine _dtlen, urchased a lot in Makati City in 1980 at a price of PA million. Safd property has been leased to MAS Corporation. a domestic corporation engaged in manufacturing Paper products, owned 99% by Maria Suerte, In October 2007, EIP Corporation, real estate developer, expressed its desire to buy the Makati property at its fair amarket value of P200 million, payable ar follows (a) P6O million down paymons and @) balance, payable equally in Owenty four G4). monthly consecutive installments, Upon the advice of a tax Lawyer, Marla ‘Suerte exchanged her Makau property for shares of stock of MAS Corporation, A 3IK ruling, confirming the tax-free exchange of property for shares of stock, was secured fom the SIR National OMe anda Cestifcate Authorizing Registration was fssued by the Revenue District Officer {RDO} where the property was Iocated. Subsequently, she sold her entire stockholdings in MAS Corporation to EIP Corporation for P300 millon. In view of the tax advice, Maria. Suerte pald_ only the capital gains tax of P29,895,000 (P100,000x 59% plus P298,900,000 x 10%), instead of the corporate income tax of P104,650,000 (@5% on P209 million gain frem sale of roal property). Afer evaliating the capital ging ‘ax payment, the RDO wrote a letter to Marla Suerte, stating that she committed Js the contention of the RDO tanable? Or was it tax avoidance that Maria Suerte had resorted to? Explain,(2008 Dar) -A: The contention of the RDO iz act tenable, Marla Suerte resorted to tat avoidance and not tax evasion. Tax avoldance is the ust of legal scans to reduce txe lability and tf the legal right of a taxpayer to decraate the amoust of ‘what otherwise would be hls taxes by means ‘which the law permit, (eng Tong Testes Coy Ine. v. Commissioner). There 1s nothlog iegel about transferring frst the property 10 a ‘Corporation in a tax free exchange and later salling the shares obtained inthe exchange ata lower tax than what could have been imposed ifthe property was sold direct. Q¢ Ludky V Corporation (Lucky) owns 2 10- storey Dullding on a 2,000 square meter lot 1m the Clty of Maka. It sotd the Jot and Dutiding to Rainier for FBO milion. One month after, Rainier sold the Tot and building to Healthy Smoke Company (HSQ), for P260 million, Lucky fled its annual return and declared its gain from the sale of the lot ad ballding in the amount of P750, 00.00. ‘An tnvestigation conducted by the BIR revealed tat two months prior to the sale of the properties to Rainier, Lucky received P40 million from HSC and not from Rainier. ‘Sald amount of P40 million was debited by HSC and reflected in its trial balance as “other inv. ~ Lucky Bldg” The BIR concluded that there is tax evasion since ‘the real buyer of the properties of Lucky is HSC and not Rainier. Ie Issued an assessment for deficiency income tax in the Ameunt of 75 million agsinst Lucky. Luckey argues that itresorted to tax avoldance ora tax saving device, which Is allowed by the [IRE and BIR ruler since it paid the correct taxes bated on the sale to Rainier. On the ‘other hand, Rainlor and HSC azo pald the prescribed taxes arising from the sale by Rainier to HSC Is the DIR correct in assessing taxes on Lucky? Explain. (2016 Bar) UST BAR OPERATIONS UMVERSITY OFSANTO Tomas SRSA EERE OR RARE GTAQUAMTO (1987-2017) Az You. The BIR is eocrect in assess taxes on tue. ‘There was no tax avoidance, instead there vas tax evacion onthe part of Licky because the simulited sale to Rainler hick had is Epparent purpose to reduca the income LX 19 ‘be pald by Lucky on the sale to HSC. “Thesale to Rainier was simulated 2s evidenced tay the fae that vo months pricr to the sale of the properties to Rainler, Lucky received °0 rallon from HSC and no: from Rainer. ‘The intermediary transaction (the simulated sale to Rainier), was prompted more on the mitigation of tax liabilities than for legate Trssinese purpose constiutes one of tac ‘evasion. EE ‘Soustiutlonal Limitation to the poxer_of ‘Sougress.in granting tax exemptions (1999, 3982) 3) The President of the Philippines and the Prime Minister of Japan enteret mo an exacutive agieement in respect ‘ofa loan facility tothe Philippines from Jopan whereby it war stipulated that interest om loans granted by private Japanese financial institations private financial Institutions in the Philippines shall not be subject t» Philippine lacome axes, (1992 Bar) Isthis tax exemption valid? Explain. ‘Aces. The tax exemption is valid because ‘an executive agreement bas the force ani tiie ofa treaty under the provision ofthe Revenue Cede. Taeation i= subject Inzemarional omit. ALTERNATIVE ANSWER: 2) Theact of ax exemptionis an act of taxz.00 ‘hich is inherently legisatwe Therefore, @ rere executive agreement cannot provide fora ‘axexemption. G May taxes be the subject of cetoff or ‘compensation? Explain. (2005 Bar) ‘A: Mo. Toxes cannot be the subject of set-off or fompencation for the following reazons: (1) ‘teat are of dstint kind, essence and nature and these imporitons cannot be classed in ierely the camo category az ordinary cbligatons; (2) the applicable laws and ‘principles governing each are peculer, not fecessarily commen, to exch, end (3) pele polky fs better subserved Ifthe integrity and Independence of taxes are msiniainel [Republic \. Mambulao Lumber Company, 4 ‘SCRA 622 (1962)}- owerer, ifthe obligation to yay taxes and the taxpayer's claim against the government are both overdue, demandable, as well as fully liguidited, compensation takes place by operation of law and both obligetions are fertingulshed to thele concurrent amount [Damiage v Goritos 0SCRA #49 (2563). Can an assocement for a local tax be the subject of sotoff or compensation against a final jadgment flora sum of money ebtain« by the taxpayer against the local government that made the ascecement? Explain. (2005 Bax) A: Mo, Taxes and debts are of diferent nature land charsctsr; hence, 0 etoff of Compensation botoon thoce two. diforert classes of ablations is allowed, The taxes asseosed are the cblgations of the taxpayer arising from law, whi the money jadgiient aganstthe government is an obligation ering from contract whether express or implied Tnagmich that eaves are moe debs, i follows ‘hat the two obligations are not suscepeble to ‘setoff or legal compensation. (Francie. Intermediate appelate Court, 162 SCRA 753 (1988), Is only when the lea tax assessment and the ‘nal judgment are both overdue, demardable, as well fully guidated may secoff or ‘compensation be alowed. [Dombi v. Garltos, SCRA #45 (1963)]- SETTERS Q: When ray a taxpayer's suit be 099) ‘a A cxpayer's sure may only be allowed when. fan act complnined of which may iachide # legislative enactment, directly involves the ‘legal dsbursement of public funds derived from taation. (Pascual vs. Secretary of Public Works 110 Phil 33) A law linposes a tax of 1/5 of 1% if the export price of prawns produced in we Philippines. The law provides that the ‘proceeds of the tax shall be turned over to ‘the Philippine Prawn Growers Association, Tne (PGA), a non-prefit private ‘corporation registered with the Securities ‘and Exchange Commission to be used by PPGA exclusively to undertake activities that promote the growth of the Philipp prawns industry, such as undertaking esearch on how. t» improve the productivity of prawn farms in the Philippines, undertaking marketing activities that will directly further the srowth ofthe industry. ‘The members of FPGA constitute 90% of all the Prawn growers in the country representing 100% of the country's prawn ‘exports. IN, a practicing lawyer and ‘taxpayer, fled a sult with the Supreme Court questioning the eonstitutionality of owed? ‘UNITERSITY oF SANTO Tomas (ByTAXATION LAW. thelaw on the ground that the funde raised through taxation will be used for a private purpose, Will said suit prosper? Explain. (493052) ‘A: No, because Arty JN i not peajudlcadby the law. Tee net hie tae money that i being used In short, he has no lozus stand Furthermors, tasistance © the prawn indusery Is for a public purpose because the industry is ore of the pillars of the economy. contribution wo employment and fore exchange (Domondon, Remedies pg 815) ES POSTON M TE NOGA Power to inquire into bank deposits (1998, 11999, 2000, 2003, 2017) @ Cen the Commissioner of Internst ‘Revenue Inquire into the bank deposits of taxpayer? If so, does this pover of the Commissioner conflict with RA 1005 (Geerecy of Bank Deposits Law) (1998Br) ‘A: The Commissioner of Internal Revenue is authorized ta inquire into the bank deposits ot 4, any taxpayer upon his writen consent; 2, a decadent to determine hie gross estate 3. any taxpayer who has filed an application for compromise of his tax liability by means of financial incapacity to pay his tae abaey: 4. specific taxpayer or taxpayers subject of 1 request for the supply of tax information froma foreign tax atthority pursuane to an international convertion or agreement on tax matters to which the Philippines is 2 signatory. [See (0), NRC] ‘The limited power of the Commissioner does not confict with R.A. No. 1405 because the provisions of the Tax Code granting ths power {san exception tothe Secrecy of Bank Deposits tawas embodied ina later legislation. Furthermore, in case a taxpayer applies for an applicatien to compromise the payment of his ‘tax labiltles on his claim that his financial pposkion demonstrates a clear inability 0 pay the tax assessed, his application shall not be considered unless and unt he walres in ‘writing his privilege under RA. No. 1405, ani such waiver shal constitute the authority of ‘the Commissioner to inquire into the bani What is the Driefly. (2020 Bar) ‘event test"? Explain ‘A The “ll events tex” i 2 tast applied in the realization of income and expenco by an scerual-base taxpayer, The test requires (1) the fixing t the right to the facome or abil to pay; and (2) the availabilty of reasonably, ccurste determination of such income oF ty, to warrant the inclusion ofthe income or expense the gross income or deductions during the erable year. (CIR Isabela Cultural Corporation, GR No. 172231, Feb 12,2007) Mr. Jose Castillo is a resident Filipino itizen, He purchased a parcel of land in Makai City in 1970 at a consideration of Pi Million. in 2011, the land, which remained undeveloped and fle, had 2 fair market vahie of P20Million. ‘Mr. Antonia Ayala, another Filipino citizen, is very mich Interested inthe property and he offered to Duy the same for P20 Million. The Assessor of Makati Gy reassessed Ip 2011 the property at P10 Million, 1s Mr. Castille Uable for income tax ia 2011 baved on the offer to buy by Mr. Ayala? Explain your answer. (2012 Bar) ‘As No. Mr. Cala fs nat able for income tax in 2011 because no income is realized by him uring that year, Tax labiey for income tex atteches only if there ba gain realized resulting from 2 closed and complete warsection (Madrigal w Ragery, GR Ne. L- 12287, August7, 1918) Ta (1994, 3993, 1995, 2001, 2003,2016) QA “fringe benefit is defined as being any good, service or other benefit furnished or ‘granted fn cash or Ia kind by an employer {0 an Individual employee, Would It be the employer or the employee whe is legally required to pay an mcome tax on 17 Explain, (2003 Bar) 4; lets the employer who is legally required to pay a0 income tax on the feinge benedt. The Finge benef tax is imposed as a. final ‘withholding tax placing the legal obligation to remit the tax onthe employes, sack that ifthe ‘ax ts nor pald the legal resourse of the BIR Is 1 go after theemployer. Any amount or value received by the employee asa fringe bene't iS ‘considered tar paid hence, net ofthe income ‘ax due thereon The person who is legally required topay (same as statetory incidence as distinguished from economic inddence) is that person who, in case of non-parment, can be legally demanded to pay the tax. In 2014, Solar Computer Corporation Gola) “purchased a proprietary membership share covered by Membership certificate No. 8 from the Mabuhay Golf Gib, Inc. for P500, 000.00. On December UST BAR OPERATIONS UuivERsity oF Santo TOMAS SS) ACADEMICS COMMITTEE 2017QUAMTO (1987-2017) 27, 2022, it transferred the saine to David, its American consultant, fo enable him to vail of the faellties of the Cub. David Cxecuted a Deed of Declaration of Trust and Assignment of Shares wherein he Acknowledged the absolute owsership of Solar over the share; that the assignment ‘was without any consideration; and thet the ‘share was placed tn his name because the lub required it to be done. in 2013, the value of the share increased’ t0 800,000.00. Is the sald assignment a "git" and, therefore, subject to gift tax? Explain. (2016 sar) |A: Nos Th assignments are aot gratuitous, nd there is no latent to transfer ownership hence nt subjectto gittax. ‘The value ofthe sight to avs ofthe privileges faterdent to Mabuhay Golf Club, Inc ‘Membership Certifiate is due to David's merits for services 19 @ computer consultant, It = fringe benest taxable fo the employer. [NIRC of 1997, 20.93 (9) (@)) pa ere Pere eee Mee ORES OTe) Q; Distinguish s “capital ascot” from an “ordinary asset”, (2003 Bar) Ac The term “capital scset” reports all properties not specifically excluded in the statutory definition of capital asses the profits for leas onthe aale or the exchange of which are tested a2 capital gotze oF capital lossus. Conversely, al’ those properties specife:lty ‘excluded are considered as ordinary assets and ‘the profits or losses realized must have to b= Uueaied as ordinary gains oF ordivary losses. Accor, “apt ees neues property held by the taxpayer whether or a0 conse wa eare wcaeaie oo eee hot include any of the folowing, watch ave ‘consequenty consicered “ordinary asses" 1. stock in ele of the taxpayer oF other property of a Mad which would properly be inchided in the inventory. of the turpayer If on hand st the close of the ‘auable year, 2. property held by the taxpayer. primarily for sale to customers in the: ordinary courreeftrade orbueines = property used in thetrade or business of character which is subjectto the allowance for dapredation provided in ection 34 (F) ofthe Tax Code: oF 4. real property used in trade or business of the taxpayer, ‘The satutory definition of “capital assets” practically excludes from is scope, it wil be noted, all property held by the taxpayer ifused Jnconnection with his trade or business. Q What ie the rationale for the rule prohibiting the deduction of capital losses from ordinary goine? Sxplain. (200% Bar) ‘A: Its to Insure that only costs or expenses Incurred in earning the income shall. be dedvetle for income fax purposes consonznt with the requirement of the lew that only necessary expenses are allowed as deductions from greceinceme, ‘The term “necessary expenses" presupposes thet in onder to be allowed t= deluction, the expense must be business connected, which is aot the case Insofar as capltal loaves are conceraed: Tis le also te reason way all nenbusiness connected expenses Ike personal, living and family expenses, are nor allowed as deduction from os acm, Bein 390) of 1997 Ps Code ALTERNATIVE ANSWER: ‘The prohibition f deduction of capital from ordinary gana designed t forestall he shifing of dnduetione from an area cubject to lower tae to an aroa subject to higher tanes thereby unnectesarly resulting in loskege of tax revenues Capital gains are generally 2x0d ata lower rate to prevent, among others, the ‘bunching of tnzome in one table year wich tsa lberalty inthe law begotten from motives of pabile policy (Rale on Holding Period). I sands t@ reason therefore, tut if the transaction results fa loss, te same should b: allowed only from and te the extent of capita gains and not to be deducted rom ordinary gains which are subject to a higher rate of Income tae. In 1990, Mr, Naval bought a lot for P:, (000, 000.00 in a subdivision with the intention of building his residence on it In 1994, he abandoned bis plan to build residence om It because the surrounds area became a depressed area and lan! values in the subdivision went dows Instead, he sold It for P800, 000.00. At t= ‘ime of the sale, the zunal value was P500. ‘000.00. 1. Isthe land a capital asset or an ordinar; asset? Explain. ‘A: Theandis capital asset because itis ‘either for sale inthe ordinary course of business nor apropery used in the trade or business of the taxpayer. (Sec 33 NRO). 2, Isthere any income tax due on the sale? Explain. (1994 Bar) ‘As Yes Mir, Naval i liable to the 6% capital fins taximposed under the Tax Code based on ‘he gross selllag price of PE, 000.00 which» sn amount higher than the otal value. @ im January 1970, Juan Gonzales bouglt ‘one hectare of agriculzural land in Lagu Unrvensity oF Santo Tomas (3)TAXATION LAW. for 100, 000. This property has a current fair market value of P10 million in view of the construction of a concrcte road traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Liguna for a one-half hectare residential property located In Batangas, with a falr market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in2C07 fer P9 million, What is the nature of the reat ps fexchanged for tax purposes = capital asset or ordinary asset? Explain. ‘A: The one hecare agricultural land owned by [Man Gonzales isa capital asset because itls nce 4 Teal property use¢ im trace or business. The ‘one-half hectare residential property awed by Aloha Corporation isan ordinary asset because the owner Is engaged in the purchase and sale of real property. (Section 39, NIRG, Revenue Regulations No. 7-03) Is Juan Gonzales subject to income tax on the exchange of property? Ifso. what is the tar hase and rate? Explain. ‘As Yes. The taxbasein a taxable disposition of a real property classed as a capkal aset is. the higher between two values: the fir market value ofthe property received in exchange and the fair niarcet value of the property exchanged. Since the fai market value cf te properties are the same, the said fair mare: vvahie should be taken ac the tax bare which ic 0 mil¥on. The iaceins ta rate e696, (Secon 24(0) (1), IRC, 1s Alpha Corporation subject to income tax ‘on the exchange of property? If so, what is tthe taxbaseand rate? Explain, (2008 Bar) ‘Av Yes. The gain from the exchange constitutes ‘an item of gross income, and belng a business income, i must be reported {a the annual Income tax return of Alpha Corporsticn. From the pertinent items of gros income. Aetuctions allowed by law fom gross income can be claimed to ariive at the net income ‘Wek isthe tax base for the corporate Income tax rate of 35%, (ectfon 27 (A) and Section 31, RG) ‘Exemptions {rem capital gains tax Mi. Ht decided to sell the house and lot ‘wherein he and his amily have ved forthe past 10 years, hoping to bay and move to 2 ‘bow hotte and lot closer to hie childven’s school. Concerned about tho capital gine fr that will be due on the sale of thelr ‘house, Me. H approaches you as a friend for anlvice If ts possible for the sale of thelr ‘house w be exempted from capital gals tax and the conditions they must comply with to avall themselves of sald. exemption. @015 Bax) A I would advise Mir. H thet he may be cxompted ffom the payment of the capitl ‘gains taxon the sale or diepostion of the house and lot where his family Ives because the sale of principal residence by a natural person is exempt provided the following conditions are complied with: 1. The precseds ofthe sale & fully utilized in acquiring or construction new prindpal residence withla 18 calendar’ months ‘fromthe date ofthe sale or disposition, 2. The historical east or adjusted basic of tho real propary sold or disposed will be carried averto the new principal residence builtor acquired; 3. The Commissioner has heen duly natfed, through 2 presertbed rerum, within 30 daysteom the date of sale or dispastion ofthe person's intention > avall of the tax exemption; aad 4, The eeomption wae sailed only once ‘ovary 10 yoars [Soe 24 (@)(2} NERC] @ Cobu Development Inc. (CDN) has a2 authorized capital stock ef PS, 000, 000.09 divided into 50,000 shares with a par value ‘of One Hundred Pesos (P100.00) per share. (Of the authorized capital stock, twengytive ‘thousand (25,000) shares ‘have been subscribed. Mr. Juan Legaspi isa Stockholder of CDI where he has Subscription amounting te 13,900 shares, ‘To faly pay his uapaid subscription in the amount of P950, 600.00, Mr. Legaspi transferred to the corporation a parcel of land that he owns by virtue of a Deed of Assignment, Upon investigation, the discovered that Mr. Legasp! acquired property for only P500,0G0.00. Is Mr. Lease Hable or any trae est (1991 Bar) A: The transfer by Mr. Legaspi to the corporation ofthe parcel of land in payment of ‘ls unpald subscription did not increase hi stoctholdings in the corporation. It cannot be ‘sold that he acquire control ofthe comporation by virtue of the transfer of the land. His percentage of tockholdings nthe capital stock ‘of the corporation remains the same ator the transfer ac before Therefore, Mr. Legispt derived exable gain for his ezonomic gain ‘which was realized by virme ofthe exchange of the land for the liability forthe subscription. ALTERNATIVE ANSWER: Mr, Legaspi fe not liable for any taxable gain. The trancaction amounted t an exchange of sharve of property for shares of otece ae a result of which the propery transferor anqulred control of the corporation, The 13000 shares of stock acquired In exchange of property was more ‘han My percent (50%) of the wcal subscribed captal stock of Cebu Development, Inc. (CDI) ‘that qualified the transaction as a tax-exempt UST BAR OPERATIONS: (@ evensize or sanro Tomas aetbhea resinemiimoeec,QUAMTO (1987-2017) under the provisions of See. 24 (e) 2) ofthe National interaal Revenue Co: BBB, inc, a domestic corporation, enjoyed a particularly profitable year in 2014. In june 2015, its Board of Directors approved the distribution of cash dividend tt kts stockholders. BBB, Ine. has individual ‘and corporate scockholders. What isthe tax treatment of the cash dividends received fom BBB, Inc by the following stockholders: 1. Aresident citizen, 4: A nal wabholding tx for tem percent (10%) shall be imposed upon the ash dividends actualy oF constructively received by a resident citizen froin BBB, Inc. (See. 24 @@.NIRO, 2. Nonresident business len engaged In trade or 4s A final withholding tax of twenty percent {20%} shall be imposed upon the cash dividends actualy or constructively reteired by a noreresiZent allen engaged in trade or ‘isinessfeem BEB ne (See 25 (02) MIRC). 3. Non-resident alien not engaged intrade orbusinese ‘cA Saal withholding tax equal to twenty-five percent (25%) of the entire income received from all sourees within the Philippines, fnclading the cash dividends reczived fom ‘BRB, Ire. (See. 25(b) NIRC. 4, Domestiecorporation A: Dwvidends received by a domestic corporation from arotier domestic corporation, suck as BBB, Inc, shall not be subject to tax Sex. 27(2)(4}, NRC). 5. Nonresident foreign corporation ‘Ae Dividends received by 2 nomresdent fordign corporstion froma domestic ‘corporation are gorerlly subject to aa income tax of 30% to bo witheld at source (See 2O0)(1), NIRC). However, a final withholding ‘ax of Been percent (1596) is impazed om the amourt of cash dividends received from ‘domestic corporation like BBS, Inc. if the tax ‘sparing rule applies (Ses. 28(8)(5)(0), NISC). Pursuant to Unis rule, we lower rate of ta ‘would apply i te councry in wich the nor Fasident.foregn corperasion 1s comicled ‘would allow as tax credit agalnst the tax due ‘rom i taxes deemed paid in the Philippines of 15% representing the diference between the regular income fax rate and the preferential te & Mr javier 1s a non-resident senior cdtizen. He receives a monthly pension froma ‘the GSIS which he deposits with the PNB- Makati Bronch. fr he exempt from income tax and therefore not required to fle an Income taxretum? (2000 Bar) ‘Ae Mr. Jater is ezemapt from income tax on his ‘monthly GSIS pension (Sec 32/8)(6\0). NIRC of £1997] but net on the erst income that might ‘accrue on the pensions depesited with FNB which are subject tofinal wehelding tax Concequentiy, since Mr. Javier's sole taxable incems would have been subjected ta final witilding tax, hes not required anymore to Fle an income tax return (See 51 (A) (2) (Ones. © What are diseused dividends in income ‘taxation? Give an example, (1994 Bar} ‘A: Disguised dividers are those income payments made by 2 domestic corporation, ‘whichis a subsidiary of 2 non-resident foreign corporation, to the latter ostensibly for services rendered by the latter to the former, ‘but which payments. are disproportionately larger than the achat value of the services rendered In sich cate, the amount over and ‘above the true value of the sarvice rendered ‘hall be treated az a dividend, and shall be ‘ubjected tothe corresponding tax of 35% oa Philippine sourced gross income, or auch other ‘referential rte as may be provided under 3 Corresponding Tax Treaty. Beample: Royty payments under 2 corresponding licensing agreement. Noel Santos is 2 very bright computer science graduate, He was hired by Hewlett Packard. To entice him to accept the offer of employment, he was offered ce ‘arrangement that part of his compensaion would be an insurance policy with a race value of F20 Million, Tae parents of Noel are made the benefidaries of tie insurance policy. WIN the proceeds of the insurance form part of die Income of the parents of Nod! ‘and be sublect to Income tax? Reason Driety. (007 Bar) ‘A: No. Tae proceeds of life insurance polices ‘ld to the heirs or benefidaries upon the ‘death ofthe Insured are not included as part of the gloss income of the recipient. [Secfon S2(8)(1), NERC] There 1s no income realized Decause nog Nows wo Noel's parents omer ‘han a mere return ofcaplal the capital being ‘he life ofthe insured. @ Born of a poor family on 14 February 4944, Mario worked his way through college. After working formore than Z years in X Manufacturing Corporation, ‘Marto decided to retire and avail o! the benefits ‘under the very reasonable retirement plan Umtvensity or SANTO T. as chyTAXATION LAW. ‘maintained by his empioyer. He planned to invest whatever retirement benefits he would receive in a business that. will provide his employer with the needed raw materials, On the day of his retirement on 30 April 1985, he received P400, 000.00 as. Tetirement benefit. In addition, his ‘endowment insurance policy, for which he was paying an annual premium of Pi 520.00 since 1965. also matured, He wat then paid the face value of his Incurance policy inthe amount ef P50, 000.00. Is is P50, 000.90 insurance proceeds ‘exempt from income taxation? (1991 Far) ‘A: The P50, 000.00 insurance proceeds ‘snot totally exempt from income tax. The excuded amount isonly chat portin which corresponds to the premiums that be had paid since 1955, tthe rate of P1520.00 per year meltiplied by twenty (20) yeare which war the perfed af the policy he must have paid total of P30, 400.0, ‘Accordingly, he will bo subject to report az tazalloincome the amourt of P 19,600.00. Q Me. A, a citizen and resident of the Philippines is a professional boxer. In a professional boxing match held in 2013, he won prize money in United states (US) dollars equivalent to P300,000.00, ‘Is the prize money pald to and recetved, dy Mr A In the US taxable m me Philippines? Why? [As Ves. Under the Tax Code, che income within and without of a resident citzen is toable, Since Mr. A is a resident Flipino citizen, Bis Income worldwide fs taxable nthe Philippines, (Bes 29(A} nrc] b. May Mr. A's prize money quallff ar an ‘exchusion from hlo gross Income? Why? AA: No. Under the law, all prizes and aveards ‘ranted to athletes in local and International sports compeitions and tournaments whether held inthe Philippines or abrocd and sanctionad by their national sport sssochtions are excluded from grose incotme. ‘The exclusion fad application enly to emateu sthleta where the prize une given in an event sanctioned by the appropriate national sports sssochtion affisted with the Philippine Olympic Committee ane not to professional athletes Uke Mr. A. Therefore the prize money ‘would not qualify 2s an exclusion from Mr. gross income, [SEC32 B (7)(4), NRC] The US already imposed and withheld income taxes from Mr. 8's prize money. Tow may Mt. use or apply the income taxes he paid on his prize money to the Us when he computes his income tax liability in the Philippines for 20137 (2015 Bar) ‘As "The income taxes withheld and pald to the US government maybe claimed ty Mr. A ether asa deduction from bis gross income or as a tax credit from the Income tax due when he meat tel For taxable year 2013. Sec 34 () (2) (2). IRC} 2 is 2 Filiping immigrant living in the United States for more than 10 years. He 15 retired and he came back to we Philippines as abalikbayan. Every me he comes fo the Philippines, ne stays here for about 2 month. He regularly receives a pension from his former employer in the United States, amounting to US§1,000 a month, While in the Philippines, with his pension pay from his former employer, he urchased three condominium wnits in Makati which he is renting out for P15, 000, amonth each, Does the US$1,000 pension become taxable because he ‘is now residing in the Philippines? Reason briefly. (2007 Bar) ‘A:No. The provisions of any existing law to the contrary notwithstanding, social security benefits retirement gratultes, pensions and ‘otter similar benefits received by a resident citizens of the Philippines , such 2s Z, from a foreign private institutions is excladed From incometaxation. [Sec 32 (8)(6) (0. IRC] :X,an employee of ARC Corporation died. [ABC Corporation gave X's widow an amount ‘equivalent to X's salary for ane year. le the amount considered table income to the ‘widow? Why? (2995) ‘A:No. Theamount received by the widow from the decedent's employer may ethar bea gitor 2 separation benefit on account ef death Bath are exclusions from gross income pursuant to provisions of Section 28(3) of tha Tax Code, ALTERNATIVE ANSWER: No. Since the amount was given to the widow and net to the estat, it becomes obvious that the amount Is more of a gift. In one US. tax cave (Est of Hellstrom vs. Commissioner 24 7. 916) it was ‘held that payments to the widow ‘of the president of corperation of the amourt the president would have received in ealary fhe lived ovt the year conctituted agit and not an The controlling facts which weuld lead to the conclusion that the amount receved by the widow isnotanincomeare ae fllowe: a. thegif- wasmade tothe widow ratherthan theestate: b, there was no ebligation forthe corporation ‘to make further payments to the deceased UST BAR OPERATIONS RSITYOF SANTO TOMASQUAMTO (1987-2017) the widow had never worked for the comporation: 4. the comporation received no economic bereft and the deceased had been fully compensated forhis services. [Estate of Sey Carter us. (Commissioner 453 F.2d 61 (2¢ Gr. 1971} A. an employee of the Court of appeats, retired upon reaching the compulsory age (0f 65 years. Upon compulsory retirement, A received the money value of his ccumulated leave credits in the amount of S00, 600.00, is said amount subject to tax? Expain. (1996 Bar) A: No, The commutation of leave reds, ore ‘cemmonly known as terminal lave pay, le, the ‘ash equivalent of accumplated vatatlon and sick leave credits given to an officer or ‘enployee who relies, or separated from the ‘service through no fault of is own, is exempt from income tax (BIR Ruling 234-91 dared November 8 1981: Commissioner v. CA ond Bjren Castaneda. GR Wo. 96016, October 17, 409) Q Under what conditions are retirement benefits received by officials and employees ‘of private firms excluded from gross ‘income and exempt from taxation? (2000 Bar) ‘Az Reticoment benefits recived under RA. No, 7641 and those received by officals and employees of private firms, whether, individual fof corporate, in accordance with the employers ressonable private benefit plan approved by the BIR, are exclude from gross {ncomeazd exempt from income taxation ifthe rating ofcaloremployee was: Ln service of same ereployer for atleast 10 years, 2. Not less than fity years of age at time of retirement, 3. Avalled of the benefit of exchsion only once. [522 (6) (5) (4) NAC] ‘A. The retiring ofieal or employee should nothave previously avaled of the privlege Under the resremane plan ofthe same oF another employer [RR 2-98 Section 278 Op pe} Explain briefly whether the following ‘toms are taxable or non- tarable: a) Income from jueteng by xxx 00S Bar) ‘A: itis table, The law imposes « tax on ‘come trom any source whatever which smeans thet i eludes income whether legal or ‘legal. See 22(4). IROL Grose Income (2012, 2013, 2014, 2015) Me. Gipit borrowed from Mfr. Maunaw: 100,000.00, payzble in five (5) equal ‘monthly installments. Before the first netallment became due, Mr. Gipit rendered ‘general conning services in th building of Mr. Maunawain, compensation therefor, Mr. Maunawain cameclled the Indebtedness of Mr. Gipit up to the amount of 775,000.00. Mr. Gipit caims “tat the cancelation of his indebtedness cannot be considered as gain ‘on his part which must be subjectto Income tax, Because according to him, te did not actually receive payment | from Mr. ‘Maunawain or the general deaning services, Is Mr. ipit corrert? Explain. (2014 Bar) ‘A:No, Section 50 of Rev. Regs. No.2, otherwise ‘known az Income Tax Regulations, provides thacifs deblorperterms serves for ac ‘who cancels the debe In consideration for such services, the éebtor realizes income to that amount 2 compensation for his services. In the given problem, the cancelation of Mr. Gipit's indebtedness up to the amount of Php 75,0000 gave tise to compensation income subject to income tax, since Mr. Maunawain Condored such amoust ac consideration for the general cleaning services rendered by Mr. Gpit In 2010, Mr. Paton sent his sister Helen ‘Si, 000 via a telegraphic transfer through ‘the Bank of PL, The bank’s remittance clerk ‘made a mistake and credited Helen with $1,000,000 which she promplly withdrew. ‘The bark demanded the return of the mistakenly credited excess, but Helen refused. The BIR entered the picture and Investigated Helon. Would the BIR be correct if it determine: zhat Helen earned ‘auable income undar there facts? (2013, Bar) (A) No, she had no income because she had ‘no right tothe mistakenly credited funds. (8) Yes, income is income regardless of the (@ No, #t wae not her fault that the funds in ‘excess of $3,000 wore credited toher. (0) No, ehe funde fa excess of81,000 were in ‘effect donated to her. 42, income ie income regardless of the Section 32 of the NIRC defines gross income as. all income, derived fem whatever sovrce. Consequently, the flow of wealts without any distinction as tothe lawfulness ofits soures, subject t9 Income tax In other words, the phrase “Iucome from whatever source" ‘Umivensiry or Saw Tomas Gy TLTAXATION LAW. Giccloees 2 Inpieiatve policy ro midude all income nat oxpracily exempted wihia the lags oftazable incomeuunder the! SSS ASTON TONIETT EXCLUSIONS UNDER THE TAX CODE sis of 1991, 2003, 2005, 2007) ‘State with reasons the tax treatment of the following In the preparation of annual Income tax returns: (2988, 1. Procecds of life insurance recs clld as irrevocable beneficiary; aby = bse (2005 Bar) As Tha proceeds of life insurance received by 2 child as irrevocable benefidary are not to be feported in the annual income tex returns because they ate excluded ffom gross income. This kind of receipt does sot fall widin the defnitien of Income —"Many wealth which flows into the txpayer other chan a mere rem of capil” Since insurance is compensatory i nature, the recept is werely ‘considered 2¢ a return of capita. [Section 32(8)(1), MIRC; Fisher v. Trinidad, 43 Phi 73 (23) 1989, 1 1996, 1997, 2008) Mr, Rodrigo, an 80-year old retired Dusinessmaa, feli in love with 20-year old Tetehie Sonora, a night club hospitality girl Although she refused to marry him she agreed tobe his live-in" partner. ‘in grattute Mr. Rodrigo transferred to her 2 condominium init, where they beth live, lunder a deed of sale for Fi0 Million. Mr. Rodrigo paid the capital gains tax of 59% of XD Million. ‘The Commissioner of Internal Revenue found that the property was transferred to Tetchle Sonora by Mr. Rodrigo because of the companionship she was providing him. Accordingly, the Commissioner mate i determination that Sonora’ had ‘compensation income of P10 Million in the year the condominium unit was transferred to her and issued a deficiency income tax assessment. ‘Tetehte Sonora protests the assessment and calms that te transfer of te condominium ‘unit was a giftand therefore exciuded from Income, How will you rule on the protest of Tetchle Sonora? Explain. (1995 Bar) ‘As I will grant the protect and saned the assessment. The transfer of the property by Mr. Rodrigo to Ms. Sonora was gratuitous. The deed of sale indicating 2 P10 milion cansidaration was simulated becaucs Me. Rodrigo didnot receive anything fem the cale ‘Tho problem cotogoricaly states thet the transfer was rade in geatitade to Me, Sonora’s companionship. The tansfer being gratultous fs subject to denor's cas. ux Rodrigo should be assessed defcercy donor's tax and a 50% surcharge imposed for fraudulendly simulating a contrac of sale to evade donor's tax [See 91(0), IRC ‘Awards and agreements for damages paid ‘on account of or resuitine from injuries or ‘sickness (1995, 2003, 2005, 2007) @ Mr, Infante was Ait by 2 wayward bus ‘while on his way to work He survived but ad to pay P#00, 000.00 for his ‘hospitalization, He was unable to work for ‘sie months which meant that he did aot receive his usual salary of P10,000.00 2 ‘month oF a total of P60, 000.00. Ho sued the ‘company and was able fo ebtatn a fnal judgment awarding him P400, 000.00 a: reimbursement (or his ho:pitaizatfon, P50, (000 for the salaries be failed to receive ‘while hospitalized, F200, 000.00 as moral damages for hls paln and suffering, and 100,000.00 as exemplary damages. He was, able collectin full roms dhe judgment. How much income did he realize when he collected on the judgment? Explain. (1995 Bar) 4: Nove, The ?200000 mara and examen damages are compinsetion for inh Eustained by Me. Infante Tso 490, 00000 Fembursement for haspitlization expenses land the P60, 600.00 for salaries he flied to receive are amounts of any damages recered whether by sult or agresmene on account of such inrtes. Scion 28(0)(5) ofthe Tax Code Specifically exdutc these amounts from the gross Income of te nclvidual inured, [Section 78(0), MIRC: Se. 63 Rev. Reg. No.2) @ JR wor a passenger of an airline that crashed. He ‘survived the accident but sustained serious physical injuries which Fequlred hospkalization for 3 months. Following negouations wh the alrline and 4s insurer, an agreement was reached ‘under the terms of which JR was paid the following amounts: 7500, 900.00 for his hospitalization; 250, 090,00 as. moral damages; F300, 000.00 for loss of income uring the period of his treatment and recuperation. In addition, JR received from hls employer the amount ef 200,090.00 representing the cash equivalent of his ‘earned vacation and sick leaves. Which, If any, of the amounts he received are subject ‘to income tax? Explain (2005 Bar) ‘A: Theamount of P200,000.00 that R recelvad fiom bis employer is subject to income tax except the money equivalent often (10) days ‘unutiized vacation leave crate which fe not taxable. Amountr of vacation allowances oF ‘UST BAR OPERATIONS Ww UNIVERSITY OF SANTO TOMAS “ACADEMICS COMMITTEE 2037