Jurists Suggested Answers To The Additional Taxation Law Mock Bar Examination

JURISTS BAR REVIEW CENTER™
SUGGESTED ANSWERS TO THE ADDITIONAL TAXATION LAW

MOCK BAR EXAM
I
Mr. AAA and Mr. BBB are best friends from college. Mr. AAA is employed as an IT
Engineer in a private company, while Mr. BBB runs his own IT company. In one of their “two
bottles” sessions, Mr. AAA said that it should be Mr. BBB’s treat because he earns better. Mr.
AAA opined that it is unjust and unconstitutional that those earning purely compensation income
are not allowed any deductions from their compensation income, while those who are self-
employed can claim expenses and deductions. Mr. AAA further said that compensation income
earners and those who are self-employed should be treated alike. Mr. BBB, knowing that you
are knowledgeable in Taxation Law asked for your opinion. What would you say?
Suggested answer:
I would say that Mr. AAA’s opinion is wrong.
The Supreme Court has held that among the requisites for a valid classification under
the Equal Protection Clause are that the classification rests on substantial distinctions and that
it must apply equally to all members of the same class.
Here, there was a classification of taxpayers – compensation income earners and self-
employed individuals, thus a substantial distinction. Further, all compensation income earners
are not allowed to claim deductions, while all self-employed taxpayers are allowed to claim
deductions, thus the classification applies equally to all members of each class.
Hence, the opinion of Mr. AAA is wrong. There being valid classification, then the
classification is constitutional.
II
Mr. XXX was assessed for deficiency income taxes for his 2017 income. As he was not
able to find for supporting documents and provide arguments to contest the assessment, he
paid the assessed deficiency income tax, including interest, surcharge, and penalties due
thereon in 2019.
In his 2019 income tax return, he claimed, among others, interest expense, the amount
of which includes the interest due on the 2017 deficiency income tax. The BIR, in its audit of
Mr. XXX’s 2019 income, disallowed the interest expense pertaining to the deficiency income
tax. Decide.
Suggested answer:
The BIR is correct in disallowing the interest expense pertaining to the 2017 deficiency
income tax.
Under the Tax Code, the amount of interest paid or accrued within a taxable year shall
be allowed as deduction from gross income provided that the interest is on indebtedness in
connection with the taxpayer’s profession, trade or business.
Jurists Suggested Answers to the Additional Taxation Law Mock Bar Examination. © 2021 by Jurists Review
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Page 1 of 9
Here, the interest expense paid on the deficiency income tax is not an interest on
indebtedness in connection with the taxpayer XXX’s profession, trade, or business.
Hence, the BIR is correct.
III
CCC and DDD are good friends, who are both very meticulous with their finances. CCC,
after studying his finances, decided to withdraw his bank deposits and to buy non-taxable or
tax-exempt securities. DDD, on the other hand, declared in his tax returns that his sales for the
year amounted to P20,000,000, although his personal record shows that his total sales were
P30,000,000. Are their actions legal?
Suggested answer:
Only CCC’s action is legal.
The Supreme Court has held that tax avoidance is the minimization of tax liabilities
through legal means. On the other hand, there is tax evasion when the means used to minimize
income tax liability is illegal.
Here, the act of CCC in withdrawing his bank deposit to buy to buy non-taxable or tax-
exempt securities is legal. While the act of DDD in underdeclaring his sales to minimize his tax
liability is illegal.
Hence, only CCC’s action is legal.
IV
Explain:
a. Doctrine of Constructive Receipt of Income

b. Realization Principle
Suggested answer:
a. The Doctrine of Constructive Receipt provides that income which is credited to the
account of and set apart for a taxpayer and which may be drawn by him/it anytime is
subject to tax for the year during which it was so credited or set apart although not yet
then actually received or placed in his possession.
b. The Realization Principle provides that income is generally recognized when the
following conditions are both met: (i) the earning process is complete or virtually
complete; and (ii) an exchange has taken place.
In 1978, EEE Electric Cooperative was a grantee of a franchise to construct, maintain, and
operate an electric light plant in the Province of ZZZ for a period of 50 years. Under the
franchise, the company shall pay a franchise tax of 5% annually on its gross receipts which
shall be “in lieu of taxes of whatever kind and nature that may be imposed by any national or
local government” for the duration of the franchise. In year 2015, however, Congress passed a
law establishing a uniform franchise tax (UFT) rates on all existing franchise guarantees. In
2020, the BIR assessed EEE for income tax on income earned in 2017. EEE argues that the
law on UFT cannot be made applicable to them because to do so would be an impairment of
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the obligation of contracts since this impairs their contract under the franchise granted to them.
Decide.
Suggested answer:
The argument of EEE that applying the UFT law to it would impair the obligation of
contracts is not correct.
The Supreme Court has held that Congress could impair a legislative franchise by
making the franchisee liable for income tax from which heretofore it was exempted by virtue of
the exemption provided for in its franchise. This is in effect withdrawing the franchisee’s
exemption from income tax and does not constitute impairment of the obligation of contracts.
Here, Congress passed a law establishing a uniform franchise tax rates on all existing
franchise guarantees during the effectivity of the franchise period of EEE. Thus, the new law is
in effect a withdrawal of EEE’s exemption from income tax.
Hence, the argument of EEE is not correct.
VI
FFF Ministry, a religious organization sought your legal advice on whether they are liable
to pay for the following:
a. Building permit fee for the renovation of the west wing of the church building;
b. Registration fees for the car of Reverend Ike, the parish priest. The car is used when he
goes to the remote barrios to lead bible studies, and other related church functions; and
c. Real estate tax assessed on a portion of the church lot planted with various vegetable
for use of the priests who all reside in the seminary.
Discuss.
Suggested answer:
a. FFF Ministry is liable for the building permit fee.
The constitutional exemption from taxes granted to religious organizations pertains only
to real property tax on real property actually, directly, and exclusively used for religious
purposes.
Here, what was being assessed is building permit fee not a real property tax.
Hence, the religious organization is liable.
b. FFF Ministry is liable for the registration fee.
As previously stated, the exemption pertains only to real property tax.
Here, what was being assessed is a registration fee.
Hence, the religious organization is liable.
c. FFF Ministry is liable for the real estate tax.
As previously stated, the constitutional exemption applies only if the real property or
estate is being actually, directly, and exclusively used for religious purposes.
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Here, what was being assessed for real property or estate tax is a lot used as a vegetable
garden for the benefit of the priests residing in the seminary and not actually, directly or
exclusively used for religious purposes.
Hence, the religious organization is liable for the real estate tax.
VII
Spouses GGG and HHH currently reside in a house and lot that they bought in 2000 for
P1 million. They want to transfer the ownership of the house and lot to their son III. They sought
your advice on what are the possible ways to do this, and what are the tax implications. Discuss
briefly.
Suggested answer:
The available options to transfer the ownership from Spouses GGG and HHH to their
son III are to transfer by sale, or by donation, or thru succession.
The transfer by sale is subject to 6% capital gains tax based on the ross selling price or
fair market value of the property, whichever is higher.
The transfer by donation is subject to 6% donor’s tax based on the fair market value at
the time the donation was made.
If the transfer is by succession, the transfer shall be subject to 6% estate tax based on
the net estate.
VIII
JJJ Corporation is a Japan-based foreign corporation engaged in construction and

installation projects. In 2020, KKK awarded an anti-pollution project to JJJ Corporation,
whereby JJJ shall design, supply machinery and equipment, provided that the installation part
of the project may be sub-contracted to a local construction company. Pursuant to the contract,
the design and supply contracts were done in Japan by JJJ, while the installation works were
sub-contracted by JJJ with LLL, Inc., a domestic corporation. The project with a total cost of
P100 Million was completed in 2021 at the following cost components:
Design - P20 Million;

Machinery and equipment (with term FOB shipping point) - P50 Million; and
Installation - P30 Million.
Assume that the project was 40% complete in 2020 and 100% complete in 2021, based
on the certificates issued by the architects and engineers working on the project. KKK paid
JJJ as follows: P60 Million in 2020 and P40 Million in 2021 and JJJ paid LLL in foreign currency
through a Philippine bank as follows: P10 Million in 2020 and P20 Million in 2021.
Is JJJ liable to Philippine income tax, and if so, how much revenue shall be reported by
it in 2020 and in 2021? Explain your answer.
Suggested answer:
JJJ is liable to Philippine income tax on the income earned for the installation of the
machinery and equipment.
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Under the Tax Code, non-resident foreign corporations are subject to tax on their income
derived from sources within the Philippines.
Here, only the income on the installation of the machinery and equipment was earned
from sources within the Philippines.
Hence, JJJ is liable to Philippine income tax on the income earned for the installation of
the machinery and equipment.
IX
The BIR found discrepancies between MMM’s Income Tax return and VAT Returns for
2018, informed MMM and issued a Letter Notice (LN). Subsequently, the BIR issued a
Preliminary Assessment Notice (PAN) and a Final Assessment Notice (FAN) against MMM for
deficiency VAT. After denial of its protest, MMM filed a Petition for Review before the CTA which
sustained the BIR’s position. The CTA ruled that the determination of deficiency VAT is not
limited on the basis of the issuance of a Letter of Authority (LOA) alone as the CIR is granted
vast powers to perform examination and assessment functions; and that in lieu of the LOA, an
LN may be issued informing MMM of the discrepancies, a procedure authorized under existing
rules. Did the absence of a LOA violate MMM’s right to due process?
Suggested answer:
Yes, the absence of a LOA violated MMM’s right to due process.
In a similar case, the Supreme Court has held that a FAN issued not on the basis of an
LOA is void, and therefore a violation of a taxpayer’s right to due process. [Medicard Philippines,
Inc. vs. CIR, G.R. No. 222743, April 5, 2017]
BIR assessed NNN Inc. for alleged deficiency taxes covering the taxable year 2018.
NNN received an undated Final Assessment Notice (FAN) assessing deficiency income tax,
VAT, withholding on compensation, expanded withholding tax, fringe benefits tax, and
documentary stamp tax. In the last paragraph of the undated FAN, the petitioner is “requested
to pay… xxx… within the time shown in the enclosed assessment notice.” The due dates on
the enclosed Audit Result/Assessment Notices for all the assessment items were left blank or
unaccomplished. Is the FAN issued a valid assessment notice?
Suggested answer:
No, the FAN issued is not a valid assessment notice.
In a case involving similar facts, the Court ruled that the FAN cannot be deemed a valid
formal assessment notice absent specific date or period within which the alleged tax liabilities
must be settled or paid by the taxpayer. The date certain for the payment of tax liabilities is
indispensable in an assessment as it dictates the time when the penalties, surcharges and
interest begin to accrue against. The lack of a definite period for payment of the taxes assessed
negated the BIR’s demand of payment. [Lorenzo Shipping Corp. v. CIR, CTA Case No. 8694,
28 June 2018]
XI
a. What is a jeopardy assessment?
Page 5 of 9
b. What is a disputed assessment?
Suggested answer:
a. A tax assessment which is assessed without the benefit of complete or partial audit
by an authorized revenue officer, who has reason to believe that the assessment and collection
of deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with
audit and investigation requirements to present his books of accounts and/or pertinent records,
or substantiate all or any of the deductions, exemptions, or credits claimed in his return.
b. A disputed assessment is one wherein the taxpayer or his duly authorized
representative filed an administrative protest against the formal letter of demand and
assessment notice within thirty (30) days from date of receipt thereof.
XII
Revenue Officer OOO is currently examining the books of Company PPP. Based on his
examination, he noted discrepancies between the Company’s books and its tax returns. Based
on the noted discrepancies, the BIR issued Letter of Authority, and thereafter the corresponding
Notice of Informal Conference and Preliminary Assessment Notice. Even during the pandemic
and the corresponding community quarantine, Revenue Officer OOO continued with his
examination of the company’s books and tax returns, as well as the other submissions made
by the Company. As there are remaining issues which were unsettled, the BIR eventually issued
the Final Assessment Notice (FAN) and Final Letter of Demand via electronic mail. Is the
assessment valid?
Suggested answer:
No, the assessment is not valid.
In a similar case, the CTA has held that the issuance of the FAN via electronic mail (e-
mail) is not sanctioned by any law, rules or regulations. FAN/FLD shall be sent to the taxpayer
only by registered mail and by personal delivery. (CIR v. Freelife Philippines Distribution, Inc.-
Phil Branch, CTA EB No. 1714, 4 January 2019)
XIII
QQQ Inc. received a copy of the Final Assessment Notice (FAN) which stated “Please
note, however, that the interest and the total amount due will have to be adjusted if paid prior
to April 15, 2020”. QQQ argued that the FAN issued to it could not be claimed as a valid
deficiency assessment that could justify the issuance of a warrant of distraint and/or levy. It
asserted that it was a mere request for payment as it did not provide the period within which to
pay the alleged liabilities. Is the disputed FAN a valid assessment?
Suggested answer:
No, the disputed FAN is not a valid assessment.
In a similar case, the Supreme Court held that a FAN which states that the total amount
due will have to be adjusted if not paid on a certain date is a FAN that lacks the definite amount
of tax liability for which the respondent is accountable. It does not purport to be a demand for
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payment of tax due, which a FAN should supposedly be. [Commissioner of Internal Revenue
vs. Fitness by Design GR No. 215957 November 9, 2016. J. Leonen]
XIV
RRR Inc. is a janitorial agency. Whenever it needs office supplies, its administrative
officer would ask one of the janitors to buy at a nearby bookstore, which then signs the cash
voucher of RRR. During a BIR audit, RRR’s office supplies expense was disallowed due to
improper and/or lack of substantiation. RRR argued that the cash voucher should suffice as it
was signed by the bookstore representative and the items purchased were properly itemized.
Is RRR correct?
Suggested answer:
No, RRR is not correct in stating that the cash voucher should suffice.
The Supreme Court has held that cash vouchers are not sufficient proof of expenses
since the tax laws require that the substantiation requirements for expenses should be in the
form of official receipts or sales invoices. [H. Tambunting Pawnshop v. CIR, G. R. No. 173373,
29 July 2013]
XV
SSS Company’s books show the following:
2015 Taxable Income before bad debts P 100,000
Bad Debts in 2015 P 170,000
Bad Debts Recovered in 2016 P 130,000
How should the bad debts recovery in 2016 be reported in SSS Company’s income statement?
Suggested answer:
The benefit from the recovery of Bad Debts in 2015 that should be reported in 2016
taxable income is P 100,000.
Under the Tax Benefit Rule, the recovery of bad debts previously allowed as deduction
in the preceding year/s shall be included as part of the taxpayer's gross income in the year of
such recovery to the extent of the income tax benefit of said deduction [NIRC, Sec. 34(E)(l)j]
Here, the taxable income from 2015 was only P100,000, the bad debts of 2015
(P170,000) as a deduction covered it fully. The P30,000 difference of the bad debts recovered
in 2016 (P130,000) and the benefit of the bad debts in 2015 (P100,000) to the 2015 taxable
income shall be non-taxable.
Hence, of the bad debts recovered in 2016 (P130,000), only P100,000 shall be taxable
and included in the taxable income 2016.
XVI
What is the cross border doctrine of the VAT system?
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Suggested answer:
The cross border doctrine states that no VAT shall be imposed to form part of the cost
of goods destined for consumption outside of the territorial border of the taxing authority.
Accordingly, the sales made by suppliers from a customs territory to a purchaser located within
an ECOZONE will be considered as exportations. [Commissioner of Internal Revenue v.
Toshiba Information Equipment (PHILS.) Inc., G.R. No. 150154, August 9, 2005]
XVII
In a claim for refund of excess income tax payments resulting from unutilized creditable
withholding taxes, TTT was required by the BIR to present in evidence its quarterly income tax
return of the subsequent year to prove that excess income tax payment was indeed not carried
over to the succeeding year; otherwise, its claim for refund will be denied. TTT argued that this
is not required. Decide.
Suggested answer:
TTT’s argument that presentation of the subsequent quarterly income tax return is not
indispensable is correct.
The Supreme Court has held that subsequent quarterly income tax returns are not
indispensable in a claim for refund of excess income tax. What Sec. 76 of the Tax Code requires
is to prove the prima facie entitlement to a claim, including the fact of not having carried over
the excess credits to the subsequent quarters or taxable year through any document which is
competent, relevant and part of the records. [Winebrenner & Ihigo Insurance Brokers, Inc.vs.
Commissioner of Internal Revenue, G.R. No. 206526, 28 January 2015]
XVIII
Ms. UUU, a resident citizen, died on November 10, 2018. She died leaving three
condominium units in Quezon City valued at P5 Million each. Mr. VVV was her only heir. He
reported her death on December 5, 2019, and filed the estate tax return on
March 30, 2020. Because the estate had liquidity problems, VVV requested the Commissioner
of Internal Revenue to give him one year to pay the estate tax due. The Commissioner
approved the request for extension of time provided that the estate tax be computed on the
basis of the value of the property at the time of payment of the tax. Does the condition that
the basis of the estate tax will be the value at the time of the payment have legal basis?
Reason briefly.
Suggested answer:
No, the condition that the basis of the estate tax will be the value at the time of the
payment does not have legal basis.
Under the Tax Code, the valuation of properties comprising the estate of a decedent
should be the fair market value as of the time of death.
XIX
Spouses WWW and XXX, both Filipino citizens, are the owners of a residential house
and lot in Quezon City. After the recent wedding of their son, YYY, to ZZZ, the spouses
donated said real property to them. At the time of donation, the real property has a fair
Page 8 of 9
market value of P2 million. Are WWW and XXX subject to donor’s tax? If so, how much
is the taxable gift of each spouse and what rate shall be applied to the gift?
Suggested answer:
Yes, the donation of WWW and XXX to YYY and ZZZ is subject to 6% donor’s tax.
Under the Tax Code, there shall be levied, assessed, collected and paid upon any
person, resident or non-resident, of the property by gift, a donor’s tax of 6% of the total gifts in
excess of P250,000 exempt gifts during the calendar year.
Here, the gift or donation of each spouse is P1 million. The total gift or donation in
excess of P250,000 exempt gift is P750,000.
Hence, the taxable gift of each of the spouse shall be P750,000.
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JURISTS BAR REVIEW CENTER™

SUGGESTED ANSWERS TO THE ADDITIONAL TAXATION LAW

I would say that Mr. AAA’s opinion is wrong.

Hence, the BIR is correct.

Only CCC’s action is legal.

Hence, only CCC’s action is legal.

a. Doctrine of Constructive Receipt of Income

Hence, the argument of EEE is not correct.

a. FFF Ministry is liable for the building permit fee.

Hence, the religious organization is liable.

b. FFF Ministry is liable for the registration fee.

As previously stated, the exemption pertains only to real property tax.

Here, what was being assessed is a registration fee.

Hence, the religious organization is liable.

c. FFF Ministry is liable for the real estate tax.

JJJ Corporation is a Japan-based foreign corporation engaged in construction and

Design - P20 Million;

Yes, the absence of a LOA violated MMM’s right to due process.

No, the FAN issued is not a valid assessment notice.

a. What is a jeopardy assessment?

No, the assessment is not valid.

No, the disputed FAN is not a valid assessment.

Bad Debts in 2015 P 170,000

Bad Debts Recovered in 2016 P 130,000

What is the cross border doctrine of the VAT system?

Hence, the taxable gift of each of the spouse shall be P750,000.

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