Tax Suggested Answers (1994-2006) - NoRestriction

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) sirdondee@gmail.
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ANSWERS TO BAR
EXAMINATION QUESTIONS
IN
TAXATION LAW
* ARRANGED BY TOPIC *
(1994 – 2006)
Edited and Arranged by:

ROMUALDO L. SEÑERIS II
Silliman University - College of Law
From the ANSWERS TO BAR EXAMINATION QUESTIONS

by the UP LAW COMPLEX
&
PHILIPPINE ASSOCIATION OF LAW SCHOOLS
June 3, 2007
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) [email protected] 2 of 73
FOREWARD
This work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may
be freely copied and distributed, nevertheless, PERMISSION TO COPY from the editors
is ADVISABLE to protect the interest of the ORIGINAL SOURCES/REFERENCES of
this material…. It is primarily intended for all those who desire to have a deeper
understanding of the issues commonly touched by the Philippine Bar Examinations and
its trend on specifically on Taxation Laws. It is specifically intended for law students from
the provinces who, very often, are recipients of deliberately distorted notes from other
unscrupulous law schools and students.
I would like to seek the indulgence of the reader for some Bar Questions which are
improperly classified under a topic and for some topics which are improperly or
ignorantly phrased, for the arranger is just a Bar Reviewee who has prepared this work
nd
while reviewing for the 2 time for the Bar Exams 2007 under time constraints and
within his limited knowledge of the law. I would like to seek the reader’s indulgence also
for a number of typographical errors in this work.
The Arranger
Detailed Table of Contents

GENERAL PRINCIPLES........................................................................................................................... 8
Basic Features: Present Income Tax System (1996)....................................................................................................
8
Basic Stages or Aspects of Taxation (2006) ................................................................................................................
8
Collection of Taxes: Authority; Ordinary Courts (2001) ............................................................................................... 8
Collection of Taxes: Prescription (2001) ..................................................................................................................... 8
Direct Tax vs. Indirect Tax (1994) ................................................................................................................................ 8
Double Taxation (1997) ............................................................................................................................................... 9
Double Taxation: What Constitutes DT? (1996) ...........................................................................................................
9
Double Taxation; Indirect Duplicate Taxation (1997) ...................................................................................................
9
Double Taxation; License Fee vs. Local Tax (2004) .....................................................................................................
9
Double Taxation; Methods of Avoiding DT (1997) ....................................................................................................... 9
Imprescriptibility of Tax Laws (1997) .......................................................................................................................... 9
Power of Taxation: Equal Protection of the Law (2000) ............................................................................................
10
Power of Taxation: Inherent in a Sovereign State (2003) ...........................................................................................
10
Power of Taxation: Legality; Local Gov’t Taxation (2003) ..........................................................................................
10
Power of Taxation: Legislative in Nature (1994) ........................................................................................................
10
Power of Taxation: Limitations of the Congress (2001) .............................................................................................
10
Power of Taxation: Limitations: Passing of Revenue Bills (1997) ..............................................................................
11
Power of Taxation: Limitations; Power to Destroy (2000) ..........................................................................................
11
Power of Taxation: Revocation of Exempting Statutes (1997) ...................................................................................
11
Power of Taxation; Inherent in a Sovereign State (2005) ...........................................................................................
11
Power of Taxation; Legislative in Nature (1996) ........................................................................................................
12
Purpose of Taxation; Interpretation (2004) ................................................................................................................
12
Purpose of Taxation; Legislative in Nature (2004) .....................................................................................................
12
Rule on Set-Off or Compensation of Taxes (1996).....................................................................................................
12
12
13
Rule on Set-Off or Compensation on Taxes (2005) ....................................................................................................
13
Tax Avoidance vs. Tax Evasion (1996) ...................................................................................................................... 13
Tax Avoidance vs. Tax Evasion (2000) ...................................................................................................................... 13
Tax Exemptions: Nature & Coverage; Proper Party (2004) ........................................................................................
13
Tax Laws; BIR Ruling; Non-Retroactivity of Rulings (2004) .......................................................................................
14
Tax Pyramiding; Definition & Legality (2006) ............................................................................................................ 14
Taxpayer Suit; When Allowed (1996)......................................................................................................................... 14
Uniformity in the Collection of Taxes (1998) ............................................................................................................. 14
INCOME TAXATION................................................................................................................................ 14
Basic: Allowable Deductions vs. Personal Exemptions (2001) ..................................................................................
14
Basic: Meaning of Taxable Income (2000) .................................................................................................................
15
Basic: Principle of Mobilia Sequuntur Personam (1994) ............................................................................................
15
Basic: Proper Allowance of Depreciation (1998) ....................................................................................................... 15
Basic: Sources of Income: Taxable Income (1998) ....................................................................................................
15
Basic: Tax Benefit Rule (2003) .................................................................................................................................. 15
Basic; Basis of Income Tax (1996) ............................................................................................................................ 16
Basic; Gross Income: Define (1995) ..........................................................................................................................
16
Basic; Income vs. Capital (1995) ...............................................................................................................................
16
Basic; Schedular Treatment vs. Global Treatment (1994) .........................................................................................
16
Compensation; Income Tax: Due to Profitable Business Deal (1995) ........................................................................
16
Corporate: Income: Donor’s tax; Tax Liability (1996) ................................................................................................
17
Corporate; Income Tax; Reasonableness of the Bonus (2006) ..................................................................................
17
Corporate; Income: Coverage; "Off-Line" Airline (1994) ............................................................................................
17
Corporate; Income: Coverage; "Off-Line" Airline (2005) ............................................................................................
17
Dividends: Disguised dividends (1994) ..................................................................................................................... 18
Dividends; Income Tax; Deductible Gross Income (1999) .........................................................................................
18
Effect; Condonation of Loan in Taxation (1995) ........................................................................................................ 18
Fringe Benefit Tax: Covered Employees (2001).........................................................................................................
18
Fringe Benefit Tax: Employer required to Pay (2003) ................................................................................................
19
Interest: Deficiency Interest: define (1995 Bar)..........................................................................................................
19
Interest: Delinquency Interest: define (1995) .............................................................................................................
19
ITR: Personal Income; Exempted to File ITR (1997)...................................................................................................
19
ITR; Domestic Corporate Taxation (1997).................................................................................................................. 19
ITR; Domestic Corporate Taxation (2001).................................................................................................................. 20
ITR; Personal Income: Two Employment (2001) ........................................................................................................
20
ITR; Personal Income; GSIS Pension (2000) .............................................................................................................
20
ITR; Personal Income; Married Individual (2004) .......................................................................................................
20
ITR; Taxpayer; Liabilities; Falsified Tax Return (2005) ..............................................................................................
20
Partnership: Income Tax (1995) ................................................................................................................................ 21
Personal; Income Tax: Non-Resident Alien (2000) ....................................................................................................
21
Personal; Income Tax: Non-Resident Citizen (1999) ..................................................................................................
21
Personal; Income Tax: Tax-Free Exchange (1997).....................................................................................................
22
Personal; Income Tax; Contract of Lease (1995) .......................................................................................................
22
Personal; Income Tax; Married Individual (1997)....................................................................................................... 22
Personal; Income Tax; Retiring Alien Employee (2005) .............................................................................................
23
Personal; Income Taxation: Non-Resident Citizen (1997) ..........................................................................................
23
Taxable Income: Illegal Income (1995 Bar) ................................................................................................................
23
Taxable or Non-Taxable; Income and Gains (2005) ...................................................................................................
23
Withholding Tax: Non-Resident Alien (2001) .............................................................................................................
24
Withholding Tax: Retirement Benefit (2000) ..............................................................................................................
24
Withholding Tax: Retirement Benefit (2000) ..............................................................................................................
24
Withholding Tax: Royalty (2002) ............................................................................................................................... 24
Withholding Tax; Coverage (2004) ............................................................................................................................ 25
Withholding Tax; Domestic Corporation; Cash Dividends (2001) ..............................................................................
25
Withholding Tax; Income subject thereto (2001) .......................................................................................................
25
Withholding Tax; Non-Resident Alien (1994) .............................................................................................................
25
Withholding Tax; Non-Resident Corporation (1994) ..................................................................................................
26
Withholding Tax; Reader's Digest Award (1998)........................................................................................................ 26
Withholding Tax; Time Deposit Interest; GSIS Pension (1994) ..................................................................................
26
DEDUCTIONS, EXEMPTIONS, EXCLUSIONS & INCLUSIONS..................................................... 26
Deduction: Facilitation Fees or "kickback" (1998) .....................................................................................................
26
Deductions: Ordinary Business Expenses (2004) .................................................................................................... 26
Deductions: Amount for Bribe (2001)........................................................................................................................ 27
Deductions: Capital Losses; Prohibitions (2003) ...................................................................................................... 27
Deductions: Deductible Items from Gross Income (1999)..........................................................................................
27
Deductions: Income Tax: Donation: Real Property (2002) ........................................................................................
27
Deductions: Non-Deductible Items; Gross Income (1999) .........................................................................................
28
Deductions: Requisites; Deducibility of a Loss (1998) ..............................................................................................
28
Deductions; Income Tax: Allowable Deductions (2001)............................................................................................. 28
Deductions; Vanishing Deduction; Purpose (2006) ...................................................................................................
28
Exclusion & Inclusion; Gross Receipts (2006) .......................................................................................................... 28
Exclusion vs. Deduction from Gross Income (2001) ..................................................................................................
28
Exclusions & Inclusions: Benefits on Account of Injury (1995) ................................................................................. 29
Exclusions & Inclusions: Executive Benefits (1995).................................................................................................. 29
Exclusions & Inclusions; Assets; Resident Alien (2005) ........................................................................................... 29
Exclusions & Inclusions; Benefits on Account of Death (1996) .................................................................................
30
Exclusions & Inclusions; Benefits on Account of Injury (2005) ................................................................................. 30
Exclusions & Inclusions; Compensation for personal injuries or sickness (2003) .....................................................
30
Exclusions & Inclusions; Facilities or Privileges; Military Camp (1995) .....................................................................
30
Exclusions & Inclusions; Gifts over and above the Retirement Pay (1995) ................................................................
31
Exclusions & Inclusions; ITR; 13th month pay and de minimis benefits (2005) .........................................................
31
Exclusions & Inclusions; ITR; Dividends received by a domestic corporation (2005) ................................................
31
Exclusions & Inclusions; ITR; Income realized from sale (2005)................................................................................
31
Exclusions & Inclusions; ITR; Interest on deposits (2005).........................................................................................
31
Exclusions & Inclusions; ITR; Proceeds of life insurance (2005) ...............................................................................
32
Exclusions & Inclusions; Life Insurance Policy (2003) ..............................................................................................
32
Exemptions: Charitable Institutions (2000) ............................................................................................................... 32
Exemptions: Charitable Institutions; Churches (1996) .............................................................................................. 32
Exemptions: Educational institution (2004)............................................................................................................... 32
Exemptions: Gifts & Donations (1994) ...................................................................................................................... 32
Exemptions: Head of the Family: (1998)................................................................................................................... 33
Exemptions: Non-Profit Educational Institutions (2000) ............................................................................................
33
Exemptions: Non-Profit Entity; Ancillary Activity & Incidental Operations (1994) ......................................................
33
Exemptions: Non-Stock/ Non-Profit Association (2002) ............................................................................................
34
Exemptions: Prize of Peace Poster Contest (2000)....................................................................................................
34
Exemptions: Prizes & Awards; Athletes (1996) ......................................................................................................... 34
Exemptions: Retirement Benefits: Work Separation (1999) .......................................................................................
34
Exemptions: Separation Pay (1994) .......................................................................................................................... 35
Exemptions: Stock Dividends (2003) ........................................................................................................................ 36
Exemptions: Strictly Construed (1996) ..................................................................................................................... 36
Exemptions: Terminal Leave Pay (1996) ...................................................................................................................
36
Exemptions; Charitable Institutions (2006) ............................................................................................................... 36
Exemptions; Educational institution (2004)............................................................................................................... 36
Exemptions; Exemptions are Unilateral in Nature (2004)...........................................................................................
37
Exemptions; Gov’t Bonus, Gifts, & Allowances (1994) ..............................................................................................
37
Exemptions; Personal & Additional Exemption (2006) .............................................................................................. 37
Exemptions; Roman Catholic Church; Limitations (2005) .........................................................................................
38
CAPITAL GAIN TAX................................................................................................................................ 38
Capital Asset vs. Ordinary Asset (2003) ....................................................................................................................
38
Capital Gain Tax; Nature (2001) ................................................................................................................................
38
Ordinary Sale of a Capital Asset (1994) .....................................................................................................................
38
Sales of Share of Stocks: Capital Gains Tax Return (1999) .......................................................................................
39
Tax Basis: Capital Gains: Merger of Corporations (1994) ..........................................................................................
39
Tax Basis: Capital Gains: Tax-Free Exchange of Property (1994) ..............................................................................
39
CORPORATION & PARTNERSHIP...................................................................................................... 39
Bad Debts; Factors; Elements thereof (2004) ............................................................................................................
39
Condominium Corp.; Sale of Common Areas (1994) .................................................................................................
40
Corporation; Sale; Creditable Withholding Tax (1994)...............................................................................................
40
Dividends: Withholding Tax (1999) ........................................................................................................................... 40
Effect: Dissolution; Corporate Existence (2004) ........................................................................................................
41
Minimum Corporate Income Tax (2001)..................................................................................................................... 41
Minimum Corporate Income Tax; Exemption (2001) ..................................................................................................
41
ESTATE & DONOR’S TAXES ............................................................................................................... 41
Donor’s Tax: Election Contributions (1998) .............................................................................................................. 41
Donor’s Tax; Basis for Determining Gain (1995) ....................................................................................................... 41
Donor’s Tax; Dacion en Pago; Effect: Taxation (1997) ..............................................................................................
42
Donor’s Tax; Donation to a Sibling (2001) .................................................................................................................
42
Donor’s Tax; Donation to Non-Stock, Non-Profit Private Educational Institutions (2000) ...........................................
42
Donor’s Tax; Donation to Political Candidate (2003) .................................................................................................
43
Donor’s Tax; Donee or Beneficiary; Stranger (2000) .................................................................................................
43
Donor’s Tax; Sale of shares of Stock & Sale of Real Property (1999).........................................................................
43
Estate Tax: Comprehensive Agrarian Reform Law (1994)..........................................................................................
43
Estate Tax: Donation Mortis Causa (2001) ................................................................................................................
43
Estate Tax: Donation Mortis Causa vs. Inter Vivos (1994) .........................................................................................
44
Estate Tax: Gross Estate: Allowable Deduction (2001) ..............................................................................................
44
Estate Tax: Gross Estate: Deductions (2000) ............................................................................................................
44
Estate Tax: Inclusion: Resident Alien (1994) .............................................................................................................
44
Estate Tax: Payment vs. Probate Proceedings (2004) ...............................................................................................
45
Estate Tax: Situs of Taxation: Non-Resident Decedent (2000) ...................................................................................
45
Estate Tax: Vanishing Deductions (1994).................................................................................................................. 45
Estate Tax; Payment vs. Probate Proceedings (2005) ...............................................................................................
45
BUSINESS TAXES .................................................................................................................................. 45
VAT: Basis of VAT (1996).......................................................................................................................................... 45
VAT: Characteristics of VAT (1996)........................................................................................................................... 45
VAT: Exempted Transactions (1996) ......................................................................................................................... 45
VAT: Liable for Payment (1996) ................................................................................................................................ 46
VAT: Transactions "Deemed Sales” (1997) ............................................................................................................... 46
VAT; Covered Transactions (1998) ........................................................................................................................... 46
VAT; Exemption: Constitutionality (2004) ................................................................................................................. 46
VAT; Non-VAT taxpayer; Claim for Refund (2006) ..................................................................................................... 47
REMEDIES IN INTERNAL REVENUE TAXES ................................................................................... 47
BIR: Assessment: Unregistered Partnership (1997) ..................................................................................................
47
BIR: Collection of Tax Deficiency (1999) ................................................................................................................... 47
BIR: Compromise; Conditions (2000)........................................................................................................................ 48
BIR: Compromise; Extent of Authority (1996) ........................................................................................................... 48
BIR: Compromise; Withholding Agent (1998)............................................................................................................ 48
BIR: Corporation: Distraint & Levy (2002) ................................................................................................................. 48
BIR: Court of Tax Appeals: Collection of Taxes; Grounds for Compromise (1996) ....................................................
49
BIR: Criminal Prosecution: Tax Evasion (1998) .........................................................................................................
49
BIR: Extinction; Criminal Liability of the Taxpayer (2002)..........................................................................................
49
BIR: Fraudulent Return; Prima Facie Evidence (1998) ...............................................................................................
50
BIR: Fraudulent Return; Prima Facie Evidence (2002) ...............................................................................................
50
BIR: Garnishment: Bank Account of a Taxpayer (1998).............................................................................................
50
BIR: Pre-Assessment Notice not Necessary (2002) ...................................................................................................
51
BIR: Prescriptive Period: Civil Action (2002) .............................................................................................................
51
BIR: Prescriptive Period; Assessment & Collection (1999) ........................................................................................
51
BIR: Prescriptive Period; Criminal Action (2002) .......................................................................................................
51
BIR: Secrecy of Bank Deposits Law (1998) ...............................................................................................................
52
BIR: Summary Remedy: Estate Tax Deficiencies (1998) ............................................................................................
52
BIR: Unpaid Taxes vs. Claims for Unpaid Wages (1995) ............................................................................................
53
BIR; Assessment; Criminal Complaint (2005)............................................................................................................ 53
BIR; Authority; Refund or Credit of Taxes (2005) ......................................................................................................
53
BIR; Compromise (2004)........................................................................................................................................... 53
BIR; Compromise (2005)........................................................................................................................................... 54
BIR; Deficiency Tax Assessment vs. Tax Refund / Tax Credit (2005) .........................................................................
54
BIR; Distraint; Prescription of the Action (2002)........................................................................................................ 54
BIR; False vs. Fraudulent Return (1996)....................................................................................................................
55
BIR; Jurisdiction; Review Rulings of the Commissioner (2006) .................................................................................
55
BIR; Prescriptive Period; Assessment; Fraudulent Return (2002)..............................................................................
55
BIR; Prescriptive Period; Criminal Action (2006) .......................................................................................................
55
BIR; Taxpayer: Civil Action & Criminal Action (2002) ................................................................................................
55
Custom: Violation of Tax & Custom Duties (2002)..................................................................................................... 56
Customs; Basis; Automatic Review (2002)................................................................................................................ 56
Delinquent Tax Return (1998) ................................................................................................................................... 57
Jurisdiction: Customs vs. CTA (2000) ...................................................................................................................... 57
LGU: Collection of Taxes, Fees & Charges (1997) .....................................................................................................
57
Tax Amnesty vs. Tax Exemption (2001) .................................................................................................................... 57
Taxpayer: Administrative & Judicial Remedies (2000)............................................................................................... 57
Taxpayer: Assessment: Protest: Claims for refund (2000).........................................................................................
58
Taxpayer: Assessment; Injunction (2004) ................................................................................................................. 58
Taxpayer: BIR Audit or Investigation (1999) ..............................................................................................................
58
Taxpayer: City Board of Assessment Decision; Where to appeal (1999)....................................................................
59
Taxpayer: Claim for Refund; Procedure (2002).......................................................................................................... 59
Taxpayer: Deficiency Income Tax (1995)................................................................................................................... 59
Taxpayer: Exhaustion of Administrative Remedies (1997)......................................................................................... 60
Taxpayer: Failure to Withheld & Remit Tax (2000) .....................................................................................................
60
Taxpayer: NIRC vs. TCC Remedies (1996).................................................................................................................
60
Taxpayer: Overwitholding Claim for Refund (1999) ...................................................................................................
61
Taxpayer: Prescriptive Period: Suspended (2000)..................................................................................................... 61
Taxpayer: Prescriptive Period; Claim for Refund (1997) ............................................................................................
61
Taxpayer: Prescriptive Period; Claims for Refund (1994) ..........................................................................................
61
Taxpayer: Prescriptive Period; Claims for Refund (2004) ..........................................................................................
62
Taxpayer: Protest against Assessment (1998) .......................................................................................................... 62
Taxpayer: Protest; Claim of Refund (1996)................................................................................................................ 63
Taxpayer; Appeal to the Court of Tax Appeals (2005)................................................................................................
63
Taxpayer; Claim for Tax Credits (2006) ..................................................................................................................... 63
Taxpayer; Compromise after Criminal Action (1998) .................................................................................................
63
Taxpayer; Protest against Assessment; Donor’s Tax (1995) ..................................................................................... 64
Taxpayer; Withholding Agent; Claim of Tax Refund (2005) .......................................................................................
64
LOCAL & REAL PROPERTY TAXES .................................................................................................. 64
Local Taxation: Actual Use of Property (2002) .......................................................................................................... 64
Local Taxation: Coverage (2002)............................................................................................................................... 64
Local Taxation: Exemption; Real Property Taxes (2002) ...........................................................................................
65
Local Taxation: Imposition of Ad Valorem Tax (2000) ............................................................................................... 65
Local Taxation: Legality/ Constitutionality; Tax Ordinance (2003) .............................................................................
65
Local Taxation: Legality; Imposition of Real Property Tax Rate (2002) ......................................................................
65
Local Taxation: Power to Impose (2003) ................................................................................................................... 65
Local Taxation: Remission/Condonation of Taxes (2004) ..........................................................................................
66
Local Taxation: Rule of Uniformity and Equality (2003) .............................................................................................
66
Local Taxation; Situs of Professional Taxes (2005) ...................................................................................................
66
Local Taxation; Special Levy on Idle Lands (2005)....................................................................................................
66
Real Property Tax: Underground Gasoline Tanks (2003) ...........................................................................................
67
Real Property Tax; Requirements; Auction Sales of Property for Tax Delinquency (2006) .........................................
67
Real Property Taxation: Capital Asset vs. Ordinary Asset (1995) ..............................................................................
67
Real Property Taxation: Capital Gains vs. Ordinary Gains (1998) ..............................................................................
67
Real Property Taxation: Coverage of Ordinary Income (1998) ...................................................................................
67
Real Property Taxation: Exchange of Lot; Capital Gain Tax (1997) ............................................................................
68
Real Property Taxation: Exemption/Deductions; Donor’s Tax (1998).........................................................................
68
Real Property Taxation: Exemption: Acquiring New Principal Residence (2000) .......................................................
68
Real Property Taxation: Fundamental Principles (1997) ............................................................................................
69
Real Property Taxation: Principles & Limitations: LGU (2000)...................................................................................
69
Real Property Taxation: Property Sold is an Ordinary Asset (1998) ...........................................................................
69
Real Property Taxation: Underground Gasoline Tanks (2001) ...................................................................................
69
Real Property Taxation; Exempted Properties (2006) ................................................................................................
69
TARIFF AND CUSTOMS DUTIES ........................................................................................................ 70
Customs: “Flexible Tariff Clause” (2001) .................................................................................................................. 70
Customs: Administrative vs. Judicial Remedies (1997) ............................................................................................
70
Customs: Importation (1995) .................................................................................................................................... 70
Customs: Jurisdiction; Seizure & Forfeiture Proceedings (1996) .............................................................................
70
Customs: Kinds of Custom Duties (1995) ................................................................................................................. 70
Customs: Kinds of Custom Duties (1997) ................................................................................................................. 71
Customs: Remedies of an Importer (1996) ................................................................................................................
71
Customs: Returning Residents: Tourist/Travelers (2003) ..........................................................................................
71
Customs: Seizure & Forfeiture: Effects (1994) ..........................................................................................................
71
Customs: Steps involving Protest Cases (1994)........................................................................................................ 72
Customs; Basis of Dutiable Value; Imported Article (2005) .......................................................................................
72
Customs; Countervailing Duty vs. Dumping Duty (2005)........................................................................................... 72
Customs; Taxability; Personal Effects (2005)............................................................................................................ 72
OTHER RELATED MATTERS ............................................................................................................... 73
BIR: Bank Deposits Secrecy Violation (2000) ............................................................................................................
73
BIR: Secrecy of Bank Deposit Law (2003) .................................................................................................................
73
GENERAL PRINCIPLES
Basic Features: Present Income Tax System (1996) stockholders (except to non- residents)
What are the basic features of the are not subject to income tax.
present income tax
system"? Basic Stages or Aspects of Taxation (2006)
SUGGESTED ANSWER: Enumerate the 3 stages or aspects of
Our present income tax system can be taxation. Explain each. (5%)
said to have the following basic features: SUGGESTED ANSWER:
(a) It has adopted a The aspects of taxation are:
COMPREHENSIVE TAX (1) LEVYING — the act of the legislature
SITUS by using the nationality, in choosing
residence, and the persons, properties, rights or
source rules. This makes citizens and privileges to be subjected to taxation.
resident aliens (2) ASSESSMENT and COLLECTION —
taxable on their income derived from all This is the act of executing the law
sources while non-resident aliens are through the administrative agencies of
taxed only on their income derived from government.
within the Philippines. Domestic (3) PAYMENT — the act of the taxpayer in
corporations are also taxed on universal settling his
income while foreign corporations are tax
taxed only on income from within. obligations.
(b) The individual income tax system

is mainly PROGRESSIVE IN
NATURE in that it provides a
graduated rates of income tax.
Corporations in general are taxed at a
flat rate of thirty five percent (35%) of
net income.
(c) It has retained MORE

SCHEDULAR THAN GLOBAL
FEATURES with respect to individual
taxpayers but has maintained a
more global treatment on
corporations.
Note: The following might also be cited
by the bar candidates as features of the
income tax system:
a. Individual compensation income
earners are taxed
on modified Gross Income (Gross
compensation income less personal
exemptions). Self-employed and
professionals are taxed on net income
with deductions limited to seven items
or in lieu thereof the forty percent
(40%) maximum deduction plus the
personal exemptions. Corporations are
generally taxed on net income except for
non-resident foreign corporations which
are taxed on gross income.
b. The income tax is generally imposed

via the self- assessment system or pay-
as-you-file concept of imposing the tax
although certain incomes. Including
income of non-residents, are taxed on
the pay-as- you-earn concept or the so
called withholding tax.
c. The corporate income tax is a one-layer

tax in that distribution of profits to
Collection of Taxes: Authority; Ordinary Courts DIRECT TAXES are demanded from the very
(2001) person who, as intended, should pay the
May the courts enjoin the collection of tax which he cannot shift to another; while
revenue taxes? an INDIRECT TAX is demanded in the first
Explain your answer. instance from one person with the
(2%) expectation that he can shift the burden to
SUGGESTED ANSWER:
someone else, not as a tax but as a part of
As a general rule, the courts have no
the purchase price.
authority to enjoin the collection of revenue
taxes. (Sec. 218, NIRC). However, the Court
Direct Tax vs. Indirect Tax
of Tax Appeals is empowered to enjoin the
(2001)
collection of taxes through administrative Distinguish direct taxes from indirect
remedies when collection could jeopardize taxes, and give an
the interest of the government or taxpayer. example for each
(Section 11, RA 1125). one. (2%)
SUGGESTED ANSWER:
Collection of Taxes: Prescription DIRECT TAXES are taxes wherein both
(2001) the incidence (or liability for the payment
May the collection of taxes be barred by of the tax) as well as the impact or
prescription? burden of the tax falls on the same person.
Explain your answer. An
(3%)
SUGGESTED ANSWER:
Yes. The collection of taxes may be
barred by prescription. The prescriptive
periods for collection of taxes are governed
by the tax law imposing the tax. However, if
the tax law does not provide for
prescription, the right of the government to
collect taxes becomes imprescriptible.
Direct Tax vs. Indirect Tax (1994)

Distinguish a direct from an
indirect tax. SUGGESTED ANSWER:
A DIRECT TAX is one in which the taxpayer
who pays the tax is directly liable therefor,
that is, the burden of paying the tax falls
directly on the person paying the tax.
An INDIRECT TAX is one paid by a person

who is not directly liable therefor, and who
may therefore shift or pass on the tax to
another person or entity, which ultimately
assumes the tax burden. (Maceda v.
Macaraig,
197 SCRA
771)

(2000)
Among the taxes imposed by the
Bureau of Internal
Revenue are income tax, estate and donor's
tax, value- added tax, excise tax, other
percentage taxes, and documentary stamp
tax. Classify these taxes into direct and
indirect taxes, and differentiate direct from
Indirect taxes. (5%)
SUGGESTED ANSWER:
Income tax, estate and donor's tax are
considered as direct taxes. On the other
hand, value-added tax, excise tax, other
percentage taxes, and documentary stamp
tax are indirect taxes.
example of this tax is income tax where the 3. by the same taxing authority,
person subject within the same
to tax cannot shift the burden of the tax jurisdiction or taxing district,
to another person. 4. for the same taxable
period and
INDIRECT TAXES, on the other hand, 5. for the same kind or
are taxes wherein the incidence of or the character of a tax
liability for the payment of the tax falls on
one person but the burden thereof can be then it becomes legally
shifted or passed on to another person. objectionable for being oppressive and
Example of this tax is the value-added tax. inequitable.
ALTERNATIVE ANSWER: Double Taxation: What Constitutes DT?

A direct tax is a tax which is demanded from (1996)
the person who also shoulders the burden of X, a lessor of a property, pays real
the tax. Example: corporate and individual estate tax on the
income tax. premises, a real estate dealer's tax based
on rental receipts
An indirect tax is a tax which is and income tax on the rentals. X claims that
demanded from one person in the this is double taxation? Decide.
expectation and intention that he shall SUGGESTED ANSWER:
indemnify himself at the expense of another,
and the burden finally resting on the
ultimate purchaser or consumer. Example:
value added tax.

(2006)
Distinguish "direct taxes" from "indirect
taxes." Give
examples.
(5%)
SUGGESTED ANSWER:
DIRECT TAXES are demanded from the
very person who should pay the tax and
which he can not shift to another. An
INDIRECT TAX is demanded from one
person with the expectation that he can
shift the burden to someone else, not as a
tax but as part of the purchase price.
Examples of direct taxes are the income tax,
the estate tax and the donor's tax. Examples
of indirect taxes are the value-added tax, the
percentage tax and the excise tax on
exciseable articles.
Double Taxation
(1997)
Is double taxation a valid defense against
the legality of a tax measure?
SUGGESTED ANSWER:
No, double taxation standing alone and not
being forbidden by our fundamental law is
not a valid defense against the legality of
a tax measure (Pepsi Cola v. Tanawan,
69 SCRA 460). However, if double
taxation amounts to a direct duplicate
taxation,
1. in that the same subject is taxed twice
when it should
be taxed but once,
2. in a fashion that both taxes are imposed
for the same
purpose
There is no double taxation. occurrence of
DOUBLE double
TAXATION means taxing for the same tax taxation?
period the same thing or activity twice, SUGGESTED ANSWER:
when it should be taxed but once, by the The usual methods of avoiding the
same taxing authority for the same purpose occurrence of double taxation are:
and with the same kind or character of tax. 1. Allowing reciprocal exemption either
The REAL ESTATE TAX is a tax on property; by law or by treaty;
the REAL ESTATE DEALER'S TAX is a tax on 2. Allowance of tax credit for foreign
the privilege to engage in business; while taxes paid;
the INCOME TAX is a tax on the 3. Allowance of deduction for foreign
privilege to earn an income. These taxes are taxes paid; and
imposed by different taxing authorities and 4. Reduction of the Philippine
are essentially of different kind and tax rate.
character (Villanueva vs. City of Iloilo, 26 Note: Any three of the methods shall be
given full credit.
SCRA
578
). Imprescriptibility of Tax Laws
(1997)
Double Taxation; Indirect Duplicate Taxation Taxes were generally imprescriptible;
(1997) statutes, however, may provide otherwise.
When an item of income is taxed in the State the rules that have been adopted on
Philippines and this score by -
the same income is taxed in another
country, is there a case of double taxation?
SUGGESTED ANSWER:
Yes, but it is only a case of indirect duplicate
taxation which is not legally prohibited
because the taxes are imposed by different
taxing authorities.
Double Taxation; License Fee vs. Local Tax

(2004)
A municipality, BB, has an ordinance which
requires that all stores, restaurants, and
other establishments selling liquor should
pay a fixed annual fee of P20.000.
Subsequently, the municipal board proposed
an ordinance imposing a sales tax equivalent
to 5% of the amount paid for the purchase
or consumption of liquor in stores,
restaurants and other establishments.
The municipal mayor, CC, refused to sign
the ordinance on the ground that it would
constitute double taxation. Is the refusal of
the mayor justified? Reason briefly. (5%)
SUGGESTED ANSWER:
No. The refusal of the mayor is not justified.
The impositions are of different nature
and character. The fixed annual fee is in
the nature of a license fee imposed through
the exercise of police power while the 5%
tax on purchase or consumption is a local
tax imposed through the exercise of taxing
powers. Both a license fee and a tax may be
imposed on the same business or
occupation, or for selling the same article
and this is not in violation of the rule
against double taxation {Campania
General de Tabacos de Filipinos v. City
of Manila, 8 SCRA 367 [1963]).
Double Taxation; Methods of Avoiding DT

(1997)
What are the usual methods of avoiding the
(a) The National Internal law, granting
Revenue Code; tax and duty incentives only to businesses
(b) The Tariff and Customs and residents within the "secured area" of the
Code; and Subic Economic Special Zone, and denying
(c) The Local Government Code said incentives to those who live within
Answer: the Zone but outside such "secured area". Is
SUGGESTED ANSWERS:
the constitutional right to equal protection of
The rules that have been adopted on
the law violated by the Executive Order?
prescription are as follows:
Explain. (3%)
(a) National Internal Revenue Code - SUGGESTED ANSWER:
The statute of No. Equal protection of the law clause is
limitation for assessment of tax if a subject to reasonable classification.
return is filed is within three (3) years Classification, to be valid, must (1) rest on
from the last day prescribed by law for substantial distinctions, (2) be germane to the
the filing of the return or if filed after purpose of the law, (3) not be limited to
the last day, within three years from existing conditions only, (4) apply equally to
date of actual filing. If no return is filed all members of the same class.
or the return filed is false or fraudulent,
the period to assess is within TEN
YEARS from discovery of the omission,
fraud or falsity.
The period to collect the tax is within

THREE YEARS from date of assessment.
In the case, however, of omission to file
or if the return filed is false or
fraudulent, the period to collect is
within TEN YEARS from discovery
without need of an assessment.
(b) Tarif and Customs Code - It does not

express any general statute of
limitation; it provided, however, that
"when articles have entered and passed
free of duty or final adjustment of duties
made, with subsequent delivery, such
entry and passage free of duty or
settlement of duties will, after the
expiration of ONE (1) YEAR, from the
date of the final payment of duties, in
the absence of fraud or protest, be final
and conclusive upon all parties, unless
the liquidation of Import entry was
merely tentative" (Sec
1603,
TCC).
(c) Local Government Code - Local

taxes, fees, or charges shall be assessed
within FIVE (5) YEARS from the date
they became due. In case of fraud or
intent to evade the payment of taxes,
fees or charges the same maybe
assessed within TEN YEARS from
discovery of the fraud or intent to evade
payment. They shall also be collected
either by administrative or judicial
action within FIVE (5) YEARS from date
of assessment (Sec. 194, LGC).
Power of Taxation: Equal Protection of the Law

(2000)
An Executive Order was issued pursuant to
There are substantial differences as the tax base for corporations doing
between big business in the Philippines. Is the Revenue
investors being enticed to the "secured Regulation valid?
area" and the business operators outside SUGGESTED ANSWER:
that are in accord with the equal The regulation establishing gross income
protection clause that does not require as the tax base for corporations doing
territorial uniformity of laws. The business in the Philippines (domestic as
classification applies equally to all the well as resident foreign) is not valid. This
resident individuals and businesses within is no longer implementation of the law but
the "secured area". The residents, being in actually it constitutes legislation because
like circumstances to contributing directly among the powers that are exclusively
to the achievement of the end purpose within the legislative authority to tax is the
of the law, are not categorized further. power to determine -the amount of the tax.
Instead, they are similarly treated, both in (See 1 Cooley
privileges granted and obligations 176-184). Certainly, if the tax is limited to
required. (Tiu, et al, v. Court of 4npeals, et gross income without deductions of these
al, G.R. No. 127410, January 20, 1999) corporations, this is changing the amount of
the tax as said amount ultimately depends
Power of Taxation: Inherent in a Sovereign State on the taxable base.
(2003) Why is the power to tax
considered inherent in a sovereign Power of Taxation: Limitations of the Congress (2001)
State? (4%) Congress, after much public hearing and
SUGGESTED consultations with various sectors of
ANSWER: society, came to the conclusion that it will
It is considered inherent in a sovereign be good for the country to have only one
State because it is a necessary attribute of
sovereignty. Without this power no
sovereign State can exist or endure. The
power to tax proceeds upon the theory
that the existence of a government is a
necessity and this power is an essential
and inherent attribute of sovereignty,
belonging as a matter of right to every
independent state or government. No
sovereign state can continue to exist
without the means to pay its expenses; and
that for those means, it has the right to
compel all citizens and property within its
limits to contribute, hence, the emergence
of the power to tax. (51
Am.
Jur.,Taxation
40).
Power of Taxation: Legality; Local Gov’t Taxation

(2003) May Congress, under the 1987
Constitution, abolish the power to tax of
local governments? (4%)
SUGGESTED
ANSWER:
No. Congress cannot abolish what is
expressly granted by the fundamental law.
The only authority conferred to Congress
is to provide the guidelines and
limitations on the local government's
exercise of the power to tax (Sec.
5, Art. X, 1987
Constitution).
Power of Taxation: Legislative in Nature

(1994)
The Secretary of Finance, upon
recommendation of the
Commissioner of Internal Revenue, issued
a Revenue Regulation using gross income
system of taxation by centralizing the amendments. This follows from the co-
imposition and equality of the two chambers of Congress
collection of all taxes in the national (Tolentino v. Secretary of Finance, GR
government. Accordingly, it is thinking of No. 115455, Oct. 30, 1995).
passing a law that would abolish the taxing
power of all local government units. In your Power of Taxation: Limitations; Power to Destroy (2000)
opinion, would such a law be valid under the Justice Holmes once said: The power to tax
present Constitution? Explain your answer. is not the power to destroy while this Court
(5%) (the Supreme Court) sits." Describe the
SUGGESTED ANSWER:
No. The law centralizing the imposition and power to tax and its limitations. (5%)
SUGGESTED ANSWER:
collection of all taxes in the national The power to tax is an inherent power of the
government would contravene the sovereign which is exercised through the
Constitution which mandates that: . . . "Each legislature, to impose burdens upon subjects
local government unit shall have the power and objects within its Jurisdiction for the
to create their own sources of revenue and purpose of raising revenues to carry out the
to levy taxes, fees, and charges subject to legitimate objects of government. The
such guidelines and limitations as Congress underlying basis for its exercise is
may provide consistent with the basic policy governmental necessity for without it no
of local autonomy." It is clear that Congress government can exist nor endure.
can only give the guidelines and limitations Accordingly, it has the
on the exercise by the local governments of
the power to tax but what was granted by
the fundamental law cannot be withdrawn
by Congress.
Power of Taxation: Limitations: Passing of Revenue

Bills
(1997
)
The House of Representatives introduced
HB 7000 which
envisioned to levy a tax on various
transactions. After the bill was approved by
the House, the bill was sent to the Senate as
so required by the Constitution. In the upper
house, instead of a deliberation on the
House Bill, the Senate introduced SB 8000
which was its own version of the same tax.
The Senate deliberated on this Senate Bill
and approved the same. The House Bill
and the Senate Bill were then consolidated
in the Bicameral Committee. Eventually, the
consolidated bill was approved and sent to
the President who signed the same. The
private sectors affected by the new law
questioned the validity of the enactment on
the ground that the constitutional provision
requiring that all revenue bills should
originate from the House of Representatives
had been violated. Resolve the issue.
SUGGESTED ANSWER:
There is no violation of the constitutional
requirement that all revenue bills should
originate from the House of
Representatives. What is prohibited is for
the Senate to enact revenue measures on its
own without a bill originating from the
House. But once the revenue bill was passed
by the House and sent to the Senate, the
latter can pass its own version on the
same subject matter consonant with the
latter's power to propose or concur with
broadest scope of all the powers of laws even in the absence of a
government constitutional provision because the power
because in the absence of limitations, it is to tax is inherent in the government and not
considered as unlimited, plenary, merely a constitutional grant. The power of
comprehensive and supreme. The two taxation is an essential and inherent
limitations on the power of taxation are the attribute of sovereignty belonging as a
inherent and constitutional limitations matter of right to every independent
which are intended to prevent abuse on the government without being expressly
exercise of the otherwise plenary and granted by the people. (Pepsi-Cola
unlimited power. It is the Court's role to Bottling Company of the Philippines,
see to it that the exercise of the power Inc. v. Municipality of Tanauan, Leyte,
does not transgress these limitations. G.R. No. L-31156, February 27,1976)
Power of Taxation: Revocation of Exempting Taxation is the inherent power of a State to

Statutes collect enforced proportional contribution
(199 to support the expenses of government.
7) Taxation is the power vested in the
"X" Corporation was the recipient in legislature to impose burdens or charges
1990 of two tax upon persons and property in order to
exemptions both from Congress, one law raise revenue for public purposes.
exempting the
company's bond issues from taxes The power to tax is so unlimited in force and
and the other exempting the company so searching in extent that courts
from taxes in the operation of its public scarcely venture to declare it is
utilities. The two laws extending the
tax exemptions were revoked by Congress
before their expiry dates. Were the
revocations constitutional?
SUGGESTED
ANSWER:
Yes. The exempting statutes are both
granted unilaterally by Congress in the
exercise of taxing powers. Since taxation
is the rule and tax exemption, the
exception, any tax exemption unilaterally
granted can be withdrawn at the pleasure
of the taxing authority without violating
the Constitution (Mactan Cebu
International Airport Authority v,
Marcos, G.R No. 120082, September
11,
19
96
).
Neither of these were issued by the taxing

authority in a contract lawfully entered by
it so that their revocation would not
constitute an impairment of the obligations
of contracts.
ALTERNATIVE
ANSWER:
No. The withdrawal of the tax exemption
amounts to a deprivation of property
without due process of law, hence
unconstitutional.
Power of Taxation; Inherent in a Sovereign State

(2005) Describe the power of taxation.
May a legislative body enact laws to
raise revenues in the absence of a
constitutional provision granting said
body the power to tax? Explain.
SUGGESTED
ANSWER:
Yes, the legislative body may enact
subject to any restrictions whatever, except rationale for the grant of tax power to local
such as rest in government units is to safeguard their
the discretion of the authority which viability and self-sufficiency by directly
exercises it. (Tio v. Videogram Regulatory granting them general and broad tax powers
Board, G.R. No. L-75697, June 18, (Manila Electric Company v. Province of
1987) So potent is the power to tax that it Laguna et. al., 306 SCRA
was once opined that "the power to tax 750 [1999]). Considering that inasmuch as
involves the power to destroy." (C.J. the power to tax
Marshall in McCulloch v. Maryland, 4 may be exercised by local legislative bodies,
Wheat, 316 4 L. Ed. 579, 607) no longer by valid congressional delegation
but by direct authority conferred by the
Power of Taxation; Legislative in Nature
Constitution, in interpreting statutory
(1996) What is the nature of the
provisions on municipal fiscal powers, doubts
power of taxation? SUGGESTED
ANSWER:
will, therefore, have to be resolved in favor of
The POWER TO TAX is an attribute of municipal corporations (City Government of
sovereignty and is inherent in the State. It is San Pablo, Laguna v. Reyes, 305 SCRA
a power emanating from necessity because 353 [1999]). This means that the court
it imposes a necessary burden to must adopt a liberal construction of a
preserve the State's sovereignty (Phil law granting a municipal corporation the
Guarantee Co. vs. Commissioner, L- power to tax.
Note: If the examinee chose proposition
22074, April 30, 1965). It is inherently no. 4 as his
legislative in nature and character in that answer, it should be given full credit
the power of taxation can only be considering that the present CTA Act
exercised through the enactment of law. (R.A. No. 9282) has made the CTA a
ALTERNATIVE ANSWER: coequal judicial body of the Court of
The nature of the power of taxation refers to Appeals. The question "Which of the
its own limitations such as the requirement following propositions
that it should be for a public purpose, that
it be legislative, that it is territorial and
that it should be subject to international
comity.
Purpose of Taxation; Interpretation

(2004)
Which of the following propositions
may now be
untena
ble:
1) The court should construe a law
granting tax
exemption strictly against the taxpayer.
2) The court should construe a law
granting a municipal
corporation the power to tax most
strictly.
3) The Court of Tax Appeals has
jurisdiction over
decisions of the Customs
Commissioner in cases involving
liability for customs duties.
4) The Court of Appeals has jurisdiction
to review decisions of the Court of Tax
Appeals.
5) The Supreme Court has jurisdiction
to review decisions of the Court of
Appeals.
Justify your answer or choice
briefly. (5%)
SUGGESTED ANSWER:
2. The court should construe a law granting
a municipal corporation the power to tax
most strictly.
This proposition is now untenable. The basic
may now be untenable" him for the expropriation of his property.
may lead the
Decide.
examinee to choose a proposition which SUGGESTED ANSWER:
is untenable on the basis of the new The income tax liability of X can not be
law despite the cut-off date adopted by
compensated with the amount owed by the
the Bar Examination Committee. R.A.
No. Government as compensation for his
9282 was passed on property expropriated, taxes are of distinct
March 30, 2004. kind, essence and nature
than ordinary obligations. Taxes and
Purpose of Taxation; Legislative in Nature debts cannot be the subject of compensation
(2004) because the Government and X are not
Taxes are assessed for the purpose of mutually creditors and debtors of each other
generating revenue and a claim for taxes is not a debt, demand,
to be used for public needs. Taxation contract, or Judgment as is allowable to be
itself is the power set off. (Francia vs. IAC. G.R 76749, June
by which the State raises revenue to 28.
defray the expenses of government. A 1988)
jurist said that a tax is what we pay for
civilization.In our jurisdiction, which of the Rule on Set-Off or Compensation of Taxes
following statements may be erroneous: (2001)
1) Taxes are pecuniary May a taxpayer who has pending claims
in nature. for VAT input
2) Taxes are enforced charges and credit or refund, set-off said claims against
contributions. his other tax liabilities? Explain your
3) Taxes are imposed on persons and answer. (5%)
property within the territorial SUGGESTED ANSWER:
jurisdiction of a State.
4) Taxes are levied by the executive
branch of the government.
5) Taxes are assessed according to a
reasonable rule of apportionment.
Justify your answer or choice
briefly. (5%)
SUGGESTED
ANSWER:
A. 4. Taxes are levied by the
executive branch of government.
This statement is erroneous because levy
refers to the act
of imposition by the legislature which is
done through the enactment of a tax law.
Levy is an exercise of the power to tax
which is exclusively legislative in nature
and character. Clearly, taxes are not levied
by the executive branch of government.
(JVPC v. Albay, 186 SCRA 198 [1990]).
Rule on Set-Off or Compensation of Taxes

(1996)
X is the owner of a residential lot
situated at Quirino
Avenue, Pasay City. The lot has an area of
300 square meters. On June 1, 1994, 100
square meters of said lot owned by X was
expropriated by the government to be used
in the widening of Quirino Avenue, for
P300.000.00 representing the estimated
assessed value of said portion. From 1991
to 1995, X, who is a businessman, has
not been paying his income taxes. X is now
being assessed for the unpaid income taxes
in the total amount of P150,000.00. X
claims his income tax liability has already
been compensated by the amount of
P300.000.00 which the government owes
No. Set-off is available only if both already become overdue and demandable as
obligations are well as fully liquidated. Compensation takes
liquidated and demandable. Liquidated place by operation of law under Art. 1200 in
debts are those where the exact amounts relation to Articles 1279 and 1290 of the New
have already been determined. In the Civil Code. (Domingo v. Garlitos, G.R. No. L-
instant case, the claim of the taxpayer for 18994, June 29, 1963)
VAT refund is still pending and the amount
has still to be determined. A fortiori, the Rule on Set-Off or Compensation on Taxes
liquidated obligation of the taxpayer to the (2005)
government can not, therefore, be set-off Can an assessment for a local tax be the
against the unliquidated claim which subject of set-off
the taxpayer conceived to exist in his or compensation against a final judgment
favor. (Philex Mining Corp. v. CIR, GR for a sum of
No. 125704, August 29, 1998). money obtained by the taxpayer
ALTERNATIVE ANSWER: against the local government that made
No. Taxes and claims for refund cannot be the assessment? Explain. SUGGESTED ANSWER:
the subject of set-off for the simple reason No, taxes cannot be the subject of set-off
that the government and the taxpayer are even when there is a final judgment for a
not creditors and debtors of each other. sum of money against the local
There is a material distinction between a government making the
tax and a claim for refund. Claims for assessment. The government
refunds just like debts are due from the and the taxpayer are not the "mutual
government in its corporate capacity, while creditors and debtors" of each other who can
taxes are due to the government in its avail of the remedy of compensation which
sovereign capacity. (Philex Mining Corp. Art. 1278 (Civil Code) is
v. CIR, GR No. 125704, August 29,
199
8).
Rule on Set-Off or Compensation of Taxes

(2005)
May taxes be the subject of set-off or
compensation?
Explai
n.
SUGGESTED ANSWER.
No, taxes cannot be the subject of
set-off or compensation for the following
reasons:
1) The lifeblood theory requires that there
should be no
unnecessary impediments to the
collection of taxes to make available to the
government the wherewithal to meet its
legitimate objectives; and
2) The payment of taxes is not a contractual

obligation but arises out of a duty to pay,
and in respect of the positive acts of
government, regarding the making and
enforcing of taxes, the personal consent of
the individual taxpayer is not required.
(Republic v. Mambulao Lumber Co., G.R.
No. L-17725, February 28, 1962; Caltex v.
Commission on Audit, G.R. No. 92585,
May 8, 1992; and Philex v.
Commissioner of Internal Revenue,
G.R. No. 125704, August 28, 1998)
However, there is a possibility that set-off

may arise, if the claims against the
government have been recognized and an
amount has already been appropriated
for that purpose. Where both claims have
referring to Republic of the donor's tax. The donation is the legal means
Philippines v. employed to transfer the incidence of
Mambulao Lumber Co., G.R. No. L- income tax on the rental income.
17725, February 28,
1962; and Francia v. Intermediate
Appellate Court, G.R. Tax Exemptions: Nature & Coverage; Proper Party
No. L-67649, June (2004) As an incentive for investors, a law
28,1998. was passed giving newly established
companies in certain economic zone
There is, however, legal basis to state that exemption from all taxes, duties, fees,
an assessment for a local tax may be the imposts and other charges for a period
subject of set-off or compensation against of three years. ABC Corp. was organized
a final judgment for a sum of money and was granted such incentive. In the
obtained by the taxpayer against the local course of business, ABC Corp. purchased
government by operation of law where the mechanical equipment from XYZ Inc.
local government and the taxpayer are in Normally, the sale is subject to a sales tax.
their own right reciprocally debtors and
creditors of each other, and that the debts XYZ Inc. claims, however, that since
are both due and demandable. This is it sold the equipment to ABC Corp.
consistent with the ruling in Domingo v. which is tax exempt, XYZ
Garlitos, G.R. No. L-18994, June 29,1963,
relying upon Arts. 1278 and 1279 of the
Civil Code, where these provisions were
applied in relation to the national tax, and
should therefore be applicable to a local
tax.
Tax Avoidance vs. Tax Evasion (1996)

Distinguish tax evasion from tax
avoidance. SUGGESTED ANSWER:
Tax evasion is a scheme used outside
of those lawful means to escape tax
liability and, when availed of, it usually
subjects the taxpayer to further or
additional civil or criminal liabilities. Tax
avoidance, on the other hand, is a tax
saving device within the means sanctioned
by law, hence legal.
Tax Avoidance vs. Tax Evasion

(2000)
Mr. Pascual's income from leasing his
property reaches the maximum rate of tax
under the law. He donated one- half of his
said property to a non-stock, non-profit
educational institution whose income and
assets are actually, directly and exclusively
used for educational purposes, and
therefore qualified for tax exemption under
Article XIV, Section 4 (3) of the
Constitution and Section
30 (h) of the Tax Code. Having thus
transferred a portion
of his said asset, Mr. Pascual succeeded in
paying a lesser tax on the rental income
derived from his property. Is there tax
avoidance or tax evasion? Explain. (2%)
SUGGESTED ANSWER:
There is tax avoidance. Mr. Pascual has
exploited a fully permissive alternative
method to reduce his income tax by
transferring part of his rental income to
a tax exempt entity through a donation of
one-half of the income producing property.
The donation is likewise exempt from the
should not be liable to pay the sales tax. of the principle of non-retroactivity of
Is this claim rulings and doing so would result in grave
tenable? injustice to the taxpayer who relied on the
(5%) first ruling in good faith (Section 246, NIRC;
SUGGESTED ANSWER: CIR v. Burroughs, Inc., 142 SCRA
A. No. Exemption from taxes is personal in 324[1986]).
nature and covers only taxes for which the
taxpayer-grantee is directly liable. The Tax Pyramiding; Definition & Legality (2006)
sales tax is a tax on the seller who is What is tax pyramiding? What is its basis
not exempt from taxes. Since XYZ Inc. is in law? (5%)
directly liable for the sales tax and no tax SUGGESTED ANSWER:
exemption privilege is ever given to him, Tax Pyramiding is the imposition of a tax
therefore, its claim that the sale is tax upon another tax. It has no basis in fact or
exempt is not tenable. A tax exemption is in law (People v. Sandiganbayan, G.R. No.
construed in strictissimi juris and it can not 152532, August 16, 2005). There is also tax
be permitted to exist upon vague pyramiding when sales taxes are
implications (Asiatic Petroleum Co., Ltd. V. incorrectly applied to goods several times
Llanes, 49 Phil from production to final
466
[1926]).
Assume arguendo that XYZ had to and did

pay the sales tax. ABC Corp. later found
out, however, that XYZ merely shifted or
passed on to ABC the amount of the sales
tax by increasing the purchase price. ABC
Corp. now claims for a refund from the
Bureau of Internal Revenue in an amount
corresponding to the tax passed on to it
since it is tax exempt. Is the claim of ABC
Corp. meritorious? (5%)
SUGGESTED ANSWER;
B. No. The claim of ABC Corp. is not
meritorious. Although the tax was shifted to
ABC Corp. by the seller, what is paid by it is
not a tax but part of the cost it has assumed.
Hence, since ABC Corp. is not a taxpayer, it
has no capacity to file a claim for refund.
The taxpayer who can file a claim for
refund is the person statutorily liable for
the payment of the tax.
Tax Laws; BIR Ruling; Non-Retroactivity of Rulings

(2004) Due to an uncertainty whether or not a
new tax law is applicable to printing
companies, DEF Printers submitted a legal
query to the Bureau of Internal Revenue on
that issue. The BIR issued a ruling that
printing companies are not covered by the
new law. Relying on this ruling, DEF
Printers did not pay said tax.
Subsequently, however, the BIR reversed the

ruling and issued a new one stating that the
tax covers printing companies. Could the
BIR now assess DEF Printers for back taxes
corresponding to the years before the new
ruling? Reason briefly. (5%)
SUGGESTED ANSWER:
No. Reversal of a ruling shall not be given a
retroactive application if said reversal will
be prejudicial to the taxpayer. Therefore,
the BIR can not assess DEF printers for
back taxes because it would be violative
sale, thus, shifting the tax burden same force and effect in every place where
to the ultimate the subject maybe found. (Phil. Trust &
consu Co. v. Yatco, 69 Phil. 420).
mer.
(NOTABENE: This concept pertains to the
VAT law which is
excluded from the bar coverage, Guidelines for
2006 Bar Examinations, INCOME TAXATION
June 15, Basic: Allowable Deductions vs. Personal
2006) Exemptions
(2001
Taxpayer Suit; When Allowed (1996) )
When may a taxpayer's suit Distinguish Allowable Deductions
be allowed? SUGGESTED from Personal
ANSWER: Exemptions. Give an example of an
A taxpayer's suit may only be allowed allowable deduction and another example
when an act for personal exemption. (5%) SUGGESTED
complained of, which may include a ANSWER:
legislative enactment, directly involves the The distinction between allowable
illegal disbursement of public funds deductions and personal exemptions are as
derived from taxation (Pascual vs. follows:
Secretary of Public Works, 110 Phil. a. As to amount — Allowable
331). deductions generally
refer to actual expenses incurred in the
Uniformity in the Collection of Taxes pursuit of
(1998) trade, business or practice of
Explain the requirement of uniformity as profession while
a limitation in the imposition and/or
collection of taxes. (5%| SUGGESTED ANSWER:
Uniformity in the imposition and/or
collection of taxes means that all taxable
articles, or kinds of property of the same
class shall be taxed at the same
rate. The requirement of uniformity is
complied with when the tax operates with
the same force and effect in every place
where the subject of it is found
(Churchill & Tail v. Conception, 34 Phil.
969). It does not mean that lands,
chattels, securities, income,
occupations, franchises, privileges,
necessities and luxuries shall be assessed
at the same rate. Different articles
maybe taxed at different amounts
provided that the rate is uniform on the
same class everywhere with all people at
all times. Accordingly, singling out one
particular class for taxation purposes
does not infringe the requirement of
uniformity.
FIRST ALTERNATIVE
ANSWER:
The criteria is met when the tax laws
operate equally and uniformly on all
persons under similar circumstances. All
persons are treated in the same manner,
the conditions not being different, both in
privileges conferred and liabilities
imposed. Uniformity in taxation also refers
to geographical uniformity. Favoritism and
preference is not allowed.
SECOND ALTERNATIVE
ANSWER:
A tax is deemed to have satisfied the
uniformity rule when it operates with the
personal exemptions are arbitrary (b) declining-balance method;
amounts allowed (c) sum-of-years-digit method; and
by law. (d) any other method which may be
b. As to nature — Allowable prescribed by the Secretary
deductions constitute of Finance upon
business expenses while personal recommendation of the
exemptions Commissioner of Internal Revenue
pertain to personal expenses. (Sec. 34(F). NIRC).
c. As to purpose — Deductions are
allowed to 2. The annual depreciation of the
enable the taxpayer to recoup his depreciable fixed asset may be computed
cost of doing on the straight-line method which will
business while personal exemptions allow the taxpayer to deduct an annual
are allowed to cover personal, family depreciation of Php4,500, arrived at by
and living expenses. dividing the depreciable
d. As to claimants — Allowable
value (Php l00.000-Phpl0.000)
deductions can be
of Php90,000 by the estimated
claimed by all taxpayers, corporate
or otherwise, useful life (20 years).
while personal exemptions can be
NOTE: The bar candidate may give a different
claimed only by individual taxpayers. figure depending on the method he used in
computing the annual depreciation.
Basic: Meaning of Taxable Income
(2000) What is meant by taxable
income? (2%) SUGGESTED
ANSWER:
TAXABLE INCOME means the pertinent
items of gross income specified in the Tax
Code, less the deductions and/or personal
and additional exemptions, if any, authorized
for such types of income by the Tax Code or
other special laws. (Sec. 31, NIRC of 1997)
Basic: Principle of Mobilia Sequuntur Personam (1994)

What is the principle of mobilia
sequuntur personam in income taxation?
SUGGESTED ANSWER:
Principle of Mobilia Sequuntur Personam in
income taxation refers to the principle that
taxation follows the property or person who
shall be subject to the tax.
Basic: Proper Allowance of Depreciation (1998)

2. What is the proper allowance for
depreciation of any property used in
trade or business? [3%)
3. What is the annual depreciation of a
depreciable fixed asset with a cost of
P100,000 and an estimated useful life of
20 years and salvage value of P 10,000
after its useful life?
SUGGESTED ANSWER:
1. The proper allowance of
depreciation of any
property used in trade or business refers
to the reason-
able allowance for the exhaustion, wear
and tear (including reasonable
allowance for obsolescence) of said
property. The reasonable allowance shall
include, but not limited to, an allowance
computed under any of the following
methods:
(a) straight-line method;
The facts given in the problem are extent of the tax benefit enjoyed by the
sufficient to
taxpayer when the bad debts were written-
compute the annual depreciation either under
the declining- balance method or sum-of-
off and claimed as a deduction from income.
years-digit method. Any answer arrived at It also applies to taxes previously deducted
by using any of the recognized methods from gross income but which were
should be given full credit. It is suggested subsequently refunded or credited. The
that no question requiring computation taxpayer is also required to report as
should be given in future bar examinations. taxable income the subsequent tax refund or
tax credit granted to the extent of the tax
Basic: Sources of Income: Taxable Income benefit the taxpayer enjoyed when such
(1998) taxes were previously claimed as deduction
From what sources of income are the from income.
following persons/corporations taxable
by the Philippine (b) Give an illustration of the application
government? of the tax benefit rule.
2) Citizen of the Philippines residing SUGGESTED ANSWER:
therein; [1%] (b) X Company has a business connected
3) Non-resident receivable amounting to P100,000.00 from Y
citizen; [1%1 who was declared bankrupt by a competent
4) An individual citizen of the court. Despite earnest efforts to collect the
Philippines who is same, Y was not able to pay, prompting X
working and deriving income from Company to write-off the entire liability.
abroad as an overseas contract During the year of write-off, the entire
worker; [1%] amount was claimed as a deduction for
5) An alien individual, whether a resident income tax purposes reducing the taxable
or not of the net income of X Company to only
Philippines; P1,000,000.00. Three years later, Y
[1%]
6) A domestic
corporation; [1%]
SUGGESTED ANSWER: (Section 23, NIRC
of 1997)
1) A citizen of the Philippines
residing therein is taxable on all
income derived from sources within
and without the Philippines.
2) A nonresident citizen is taxable
only on income
derived from sources within the
Philippines.
3) An individual citizen of the
Philippines who is
working and deriving income from
abroad as an overseas contract worker
is taxable only on income from sources
within the Philippines.
4) An alien individual, whether a resident
or not of the
Philippines, is taxable only on income
derived from sources within the
Philippines.
5) A domestic corporation is taxable
on all income derived from sources
within and without the Philippines.
Basic: Tax Benefit Rule

(2003)
(a) What is meant by the "tax
benefit rule"?
SUGGESTED
ANSWER:
(a) TAX BENEFIT RULE states that the
taxpayer is obliged to declare as taxable
income subsequent recovery of bad debts
in the year they were collected to the
voluntarily paid his obligation previously royalties; dividends; annuities; prizes and
written-off to X winnings; pensions; and partner's distributive
Company. In the year of recovery, the entire share of the gross income of general
amount constitutes part of gross income of professional partnership (Sec. 28, NIRC).
X Company because it was able to get full ALTERNATIVE ANSWER:
tax benefit three years earlier. a) Gross income means all wealth which
flows into the taxpayer other than as a mere
Basic; Basis of Income Tax return of capital. It includes the forms of
(1996) income specifically described as gains and
X is employed as a driver of a profits including gains derived from the sale
corporate lawyer and or other disposition of capital.
receives a monthly salary of P5,000.00 with
free board and lodging with an equivalent b) Gross income means income (in the broad
value of P1,500.00. sense) less income which is, by statutory
1. What will be the basis of X's provision or otherwise, exempt from the tax
income tax? Why imposed by law (Sec. 36, Rev. Reg. No. 2).
2. Will your answer in question (a) be the Gross income from business means total
same if X's sales, less cost of goods sold, plus any income
employer is an obstetrician? Why? from investments
SUGGESTED ANSWERS:
1) The basis of X’s income tax would
depend on whether his employer is an
employee or a practicing corporate lawyer.
• If his employer is an employee, the
basis of X's income tax is P6,500.00
equivalent to the total of the basic salary
and the value of the board and lodging.
This is so because the
employer/corporate lawyer has no place
of business where the free board and
lodging may be given.
• On the other hand, if the corporate
lawyer is a "practicing lawyer (self-
employed), X should be taxed only on
P5,000.00 provided that the free board
and lodging is given in the business
premises of the lawyer and for his
convenience and that the free lodging
was given to X as a condition for
employment.
2) If the employer is an obstetrician who

is self-employed, the basis of X's income
will only be P5,000.00 if it is proven that the
free board and lodging is given within the
business premises of said employer
for his convenience and that the free
lodging is required to be accepted by X as
condition for employment. Otherwise, X
would be taxed on P6,500.00.
Basic; Gross Income: Define

(1995)
What is "gross Income" for purposes of the
Income tax?
SUGGESTED ANSWER:
GROSS INCOME means all income from
whatever source derived, including
(but not limited to)
compensation for services, including fees,
commissions, and similar items; gross
income from business; gains derived from
dealings in property; interest; rents;
and from incidental or outside In gratitude, Perez, in behalf of his
operations or manufacturing firm, sent Osorio an
sources (Sec. 43, Rev. expensive car as a gift. Osorio called Perez
Reg. No. 2). and told him that there was really no
obligation on the part of Perez or his
Basic; Income vs. Capital company to give such an expensive gift.
(1995) But Perez insisted that Osorio keep the car.
How does "Income" differ from The company of Perez deducted the cost of
"capital"? Explain. the car as a business expense.
SUGGESTED
ANSWER:
Income differs from capital in that The Commissioner of Internal Revenue
INCOME is any wealth which flows into included the fair market value of the car
the taxpayer other than a return of capital as Income of Osorio who protested that
while capital constitutes the investment the car was a gift and therefore excluded
which is the source of income. from income. Who is correct, the
Therefore, capital is fund while income is Commissioner or Osorio? Explain.
SUGGESTED ANSWER:
the flow. Capital is wealth, while income is
The Commissioner is correct. The car
the service of wealth. Capital is the tree
having been given to Mr. Osorio in
while income is the fruit (Vicente Madrigal
consideration of having introduced Mr.
et al v. James Rqferty, 38 Phil. 414).
Perez to a foreign Importer which resulted
to a profitable business deal is considered
Basic; Schedular Treatment vs. Global Treatment
to be a compensation for
(1994) Distinguish "schedular treatment"
from "global treatment" as used in
income taxation.
SUGGESTED
ANSWER:
Under a SCHEDULER SYSTEM, the
various types/items of income
(compensation; business/professional
income) are classified accordingly and
are accorded different tax treatments, in
accordance with schedules characterized
by graduated tax rates. Since these types
of income are treated separately, the
allowable deductions shall likewise vary
for each type of income.
Under the GLOBAL SYSTEM, all income

received by the taxpayer are grouped
together, without any distinction as to the
type or nature of the income, and after
deducting therefrom expenses and other
allowable deductions, are subjected to tax
at a fixed rate.
Compensation; Income Tax: Due to Profitable

Business
Deal
(1995)
Mr. Osorio, a bank executive, while
playing golf with Mr.
Perez, a manufacturing firm executive,
mentioned to the latter that his (Osorio)
bank had just opened a business
relationship with a big foreign importer of
goods which Perez' company
manufactures. Perez requested Osorio to
introduce him to this foreign importer and
put in a good word for him (Perez), which
Osorio did. As a result, Perez was able to
make a profitable business deal with
the foreign Importer.
services rendered. The transfer is not a corporation is located in the Philippines or
gift because it is the shares donated have acquired business
not made out of a detached or disinterested situs in the Philippines, the donation may be
generosity but for a benefit accruing to Mr. taxed in the Philippines subject to the rule of
Perez. The fact that the company of Mr. reciprocity.
Perez takes a business deduction for the
payment indicates that it was considered as 2) If the shares of stocks were given to
a pay rather than a gift. Hence, the fair Mr. Y in consideration of his services to the
market value of the car is includable in the corporation, the same shall constitute taxable
gross income pursuant to Section 28(a)(l) of compensation income to the recipient
the Tax Code (See 1974 Federal Tax because it is a compensation for services
Handbook, p. 145). A payment though rendered under an employer-employee
voluntary, if it is in return for services relationship, hence, subject to income tax.
rendered, or proceeds from the constraining
force of any moral or legal duty or a benefit The par value or stated value of the shares
to the payer is anticipated, is a taxable issued also constitutes deductible expense
income to the payee even if characterized to the corporation provided it is subjected
as a to withholding tax on wages.
'gift' by the payor (Commissioner vs.
Duberstein, 363 U.S.
27
8).
ALTERNATIVE ANSWER:
Mr. Osorio is correct. The car was not
payment for services rendered. There was
no prior agreement or negotiations between
Mr. Osorio and Mr. Perez that the former
will be compensated for his services. Mr.
Perez, in behalf of his company, gave the car
to Mr. Osorio out of gratitude. The transfer
having been made gratuitously should be
treated as a gift subject to donor's tax
and should be excluded from the gross
income of the recipient, Mr. Osorio. The
Commissioner should cancel the
assessment of deficiency income tax to
Mr. Osorio and instead assess deficiency
donor's tax on Mr Perez' company.
(Sec. 28(b)(3),NIRC; Pirovano
vs. Commissioner)
Corporate: Income: Donor’s tax; Tax Liability

(1996)
X, a multinational corporation doing
business in the
Philippines donated 100 shares of
stock of said corporation to Mr. Y, its
resident manager in the Philippines.
1) What is the tax liability, if any, of X
corporation?
2) Assuming the shares of stocks were
given to Mr. Y in consideration of his
services to the corporation, what are
the tax implications? Explain.
SUGGESTED ANSWERS:
1) Foreign corporations effecting a
donation are subject to donor's tax only if
the property donated is located in the
Philippines. Accordingly, donation of a
foreign corporation of its own shares of
stocks in favor of resident employee is
not subject to donor's tax (BIR Ruling No.
018-87, January 26, 1987). However, if
85% of the business of the foreign
Corporate; Income Tax; Reasonableness of ticketing services.
the Are the revenues of Caledonia Aircargo
Bonus from tickets reserved by its Philippine
(2006) office subject to tax? SUGGESTED ANSWER:
Gold and Silver Corporation gave extra The revenues in the Philippines of Caledonia
14th month Aircargo as an "off-line" airline from ticket
bonus to all its officials and employees in reservation services are taxable income
the total amount from "whatever source" under Sec. 28(a) of
of P75 Million. When it filed its corporate the Tax Code. This case is analogous to
income tax return the following year, the Commissioner v. BOAC, G.R No. No.
corporation declared a net operating loss. 65773-74, April 30, 1987 where the
When the income tax return of the Supreme Court ruled that the income
corporation was reviewed by the BIR the received in the Philippines from the sale of
following year, it disallowed as item of tickets by an "off-line" airline is taxable as
deduction the P75 Million bonus the income from whatever source.
corporation gave its officials and
employees on the ground of Corporate; Income: Coverage; "Off-Line" Airline
unreasonableness. The corporation claimed (2005)
that the bonus is an ordinary and An international airline with no landing
necessary expense that should be rights in the Philippines sold tickets in the
allowed. If you were the BIR Philippines for air transportation. Is
Commissioner, how will you resolve the income derived from such sales of tickets
issue? (5%) considered taxable income of the said
SUGGESTED international
ANSWER:
I will disallow the expense. A bonus is
ordinary and necessary where said
expenditure is (1) appropriate and helpful
in the development of the taxpayers
business (Martens, Law of Federal Income
Taxation, Volume IV, p. 315) and (2) is
normal in relation to the business of
the taxpayer and the surrounding
circumstances (p. 316, Ibid).
To determine the reasonableness of the

bonus it must be commensurate with
services performed by the officials and
employees. Other factors to consider are
whether the payment was made in good
faith; the character of the taxpayer's
business; the volume and amount of its net
earnings; its locality; the type and extent of
the services rendered; the salary policy of
the corporation; the size of the particular
business; the employees' qualification and
contributions to the business venture; and
general economic conditions (Atlas
Mining v. CIR, G.R. No. L-
26911, January 27, 1981). However,
since the business suffers from a net
operating loss, I will rule that the bonus
is an unreasonable
expense.
Corporate; Income: Coverage; "Off-Line" Airline (1994)

Caledonia Aircargo is an off-line
international carrier without any flight
operations in the Philippines. It has,
however, a liaison office in the Philippines
which is duly licensed with the Securities
and Exchange Commission, established
for the purpose of providing passenger
and flight information, reservation and
air carrier from Philippine sources under which is a subsidiary of a non- resident
the Tax Code? foreign corporation, to the latter ostensibly
Explain. for services rendered by the latter to the
(5%) former, but which payments are
ALTERNATIVE ANSWER:
disproportionately larger than the actual
Yes. The income derived from the sales of
value of the services rendered. In such case,
tickets in the Philippines is considered
the amount over and above the true value of
taxable income of the international air
the service rendered shall be treated as a
carrier from Philippine sources.
dividend, and shall be subjected to the
corresponding tax of 35% on Philippine
The source of income is the property,
sourced gross income, or such other
activity or service that produced the
preferential rate as may be provided under a
income. The sale of tickets in the Philippines
is the activity that produces the income. The corresponding Tax Treaty.
absence of landing rights in the
Example: Royalty payments under a
corresponding
Philippines cannot alter the fact that
licensing
revenues were derived from ticket sales
agreement.
within the Philippines. (Commissioner of
Internal Revenue v. Japan Air Lines,
G.R. No. 60714, October 4, 1991 Dividends; Income Tax; Deductible Gross Income
reiterating British Overseas Airways (1999)
Corp., Air India and American Airlines, A Co., a Philippine corporation, issued
Inc.) preferred shares of stock with the following
ALTERNATIVE ANSWER: features:
No, under Sec. 3 of R.R. No. 15-2002, an off-
line airline having a branch office or a sales
agent in the Philippines which sells passage
documents for compensation or commission
to cover off-line flights of its principal or
head office, or for other airlines
covering flights originating from Philippine
ports or off-line flights, is not considered
engaged in business as an international air
carrier in the Philippines and is, therefore,
not subject to Gross Philippine Billings Tax
nor to the 3% common carrier's tax.
Based on the foregoing, the international

airline company is not considered as
engaged in business in the Philippines and
is therefore a non-resident foreign
corporation. A non-resident foreign
corporation is subject to the gross income
tax on its income derived from sources
within the Philippines. The income from
sale of tickets shall not form part of
taxable income because the term "taxable
income" as defined under Sec. 31 of the
NIRC refers only to income of those
taxpayers who pay by way of the net income
tax. Taxable income means the pertinent
items of gross income specified in the NIRC,
less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the NIRC or
other special laws.
Dividends: Disguised dividends

(1994)
Disguised dividends in income taxation?
Give an example.
SUGGESTED ANSWER:
Disguised dividends are those income
payments made by a domestic corporation,
1) Non- Fringe Benefit Tax: Covered Employees
voting; (2001)
2) Preferred and cumulative dividends X was hired by Y to watch over V’s
at the rate of fishponds with a
10% per annum, whether or not in salary of Php 10,000.00. To enable him to
any period the perform his duties well, he was also
amount is covered by earnings provided a small hut, which he could use as
or projects; his residence in the middle of the
3) In the event of dissolution of the fishponds. Is the fair market value of the use
issuer, holders of of the small hut by X a "fringe benefit" that
preferred stock shall be paid in full or is subject to the 32% tax imposed by Section
ratably as the assets of the issuer may 33 of the National Internal Revenue
permit before any distribution shall be Code? Explain your answer. (5%)
made to common stockholders; and SUGGESTED ANSWER:
4) The issuer has the option to redeem No. X is neither a managerial nor a
the preferred stock. supervisory employee. Only managerial or
supervisory employees are entitled to a
A Co. declared dividends on the fringe benefit subject to the fringe benefits
preferred stock and claimed the tax. Even assuming that he is a managerial
dividends as interests deductible from or supervisory employee, the small hut is
its gross Income for income tax provided for the convenience of the
purposes. The BIR disallowed the
deduction. A Co. maintains that the
preferred shares with their features are
really debt and therefore the dividends
are realty interests. Decide. (10%)
SUGGESTED ANSWER:
The dividends are not deductible from
gross income. Preferred shares shall be
considered capital regardless of the
conditions under which such shares are
issued and, therefore, dividends paid
thereon are not considered
'interest' which are allowed to be deducted
from the gross income of the corporation.
(Revenue Memorandum Circular No. 17-
71, July 12, 1971).
Effect; Condonation of Loan in Taxation

(1995)
Mr. Francisco borrowed P10,000.00 from
his friend Mr.
Gutierrez payable in one year without
interest. When the loan became due Mr.
Francisco told Mr. Gutierrez that he (Mr.
Francisco) was unable to pay because of
business reverses. Mr. Gutierrez took pity
on Mr. Francisco and condoned the loan.
Mr. Francisco was solvent at the time he
borrowed the P 10,000.00 and at the time
the loan was condoned. Did Mr. Francisco
derive any income from the cancellation or
condonation of his indebtedness? Explain.
SUGGESTED ANSWER:
No, Mr. Francisco did not derive any
income from the cancellation or
condonation of his indebtedness. Since it is
obvious that the creditor merely desired to
benefit the debtor in view of the absence of
consideration for the cancellation, the
amount of the debt is considered as a gift
from the creditor to the debtor and need
not be included in the latter's gross
income.
employer, hence does not constitute a SUGGESTED ANSWER:
taxable fringe Delinquency interest is the interest of 20% or
benefit. (Section 33, the Manila Reference Rate, whichever is
NERC). higher, required to be paid in case of failure
to pay:
Fringe Benefit Tax: Employer required to Pay (a) the amount of the tax due on any return
(2003) required to be filed; or
A "fringe benefit" is defined as being any (b) the amount of the tax due for which
good, service or return is required; or
other benefit furnished or granted in cash or (c) the deficiency tax or any surcharge
in kind by an employer to an individual or interest thereon, on the due date
employee. Would it be the employer or the appearing in the notice and demand of the
employee who is legally required to pay an Commissioner of Internal Revenue.
income tax on it? Explain. (4%)
SUGGESTED ANSWER: If in the above illustration the assessment
It is the employer who is legally required to notice was released on December 31, 1994
pay an income tax on the fringe benefit. The and the amount of deficiency tax, inclusive
fringe benefit tax is imposed as a FINAL of surcharge and deficiency interest were
WITHHOLDING TAX placing the legal computed up to January 30, 1995 which is
obligation to remit the tax on the employer, the due date for payment per assessment
such that, if the tax is not paid the legal notice, failure to
recourse of the BIR is to go after the
employer. Any amount or value received by
the employee as a fringe benefit is
considered tax paid hence, net of the
income tax due thereon. The person who is
legally required to pay (same as statutory
incidence as distinguished from economic
incidence) is that person who, in case of
non-payment, can be legally demanded to
pay the tax.
Interest: Deficiency Interest: define (1995

Bar)
What is a "deficiency interest" for purposes
of the income
tax?
Illustrate.
SUGGESTED ANSWER:
DEFICIENCY INTEREST for purposes of the
income tax is the interest due on any
amount of tax due or installment thereof
which is not paid on or before the date
prescribed for its payment computed at
the rate of 20% per annum or the Manila
Reference Rate, whichever is higher, from
the date prescribed for its payment until it
is fully paid.
If for example after the audit of the books of

XYZ Corp. for taxable year 1993 there was
found to be due a deficiency income tax of
P125,000.00 inclusive of the 25% surcharge
imposed under Section 248 of the Tax
Code, the interest will be computed on the
P125.000.00 from April 15, 1994 up to its
date of payment.
Interest: Delinquency Interest: define

(1995)
What is a "delinquency interest" for
purposes of the
income tax?
Illustrate.
pay on this latter date will ƒ The interest from money market
render the tax placements is
delinquent and will require the payment of subject to a final withholding tax of 20%;
delinquency interest. ƒ The dividends from domestic corporation
are exempt
ITR: Personal Income; Exempted to File ITR from income tax; and
(1997) ƒ gains from stock transactions with
A bachelor was employed by Corporation the Philippine
A on the first working day of January Stock Exchange are subject to
1996 on a part-time basis with a salary of transaction tax which is in lieu of the
P3,500.00 a month. He then received the income tax.
13th month pay. In September 1996, he ƒ The proceeds under an insurance policy
accepted another part- time Job from on the loss
Corporation B from which he received a of goods is not an item of income but
total compensation of P14,500.00 for the merely a return of capital hence not
year 1996. The correct total taxes were taxable.
withheld from both earnings. With the
withholding taxes already paid, would he ALTERNATIVE ANSWER:
still be required to file an income tax The gross receipts from trading business is
return for his 1996 income? SUGGESTED includible as an item of income in the
ANSWER: corporate income tax return. Likewise, the
Yes, because what is exempt from filing are gain or loss realized as a consequence of the
those individuals who have total receipt of proceeds under an insurance
compensation income not exceeding policy on the loss of goods will be
P60.000 with the taxes correctly withheld included in the corporate income tax
only by one employer. In this case, even if
his aggregate compensation income from
both his employers does not exceed
P60.000 and that total withholding taxes
were correctly withheld by his
employers, the fact that he derives
compensation income concurrently from
two employers at anytime during the
taxable year, does not exempt him from
filing his income tax return (RA 7497, as
implemented by RR No. 4-93).
ITR; Domestic Corporate Taxation

(1997)
During the year, a domestic
corporation derived the
following items of revenue: (a) gross
receipts from a
trading business; (b) interests from money
placements in the banks; (c) dividends
from its stock investments in domestic
corporations; (d) gains from stock
transactions through the Philippine
Stock Exchange; (e) proceeds under an
insurance policy on the loss of goods. In
preparing the corporate income tax return,
what should be the tax treatment on each
of the above items?
SUGGESTED
ANSWER:
The gross receipts from trading
business is includible
as an item of income in the corporate
income tax return
and subject to corporate income tax rate
based on net income.
The other items of revenue will not be

included in the corporate income tax
return.
return either as a taxable gain or a employers does not exceed her total personal
deductible loss. The and additional exemptions for the year 2000.
gain or loss is arrived at by deducting from Was she required to file an income tax
the proceeds of insurance (amount realized) return last April? Explain your answer.
the basis of the good lost (Sec. 34(a), (5%)
NIRC). The net income of the corporation SUGGESTED ANSWER:
shall be subject to corporate income tax rate Yes. An individual deriving compensation
of 35%. concurrently from two or more employers
at any time during the taxable year shall
The other items of revenue will not be file an income tax return (Sec.
included in the corporate income tax return. 51(A)(2)(b),
The interest from money market placements NIRC.)
is subject to a final withholding tax of ALTERNATIVE ANSWER:
20%; dividends from domestic corporations It depends. An individual with pure
are exempt from income tax; and gains from compensation income is not required to file
stock transactions with the Philippine Stock an income tax returns when she meets the
Exchange are subject to transaction tax following conditions; (1) the total gross
which is in lieu of the income tax. compensation income does not exceed
Php60,000.00 and (2) the income tax has
ITR; Domestic Corporate Taxation been correctly withheld, meaning
(2001)
a) How often does a domestic corporation
file income tax return for income earned
during a single taxable year? Explain the
process. (3%)
SUGGESTED ANSWER:
a) A domestic corporation is required to
file income tax returns four (4) times for
income earned during a single taxable year.
Quarterly returns are required to be filed for
the first three quarters where the
corporation shall declare its quarterly
summary of gross income and deductions
on a cumulative basis. (Section 75, NIRC).
Then, a final adjustment return is required
to be filed covering the total taxable income
for the entire year, calendar or fiscal.
(Section 76, NIRC).
b) What is the reason for such

procedure? (2%)
SUGGESTED ANSWER:
b) The reason for this procedure is to
ensure the timeliness of collection to meet
the budgetary needs of the government.
Likewise, it is designed to ease the burden
on the taxpayer by providing it with an
installment payment scheme, rather than
requiring the payment of the tax on a lump-
sum basis after the end of the year.
ALTERNATIVE ANSWER:
b) The reason for the quarterly filing of tax
returns is to allow partial collection of the
tax before the end of the taxable year and
also to improve the liquidity of government
ITR; Personal Income: Two Employment

(2001)
In the year 2000, X worked part time as a
waitress in a
restaurant in Mega Mall from 8:00 a.m. to
4:00 p.m. and then as a cashier in a 24-hour
convenience store in her neighborhood. The
total income of X for the year from the two
the tax withheld is equal to the tax being married) as if the spouse died at the
due. (Section 5 close of such year (Section 35/Cj, NIRC).
l(A](2)(b),
NIRC). ITR; Taxpayer; Liabilities; Falsified Tax Return (2005)
Danilo, who is engaged in the trading
There is no mention in the problem of the business, entrusted to his accountant the
amount of personal and additional preparation of his income tax return and
personal exemption to quantify how much the payment of the tax due. The
is that compensation income that did not accountant filed a falsified tax return by
exceed the personal and additional underdeclaring the sales and overstating
personal exemptions. There is no, mention, the expense deductions by Danilo.
either, of whether or not the employers Is Danilo liable for the deficiency tax and
withheld taxes and that the amount the penalties
withheld is equal to the tax due. Whether thereon? What is the liability, if any, of the
or not she will be required to file an accountant? Discuss. (5%)
income tax return last April 15 on the 2000 SUGGESTED ANSWER:
income will depend on her compliance Danilo is liable for the deficiency tax as well
with the requirements of the law. as for the deficiency interest. He should
not be held liable for the
ITR; Personal Income; GSIS Pension
(2000)
Mr. Javier is a non-resident senior citizen.
He receives a monthly pension from the
GSIS which he deposits with the PNB-
Makati Branch. Is he exempt from income
tax and therefore not required to file an
income tax return? (5%)
SUGGESTED
ANSWER:
Mr. Javier is exempt from income tax on
his monthly GSIS pension (Sec. 32(B)(6)
(f), NIRC of 1997) but not on the interest
income that might accrue on the pensions
deposited with PNB which are
subject to final withholding tax.
Consequently, since Mr. Javier's sole
taxable income would have been subjected
to a final withholding tax, he is not
required anymore to file an income tax
return. (Sec. 51 (A) (2) (c). Ibid].
ITR; Personal Income; Married Individual

(2004)
RAM got married to LISA last
January 2003. On
November 30, 2003, LISA gave birth to
twins. Unfortunately, however, LISA died
in the course of her delivery. Due to
complications, one of the twins also died
on December 15, 2003.
In preparing his Income Tax Return

(ITR) for the year
2003, what should RAM indicate in the
ITR as his civil status: (a) single; (b)
married; (c) Head of the family; (d)
widower; (e) none of the above? Why?
Reason. (5%) SUGGESTED ANSWER:
RAM should indicate "(b) married" as his
civil status in preparing his Income Tax
Return for the year 2003. The death of his
wife during the year will not change his
status because should the spouse die
during the taxable year, the taxpayer may
still claim the same exemptions (that of
fraud penalty because the accountant obligated to report as income their share in
acted beyond the the income of the general professional
limits of his authority. There is no showing partnership during the taxable year
in the problem that Danilo signed the whether distributed or not. The SNITS treat
falsified return or that it was prepared professionals as one class of taxpayer so that
under his direction. they shall be treated alike irrespective of
{On the other hand the accountant may be whether they practice their profession alone
held criminally or in association with other professionals
liable for violation of the Tax Code when he under a general professional partnership.
falsified the tax return by underdeclaring What are taxed differently are individuals and
the sale and overstating the expense corporations. All individuals similarly situated
deductions. If Danny's accountant is a are taxed alike under the regulations,
Certified Public Accountant, his certificate therefore, the principle of uniformity in
as a CPA shall automatically be revoked or taxation is not violated. On the contrary, all
cancelled upon conviction. the requirements of a valid classification
have been complied with (Ton vs. Del
Partnership: Income Tax Rosario et al G.R No. 109289, Octobers,
(1995) 1994).
Five years ago Marquez, Peneyra, Jayme,
Posadas and 2) Is Revenue Regulation No. 2-93 now
Manguiat, all lawyers, formed a partnership considered as having adopted a gross
which they named Marquez and Peneyra income method instead of retaining the
Law Offices. The Commis- sioner of Internal net income taxation scheme? Explain.
Revenue thereafter issued Revenue Regu- SUGGESTED ANSWER:
lation No. 2-93 implementing RA. 7496
known as the Simplified Net Income
Taxation Scheme (SNITS). Revenue
Regulation No. 2-93 provides in part:
Sec. 6. General Professional
Partnership. —
The general professional
partnership and the
partners are covered by R.A. 7496.
Thus, in determining profit of the
partnership, only the direct costs
mentioned in said law are to be
deducted from partnership income.
Also, the expenses paid or Incurred
by partners in their individual
capacities in the practice of their
profession which are not reimbursed
or paid by the partnership but are
not considered as direct costs are not
deductible from his gross income.
1) Marquez and Peneyra Law Offices filed

a taxpayer's suit alleging that Revenue
Regulation No. 2-93 violates the
principle of uniformity in taxation
because general professional
partnerships are now subject to
payment of income tax and that there is
a difference in the tax treatment
between individuals engaged in the
practice of their respective profes-
sions and partners in general
professional partnerships. Is this
contention correct? Explain.
SUGGESTED ANSWER:
1) The contention is not correct. General
professional partnerships remain to be a
non-taxable entity. What is taxable are the
partners comprising the same and they are
2) No. Revenue Regulation the Philippines. The salary of P will be
No. 2-93 shouldered 50% by A Co. while the other
implementing RA No. 7496 have indeed 50% plus housing, cost of living and
significantly reduced the items of educational allowances of P's dependents
deduction by limiting it to direct costs will be shouldered by HK Co. A Co. will
and expenses or the 40% of gross receipts credit the 50% of P's salary to P's
maximum deduction in cases where the Philippine bank account. P will sign the
direct costs are difficult to determine. The contract of employment in the Philippines. P
allowance of limited deductions however, will also be receiving rental income for the
is still in consonance with the net income lease of his Philippine residence. Are these
taxation scheme rather than the gross salaries, allowances and rentals subject to
income method. While it is true that not all the Philippine income tax? (5%)
the expenses of earning the income might SUGGESTED ANSWER:
be allowed, this can well be justified by the The salaries and allowances received by P
fact that deductions are not matters of are not subject to Philippine income tax. P
right but are matters of legislative grace. qualifies as a nonresident citizen because he
leaves the Philippines for employment
Personal; Income Tax: Non-Resident Alien requiring him to be physically present
(2000) abroad most of the time during the taxable
Mr. Cortez is a non-resident alien based year. (Section 22(E), NIRC). A non- resident
in Hong Kong. citizen is taxable only on income derived
During the calendar year 1999, he came to from Philippine sources. (Section 23,
the Philippines several times and stayed in NIRC). The salaries and
the country for an aggregated period of
more than 180 days. How will Mr. Cortez
be taxed on his income derived from
sources within the Philippines and from
abroad? (5%)
SUGGESTED
ANSWER:
Mr. Cortez being a non-resident alien
individual who has stayed for an
aggregated period of more than 180 days
during the calendar year 1999, shall for
that taxable year be deemed to be a non-
resident alien doing business in the
Philippines.
Considering the above, Mr. Cortez shall be

subject to an income tax in the same
manner as an individual citizen and a
resident alien individual, on taxable income
received from all sources within the
Philippines. [Sec. 25 (A) (1), NIRC of 1997]
Thus, he is allowed to avail of the itemized
deductions including the
personal and additional
exemptions but subject to the rule on
reciprocity on the personal exemptions.
(Sec. 34 (A) to (J) and (M) in relation to
Sec. 25 (A) (1), Ibid, Sec. 35 (D), Ibid.]
NOTE: It is suggested that full credit
should be given if the
examinee's answer only cover the
first two paragraphs.
Personal; Income Tax: Non-Resident Citizen

(1999)
A Co., a Philippine corporation, has an
executive (P) who
is a Filipino citizen. A Co. has a subsidiary
in Hong Kong (HK Co.) and will assign P
for an indefinite period to work full time
for HK Co. P will bring his family to reside
in HK and will lease out his residence in
allowances received from being subjected to income tax, then, the sale will
employed abroad are also be taxable if a gain results therefrom. In
incomes from without because these are the instant case, the sale will not be subject
compensation for services rendered to any internal revenue tax other than the
outside of the Philippines. (Section documentary stamp tax, because the seller
42, did not realize any gain from the sale. The
NIRC). gain is measured by the difference between
the amount realized (selling price) and the
However, P is taxable on rental income for basis of the property. Incidentally, the basis
the lease of his Philippine residence to him is his share in the value of the
because this is an income derived from property received at the time of exchange,
within, the leased property being located in which is P2 Million, an amount, just equal to
the Philippines. (Section 42, NIRC). the amount realized from the sale.
Personal; Income Tax: Tax-Free Exchange Personal; Income Tax; Contract of Lease
(1997) (1995)
Three brothers inherited in 1992 a parcel Mr. Domingo owns a vacant parcel of land.
of land valued for real estate tax purposes He leases the
at P3.0 million which they held in co- land to Mr. Enriquez for ten years at
ownership. In 1995, they transferred the a rental of
property to a newly organized corporation P12,000.00 per year. The condition is that
as their equity which was placed at the Mr. Enriquez
zonal value of P6.0 million. In exchange for
the property, the three brothers thus each
received shares of stock of the corporation
with a total par value of P2.0 million or,
altogether, a total of P6.0 million. No
business was done by the Corporation, and
the property remained idle. In the early
part of 1997, one of the brothers, who was
in dire need of funds, sold his shares to the
two brothers for P2.0 million. Is the
transaction subject to any internal revenue
tax (other than the documentary stamp tax)?
SUGGESTED ANSWER:
Yes. The exchange in 1995 is a tax-free
exchange so that the subsequent sale of one
of the brothers of his shares to the other
two (2) brothers in 1997 will be subject
to income tax. This is so because the
tax-free exchange merely deferred the
recognition of income on the exchange
transaction. The gain subject to income
tax in the sale is measured by the difference
between the selling price of the shares (P2
Million) and the basis of the real property in
the hands of the transferor at the time of
exchange which is the fair market value of
his share in the real property at the time of
inheritance (Section 34(b)(2), NIRC). The
net gain from the sale of shares of stock is
subject to the schedular capital gains tax of
10% for the first P100.000 and 20% for
the excess thereof (Section
2l(d),
NIRC).
ALTERNATIVE ANSWER:
The exchange effected in 1995 did not
qualify as a tax-free exchange because there
is no showing that the three brothers gained
control of the corporation by acquiring at
least 51% of the voting rights. Since the
entire gain on the exchange was previously
will erect a building on the rental income that has accrued as of said
land which will date.
become the property of Mr. Domingo at the
end of the lease without compensation or Personal; Income Tax; Married Individual
reimbursement whatsoever for the value of (1997)
the building. Mar and Joy got married in 1990. A week
before their
Mr. Enriquez erects the building. Upon marriage. Joy received, by
completion the building had a fair market way of donation, a
value of P1 Million. At the end of the lease condominium unit worth P750.000.00 from
the building is worth only P900.000.00 due her parents. After marriage, some
to depreciation. renovations were made at a cost of
P150.000.00. The spouses were both
Will Mr. Domingo have income when the employed in 1991 by the same company.
lease expires and becomes the owner of On 30 December 1992, their first child
the building with a fair market value of was born, and a second child was born
P900.000.00? How much income must he on 07
report on the building? Explain. November 1993. In 1994, they sold the
SUGGESTED
ANSWER:
condominium unit and bought a new unit.
When a building is erected by a lessee in Under the foregoing facts, what
the leased premises in pursuance of an
agreement with the lessor that the
building becomes the property of the lessor
at the end of the lease, the lessor has
the option to report income as follows:
1) The lessor may report as income the
market value of
the building at the time when
such building is completed; or
2) The lessor may spread over the life of
the lease the estimated depreciated
value of such building at the
termination of the lease and report as
income for each year of the lease an
aliquot part thereof (Sec.
49, RR No. 2).
Under the first option, the lessor will

have no income when the lease expires
and becomes the owner of the building.
The second option will give rise to an
income during the year of lease expiration
of P90.000.00 or 1/10 of the depreciated
value of the building.
The availment of the first option will

require Mr. Domingo to report an income
of P1.000,000.00 during the year when
the building was completed. A total of
P900.000.00 income will be reported under
the second option but will be spread over
the life of the lease or P90.000.00 per year.
ALTERNATIVE
ANSWER:
Mr. Domingo will realize an income
when the lease expires and becomes the
owner of the building with a fair market
value of P900.000.00 because the condition
for the lease is the transfer of the building
at the expiration of the lease. The income
to be realized by Mr. Domingo at the time
of the expiration will consist of the value of
the building which is P900.000.00 and any
were the events in the life of the spouses income-earning property in the Philippines
that had income from which he continues to derive
tax substantial income. He also receives income
incidences? from his employment in the United States on
SUGGESTED ANSWER:
which the US income tax is paid. On which
The events in the life of spouses. Mar and
of the above income is the taxable, if at all,
Joy, which have income tax incidences are
in the Philippines, and how, in general terms,
the following:
would such income or incomes be taxed?
1) Their marriage in 1990 qualifies SUGGESTED ANSWER:
them to claim personal exemption for Juan, shall be taxed on both his income from
married individuals; the Philippines and on his Income from the
2) Their employment in 1991 by the United States because his being a citizen
same company will make them liable to makes him taxable on all Income wherever
the income tax imposed on gross derived. For the income he derives from his
compensation income; property in the Philippines, Juan shall be
3) Birth of their first child in December taxed on his net income under the
1992 would Simplified Net Income Taxation
give rise to an additional exemption of Scheme (SNITS) whereby he shall be
P5,000 for taxable year 1992; considered as a self-employed individual. His
4) Birth of their second child in November Income as employee in the United States,
1993 would likewise entitle them to on the other hand, shall be taxed in
claim additional exemption of
P5,000 raisingtheir additional
personal exemptions to P 10,000 for
taxable year 1993; and
5) Sale of their condominium unit in 1994
shall make the spouses liable to the 5%
capital gains tax on the gain presumed
to have been realized from the sale.
Personal; Income Tax; Retiring Alien Employee

(2005)
An alien employee of the Asian
Development Bank
(ADB) who is retiring soon has offered to
sell his car to you which he imported tax-
free for his personal use. The privilege of
exemption from tax is granted to qualified
personal use under the ADB Charter which
is recognized by the tax authorities. If you
decide to purchase the car, is the sale
subject to tax? Explain. (5%)
SUGGESTED ANSWER:
The sales transaction is subject to value
added tax (VAT) under Sec. 107(B) of the
NIRC, although this provision is expressly
excluded from the coverage of the 2005 bar
exam.
The proceeds from the sale are subject to

income tax. The car is considered a capital
asset of the retiring alien employee because
he is not engaged in the business of buying
and selling cars. He therefore derived
income, which should be reported in his
income tax return. (Sees.
32 and 39,
NIRC)
Personal; Income Taxation: Non-Resident Citizen (1997)

Juan, a Filipino citizen, has immigrated
to the United States where he is now a
permanent resident. He owns certain
accordance with the schedular as taxable income would perpetuate
graduated rates of injustice by relieving embezzlers of the duty
1%, 2% and 3%. based on the adjusted of paying income taxes on the money they
gross income derived by non-resident enrich themselves with through
citizens from all sources without the embezzlement, while honest people pay
Philippines during each taxable year. their taxes on every conceivable type of
income. (James vs. U.S.)
Taxable Income: Illegal Income (1995
Bar) 3) The deficiency income tax assessment is
Mr. Lajojo is a big-time swindler. In one a direct tax imposed on the owner which is
year he was able an excise on the privilege to earn an
to earn P1 Million from his swindling income. It will not necessarily be paid out
activities. When the Commissioner of of the same income that were subjected to
Internal Revenue discovered his income the tax. Mr. Lajojo's liability to pay the tax is
from swindling, the Commissioner assessed based on his having realized a taxable
him a deficiency income tax for such income from his swindling activities and will
income. The lawyer of Mr. Lajojo protested not affect his obligation to make restitution.
the assessment on the following grounds: Payment of the tax is a civil obligation
1) The income tax applies only to legal imposed by law while restitution is a civil
income, not to
liability arising from a crime.
illegal
income; Taxable or Non-Taxable; Income and Gains
2) Mr. Lajojo's receipts from his
(2005)
swindling did not
constitute income because he was
under obligation to return the amount
he had swindled, hence, his receipt
from swindling was similar to a loan,
which is not income, because for every
peso borrowed he has a corresponding
liability to pay one peso; and
3) If he has to pay the deficiency
income tax assess-
ment, there will be hardly anything left
to return to the victims of the
swindling.
How will you rule on each of the three
grounds for the protest? Explain.
SUGGESTED
ANSWERS:
1) The contention that the income tax
applies to legal income and not to illegal
income is not correct. Section
28(a) of the Tax Code includes within
the purview of
gross income all Income from whatever
source derived. Hence, the illegality of the
income will not preclude the imposition of
the income tax thereon.
2) The contention that the receipts from

his swindling did not constitute income
because of his obligation to return the
amount swindled is likewise not correct.
When a taxpayer acquires earnings,
lawfully or unlawfully, without the
consensual recognition, express or implied,
of an obligation to repay and without
restriction as to their disposition, he has
received taxable income, even though it
may still be claimed that he is not entitled
to retain the money, and even though he
may still be adjudged to restore its
equivalent (James vs. U.S.,366 U.S. 213,
1961). To treat the embezzled funds not
Explain briefly whether the following items hence the gain is considered income. (Sec.
are taxable or 32[A][3] and Sec. 39[A][1], NIRC)
non-taxable:
(5%) Withholding Tax: Non-Resident Alien (2001)
a) Income from Is a non-resident alien who is not engaged in
JUETENG; trade or business or in the exercise of
SUGGESTED ANSWER:
profession in the Philippines but who derived
Taxable. Gross income includes "all income
rental income from the Philippines required
derived from whatever source" (Sec.
to file an income tax return on April of the
32[A], NIRC), which was interpreted as
year following his receipt of said income? If
all income not expressly excluded or
not, why not? Explain your answer. (5%)
exempted from the class of taxable income, SUGGESTED ANSWER:
irrespective of the voluntary or involuntary No. The income tax on all income
action of the taxpayer in producing the derived from Philippine sources by a non-
income. Thus, the income may proceed resident alien who is not engaged in trade or
from a legal or illegal source such as from business in the Philippines is withheld by the
jueteng. Unlawful gains, gambling winnings, lessee as a Final Withholding Tax. (Section
etc. are subject to income tax. The tax code 57(A), NIRC). The government can not
stands as an indifferent neutral party on the require persons outside
matter of where the income comes from.
(Commissioner of Internal Revenue v.
Manning, G.R. No. L-28398, August 6,
1975)
b) Gain arising from

EXPROPRIATION OF PROPERTY;
SUGGESTED ANSWER:
Taxable. Sale exchange or other disposition
of property to the government of real
property is taxable. It includes taking by the
government through condemnation
proceedings. (Gonzales v. Court of Tax
Appeals, G.R. No. L-14532, May 26, 1965)
c) TAXES paid and subsequently

refunded;
SUGGESTED ANSWER:
Taxable only if the taxes were paid and
claimed as deduction and which are
subsequently refunded or credited. It shall
be included as part of gross income in the
year of the receipt to the extent of the
income tax benefit of said deduction. (Sec.
34[C][1], NIRC) Not taxable if the taxes
refunded were not originally claimed as
deductions.
d) Recovery of BAD DEBTS previously

charged off;
SUGGESTED ANSWER:
Taxable under the TAX BENEFIT RULE.
Recovery of bad debts previously
allowed as deduction in the preceding
years shall be included as part of the gross
income in the year of recovery to the extent
of the income tax benefit of said deduction.
(Sec. 34[E][1], NIRC) This is sometimes
referred as the RECAPTURE RULES.
e) Gain on the sale of a car used for

personal purposes.
SUGGESTED ANSWER:
Taxable. Since the car is used for personal
purposes, it is considered as a capital asset
of its territorial jurisdiction to file retirement; and
a return; for c. that the benefit is availed of only once.
this reason, the income tax on income
derived from within must be collected 3. Under Republic Act No. 7641 (those
through the withholding tax system and received from employers without any
thus relieve the recipient of the income retirement plan):
the duty to file income tax returns. a. Those received under existing
(Section 51, NIRC). collective
bargaining agreement and other
Withholding Tax: Retirement Benefit agreements are exempt; and
(2000) b. In the absence of retirement plan or
To start a business of his own, Mr. Mario agreement providing for retirement
de Guzman opted for an early retirement benefits the benefits are excluded
from a private company after ten (10) from gross income and exempt from
years of service. Pursuant to the company's income tax if:
qualified and approved private retirement i. retiring employee must have
benefit plan, he was paid his retirement served at least five(5) years;
benefit which was subjected to withholding and
tax. Is the employer correct in ii. that he is not less than sixty
withholding the tax? Explain. (2%) (60) years of age but not more
SUGGESTED than sixty five (65).
ANSWER:
(a) It depends. An employee retiring under
Withholding Tax: Royalty
a company's qualified and private
(2002)
retirement plan can only be exempt from
income tax on his retirement benefits if
the following requisites are met:
(1) that the retiring employee must have
been in service of the same employer
for at least ten (10) years;
(2) that he is not less than 50 years of
age at the time of retirement; and
(3) the benefit is availed of
only once.
In the instant case, there is no mention

whether the employee has likewise
complied with requisites number (2) and
(3).
Withholding Tax: Retirement Benefit

(2000)
Under what conditions are retirement
benefits received by
officials and employees of private firms
excluded from
gross income and exempt from
taxation? (3%)
SUGGESTED
ANSWER:
The conditions to be met in order that
retirement benefits received by officials
and employees of private firms are
excluded from gross income and exempt
from taxation are as follows:
2. Under Republic Act No. 4917 (those
received under a reasonable private
benefit plan):
a. the retiring official or employee
must have been in service of the
same employer for at least ten (10)
years;
b. that he is not less than fifty (50)
years of age at
the time of
The MKB-Phils. is a BOI-registered domestic Hence, the deduction of withholding taxes,
corporation being a manner of collecting the income
licensed by the MKB of the United tax on their salary, is not a diminution
Kingdom to distribute, support and use in contemplated by the fundamental law.
the Philippines its computer software (Nitafan et. al. v. CIR, 152 SCRA 284
systems, including basic and related [1987]).
materials for banks. The MKB-Phils.
provides consultancy and technical Withholding Tax; Domestic Corporation; Cash Dividends
services incidental thereto by entering into (2001)
licensing agreements with banks. Under What do you think is the reason why
such agreements, the MKB-Phils. will not cash dividends,
acquire any proprietary rights in the when received by a resident citizen or alien
licensed systems. The MKB-Phils. pays from a domestic corporation, are taxed only
royalty to the MKB-UK, net of 15% at the final tax of
withholding tax prescribed by the RP-UK 10% and not at the progressive tax rate
Tax Treaty. schedule under Section 24(A) of the Tax
Code? Explain your answer. (5%)
Is the income of the MKB-Phils. under the SUGGESTED ANSWER:
licensing agreement with banks considered The reason for imposing final withholding tax
royalty subject to 20% final withholding rather than the progressive tax schedule on
tax? Why? If not, what kind of tax will its cash dividends received by
income be subject to? Explain. (5%)
SUGGESTED ANSWER:
Yes. The income of MKB-Phils. under the
licensing agreement with banks shall be
considered as royalty subject to the 20%
final withholding tax. The term royalty is
broad enough to include technical advice,
assistance or services renderedin
connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or scheme.
(Sec. 42(4)(f), NIRC). Accordingly, the
consultancy and technical services rendered
by MKB-Phils, which are incidental to the
distribution, support and use of the
computer systems of MKB-UK are taxable as
royalty.
Withholding Tax; Coverage

(2004)
Citing Section 10, Article VIII of the 1987
Constitution which provides that salaries of
judges shall be fixed by law and that during
their continuance in office their salary
shall not be decreased, a judge of MM
Regional Trial Court questioned the
deduction of withholding taxes from his
salary since it results into a net deduction of
his pay. Is the contention of the judge
correct? Reason briefly. (5%) SUGGESTED
ANSWER:
No. The contention is incorrect. The salaries
of judges are not tax-exempt and their
taxability is not contrary to the provisions of
Section 10, Article VIII of the Constitution
on the non-diminution of the salaries of
members of the judiciary during their
continuance in office. The clear intent of
the Constitutional Commission that framed
the Constitution is to subject their salaries
to tax as in the case of all taxpayers.
a resident citizen or alien from interest from bank deposits, royalties, etc.
a domestic
corporation, is to ensure the collection of Withholding Tax; Non-Resident Alien
income tax on said income. If we subject (1994)
the dividend to the progressive tax rate, Four Catholic parishes hired the services of
which can only be done through the filing Frank Binatra,
of income tax returns, there is no a foreign non-resident entertainer, to
assurance that the taxpayer will declare perform for four (4) nights at the Folk Arts
the income, especially when there are Theater. Binatra was paid P200.000.00 a
other items of gross income earned during night. The parishes earned P1,000,000.00
the year. It would be extremely difficult for which they used for the support of the
the BIR to monitor compliance considering orphans in the city. Who are liable to pay
the huge number of stockholders. By taxes?
shifting the responsibility to remit the tax SUGGESTED ANSWER:
to the corporation, it is very easy to check The following are liable to pay
compliance because there are fewer income taxes:
withholding agents compared to the (a) The four catholic parishes because
number of income recipients. the income received by them, not being
income earned "as such" in the
Likewise, the imposition of a final performance of their religious functions
withholding tax will make the tax and duties, is taxable income under the
available to the government at an earlier last paragraph of Sec. 26, in relation to
time. Finally, the final withholding tax will Sec. 26(e) of the Tax Code. In
be a sure revenue to the government
unlike when the dividend is treated as a
returnable income where the recipient
thereof who is in a tax loss position is
given the chance to offset such loss against
dividend income thereby depriving the
government of the tax on said dividend
income. [Note: It is recommended that
any of the foregoing answers can be given
full credit because the question involves a
policy issue which can only be found in the
deliberations of Congress.]
ALTERNATIVE
ANSWER:
The reason why cash dividends received
by a resident citizen or alien from a
domestic corporation are subjected to the
final withholding tax of 10% and not at the
progressive rate tax schedule is to lessen
the impact of a second layer of tax on the
same income.
Withholding Tax; Income subject thereto

(2001)
What is meant by income subject to "final
tax"? Give at least two examples of income
of resident individuals that is subject to
the final tax. (3%)
SUGGESTED
ANSWER:
Income subject to final tax refers to an
income wherein the tax due is fully
collected through the withholding tax
system. Under this procedure, the payor of
the income withholds the tax and remits
it to the government as a final settlement
of the income tax due on said income.
The recipient is no longer required to
include the item of income subjected to
"final tax" as part of his gross income in his
income tax returns. Examples of income
subject to final tax are dividend income,
promoting and operating the Binatra conviction to a penalty equal to the total
Show, they amount of tax not withheld (Sec. 251,
engaged in an activity conducted for NIRC). In case of failure to withhold the
profit. (Ibid.) tax or in the case of under withholding,
the deficiency tax shall be collected
(b) The income of Frank Binatra, a non- from the payor/withholding agent (1st
resident alien under our law is taxable par.. Sec.
at the rate of 30%, final withholding tax 2.57[A], R.R. No. 2-98).
based on the gross income from the
show. Mr. Binatra is not engaged in any Any person required under the Tax Code or
trade or business in the Philippines. by rules and regulations to withhold taxes at
the time or times required by law or rules
Withholding Tax; Non-Resident Corporation (1994) and regulations shall, in addition to other
Bates Advertising Company is a non- penalties provided by law, upon conviction
resident corporation be punished by a fine of not less than
duly organized and existing under the laws Ten thousand pesos (Php
of Singapore. It is not doing business 10.0OO) and suffer imprisonment of not less
and has no office in the Philippines. than one (1)
Pilipinas Garment Incorporated, a
domestic corporation, retained the services
of Bates to do all the advertising of its
products abroad. For said services, Bates'
fees are paid through outward
remittances. Are the fees received by Bates
subject to any withholding tax?
SUGGESTED ANSWER:
The fees paid to Bates Advertising Co., a
non-resident foreign corporation are not
subject to withholding tax since they are
not subject to Philippine tax. They are
exempt because they do not constitute
income from Philippine sources, the same
being compensation for labor or personal
services performed outside the Philippines
(Sec. 36{c) (3) and Sec. 25(b)(l), Tax Code).
Withholding Tax; Reader's Digest Award (1998)

Is the prize of one million pesos awarded by
the Reader's
Digest subject to withholding of final
tax? Who is
responsible for withholding the tax?
What are the liabilities for failure to
withhold such tax? [5%] SUGGESTED ANSWER:
1) It depends. If the prize is considered
as winnings derived from sources
within the Philippines, it is subject to
withholding of final tax (Sec. 24[B] in
relation to Sec. 57[A], NIRC). If
derived from sources without the
Philippines, it is not subject to
withholding of final tax because the
Philippine tax law and regulations could
not reach out to foreign jurisdictions.
2) The tax shall be withheld by the

Reader's Digest or local agent who has
control over the payment of the prize.
3) Any person required to withhold or

who willfully fails to withhold, shall, in
addition to the other penalties provided
under the Code, be liable upon
year but not more than ten (10) ADD. Believing that its business outlook,
years (1st par., goodwill and opportunities improved with
Sec. 255, OXY in the government, ADD proposed to
NIRC). obtain a policy of insurance on his life. On
ethical grounds, OXY objected to the
COMMENT: It is suggested that any of the insurance purchase but ADD purchased the
following answers to the question, "What are
policy anyway. Its annual premium
the liabilities for failure to withhold such a
tax?" be given full credit: amounted to P100,000. Is said premium
1) The payor shall be liable for the payment deductible by ADD Computers, Inc.? Reason.
of the tax which was not withheld. (5%)
2) The payer/withholding agent shall be SUGGESTED ANSWER:
liable to both civil and criminal penalties No. The premium is not deductible because
imposed by the Tax Code. it is not an ordinary business expense. The
term "ordinary" is used in the income tax
Withholding Tax; Time Deposit Interest; GSIS law in its common significance and it has the
Pension connotation of being normal, usual or
(199 customary (Deputy v. Du Pont, 308 US 488
4) [1940]). Paying premiums for the
Maribel Santos, a retired public school insurance of a person not connected to
teacher, relies on the company is not normal, usual or
her pension from the GSIS and the customary.
Interest Income from a time deposit of
P500.000.00 with ABC Bank. Is Miss
Santos liable to pay any tax on her Income?
SUGGESTED
ANSWER:
Maribel Santos is exempt from tax on the
pension from the GSIS (Sec. 28(b((7)(F),
Tax Code). However, as regards her time
deposit, the interest she receives
thereon is subject to 20% final withholding
tax. (Sec. 21(a)(c), Tax Code).
DEDUCTIONS,
EXEMPTIONS, EXCLUSIONS
& INCLUSIONS
Deduction: Facilitation Fees or "kickback"
(1998)
MC Garcia, a contractor who won the
bid for the
construction of a public highway, claims as
expenses, facilitation fees which according
to him is standard operating procedure in
transactions with the government. Are
these expenses allowable as deduction
from gross income? [5%]
SUGGESTED
ANSWER:
No. The alleged facilitation fees which he
claims as standard operating procedure in
transactions with the government comes in
the form of bribes or "kickback" which are
not allowed as deductions from gross
income (Section 34(A)(l)(c), NIRC).
Deductions: Ordinary Business Expenses

(2004)
OXY is the president and chief executive
officer of ADD
Computers, Inc. When OXY was asked
to join the
government service as director of a bureau
under the Department of Trade and
Industry, he took a leave of absence from
Another reason for its non-deductibility is expense must be business connected,
the fact that it which is not the case insofar as capital
can be considered as an illegal losses are concerned. This is also the reason
compensation made to a government why all non-business connected expenses like
employee. This is so because if the personal, living and family expenses, are not
insured, his estate or heirs were made as allowed as deduction from gross income
the beneficiary (because of the requirement (Section 36(A)(1) of the 1997
of insurable interest), the payment of Tax
premium will constitute bribes which are Code).
not allowed as deduction from gross income
(Section 34[A][l][c], NIRC). The prohibition of deduction of capital losses
from ordinary gains is designed to forestall
On the other hand, if the company was made the shifting of deductions from an area
the beneficiary, whether directly or subject to lower taxes to an area subject to
indirectly, the premium is not allowed as a higher taxes, thereby unnecessarily resulting
deduction from gross income (Section in leakage of tax revenues. Capital gains are
36[A}14], generally taxed at a lower rate to prevent,
NIRC). among others, the bunching of income in one
taxable year which is a liberality in the law
Deductions: Amount for Bribe begotten from motives of public policy (Rule
(2001) on Holding Period). It stands to reason
In order to facilitate the processing of its therefore, that if the transaction results in
application for a license from a government loss, the same should be allowed only from
office, Corporation A found it necessary to and to the extent of capital gains and not to
pay the amount of Php 100,000 as a bribe to be deducted from
the approving official. Is the Php 100,000
deductible from the gross income of
Corporation A? On the other hand, is the
Php 100,000 taxable income of the
approving official? Explain your answers.
(5%)
SUGGESTED ANSWER:
Since the amount of Phpl00.000 constitutes
a bribe, it is not allowed as a deduction from
gross income of Corporation A, (Section
34(A)(l)(c), NIRC). However, to the
recipient government official, the same
constitutes a taxable income. All income
from legal or illegal sources are taxable
absent any clear provision of law
exempting the same. This is the reason why
gross income had been defined to include
income from whatever source derived.
(Section 32(A), NIRC). Illegally acquired
income constitutes realized income under
the claim of right doctrine (Rutkin v. US,
343 US 130).
Deductions: Capital Losses; Prohibitions

(2003)
What is the rationale for the rule
prohibiting the
deduction of capital losses from ordinary
gains? Explain.
SUGGESTED ANSWER:
It is to insure that only costs or expenses
incurred in earning the income shall be
deductible for income tax purposes
consonant with the requirement of the law
that only necessary expenses are allowed as
deductions from gross income. The term
"NECESSARY EXPENSES" presupposes
that in order to be allowed as deduction, the
ordinary gains which are subject to be used by the latter in building a sports
a higher rate complex for students.
of income tax. (Chirelstein, Federal A. May the donor claim in full as
Income Taxation, 1977 deduction from its gross income for the
E taxable year 2001 the amount of the
d. donated lot equivalent to its fair market
) value/zonal value at the time of the
donation? Explain your answer. (2%)
Deductions: Deductible Items from Gross Income SUGGESTED ANSWER:
(1999) Explain if the following items are A. No. Donations and/or contributions
deductible from gross income for income made to qualified donee institutions
tax purposes. Disregard who is the consisting of property other than money
person claiming the expense. (5%) shall be based on the acquisition cost of
1) Interest on loans used to acquire the property. The donor is not entitled
capital equipment to claim as full deduction the fair market
or value/zonal value of the lot donated.
machiner (Sec. 34(H), NIRC).
y.
2) Depreciation of B. In order that donations to non-stock,
goodwill. non-profit educational institution may be
SUGGESTED
ANSWER:
exempt from the donor's gift tax, what
1) Interest on loans used to acquire conditions must be met by the donee?
capital equipment or machinery is (3%)
SUGGESTED ANSWER:
a deductible item from gross
income. The law gives the taxpayer the
option to claim as
a deduction or treat as capital expenditure
interest incurred to acquire property used
in trade, business or exercise of a
profession. (Section 34(B) (3), NIRC).
2) Depreciation for goodwill is not

allowed as deduction from gross income.
While intangibles maybe allowed to be
depreciated or amortized, it is only
allowed to those intangibles whose use in
the business or trade is definitely limited
in duration. (Basilan Estates, Inc. v,
CIR, 21 SCRA 17). Such is not the case
with goodwill.
ALTERNATIVE
ANSWER:
Depreciation of goodwill is allowed as a
deduction from gross income if the
goodwill is acquired through capital outlay
and is known from experience to be of
value to the business for only a limited
period. (Section 107, Revenue Regulations
No. 2). In such case, the goodwill is
allowed to be amortized over its useful life
to allow the deduction of the current
portion of the expense from gross income,
thereby paving the way for a proper
matching of costs against revenues which
is an essential feature of the income tax
system.
Deductions: Income Tax: Donation: Real Property

(2002) On December 06, 2001, LVN
Corporation donated a piece of vacant
lot situated in Mandaluyong City to an
accredited and duly registered non-
stock, non-profit educational institution to
B. In order that donations to non-stock, with the BIR.
non-profit
educational institution may be exempt COMMENT:
from the donor's gift tax, it is required The question is vague. There are different
that not more than 30% of the said gifts kinds of losses recognized as deductible under
shall be used by the donee-institution for the Tax Code. These are losses, in general (Sec.
administration purposes. (Sec. 101(A)(3), 34[D](1); net operating loss carryover (Sec.
34[D](3); capital losses (Sec. 34[D](4); Losses from
NIRC).
wash sales of stocks or securities (Sec. 34[D]
(5) in relation to Sec. 38); wagering losses
Deductions: Non-Deductible Items; Gross Income (1999) (Sec. 34[D](6); and abandonment losses (Sec.
Explain if the following items are 34(D](7). Losses are also deductible from the
deductible from gross income for income gross estate (Sec.
tax purposes. Disregard who is the person 86[A](l)(e),
claiming the deduction. (5%) NIRC).
1. Reserves for bad
debts. Considering the time allotted for a five (5) point
question is only nine (9) minutes, the candidates
2. Worthless
would not be able to write down a complete
securities answer. It is suggested that any answer which
SUGGESTED ANSWER:
states the requisites for the deducibility of any of
1. RESERVE FOR BAD DEBTS are not the above losses be given full credit.
allowed as deduction from gross income.
Bad debts must be charged off during Deductions; Income Tax: Allowable Deductions (2001)
the taxable year to be allowed as Taxpayers whose only income consists of
deduction from gross income. The mere salaries and wages from their employers
setting up of reserves will not give rise have long been complaining
to any deduction. (Section
34(E).
NTRC).
2. WORTHLESS SECURITIES, which are

ordinary assets, are not allowed as
deduction from gross income because
the loss is not realized. However, if these
worthless securities are capital assets,
the owner is considered to have incurred
a capital loss as of the last day of the
taxable year and, therefore, deductible
to the extent of capital gains. (Section
34(D)(4), NIRC). This deduction,
however, is not allowed to a bank or
trust company. (Section 34(E)(2), NIRC).
Deductions: Requisites; Deducibility of a Loss

(1998)
Give the requisites for deducibility of
a loss. (5%1
SUGGESTED ANSWER:
The requisites for deducibility
of a loss are
1) loss belongs to the
taxpayer;
2) actually sustained and charged off
during the taxable
yea
r;
3) evidenced by a closed and
completed transaction;
4) not compensated by Insurance or
other forms of indemnity;
5) not claimed as a deduction for estate
tax purposes in case of individual
taxpayers; and
6) if it is a casualty loss it is evidenced by a
declaration of loss filed within 45 days
that they are not allowed to received by the taxpayer. The amount
deduct any item withheld is paid to the government on its
from their gross income for purposes of behalf, in satisfaction of withholding taxes.
computing their nettaxable income.With The fact that it did not actually receive the
the passage of the amount does not alter the fact that it is
Comprehensive Tax Reform Act of remitted in satisfaction of its tax
1997, is this complaint still valid? obligations. Since the income withheld is
Explain your answer. (5%) SUGGESTED an income owned by Express Transport,
ANSWER:
the same forms part of its gross receipts
No more. Gross compensation income (CIR v. Solidbank Corp., G.R. No.
earners are now allowed at least an item of 148191, November 25, 2003).
deduction in the form of premium ALTERNATIVE ANSWER:
payments on health and/or hospitalization No. The term "gross receipts," as applied to
insurance in an amount not exceeding the business of a common carrier consists of
P2,400 per annum [Section 34(M)]. This revenues from carriage of goods, cargoes,
deduction is allowed if the aggregate and passengers. It does not comprehend or
family income do not exceed P250.000 and include interest income which is properly
by the spouse, in case of married described as "Other Income."
individual, who claims additional personal (NOTA BENE: This question pertains to a
exemption for dependents. percentage tax on Gross
Receipts which is excluded
from the Bar coverage)
Deductions; Vanishing Deduction; Purpose
(2006) Exclusion vs. Deduction from Gross Income
Vanishing deduction is availed of by (2001)
taxpayers to:
a. Correct his accounting records to
reflect the actual
deductions
made
b. Reduce his gross
income
c. Reduce his output value-added
tax liability d. Reduce his gross
estate
Choose the correct answer.
Explain. (5%)
SUGGESTED
ANSWER:
(D) reduce his gross estate. Vanishing
deduction or property previously taxed is
one of the items of deduction allowed in
computing the net estate of a decedent
(Section
86[A][2] and 86[B]
[2], NIRC).
Exclusion & Inclusion; Gross Receipts

(2006)
Congress enacts a law imposing a 5% tax
on gross receipts
of common carriers. The law does not
define the term "gross receipts." Express
Transport, Inc., a bus company plying the
Manila-Baguio route, has time deposits
with ABC Bank. In 2005, Express
Transport earned P1 Million interest, after
deducting the 20% final withholding tax
from its time deposits with the bank. The
BIR wants to collect a 5% gross receipts
tax on the interest income of Express
Transport without deducting the 20%
final withholding tax. Is the BIR correct?
Explain. (5%) ALTERNATIVE ANSWER:
Yes. The term "Gross Receipts" is broad
enough to include income constructively
Distinguish "Exclusion from Gross reimbursement for hospitalization expenses
Income" from and the P60.000.00 for salaries he failed to
"Deductions From Gross Income". Give an receive are
example of each. (2%) 'amounts of any damages received
SUGGESTED ANSWER: whether by suit or
EXCLUSIONS from gross income refer agreement on account of such injuries.'
to a flow of
Section 28(b)(5) of the Tax Code specifically
wealth to the taxpayer which are not
exclude these amounts from the gross income
treated as part of
of the individual injured. (Section 28(b), NIRC
gross income, for purposes of computing
and Sec. 63 Rev. Reg. No. 2)
the taxpayer’s ALTERNATIVE ANSWER:
taxable income, due to the following The income realized from the judgment is
reasons: (1) It is exempted by the only the recovery for lost salaries. This
fundamental law; (2) It is exempted by constitutes taxable income because were it
statute; and (3) It does not come within the not for the injury, he could have received it
definition of income. (Section 61, RR No. 2). from his employer as compensation
DEDUCTIONS from gross income, on the income. All the other amounts received are
other hand, are the amounts, which the law either compensation for injuries or damages
allows to be deducted from gross income in received on account of such injuries'
order to arrive at net income.
Exclusions pertain to the computation of

gross income, while deductions pertain to
the computation of net income. Exclusions
are something received or earned by the
taxpayer which do not form part of gross
income while deductions are something
spent or paid in earning gross income.
Example of an exclusion from gross income

is proceeds of life insurance received by
the beneficiary upon the death of the
insured which is not an income or 13th
month pay of an employee not exceeding
P30.000 which is an income not recognized
for tax purposes. Example of a deduction is
business rental.
Exclusions & Inclusions: Benefits on Account of

Injury
(1995
)
Mr. Infante was hit by a wayward bus while
on his way to
work. He survived but had to pay
P400.000.00 for his hospitalization. He was
unable to work for six months which meant
that he did not receive his usual salary of P
10,000.00 a month or a total of
P60.000.00. He sued the
bus company and was able to obtain a final
judgment awarding him P400.000.00 as
reimbursement for his hospitalization,
P60.000 for the salaries he failed to receive
while hospitalized, P200,000.00 as moral
damages for his pain and suffering, and P
100,000.00 as exemplary damages. He was
able to collect in full from the judgment.
How much income did he realize when he
collected on the judgment? Explain.
SUGGESTED ANSWER:
None. The P200.000 moral and exemplary
damages are compensation for injuries
sustained by Mr. Infante. The P400.000.00
which are exclusions from employer. This is to enable Mr. Adrian to
gross income entertain company guests (Collector
pursuant to Section 28(b)(5) of vs. Henderson).
the Tax Code.
Exclusions & Inclusions; Assets; Resident Alien (2005)
Exclusions & Inclusions: Executive Benefits Ralph Donald, an American citizen, was a
(1995) top executive of a U.S. company in the
Mr. Adrian is an executive of a big Philippines until he retired in
business corporation. 1999. He came to like the Philippines
Aside from his salary, his employer so much that
provides him with the following benefits: following his retirement, he decided to
free use of a residential house in an spend the rest of his life in the country. He
exclusive subdivision, free use of a applied for and was granted a permanent
limousine and membership in a country resident status the following year. In the
club where he can entertain customers spring of 2004, while vacationing in
of the corporation. Which of these Orlando, Florida, USA, he suffered a heart
benefits, if any, must Mr. Adrian report as attack and died. At the time of his death, he
income? Explain. SUGGESTED ANSWER: left the following properties: (a) bank
Mr. Adrian must report the imputed rental deposits with Citibank Makati and Citibank
value of the house and limousine as Orlando, Florida; (b) a resthouse in Orlando,
income. If the rental value exceeds the Florida; (c) a condominium unit in
personal needs of Mr. Adrian because he
is expected to provide accommodation in
said house for company guests or the car is
used partly for business purpose, then Mr.
Adrian is entitled only to a ratable rental
value of the house and limousine as
exclusion from gross income and only a
reasonable amount should be reported as
income. This is because the free housing
and use of the limousine are given partly
for the convenience and benefit of the
employer (Collector vs. Henderson).
ALTERNATIVE
ANSWER:
Remuneration for services although not
given in the form of cash constitutes
compensation income. Accordingly, the
value for the use of the residential house is
part of his compensation income which he
must report for income tax purposes.
However, if the residential house given to
Mr. Adrian for his free use as an executive
is also used for the benefit of the
corporation/employer, such as for
entertaining customers of the
corporation, only 50% of the rental value
or depreciation (if the house is owned by
the corporation) shall form part of
compensation income (RAMO 1-87).
The free use of a limousine and the

membership in a country club is not part of
Mr. Adrian's compensation income because
they were given for the benefit of the
employer and are considered to be
necessary incidents for the proper
performance of his duties as an executive
of the corporation.
The membership fee in the country club

needs to be reported as income. It
appears that the membership of Mr.
Adrian to the country club is primarily for
the benefit and convenience of the
Makati; (d) shares of stock in the Philippine the widow is not an income are as follows:
subsidiary of 7) the gift was made to the widow
the U.S. Company where he worked; (e) rather than the
shares of stock in San Miguel Corp. and estate:
PLOT; (f) shares of stock in Disney World in 8) there was no obligation for the
Florida; (g) U.S. treasury bonds; and (g) corporation to make
proceeds from a life insurance policy issued further payments to the deceased;
by a U.S. corporation. Which of the 9) the widow had never worked for the
foregoing assets shall be included in the corporation;
taxable gross estate in the Philippines? 10) the corporation received no economic
Explain. (5%) SUGGESTED ANSWER: benefit; and
All of the properties enumerated except (g), 11) the deceased had been fully
the proceeds from life insurance, are compensated for his services(Estate
included in the taxable gross estate in the of Sydney Carter vs.
Philippines. Ralph Donald is considered a Commissioner, 453 F. 2d 61 (2dCir.
resident alien for tax purposes since he is an 1971).
American Citizen and was a permanent
resident of the Philippines at the time of his Exclusions & Inclusions; Benefits on Account of Injury
death. The value of the gross estate of a (2005)
resident alien decedent shall be determined JR was a passenger of an airline that
by including the value at the time of his crashed. He survived
death of all property, real or personal, the accident but sustained serious physical
tangible or intangible, wherever situated. injuries which
(Sec. 85, NIRC) required hospitalization for 3
The other item, (g) proceeds from a life months. Following negotiations
insurance policy, may also be included on with the airline and its insurer, an
the assumption that it was Ralph Donald agreement
who took out the insurance upon his own
life, payable upon his death to his estate.
(Sec. 85[E], NIRC)
Exclusions & Inclusions; Benefits on Account of

Death
(1996
)
X, an employee of ABC Corporation
died. ABC
Corporation gave X’s widow an amount
equivalent to X’s
salary for one year. Is the amount
considered taxable income to the widow?
Why?
SUGGESTED ANSWER:
No. The amount received by the widow from
the decedent's employer may either be a gift
or a separation benefit on account of death.
Both are exclusions from gross income
pursuant to provisions of Section 28(b) of
the Tax Code.
ALTERNATIVE ANSWER:
No. Since the amount was given to the
widow and not to the estate, it becomes
obvious that the amount is more of a gift.
In one U.S. tax case (Estate of
Hellstrom vs. Commissioner, 24 T.C. 916),
it was held that payments to the widow of
the president of a corporation of the
amount the president would have received
in salary if he lived out the year constituted
a gift and not an income.
The controlling facts which would lead to

the conclusion that the amount received by
was reached under the terms of from his gross income. Obviously, these
which JR was damages are considered by law as mere
paid the following amounts: return of capital. (Section
P500,000.00 for his hospitalization; 32(B)(4), 1997 Tax
P250,000.00 as moral damages; and Code)
P300,000.00 for loss of income during the
period of his treatment and recuperation. Exclusions & Inclusions; Facilities or Privileges;
In addition, JR received from his employer Military
the amount of P200,000.00 representing Camp
the cash equivalent of his earned vacation (1995)
and sick leaves. Which, if any, of the Capt. Canuto is a member of the Armed
amounts he received are subject to Forces of the
income tax? Explain. (5%) Philippines. Aside from his pay as
SUGGESTED captain, the government gives him free
ANSWER:
uniforms, free living quarters in whatever
All amounts received from the airline
military camp he is assigned, and free meals
company are excluded from gross income.
inside the camp. Are these benefits income
Under Sec. 32(B)(4) of the NIRC, amounts
to Capt. Canuto? Explain.
of damages received, whether by suit or SUGGESTED ANSWER:
agreement, on account of personal injuries No, the free uniforms, free living quarters
or sickness are excluded from gross and the free meals inside the camp are not
income. Since the amounts received from income to Capt. Canute because these are
the airline company were received as facilities or privileges furnished by the
damages by agreement on account of
personal injuries, all shall be excluded
from JR's gross income.
The amount of P200,000.00, less the

equivalent of not more than 10 days of
vacation leave, received by JR from his
employer, is subject to income tax under
Sec. 2.78.1 (a) (7) of R.R. No. 2-98.
Exclusions & Inclusions; Compensation for personal

injuries or sickness (2003)
X, while driving home from his office,
was seriously
injured when his automobile was bumped
from behind by
a bus driven by a reckless driver. As a
result, he had to pay P200,000.00 to his
doctor and P100, 000.00 to the hospital
where he was confined for treatment. He
filed a suit against the bus driver and the
bus company and was awarded and paid
actual damages of P300, 000.00 (for his
doctor and hospitalization bills),
P100,000.00 by way of moral damages, and
P50,000.00 for what he had to pay his
attorney for bringing his case to court.
Which, if any, of the foregoing awards are
taxable income to X and which are not?
Explain. (8%)
SUGGESTED
ANSWER:
Nothing is taxable. Under the Tax Code,
any amount received as compensation for
personal injuries or sickness, plus the
amounts for any damages received
whether by suit or agreement, on account
of such injuries or sickness shall be
excluded from gross income. Since the
entire amount of P450, 000.00 received are
award of damages on account of the
injuries sustained; all shall be excluded
employer for the employer's giving him the gratuity, hence it should
convenience which are constitute a taxable income. The payment
necessary incidents to proper performance would only qualify as a gift if there is nothing
of the military personnel's duties. but 'good will, esteem and kindness' which
motivated the employer to give the gratuity.
Exclusions & Inclusions; Gifts over and above (Stonton vs. U.S., 186 F. Supp. 393). Such is
the not the case in the herein problem.
Retirement Pay ALTERNATIVE ANSWER:
(1995) Yes. The 1 million is not compensation income
Mr. Quiroz worked as chief accountant of a subject to income tax but a gift from his
hospital for employer. There was no evidence presented
forty-five years. When he retired at 65 to show that he was not fully compensated
he received for his 45 years of service. If his services
retirement pay equivalent to two months' contributed in a large measure to the success
salary for every year of service as provided of the hospital, it did not give rise to a
in the hospital BIR approved retirement recoverable debt. The P1 million is purely a
plan. The Board of Directors of the gratuity from the company. It is a taxable gift
hospital felt that the hospital should give to the transferor. Under the Tax Code, gifts
Quiroz more than what was provided for in are excluded from gross income therefore
the hospital's retirement plan in view of his exempt from income tax. (Sec.
loyalty and invaluable services for forty-five 28{b)(3), NIRC; Pirovano vs.
years; hence, it resolved to pay him a Commissioner)
gratuity of P1 Million over and above his
retirement pay.
The Commissioner of Internal Revenue

taxed the P1 Mil- lion as part of the gross
compensation income of Quiroz who
protested that it was excluded from income
because (a) it was a retirement pay, and (b)
it was a gift.
1) Is Mr. Quiroz correct in claiming that
the additional
P1 Million was retirement pay
and therefore excluded from income?
Explain.
2) Is Mr. Quiroz correct in claiming that
the additional P1 Million was gift and
therefore excluded from income?
Explain.
SUGGESTED ANSWERS:
1) No. The additional P1 million is not a
retirement pay but a part of the gross
compensation income of Mr. Quiroz. This is
not a retirement benefit received in
accordance with a reasonable private
benefit plan maintained by the employer as
it was not paid out of the retirement plan.
Accordingly, the amount
received in excess of the retirement
benefits that he is entitled to receive under
the BIR-approved retirement plan would
not qualify as an exclusion from gross
income.
2) No. The amount received was in

consideration of his loyalty and invaluable
services to the company which is clearly a
compensation income received on account
of employment. Under the employer's
'motivation test,' emphasis should be placed
on the value of Mr. Quiroz services to the
company as the compelling reason for
Exclusions & Inclusions; ITR; 13th month capital assets; and (ii) ordinary assets.
pay SUGGESTED ANSWER:
and de minimis benefits (i) Income realized from sale of capital
(2005) assets is subject to the final withholding tax
State with reasons the tax treatment of at source and therefore excluded from the
the following in Income Tax Return (Sec. 24[C] and [D],
the preparation of annual income tax NIRC);
returns: 13th month
pay and de (ii) Income realized from sale of ordinary
minimis benefits; assets is part of
SUGGESTED Gross Income, included in the Income Tax
ANSWER:
The 13th month pay not exceeding Return. (Sec.
32[A][3],
P30,000.00 shall not
NIRC)
be reported in the income tax return
because it is excluded
Exclusions & Inclusions; ITR; Interest on deposits
from gross income (Sec. 32[B][7], [e],
(2005) State with reasons the tax treatment
NIRC) The amount of the 13th month pay
of the following in the preparation of
in excess of P30,000.00 shall be reported
annual income tax returns: Interest on
in the annual income tax return.
deposits with: (i) BPI Family Bank; and
De minimis benefits which do not (ii) a local offshore banking unit of a
exceed the ceilings are excluded from foreign bank;
SUGGESTED ANSWER:
gross income, and not to be considered for Both items are excluded from the
determining the P30,000.00 ceiling income tax return:
hence not reportable in the annual (i) Interest income from any currency
income tax return. (Sec. bank deposit is
2.78.1[A][3], R.R. 2-98 as amended by considered passive income from sources
Sec. 2.33 [C] and further amended by within the
R.R. No. 8-2000) Philippines and subject to final tax. Since it
is subject to
Exclusions & Inclusions; ITR; Dividends received
by a domestic corporation (2005)
State with reasons the tax treatment of
the following in
the preparation of annual income tax
returns: Dividends
received by a domestic corporation
from (i) another domestic corporation;
and (ii) a foreign corporation; SUGGESTED
ANSWER:
(i) Dividends received by a domestic
corporation from a domestic corporation
shall not be subject to tax (Sec.
27[D][4], NIRC), hence, excluded from
the income tax
ret
urn.
(ii) Dividends received by a domestic

corporation from a foreign corporation
form part of the gross income and are
accordingly subject to net income tax,
hence included in the annual ITR (Sec.
42[A][2][b], NIRC), hence, must be
included in the income tax return.
Exclusions & Inclusions; ITR; Income realized from

sale
(200
5)
State with reasons the tax treatment of
the following in
the preparation of annual income tax
returns: Income realized from sale of: (i)
final tax it is not to be included in the of the gross estate of the decedent to the
annual ITR. (Sec. extent of the amount receivable by the
24[B][1], NIRC) (u) Same beneficiary designated in the policy of the
as No. (j). insurance except when it is expressly
stipulated that the designation of the
Exclusions & Inclusions; ITR; Proceeds of life beneficiary is irrevocable. As stated in the
insurance problem, only the designation of Y is
(2005 irrevocable while the insured/decedent
) reserved the right to substitute Z as
State with reasons the tax treatment of beneficiary for another person. Accordingly,
the following in
the proceeds received by Y shall be excluded
the preparation of annual income tax while the proceeds received by Z shall be
returns: Proceeds of life insurance included in the gross estate of X. (Sect/on
received by a child as irrevocable 85(E), 1997 Tax Code)
beneficiary;
SUGGESTED ANSWER:
Not to be reported in the annual income tax Exemptions: Charitable Institutions (2000)
Article VI, Section 28 (3) of the 1987
returns because the proceeds of the life
Philippine
insurance are excluded from gross income.
Constitution provides that
Proceeds of Life insurance policies paid to
charitable institutions,
the heirs or beneficiaries
churches and personages or covenants
upon the death of the insured is an
appurtenant thereto, mosques, non-profit
exclusion from gross income. (Sec.32[B]
cemeteries and all lands, buildings and
[l],NIRC)
improvements actually, directly and
Exclusions & Inclusions; Life Insurance Policy
(2003)
On 30 June 2000, X took out a life insurance
policy on his own life in the amount of
P2,000,000.00. He designated his wife, Y,
as irrevocable beneficiary to
P1,000,000.00 and his son, Z, to the balance
of P1,000,000.00 but, in the latter
designation, reserving his right to substitute
him for another. On 01 September 2003, X
died and his wife and son went to the
insurer to collect the proceeds of X's life
insurance policy. (8%)
(a) Are the proceeds of the insurance
subject to income tax on the part of Y
and Z for their respective shares?
Explain.
(b) Are the proceeds of the insurance to
form part of
the gross estate of X?
Explain.
SUGGESTED ANSWERS:
(a) No. The law explicitly provides that
proceeds of life insurance policies paid to
the heirs or beneficiaries upon the death of
the insured are excluded from gross income
and is exempt from taxation. The
proceeds of life insurance received upon
the death of the insured constitute a
compensation for the loss of life, hence a
return of capital, which is beyond the scope
of income taxation. (Section 32(B)(1) 1997
Tax Code)
(b) Only the proceeds of P1,000,000.00

given to the son, Z, shall form part of the
Gross Estate of X. Under the Tax Code,
proceeds of life insurance shall form part
exclusively used for religious, briefly. (5%)
charitable or SUGGESTED ANSWER:
educational purposes shall be exempt If XYZ Colleges is a proprietary educational
from taxation. institution, all of its income from school
a) To what kind of tax does this related and non-school related activities will
exemption apply? (2%) be subject to the income tax based on its
SUGGESTED aggregate net income derived from both
ANSWER: activities (Section
This exemption applies only to property 27(B), NMC). Accordingly, all of the income
taxes. What is enumerated
exempted is not the institution itself but in the problem will be
the lands, buildings and improvements taxable.
actually, directly and exclusively used for
religious, charitable and educational The donation of lot and building will
purposes. (Commissioner of Internal likewise be subject to the donor's tax
Revenue v. Court of Appeals, et al, G.R. because a donation to an educational
No. 124043, October 14, 1998). institution is exempt only if the school is
incorporated as a non-stock entity paying no
b) Is proof of actual use necessary for dividends.
tax exemption purposes under the
Constitution? (3%) Since the donee is a proprietary
SUGGESTED
ANSWER:
educational institution, the donation is
Yes, because tax exemptions are strictly taxable (Section 101(AX3), NJRC).
construed against the taxpayer. There
must be evidence to show that the taxpayer Exemptions: Gifts & Donations
has complied with the requirements for (1994)
In 1991, Imelda gave her parents a
exemption. Furthermore, real property
Christmas gift of P
taxation is based on use and not on 100,000.00 and a donation of P50,000.00
ownership, hence the same rule must also to her parish
be applied for real property tax
exemptions.
Exemptions: Charitable Institutions; Churches

(1996)
The Constitution exempts from taxation
charitable in-
stitutions, churches, parsonages or
convents appurtenant thereto, mosques
arid non-profit cemeteries and lands,
buildings and improvements actually,
directly and exclusively used for religious,
charitable and educational purposes.
Mercy Hospital is a 100-bed hospital
organized for charity patients. Can said
hospital claim exemption from taxation
under the above-quoted constitutional
provision? Explain.
SUGGESTED
ANSWER:
Yes. Mercy Hospital can claim exemption
from taxation under the provision of the
Constitution, but only with respect to real
property taxes provided that such real
properties are used actually, directly and
exclusively for charitable purposes.
Exemptions: Educational institution

(2004)
Suppose that XYZ Colleges is a
proprietary educational
institution owned by the Archbishop's
family, rather than the Archdiocese, which
of those above cited income and donation
would be exempt from taxation? Explain
church. She also donated a parcel of 1) For income tax purposes, may Arnold be
land for the considered as "head of a family?" [3%]
construction of a building to the PUP 2) Is Arnold entitled to deduct from his
Alumni Association, a non-stock, gross income, an additional exemption
non-profit organization. for each of his illegitimate child? [2%]
Portions of the building shall be leased to SUGGESTED ANSWER:
generate income for the association. 1) Yes. An unmarried man who has
1) Is the Christmas gift of P 100,000.00 illegitimate minor children who live with
to Imelda's parents subject to tax? him and depend upon him for their chief
2) How about the donation to the support is considered as "head of the
parish church? family" (RR No. 2-98 implementing
3) How about the donation to the P.U.P, Section 35, NIRC).
Alumni Asso- 2) No. Arnold is only entitled to deduct
ciatio additional
n? personal exemption for four (4) out of the
SUGGESTED ANSWER: six (6) illegitimate children. The
1) The Christmas gift of P100,000.00 given maximum number of dependents for
by Imelda to her parents is taxable up to purposes of the additional personal
P50,000.00 because under the law (Sec. exemption is four. (Sec. 35, NIRC).
92 (a) of the Tax Code), net
gifts not exceeding P50,000.00 are Exemptions: Non-Profit Educational Institutions (2000)
exempt.
2) The donation of P50,000.00 to the

parish church even assuming that it is
exclusively for religious purposes is not
tax-exempt because the exemption
granted under Article VI, Sec. 28(3) of
the Constitution applies only to real
estate taxes (Lladoc v. Commissioner,
14SCRA292).
3) The donation to the P.U.P. Alumni

Association does not also qualify for
exemption both under the Constitution
and the aforecited law because it is not
an educational or research organization,
corporation, institution, foundation or
trust.
ALTERNATIVE ANSWER:
Donation to the P.U.P. Alumni Association
is exempt from donor's tax if it is proven
that the association is a nonstock, non-profit
charitable association, paying no dividends,
governed by trustees who receive no
compensation, and devoting all its income to
the accomplishment andpromotion
of the purposes
enumerated in its articles of incorporation.
Not more than
30% of the gift should be used for
administration
purposes by the
donee.
Exemptions: Head of the Family:

(1998)
Arnold, who is single, cohabits with Vilma,
who is legally
married to Zachary. Arnold and Vilma have
six minor children who live and depend
upon Arnold for their chief support. The
children are not married and not gainfully
employed.
Under Article XTV, Section 4 (3) The University of Bigaa, a non-stock, non-
of the 1987 profit entity,
Philippine Constitution, all revenues and operates a canteen for its students and a
assets of non- stock, nonprofit educational bookstore inside
institutions, used actually, directly and the campus. It also operates two dormitories
exclusively for educational purposes, are for its students, one of which is in the
exempt from taxes and duties. Are income campus. Is the University liable to pay
derived from dormitories, canteens and income taxes for the operation of the: 1)
bookstores as well as interest income on canteen? 2) bookstore? 3) two
bank deposits and yields from deposit dormitories?
substitutes automatically exempt from SUGGESTED ANSWER:
taxation? Explain. (5%) 1) For the operation of the canteen inside
SUGGESTED the campus, the income thereon being
ANSWER: incidental to the operations of the University
No. The interest income on bank deposits as a school, is exempt (Art. XIV (4) (3),
and yields from deposit substitutes are not Constitution; DECS Regulations No. 137-87,
automatically exempt from taxation. There Dec. 16, 1987).
must be a showing that the incomes are
included in the school's annual 2) For the same reasons, the University of
information return and duly audited Bigaa is not liable to pay income taxes
financial statements together with: for the operation of the
1. Certifications from depository banks
as to the amount of interest income
earned from passive investments not
subject to the 20% final withholding
tax;
2. Certification of actual, direct and
exclusive utilization of said income for
educational purposes;
3. Board resolution on proposed project
to be funded out of the money
deposited in banks or placed in money
market placements (Finance
Department Order No. 149-95 issued
November 24, 1995), which must be
used actually, directly and exclusively
for educational purposes.
The income derived from dormitories,

canteens and bookstores are not also
automatically exempt from taxation. There
is still the requirement for evidence to
show actual, direct and exclusive use for
educational purposes. It is to be noted that
the 1987 Philippine Constitution does not
distinguish with respect to the source or
origin of the income. The distinction is with
respect to the use which should be actual,
direct and exclusive for educational
purposes.
Consequently, the provisions of Sec. 30 of

the NIRC of
1997, that a non-stock and nonprofit
educational institution is exempt from
taxation only "in respect to income
received by them as such" could not affect
the constitutional tax exemption. Where
the Constitution does not distinguish with
respect to source or origin, the Tax Code
should not make distinctions.
Exemptions: Non-Profit Entity; Ancillary Activity &

Incidental Operations (1994)
bookstore, since this is an ancillary activity However, if these religious, charitable or
the conduct of social welfare corporations derive income
which is carried out within the from their properties or any of their activities
school premises. conducted for profit, the income tax shall be
imposed on said items of income
3) The University of Bigaa shall not be irrespective of their disposition. (Sec. 30,
liable to pay income taxes for the operation NIRC; CIR v, YMCA, GR No. 124043,
of the dormitory located in the campus, for 1998).
same reasons as the foregoing. However,
the latter shall be liable for income taxes on B. Is the income derived by XYZ Foundation
income from operations of the dormitory from the sale of a portion of its lot, rentals
located outside the school premises. from its boarding house and the operation
of its canteen and gift shop subject to tax?
Exemptions: Non-Stock/ Non-Profit Association (2002) Explain. (5%)
XYZ Foundation is a non-stock, non-profit SUGGESTED ANSWER:
association duly organized for religious, B. Yes. The income derived from the sale
charitable and social welfare purposes. Last of lot and rentals from its boarding house are
January 3, 2000 it sold a portion of its lot considered as income from properties which
used for religious purposes and are subject to tax. Likewise, the income from
utilized the entire proceeds for the the operation of the canteen and gift shop
construction of a building to house its free
Day and Night Care Center for children
of single parents. In order to subsidize the
expenses of the Day and Night Care Center
and to support its religious, charitable and
social welfare projects, the Foundation
leased the 300- square meter area of the
second and third floors of the building for
use as a boarding house. The Foundation
also operates a canteen and a gift shop
within the premises, all the income from
which is used actually, directly, and
exclusively for the purposes for which the
Foundation was organized.
A. Considering the constitutional provision

granting tax exemption to non-stock
corporations such as those formed
exclusively for religious, charitable or
social welfare purposes, explain the
meaning of the last paragraph of said
Sec. 30 of the 1997 Tax Code which
states that “Income of whatever kind
and character of the foregoing
organizations from any of their
properties, real or personal, or from any
of their activities conducted for profit
regardless of the disposition made of
such income shall be subject to tax
imposed under this Code." (5%)
SUGGESTED ANSWER:
A. The exemption contemplated in the
Constitution covers real estate tax on real
properties actually, directly and exclusively
used for religious, charitable or social
welfare purposes. It does not cover
exemption from the imposition of the
income tax which is within the context of
Section 30 of the Tax Code. As a rule, non-
stock non- profit corporations organized for
religious, charitable or social welfare
purposes are exempt from income tax on
their income received by them as such.
are income from its activities awards shall be exempt from the payment of
conducted for the donor's tax."
profit which are subject to tax. The income
tax attaches irrespective of the disposition Exemptions: Retirement Benefits: Work Separation
of these incomes. (Sec. 30, NIRC; CIR v. (1999) A Co., a Philippine corporation, has
YMCA, GR No. 124043, 1998). two divisions — manufacturing and
construction. Due to the economic situation,
Exemptions: Prize of Peace Poster Contest it had to close its construction division and
(2000) lay- off the employees in that division. A Co.
Jose Miranda, a young artist and designer, has a retirement plan approved by the BIR,
received a prize which requires a minimum of
of P100,000.00 for winning in the on- 50 years of age and 10 years of service
the-spot peace poster contest sponsored in the same
by a local Lions Club. Shall the reward be employer at the time of retirement. There
included in the gross income of the are 2 groups of employees to be laid off:
recipient for tax purposes? Explain. (3%) 1) Employees who are at least 50 years of
SUGGESTED
ANSWER:
age and has at 10 years of service at
No. It is not includable in the gross the time of termination of employment.
income of the recipient because the same 2) Employees who do no meet either the
age or length
is subject to a final tax of 20%, the
amount thereof being in excess of of service A Co. plans to give the
P10.000 (Sec. following:
24(B){1), NIRC of 1997). The prize
constitutes a taxable income because it
was made primarily in recognition of
artistic achievement which he won due to
an action on his part to enter the contest.
[Sec. 32 (B) (7) (c), NIRC of 1997] Since it
is an on-the-spot contest, it is evident
that he must have joined the contest in
order to earn the prize or award.
Exemptions: Prizes & Awards; Athletes

(1996)
Onyoc, an amateur boxer, won in a
boxing competition
sponsored by the Gold Cup Boxing
Council, a sports
association duly accredited by the
Philippine Boxing Association. Onyoc
received the amount of P500,000 as his
prize which was donated by Ayala Land
Corporation. The BIR tried to collect
income tax on the amount received by
Onyoc and donor's tax from Ayala Land
Corporation, which taxes, Onyoc and Ayala
Land Corporation refuse to pay. Decide.
SUGGESTED
ANSWER:
The prize will not constitute a taxable
income to Onyoc, hence the BIR is not
correct in imposing the income tax. R.A.
No. 7549 explicitly provides that 'All prizes
and awards granted to athletes in local and
international sports tournaments and
competitions held in the Philippines or
abroad and sanctioned by their respective
national sports associations shall be
exempt from income tax".
Neither is the BIR correct in collecting the

donor's tax from Ayala Land Corporation.
The law is clear when it categorically
stated "That the donor's of said prizes and
a. For category (A) employees - the benefits
under the BIR approved plan plus "earlier retirement" because he was
an ex gratia payment of one emigrating to Australia. He was paid
month of every year of service. P2.000.000.00 as separation pay in
b. For category (B) employees - one recognition of his valuable services to the
month for corporation.
every year of
service. Juan Cruz, another official of the same
For both categories, the cash company, was separated for occupying a
equivalent of redundant position. He was given
unused vacation and sick P1,000.000.00 as separation pay.
leave credits.
Jose Bautista was separated due to his failing
A Co. seeks your advice as to whether eyesight. He was given P500.000.00 as
or not it will subject any of these separation pay.
payments to WT. Explain your advice. All the three (3) were not qualified to
(5%) retire under the
SUGGESTED ANSWER: BIR-approved pension plan of the
For category A employees, all the benefits corporation.
received on account of their separation are 1) Is the separation pay given to Reyes
not subject to income tax, hence no subject to income tax?
withholding tax shall be imposed. The 2) How about the separation pay
benefits received under the BIR-approved received by Cruz?
plan upon meeting the service requirement 3) How about the separation pay received
and age requirement are explicitly excluded by Bautista?
from gross income. The ex gratia payment
also qualifies as an exclusion from gross
income being in the nature of benefit
received on account of separation due to
causes beyond the employees' control.
(Section 32(B), NIRC). The cash equivalent
of unused vacation and sick leave credits
qualifies as part of separation benefits
excluded from gross income (CIR v. Court
of Appeals, GR No. 96O16, October 17,
1991).
For category B employees, all the benefits

received by them will also be exempt from
income tax, hence not subject to withholding
tax. These are benefits received on account
of separation due to causes beyond
the employees' control, which are
specifically excluded from gross income.
(Section 32(B), NIRC).
ALTERNATIVE ANSWER;
All of the payments are not subject to
income tax and should not also be subject to
withholding tax. The employees were laid
off, hence separated for a cause beyond
their control. Consequently, the amounts
to be paid by reason of such
involuntary separation are excluded from
gross income, irrespective of whether the
employee at the time of separation has
rendered less than ten years of service
and/or is below fifty years of age. (Section
32(B), NIRC).
Exemptions: Separation Pay

(1994)
Pedro Reyes, an official of Corporation X,
asked for an
SUGGESTED official or employee (Sec 28, NIRC).
ANSWER: ALTERNATIVE ANSWER:
1) The separation pay given to Reyes No, Mr. Jacobo did not derive any taxable
is subject to income tax as compensation income because the separation pay was due
income because it arises from a service to a retrenchment policy adopted by the
rendered pursuant to an employer- company so that any employee terminated
employee relationship. It is not by virtue thereof is considered to have been
considered an exclusion from gross separated due to causes beyond the
income because the rule in taxation is tax employee's control. The voluntary
construed in strictissimi juris or the rule redundancy program requiring employees
on strict Interpretation of tax exemptions. to make an offer to resign is only
considered as a tool to expedite the lay-off of
2) The separation pay received by Cruz is excess manpower whose services are no
not subject to income tax because his longer needed by the employer, but is not
separation from the company was the main reason or cause for the termination
involuntary (Sec. 28 b (7), Tax Code).
SUGGESTED ANSWER:
3) The separation pay received by 2) No, Mr. Kintanar did not derive any
Bautista is likewise not subject to tax. His income when he received his separation
separation is due to disability, hence pay because his separation from
involuntary. Under the law, separation
pay received through involuntary causes
are exempt from taxation.
Exemptions: Separation Pay

(1995)
Mr. Jacobo worked for a manufacturing
firm. Due to
business reverses the firm offered
voluntary redundancy program in order to
reduce overhead expenses. Under the
program an employee who offered to
resign would be given separation pay
equivalent to his three month's basic
salary for every year of service. Mr. Jacobo
accepted the offer and received
P400.000.00 as separation pay under the
program.
After all the employees who accepted the

offer were paid, the firm found its
overhead still excessive. Hence it adopted
another redundancy
program. Various
unprofitable departments were closed. As
a result, Mr. Kintanar was separated from
the service. He also received P400.000.00
as separation pay.
1) Did Mr. Jacobo derive income when he
received his separation pay? Explain.
2) Did Mr. Kintanar derive income when
he received his separation pay? Explain.
SUGGESTED
ANSWER:
1) Yes, Mr. Jacobo derived a taxable
income when he received his separation
pay because his separation from
employment was voluntary on his part in
view of his offer to resign. What is
excluded from gross income is any
amount received by an official or
employee as a consequence of
separation of such official or employee
from the service of the employer for any
cause beyond the control of the said
employment is due to causes beyond his shareholders, the stock dividends will be
control. The subject to income tax. (Section 24(B)(2);
separation was involuntary as it was a Section 25(A)&(B); Section
consequence of the closure of various 28(B)(5)(b), 1997 Tax
unprofitable departments pursuant to the Code)
redundancy program.
Exemptions: Strictly Construed (1996)
Exemptions: Separation Pay Why are tax exemptions strictly construed
(2005) against the
Company A decides to close its taxpaye
operations due to r?
continuing losses and to terminate the SUGGESTED ANSWER:
services of its employees. Under the Labor Tax exemptions are strictly construed against
Code, employees who are separated from the taxpayer because such provisions are
service for such cause are entitled to a highly disfavored and may almost be said to
minimum of one-half month pay for every be odious to the law (Manila Electric
year of service. Company A paid the Company vs. Vera, 67 SCRA 351).
equivalent of one month pay for every year The exception contained in the tax statutes
of service and the cash equivalent of unused must be strictly construed against the one
vacation and sick leaves as separation claiming the exemption because the law does
benefits. not look with favor on tax exemptions they
Are such benefits taxable and subject to being contrary to the life-blood theory which
withholding tax is the underlying basis for taxes.
under the Tax Code? Decide with
reasons. (5%) Exemptions: Terminal Leave Pay (1996)
SUGGESTED ANSWER:
All of the benefits are not taxable, hence
they are not subject to withholding tax
under the Tax Code. Benefits received as a
consequence of separation for any cause
beyond the control of the employees such as
closure of business are excluded from gross
income. (Sec. 32[B][6][b], NIRC in relation
to Sec. 2[b][2], R.R. 2-98)
Exemptions: Stock Dividends

(2003)
On 03 January 1998, X, a Filipino citizen
residing in the
Philippines, purchased one hundred (100)
shares in the capital stock of Y Corporation,
a domestic company. On
03 January 2000, Y Corporation declared,
out of the profits of the company earned
after 01 January 1998, a hundred
percent (100%) stock
dividends on all
stockholders of record as of 31 December
1999 as a result of which X holding in Y
Corporation became two hundred (200)
shares. Are the stock dividends received by
X subject to income tax? Explain. (8%)
SUGGESTED ANSWER:
No. Stock dividends are not realized income.
Accordingly, the different provisions of the
Tax Code imposing a tax on dividend
income only includes within its purview cash
and property dividends making stock
dividends exempt from income tax.
However, if the distribution of stock
dividends is the equivalent of cash or
property, as when the distribution results
in a change of ownership interest of the
A, an employee of the Court of City. It collected and received the following:
Appeals, retired (a) Tuition
upon reaching the compulsory age of 65 fees
years. Upon compulsory retirement, A (b) Dormitory
received the money value of his fees
accumulated leave credits in the amount (c) Rentals from canteen
of P500.000.00. Is said amount subject to concessionaires
tax? Explain. (d) Interest from money-market
SUGGESTED placements of the
ANSWER:
tuition
No. The commutation of leave credits,
more commonly known as terminal leave fees
(e) Donation of a lot and building by
pay, i.e., the cash equivalent of
school alumni
accumulated vacation and sick leave
credits given to an officer or employee who Which of these above cited income and
retires, or separated from the service donation would not be exempt from
through no fault of his own, is exempt taxation? Explain briefly. (5%) SUGGESTED
ANSWER:
from income tax. (BIR Ruling 238-91 A. All of the income derived by the non-
dated November 8, 1991; Commissioner
stock, nonprofit educational institution will
v. CA and Efren Castaneda, GR No. 96016,
October 17, 1991).
be exempt from taxation provided they are
used actually, directly and exclusively for
Exemptions; Charitable Institutions educational purposes. The Constitution
(2006) provides that all revenues and assets of
The Constitution provides non-stock, non-profit educational
"charitable institutions, churches, institution which are actually, directly and
personages or convents appurtenant exclusively used for educational purposes
thereto, mosques, and non-profit are exempt from taxation (Section 4
cemeteries and all lands, buildings, and par. 3, Article XIV, 1987
improvements actually directly and Constitu
tion).
exclusively used for religious, charitable or
educational purposes shall be exempt from
taxation." This provision exempts
charitable institutions and religious
institutions from what kind of taxes?
Choose the best answer. Explain. (5%)
a. from all kinds of taxes, i.e., income,
VAT, customs
duties, local taxes and real
property tax b. from
local tax only
c. from value-
added tax
d. from real property
tax only
e. from capital gains
tax only
SUGGESTED
ANSWER:
The provision exemptions charitable
institutions and religious institutions
from (d) REAL PROPERTY TAXES only.
The exemption is only for taxes assessed as
property taxes, as distinguished from
excise taxes (CIR v. CA, CTA & YMCA,
G.R. No. 124043, October 14, 1998;
Lladoc v. Commissioner of Internal
Revenue, L-19201, June
16,1
965).
Exemptions; Educational institution

(2004)
XYZ Colleges is a non-stock, non-profit
educational
institution run by the Archdiocese of BP
The donation is, likewise, exempt from the five years. But three years later, the law was
donor's tax if repealed. With the repeal, the exemptions
actually, directly and exclusively used for were considered revoked by the BIR, which
educational purposes, provided not more assessed the investing companies for
than 30% of the donation is used by the unpaid taxes effective on the date of the
donee for administration purposes. The repeal of the law.
donee, being a non-stock, non-
profit educational institution, is a qualified NPC and KTR companies questioned the
entity to receive an exempt donation subject assessments on the ground that, having made
to conditions prescribed by law (Section 4 their investments in full reliance with the
par. 4, Art. XIV, 1987 Constitution, in period of exemption granted by the law, its
relation to Section repeal violated their constitutional right
101(AX3), against the impairment of the obligations and
NJRC). contracts. Is the contention of the companies
tenable or not? Reason briefly. (5%)
Accordingly, none of the cited income and SUGGESTED ANSWER:
donation collected and received by the non- The contention is not tenable. The
stock, non-profit educational institution exemption granted is in the nature of a
would not be exempt from taxation. unilateral tax exemption. Since the exemption
ALTERNATIVE ANSWER: given is spontaneous on the part of the
The following receipts by the non-
stock, nonprofit educational institution are
not exempt from taxation, viz: (c) Rentals
from Canteen Concessionaires. Rental
income is considered as unrelated to
the school operations; hence, taxable (DOF
Order No. 137-87, Dec. 16,
198
7)
(d) Interest from money-market

placements of the tuition fees. The
interest on the placement is taxable
(DOF Order No. 137-87). If however, the
said interest is used actually, directly and
exclusively for educational purposes as
proven by substantial evidence, the same
will be exempt from taxation (CIR v. CA, 298
SCRA 83 11998]}.
The other items of income which were all

derived from school-related activities will
be exempt from taxation in the hands of
the recipient if used actually, directly and
exclusively for educational purposes
(Section 4 par. 3, Article XTV, 1987
Constitution).
The donation to a non-stock, non-profit

educational institution will be exempt from
the donor's tax if used actually, directly and
exclusively for educational purposes and
provided, that, not more than 30% of the
donation is used for administration purposes
(Section 4, par. 4, Art. XJV, 1987
Constitution, in relation to Section
101(AM3), NJRC).
Exemptions; Exemptions are Unilateral in Nature

(2004)
A law was passed granting tax
exemption to certain
industries and investments for a period of
legislature and no service or its clientele like the people of the
duty or other municipality.
remunerative conditions have been
imposed on the taxpayers receiving the Exemptions; Personal & Additional Exemption (2006)
exemption, it may be revoked at will by Charlie, a widower, has two sons by his
the legislature (Christ Church v. previous marriage. Charlie lives with Jane
Philadelphia, 24 who is legally married to Mario. They have
How. 300 [1860]). What constitutes an a child named Jill. The children are all
impairment of the minors and not gainfully employed.
obligation of contracts is the revocation of 1. How much personal exemption can
an exemption Charlie claim?
which is founded on a valuable Explain.
consideration because it takes the form (2.5%)
and essence of a contract (Casanovas v. SUGGESTED ANSWER:
Hord, 8 Phil. 125 [1907]; Manila Charlie can claim the personal exemption of
Railroad Company v. Insular Collector a Head of a Family or P25,000.00 provided
of Customs, 12 Phil. 146 [1915]) that, at least one of his minor and not
gainfully employed children is unmarried
Exemptions; Gov’t Bonus, Gifts, & Allowances and living with and dependent upon him for
(1994) chief support (Tax Reform Act, RA 8424,
In December 1993, the Sangguniang Chapter VII, Section 35[A]; BIR Revenue
Bayan authorized a Regulation 02-98).
Christmas bonus of P3,000.00, a cash
gift of P5,000.00 and transportation and 2. How much additional exemption
representation allowance of P6,000.00 for can Charlie claim? Explain. (2.5%)
each of the municipal employees.
1) Is the Christmas bonus subject
to any tax?
2) How about the
cash gift?
3) How about the transportation and
representation
allowan
ces?
SUGGESTED
ANSWER:
1) The CHRISTMASBONUS given by
the Sangguniang Bayan to the
municipal employees is taxable as
additional compensation (Sec. 21 (a).
Tax Code).
2) The cash gift per employee of

P5.000.00 being substantial may be
considered taxable also. They partake
the nature of additional compensation
income as it is highly doubtful if
municipal governments are authorized
to make gifts in substantial sums such
as this. They are not furthermore
gifts of "small value" which employers
might give to their employees on
special occasions like Christmas -
items which could be exempt under
BIR Revenue Audit Memo No. 1-87.
3) The transportation and

representation allowances are
actually reimbursements for
expenses incurred by the employee for
the employer. Said allowances spent
by the employee for the
employer are designed to enhance
the quality of the service that the
employer is supposed to perform for
SUGGESTED ANSWER: Capital Asset vs. Ordinary Asset (2003)
His children from his previous marriage who Distinguish a "capital asset" from an
are legitimate children and his illegitimate "ordinary asset".
child with Jane will all entitle him to SUGGESTED ANSWER:
additional personal exemption of P8,000.00 (a) The term "capital asset" regards all
for each dependent, if apart from being properties not specifically excluded in the
minor and not gainfully employed, they are statutory definition of capital assets, the
unmarried, living with and dependent upon profits or loss on the sale or the exchange of
Charlie for their chief support (Tax which are treated as capital gains or capital
Reform Act, RA8424, Chapter VH, losses. Conversely, all those properties
Section 35(A); BIR Revenue Regulation 02- specifically excluded are considered as
98). ordinary assets and the profits or losses
realized must have to be treated as ordinary
Exemptions; Roman Catholic Church; Limitations (2005) gains or ordinary losses. Accordingly,
The Roman Catholic Church owns a 2- "Capital Assets" includes property held by
hectare lot, in a town in Tarlac province. the taxpayer whether or not connected with
The southern side and middle part are his trade or business, but the term does not
occupied by the Church and a convent, include any of the following, which are
the eastern side by a school run by the consequently considered "ordinary assets":
Church itself, the southeastern side by (1) stock in trade of the taxpayer or other
some commercial establishments, while property of
the rest of the property, in a kind which would properly be
particular the northwestern side, is idle or included in the
unoccupied.
May the Church claim tax exemption on
the entire land?
Decide with
reasons.
SUGGESTED ANSWER:
No. The Church cannot claim tax exemption
on the entire land. Only the southern side
and middle part that are occupied by the
Church and a convent and the eastern
side occupied by a school run by the Church
itself are exempt, because such parts of
the 2-hectare lot are actually, directly and
exclusively used for religious and
educational purposes. (Sec.
28[3], Art. VI, 1987
Constitution; Sec. 234, Local
Government Code)
The southeastern side occupied by some

commercial establishment is not tax
exempt. If real property is used for one or
more commercial purposes, it is not
exclusively used for the exempted purpose
but is subject to taxation.
'Solely' is synonymous with 'exclusively.'
(Lung Center of the Philippines v. Quezon
City, G.R. No. 144104, June 29,
2004) The property must be exclusively
(solely) used for religious or educational
purposes.
Of course, it is apparent that the

northwestern side, which is idle or
unoccupied is not "actually, directly and
exclusively" used for religious or
educational purposes, hence not exempt
from taxation.
CAPITAL GAIN TAX

inventory of the taxpayer if on hand should be taxed as a sale by an
at unregistered partnership. Is the BIR
the close of the taxable year; correct?
SUGGESTED ANSWER:
(2) property held by the taxpayer The BIR is not correct, since there is no
primarily for sale to customers in the showing that the acquisition of the property
ordinary course of trade or business; by Noel and Jovy Langit as pro indiviso
owners, and prior to the formation of the
(3) property used in the trade or partnership, was used, intended for use, or
business of a character which is bears any relation whatsoever to the pursuit
subject to the allowance for or conduct of the partnership business. The
depreciation provided in Section 34 sale of parcel A shall therefore not be
(F) of the Tax Code; or treated as a sale by an unregistered
partnership, but an ordinary sale of a
(4) real property used in trade or capital asset, and hence will be subject
business of the taxpayer. to the 5% capital gains tax and
documentary
The statutory definition of "capital assets"
practically excludes from its scope, it will
be noted, all property held by the taxpayer
if used in connection with his trade or
business.
Capital Gain Tax; Nature

(2001)
A, a doctor by profession, sold in the year
2000 a parcel of land which he bought as a
form of investment in 1990 for Php 1
million. The land was sold to B, his
colleague, at a time when the real estate
prices had gone down and so the land was
sold only for Php 800,000 which was then
the fair market value of the land. He used
the proceeds to finance his trip to the
United States. He claims that he should not
be made to pay the 6% final tax because he
did not have any actual gain on the sale. Is
his contention correct? Why? (5%)
SUGGESTED
ANSWER:
No. The 6% capital gains tax on sale of a
real property held as capital asset is
imposed on the income presumed to have
been realized from the sale which is
the fair market value or selling price
thereof, whichever is higher. (Section
24(D), NIRC). Actual gain is not required
for the imposition of the tax but it is the
gain by fiction of law which is taxable.
Ordinary Sale of a Capital Asset

(1994)
Noel Langit and his brother, Jovy, bought a
parcel of land
which they registered in their names as
pro-indiviso owners (Parcel A).
Subsequently, they formed a
partnership, duly registered with
Securities and Exchange Commission,
which bought another parcel of land
(Parcel B). Both parcels of land were sold,
realizing a net profit of P1,000,000.00 for
parcel A and P500.000.00 for parcel B.
The BIR claims that the sale of parcel A

stamp tax on transfers of real property, income tax under our jurisdiction because
said taxes to be the income derived there from is considered
borne equally by the co- as a foreign-sourced income. ALTERNATIVE
owners. ANSWER:
ALTERNATIVE ANSWER: Yes, but only on the shares of stocks of A
The BIR is correct in treating the gain from Co. and only on the portion of the purchase
the sale of parcel of land by Noel and Jovy price, which constitutes capital gains. Under
Langit at a profit of P1,000,000.00. In the the Tax Code of 1997, the capital gains tax
case of Pascual and Dragon v. imposed under Section 28(B)(5)(c) is
Commissioner, G.R. No. 78133, October collectible via the withholding of tax at
18, 1988, the Supreme Court ruled that source pursuant to Section 57 of the same
the sharing of returns does not in itself Code.
establish a partnership, whether or not (Note: The bar candidate might have
the persons sharing therein have a joint or relied on the provision of the Tax Code
common right or interest in the property. of 1997 which provides that the capital
The decision in said case cannot be applied gains tax is imposed as withholding
here because clearly the parties taxes (Section 57, NIRC). This
organized a partnership duly registered procedure is impractical and, therefore,
not followed in practice because the
with the Securities and Exchange
buyer/ withholding agent will not be in a
Commission. They pooled their position to determine how much income is
resources together with the purpose of realized by
dividing the profit between them.
Sales of Share of Stocks: Capital Gains Tax Return

(1999) HK Co. is a Hong Kong corporation
not doing business in the Philippines. It
holds 40% of the shares of A Co., a
Philippine company, while the 60% is owned
by P Co., a Filipino-owned Philippine
corporation. HK Co. also owns
100% of the shares of B Co., an
Indonesian company
which has a duly licensed Philippine branch.
Due to worldwide restructuring of the HK
Co. group, HK Co. decided to sell all its
shares in A and B Cos. The negotiations for
the buy-out and the signing of the
Agreement of Sale were all done in the
Philippines. The Agreement provides that
the purchase price will be paid to HK Co's
bank account in the U. S. and that little to A
and B Cos. Shares will pass from HK Co. to
P Co. in HK where the stock certificates will
be delivered. P Co. seeks your advice as to
whether or not it will subject the payments
of purchase price to Withholding Tax.
Explain your advice. (10%)
SUGGESTED ANSWER:
P Co. should not subject the payments of
the purchase price to withholding tax.
While the seller is a non-resident foreign
corporation which is not normally required
to file returns in the Philippines,
therefore, ordinarily all its income earned
from Philippine sources is taxed via the
withholding tax system, this is not the
procedure availing with respect to sales of
shares of stock. The capital gains tax on
the sale of shares of stock of a
domestic corporation is always required to
be paid through a capital gains tax return
filed. The sale of the shares of stock of the
Indonesian Corporation is not subject to
the seller from the sale. For this ALTERNATIVE ANSWER:
reason, any The basis in computing capital gains tax in a
of the foregoing suggested answers qualified tax- free exchange under Sec. 34
should be given full credit). (c) (2) is:
(a) With respect to the asset received by
Tax Basis: Capital Gains: Merger of Corporations the corporation the same as it would be
(1994) in the hands of the transferor increased
In a qualified merger under Section 34 (c)
by the amount of the gain recognized
(2) of the Tax
to the transferor on the transfer.
Code, what is the tax basis for computing
(b) With respect to the shares
the capital gains on: (a) the sale of the
received by the stockholders in
assets received by the surviving
exchange of the assets - the same as the
corporation from the absorbed corporation;
basis of the property, stock or securities
and (b) the sale of the shares of stock
exchanged, decreased by the money
received by the stockholders from the
received and the fair market value of the
surviving corporation?
SUGGESTED
other property received, and increased
ANSWER: by the amount treated as dividend of the
In a qualified merger under Section 34 (c) shareholder and the amount of any
(2) of the Tax gain that was recognized on the
Code, the tax basis for computing the exchange.
capital gains on:
(a) the sale of the assets received by the CORPORATION & PARTNERSHIP
surviving corporation from the
absorbed corporation shall be the Bad Debts; Factors; Elements thereof
original/historical cost of the assets (2004)
when still in the hands of the absorbed
corporation.
(b) the sale of the shares of stock received
by the stockholders from the surviving
corporation shall be the
acquisition/historical cost of assets
transferred to the surviving
corporation.
Tax Basis: Capital Gains: Tax-Free Exchange of

Property
(199
4)
In a qualified tax-free exchange of
property for shares
under Section 34 (c) (2) of the Tax Code,
what is the tax
basis for computing the capital gains on:
(a) the sale of the assets received by the
Corporation; and (b) the sale of the shares
exchange of the assets?
SUGGESTED
ANSWER:
In a qualified tax free exchange of property
for shares under Section 34 (c) (2) of the
Tax Code, the tax basis for computing the
gain on the:
(a) sale of the assets received by the
corporation shall be the
original/historical cost (purchase price
plus expenses of acquisition) of the
property/ assets given in exchange of
the shares of stock.
(b) sale of the shares of stock
exchange of the assets shall be the
original/historical cost of the property
given in exchange of the shares of
stock.
PQR Corp. claimed as a deduction in its tax returns the
amount of P1,000,000 as bad debts. The Building in accordance with the Master Deed
corporation was assessed by the with Declaration of Restrictions. The X-land
Commissioner of Internal Revenue for Building Corporation, the developer of the
deficiency taxes on the ground that the building, conveyed the common areas in favor
debts cannot be considered as "worthless," of the X-land Condominium Corporation. Is
hence they do not qualify as bad debts. the conveyance subject to any tax?
The company asks for your advice on SUGGESTED ANSWER:
"What factors will held in determining The conveyance is not subject to any tax. The
whether or not the debts are bad debts?" same is without consideration, and not in
Answer and explain briefly. (5%) SUGGESTED connection with a sale made to X-land
ANSWER: Condominium Corporation, and the purpose
In order that debts be considered as bad of the conveyance to the latter is for the
debts because they have become worthless, management of the common areas for the
the taxpayer should establish that during common benefit of the unit owners.
the year for which the deduction is sought, a
situation developed as a result of which it The same is not subject to income tax since
became evident in the exercise of sound, no income was realized as a result of the
objective business judgment that there conveyance, which was made pursuant to
remained no practical, but only vaguely the Condominium Act (R.A. No. 4626, and the
theoretical, prospect that the debt would purpose of which was merely to vest title to
ever be paid (Collector of Internal the common areas in favor of the Land
Revenue v. Goodrich International Rubber Condominium Corporation.
Co., 21
SCRA 1336 [1967]). "Worthless" is not
determined by an
inflexible formula or slide rule calculation,
but upon the exercise of sound business
judgment. The factors to be considered
include, but are not limited to, the following:
1. The debtor has no property nor
visible income;
2. The debtor has been adjudged
bankrupt or insolvent;
3. Collateral shares have become
worthless; and
4. There are numerous debtors with small
amounts of
debts and further action on the
accounts would entail expenses
exceeding the amounts sought to be
collected.
ALTERNATIVE ANSWER:
The following are the factors to be
considered in determining whether or not
the debts are bad debts:
1. The debt must be valid and
subsisting;
2. The debt is connected with the
taxpayer's trade or business, and is not
between related parties;
3. There is an actual ascertainment
that the debt is worthless; and
4. The debt is charged-off within the
taxable year.
(PRC v. CA, 256 SCRA 667 [1996];
Revenue Regs.
No. 5-
99).
Condominium Corp.; Sale of Common Areas

(1994)
X-land Condominium Corporation was
organized by the owners of units in X-land
There being no monetary consideration, discuss WT rates, if applicable. Focus your
neither is the conveyance subject to the discussion on what is the issue. (10%)
creditable withholding tax imposed under SUGGESTED ANSWER:
Revenue Regulations 1-90, as amended. I will advise A Co. to withhold and remit the
withholding tax on the dividends. While
The second conveyance was actually no the general rule is that a foreign
conveyance at all because when the units corporation is the same juridical entity
were sold to the various buyers, the as its branch office in the Philippines,
common areas were already part and when, however, the corporation transacts
parcel of the sale of said units pursuant business in the Philippines directly and
to the Condominium Act. However, the independently of its branch, the taxpayer
Deed of Conveyance is subject to would be the foreign corporation itself and
documentary stamp tax. subject to the dividend tax similarly imposed
on non-resident foreign corporation. The
N.B. Documentary stamps tax and dividends attributable to the Home Office
Condominium Law are excluded from would not qualify as dividends earned by a
the coverage of the Bar Examinations. resident foreign corporation, which is
exempt from tax. (Marubeni Corporation v.
Corporation; Sale; Creditable Withholding Tax Commissioner, GR No. 76573, September
(1994) 14,
Noel Langit and his brother, Jovy, bought a 1989).
parcel of land which they registered in
their names as pro-indiviso owners
(Parcel A). Subsequently, they formed
a partnership, duly registered with
Securities and Exchange Commission,
which bought another parcel of land
(Parcel B). Both parcels of land were sold,
realizing a net profit of P1,000,000.00 for
parcel A and P500.000.00 for parcel B.
The BIR also claims that the sale of

parcel B should be taxed as a sale by a
corporation. Is the BIR correct? SUGGESTED
ANSWER:
The BIR is correct, since a "corporation" as
defined under Section 20 (a) of the Tax
Code includes partnerships, no matter
how created or organized, except general
professional partnerships. The business
partnership, in the instant case, shall
therefore be taxed in the same manner as
a corporation on the sale of parcel B. The
sale shall thus be subject to the
creditable withholding tax under
Revenue Regulations 1-90, as amended
by 12-94, on the sale of parcel B, and the
partnership shall report the gain realized
from the sale when it files its income tax
return. Dividends: Withholding Tax (1999)
HK Co., is a Hong Kong company, which
has a duly
licensed Philippine branch, engaged in
trading activities in the Philippines. HK Co.
also invested directly in 40% of the shares
of stock of A Co., a Philippine corporation.
These shares are booked in the Head
Office of HK Co. and are not reflected as
assets of the Philippine branch. In
1998, A Co. declared dividends to its
stockholders. Before
remitting the dividends to HK Co., A
Co. seeks your advice as to whether it will
subject the remittance to WT. No need to
special tax rates. So is with PEZA
enterprises,
Effect: Dissolution; Corporate Existence become liable to the MCIT whenever this tax
(2004) imposed at 2% of gross income exceeds the
For failure to comply with certain corporate normal corporate income tax imposed on
requirements, the stockholders of ABC net income. (Sponsorship Speech,
Corp. were notified by the Securities and Chairman of Senate Ways and Means
Exchange Commission that the corporation Committee).
would be subject to involuntary
dissolution. The stockholders did not do Minimum Corporate Income Tax; Exemption (2001)
anything to comply with the Is a corporation which is exempted from
requirements, and the corporation was the minimum
dissolved. Can the stockholders be held corporate income tax automatically
personally liable for the unpaid taxes of the exempted from the regular corporate income
dissolved corporation? Explain briefly. (5%) tax? Explain your answer. (2%) SUGGESTED
SUGGESTED ANSWER: ANSWER:
No. As a general rule, stockholders cannot No. The minimum corporate income tax is a
be held personally liable for the unpaid proxy for the normal corporate income tax,
taxes of a dissolved corporation. The rule not the regular corporate income tax paid by
prevailing under our jurisdiction is that a a corporation. For instance, a proprietary
corporation is vested by law with a educational institution may be subject to a
personality that is separate and distinct regular corporate income tax of 10%
from those of the persons composing it (depending on its dominant income), but it is
(Sunio v. NLRC, 127 SCRA 390{1984]}. exempt from the imposition of MCIT
NOTE: additional point should be because the latter is not intended to
given to the substitute
examinee if he answers in the
following that: However, stockholders
may be held liable for the unpaid
taxes of a dissolved corporation if it
appears that the corporate assets
have passed into their hands (Tan
Tiong Bio v. CFR, 4 SCRA
986 [1962]). Likewise, when
stockholders have
unpaid subscriptions to the capital of
the corporation they can be made
liable for unpaid taxes of the
corporation to the extent of their
unpaid subscriptions.
Minimum Corporate Income Tax

(2001)
What is the rationale of the law in
imposing what is
known as the Minimum Corporate
Income tax on
Domestic
Corporations? (3%)
SUGGESTED ANSWER:
The imposition of the Minimum Corporate
Income Tax (MCIT) is designed to forestall
the prevailing practice of corporations of
over claiming deductions in order to
reduce their income tax payments. The
filing of income tax returns showing a tax
loss every year goes against the business
motive which impelled the stockholders
to form the corporation. This is the reason
why domestic corporations (and resident
foreign corporations) after the recovery
period of four years from the time they
commence business operations, they
CDA answer requires an interpretation of
enterprises the Election Code. Pursuant to the
etc. provisions of Section 99(C) of the NIRC,
the taxability of this type of
[Note: If what is meant by regular contributions/donations is governed by
income tax is the the Election Code.
32% tax rate imposed on taxable
income of corporations, the answer Donor’s Tax; Basis for Determining Gain
would be in the affirmative, because (1995)
domestic corporations and resident (1) Kenneth Yusoph owns a commercial
foreign corporations are either liable lot which he
for the 2% of gross income (MCIT) bought many years ago for P1
or 32% of net income (the normal Million. It is now
corporate income tax) whichever is worth P20 Million although the zonal
higher.]
value is only P15 Million. He
ALTERNATIVE
donates one-half pro-indiviso interest
ANSWER: in the land to his son Dino on 31
No. A corporation which is exempted from December
the minimum corporate income tax is not 1994, and the other one-half pro-
automatically exempted from the regular indiviso interest to
corporate income tax. The reason for this the same son on 2
is that MCIT is imposed only beginning January 1995.
on the fourth taxable year immediately How much is the value of the gifts in 1994
following the year in which such and 1995 for
corporation commenced its business purposes of computing the gift
operations. Thus, a corporation may be tax? Explain.
SUGGESTED ANSWER:
exempt from MCIT because it is only on
1) The value of the gifts for purposes of
its third year of operations
computing the gift tax shall be P7.5million
following its commencement of
in 1994 and P7.5million in
business operations.
ESTATE & DONOR’S

TAXES
Donor’s Tax: Election Contributions
(1998)
Are contributions to a candidate in an
election subject to
donor's tax? On the part of the contributor,
is it allowable as a deduction from gross
income? [5%J
SUGGESTED
ANSWER:
1) No, provided the recipient candidate
had complied with the requirement for
filing of returns of contributions with
the Commission on Elections as
required under the Omnibus Election
Code.
2) The contributor is not allowed to

deduct the contributions because
the said expense is not directly
attributable to, the
development, management,
operation and/or conduct of a trade,
business or profession {Sec.
34[AJ(l)(a), NIRC). Furthermore, if
the candidate is an incumbent
government official or employee, it
may even be considered as a bribe or
a kickback (Sec. 34[AJ(l)(c), NIRC).
COMMENT: It is suggested that full
credit should be given for any answer
to the first question because the
1995. In valuing a real property for gift tax inheritance the gain from the sale for P20
purposes the million is P5 million because the basis is the
property should be appraised at the higher fair market value as of the date of acquisition.
of two values as of the time of donation The stepped-up basis of P15 million which is
which are (a) the fair market value as the value for estate tax purposes is the basis
determined by the Commissioner (which is for determining the gain (Sec. 34(b)(2),
the zonal value fixed pursuant to Section NIRC).
16(e) of the Tax Code), or (b) the fair ALTERNATIVE ANSWER:
market value as shown in the schedule of If Dino held on to the property as a capital
values fixed by the Provincial and City asset in that it is neither for sale in the
Assessors. The fact that the property is ordinary course of business nor used in Dino's
worth P20 million as of the time of donation business, then upon sale thereof there is
is immaterial unless it can be shown that presumed to be realized an income of P20
this value is one of the two values million which is the gross selling price of
mentioned as provided under Section 81 of the property. (Sec. 21(e), NIRC). The same
the Tax Code. would be subject to the 5% capital gains
tax.
(2) The Revenue District Officer questions
the splitting of the donations into 1994 Donor’s Tax; Dacion en Pago; Effect: Taxation (1997)
and 1995. He says that since there were
only two (2) days separating the two
donations they should be treated as one,
having been made within one year. Is he
correct? Explain.
SUGGESTED ANSWER:
2) The Revenue District Officer is not
correct because the computation of the gift
tax is cumulative but only insofar as gifts
made within the same calendar year.
Therefore, there is no legal justification for
treating two gifts effected in two separate
calendar years as one gift.
(3) Dino subsequently sold the land to a

buyer for P 20
Million. How much did Dino gain on
the sale? Explain.
SUGGESTED ANSWER:
3) Dino gained an income of 19 million
from the sale. Dino acquires a carry-over
basis which is the basis of the property in
the hands of the donor or P1 million. The
gain from the sale or other disposition of
property shall be the excess of the amount
realized therefrom over the basis or
adjusted basis for determining gain (Sec.
34(a), NIRC). Since the property was
acquired by gift, the basis for determining
gain shall be the same as if it would be in
the hands of the donor or the last preceding
owner by whom the property was not
acquired by gift. Hence, the gain is
computed by deducting the basis of P1
million from the amount realized which is
P20 million.
(4) Suppose, instead of receiving the lot by

way of donation, Dino received it by
inheritance. What would be his gain
on the sale of the lot for P20
Million? Explain.
SUGGESTED ANSWER:
4) If the commercial lot was received by
An insolvent company had an )
outstanding SUGGESTED ANSWER:
obligation of P l00,000.00 from a creditor. I would advice him to split the donation.
Since it could not pay the debt, the Giving the Php200,000 as a one-time
creditor agreed to accept payment through donation would mean that it will be subject
dacion en pago a property which had a to a higher tax bracket under the graduated
market value of P30.000.00. In the dacion tax structure thereby necessitating the
en pago document, the balance of the debt payment of donor's tax. On the other hand,
was condoned. splitting the donation into two equal
A. What is the tax effect on the amounts of Php 100,000 given on two
discharge of the unpaid different years will totally relieve the donor
balance of the obligation on the debtor from the donor’s tax because the first
corporation? B. Insofar as the creditor Phpl00.000 donation in the graduated
is concerned, how is he brackets is exempt. (Section 99, NIRC).
effected tax-wise as a consequence of the While the donor’s tax is computed on the
transaction? cumulative donations, the aggregation of all
SUGGESTED donations made by a donor is allowed only
ANSWERS:
over one calendar year.
(a) The condonation of the unpaid balance
of the obligation has the effect of a
Donor’s Tax; Donation to Non-Stock, Non-Profit
donation made on the part of the
Private
creditor. It is obvious that the creditor
Educational Institutions
merely desires to benefitthe debtor
(2000)
and without any
What conditions must occur in order
consideration therefore cancels the debt,
that all grants, donations and
the amount of the debt cancelled is a gift contributions to non-stock, non-profit
from the creditor to the debtor and need private educational institutions may be
not be included in the latter's gross exempt from the donor's tax under Section
income (Sec. 101 (a) of the Tax Code? (3%) SUGGESTED
50, RR ANSWER:
No. 2); The following are the
conditions:
(b) For the difference of P70,000 the
creditor shall be subject to donor's tax at
the applicable rates provided for under the
National Internal Revenue Code.
ALTERNATIVE
ANSWER:
(a) If the discharge was prompted by the
insolvency of the debtor company, then it
is a clear case of a write-off of a bad debts
which has no tax consequence to the
debtor.
(b) The write-off of the bad debt will

entitle the creditor to claim the same as a
deduction from its gross income.
Donor’s Tax; Donation to a Sibling

(2001)
Your bachelor client, a Filipino residing in
Quezon City,
wants to give his sister a gift of Php
200,000.00. He seeks your advice, for
purposes of reducing if not eliminating
the donor's tax on the gift, on whether it is
better for him to give all of the Php
200,000.00 on Christmas 2001 or to give
Php 100,000.00 on Christmas2001 and the
other Php
100,000.00 on January 1, 2002. Please
explain your advice.
(5
%
1. Not more than thirty percent (30%) descendant; or
of said gifts B. Relative by consanguinity in the
shall be used by such donee for collateral line within the fourth degree of
administration purposes; relationship." [Sec. 98 (B), NIRC of 1997]
2. The educational institution is
incorporated as a non- stock entity, Donor’s Tax; Sale of shares of Stock & Sale of
3. paying no Real
dividends, Property (1999)
4. governed by trustees who receive no A, an individual, sold to B, his brother-in-law,
compensation, his lot with
an a market value of P1,000,000 for P600.000.
d A's cost in the lot is P100.000. B is financially
5. devoting all its income, whether capable of buying the lot.
students' fees or
gifts, donations, subsidies or other A also owns X Co., which has a fast growing
forms of philanthropy, to the business. A sold some of his shares of stock in
accomplishment and promotion of the X Co. to his key executives in X Co. These
purposes enumerated in its Articles of executives are not related to A. The selling
Incorporation. (Sec. 101 (A) (3), NIRC price is P3,000,000, which is the book value
of 1997] of the shares sold but with a market value of
P5,000,000. A's cost in the shares sold is
Donor’s Tax; Donation to Political Candidate P1,000,000. The purpose of A in selling the
(2003) shares is to enable his key executives to
X is a friend of Y, the chairman of Political acquire a propriety interest in the business
Party Z, who and have a personal
wants to run for President in the 2004
elections. Knowing
that Y needs funds for posters and
streamers, X is thinking of donating to Y
P150,000.00 for his campaign. He asks you
whether his intended donation to Y will be
subject to the donor's tax. What would
your answer be? Will your answer be the
same if he were to donate to Political
Party Z instead of to Y directly? (8%)
SUGGESTED ANSWER:
The donation to Y, once he becomes a
candidate for an elective post, is not subject
to donor's tax provided that he complies
with the requirement of filing returns of
contributions with the Commission on
Elections as required under the Omnibus
Election Code.
The answer would be the same if X had

donated the amount to Political Party Z
instead of to Y directly because the law
places in equal footing any contribution to
any candidate, political party or coalition of
parties for campaign purposes. (Section
99(C) of the 1997 Tax Code).
Donor’s Tax; Donee or Beneficiary; Stranger

(2000)
When the donee or beneficiary is a
stranger, the tax
payable by the donor shall be 30% of the net
gifts. For purposes of this tax, who is a
stranger? (2%)
SUGGESTED ANSWER:
A STRANGER is a person who
is not a:
A. Brother, sister (whether by whole or
half-blood), spouse, ancestor and lineal
stake in its business. Explain if August 1, 2001 wrote a will and, on the
the above same day, made
transactions are subject to several inter-vivos gifts to his children. Ten
donor's tax. (5%) days later, he died. In your opinion, are the
SUGGESTED inter-vivos gifts considered transfers in
ANSWER:
The first transaction where a lot was sold contemplation of death for purposes of
by A to his brother-in-law for a price below determining properties to be included in his
its fair market value will not be subject to gross estate? Explain your answer. (5%)
SUGGESTED ANSWER:
donor's tax if the lot qualifies as a capital Yes. When the donor makes his will within
asset. The transfer for less than adequate a short time of, or simultaneously with, the
and full consideration, which gives rise to making of gifts, the gifts are considered as
a deemed gift, does not apply to a sale of having been made in contemplation of
property subject to capital gains tax. death. (Roces v. Posadas, 58 Phil. 108).
(Section 100, NIRC). However, if the lot Obviously, the intention of the donor in
sold is an ordinary asset, the excess of the making the inter-vivos gifts is to avoid the
fair market value over the consideration imposition of the estate tax and since the
received shall be considered as a gift donees are likewise his forced heirs who
subject to the donor's tax. are called upon to inherit, it will create a
presumption juris tantum that said
The sale of shares of stock below the fair donations were made mortis causa, hence,
market value thereof is subject to the the properties donated shall be included as
donor's tax pursuant to the provisions of part of A's gross estate.
Section 100 of the Tax Code. The excess of
the fair market value over the selling
price is a deemed gift.
ALTERNATIVE
ANSWER:
The sale of shares of stock below the fair
market value will not give rise to the
imposition of the donor's tax. In
determining the gain from the transfer, the
selling price of the shares of stocks shall
be the fair market value of the shares of
stocks transferred. (Section 6, RR No. 2-
82). In which case, the reason for the
imposition of the donor's tax on sales for
inadequate consideration does not exist.
Estate Tax: Comprehensive Agrarian Reform Law

(1994) Jose Ortiz owns 100 hectares of
agricultural land planted to coconut trees.
He died on May 30, 1994. Prior to his
death, the government, by operation of
law, acquired under the Comprehensive
Agrarian Reform Law all his agricultural
lands except five (5) hectares. Upon the
death of Ortiz, his widow asked you how
she will consider the
100 hectares of agricultural land in the
preparation of the estate tax return. What
advice will you give her? SUGGESTED ANSWER:
The 100 hectares of land that Jose Ortiz
owned but which prior to his death on May
30, 1994 were acquired by the government
under CARP are no longer part of his
taxable gross estate, with the exception of
the remaining five (5) hectares which
under Sec. 78{a) of the Tax Code still
forms part of "decedent's interest".
Estate Tax: Donation Mortis Causa

(2001)
A, aged 90 years and suffering from
incurable cancer, on
The gross estate shall be determined by
including
Estate Tax: Donation Mortis Causa vs. Inter Vivos Estate Tax: Gross Estate: Deductions (2000)
(1994) Are donations inter vivos and Mr. Felix de la Cruz, a bachelor resident
donations mortis causa subject to estate citizen, suffered from a heart attack while on
taxes? a business trip to the USA. He died
SUGGESTED ANSWER: intestate on June 15, 2000 in New York
Donations inter vivos are subject to donor's City, leaving behind real properties situated
gift tax (Sec. in New York; his family home in Valle
91 (a). Tax Code) while donations mortis Verde, Pasig City; an office condominium
causa are subject to estate tax (Sec. 77, in Makati City; shares of stocks in San
Tax Code). However, donations inter vivos, Miguel Corporation; cash in bank;
actually constituting taxable lifetime like and personal belongings. The decedent is
transfers in contemplation of death or heavily insured with Insular Life. He had no
revocable transfers (Sec. known debts at the time of his death. As
78 (b) and (c), Tax Code) may be taxed for the sole heir and appointed Administrator,
estate tax purposes, the theory being that how would you determine the gross estate
the transferor's control thereon extends up of the decedent? What deductions may be
to the time of his death. claimed by the estate and when and where
ALTERNATIVE ANSWER: shall the return be filed and estate tax paid?
Donations inter vivos are not subject to (3%) SUGGESTED ANSWER:
estate taxes because the transfer of the
property take effect during the lifetime of
the donor. The transfer is therefore subject
to the donor's tax.
On the other hand, donations mortis causa

are subject to estate taxes since the transfer
of the properties takes effect after the death
of the decedent. Such donated properties,
real or personal, tangible or intangible, shall
form part of the gross estate.
Estate Tax: Gross Estate: Allowable Deduction

(2001)
On the first anniversary of the death of Y, his
heirs hosted
a sumptuous dinner for his doctors,
nurses, and others who attended to Y
during his last illness. The cost of the
dinner amounted to Php 50,000.00.
Compared to his gross estate, the Php
50,000.00 did not exceed five percent of
the estate. Is the said cost of the dinner
to commemorate his one year death
anniversary deductible from his gross
estate? Explain your answer. (5%) SUGGESTED
ANSWER:
No. This expense will not fall under any of
the allowable deductions from gross estate.
Whether viewed in the context of either
funeral expenses or medical expenses, the
same will not qualify as a deduction.
Funeral expenses may include medical
expenses of the last illness but not expenses
incurred after burial nor expenses incurred
to commemorate the death anniversary. (De
Guzman V. De Guzman, 83 SCRA 256).
Medical expenses, on the other hand, are
allowed only if incurred by the decedent
within one year prior to his death. (Section
86(A)(6), NIRC).
the value at the time of his death all of authorized agent bank, or Revenue District
the properties mentioned, to the Officer, Collection Officer, or duly
extent of the interest he had at the time authorized Treasurer of Pasig City, the City
of his death because he is a Filipino in which the decedent Mr. de la Cruz was
citizen. [Sec. 85 (A), NIRC of 1997] domiciled at the time of his death. [Sec. 90
(D). NIRC of 1997]
With respect to the life insurance
proceeds, the amount includible in the Estate Tax: Inclusion: Resident Alien
gross estate for Philippine tax purposes (1994)
would be to the extent of the amount Cliff Robertson, an American citizen, was
receivable by the estate of the deceased, a permanent
his executor, or administrator, under resident of the Philippines. He died in
policies taken out by decedent upon his Miami, Florida. He left 10,000 shares of
own life, irrespective of whether or not the Meralco, a condominium unit at the
insured retained the power of revocation,
or to the extent of the amount receivable
by any beneficiary designated in the policy
of insurance, except when it is expressly
stipulated that the designation of the
beneficiary is irrevocable. [Sec. 85 (E)
NIRC of 1997]
The DEDUCTIONS that may be claimed

by the estate are:
1) The actual funeral expenses or in an
amount equal to five percent (5%) of
the gross estate, whichever is lower,
but in no case to exceed two
hundred thousand pesos (P200.000.00).
[Sec. 86 (A) (1) (a). NIRC of 1997]
2) The judicial expenses in the

testate or intestate proceedings.(Sec.
86(A)(1)
3) The value of the decedent's family

home located in Valle Verde, Pasig City
in an amount not exceeding one million
pesos (P1,000,000.00), and upon
presentation of a certification of the
barangay captain of the locality that
the same have been the decedent's
family home. [Sec. 86 (A) (4), Ibid]
4) The standard deduction of P1,000,000.

(Sec. 86(A)(5)
5) Medical expenses incurred within

one year from death in an amount
not exceeding P500,000.(Sec.
86(A)(6)
The ESTATE TAX RETURN shall be

filed within six (6) months from the
decedent's death (Sec. 90 (B), NIRC of
1997], provided that the Commissioner of
Internal Revenue shall have authority to
grant in meritorious cases, a reasonable
extension not exceeding thirty (30) days
for filing the return (Sec. 90 (c), Ibid]
Except in cases where the Commissioner

of Internal Revenue otherwise permits, the
estate tax return shall be filed with an
Twin Towers Building at Pasig, Metro at the time of his death shall be determined
Manila and a house by including the value at the time of his death
and lot in Los Angeles, of all property, real or personal, tangible or
California. intangible, wherever situated to the extent
What assets shall be included in the Estate of the interest therein of the decedent at the
Tax Return to time of his death [Sec. 85 (A), NIRC of
be filed with the 1997). These properties shall have a situs of
BIR? taxation in the Philippines hence subject to
SUGGESTED ANSWER:
Philippine estate taxes.
All of Mr. Robertson's assets consisting of
10,000 shares in the Meralco, a
On the other hand, in the case of a non-
condominium unit in Pasig, and his house
resident decedent who at the time of his
and lot in Los Angeles, California are
death was not a citizen of the Philippines,
taxable. The properties of a resident alien
only that part of the entire gross estate
decedent like Mr. Robertson are taxable
which is situated in the Philippines to the
wherever situated (Sees. 77, 78 and 98, Tax
extent of the interest therein of the decedent
Code).
at the time of his death shall be included in
his taxable estate. Provided, that, with
Estate Tax: Payment vs. Probate Proceedings respect to intangible personal property, we
(2004) apply the rule of reciprocity. (Ibid)
VCC is the administrator of the estate of his
father NGC, Estate Tax: Vanishing Deductions (1994)
in the estate proceedings pending Vanishing deductions in estate-
before the MM Regional Trial Court. Last taxation?
year, he received from the Commissioner of
Internal Revenue a deficiency tax
assessment for the estate in the amount
of P1,000,000. But he ignored the notice.
Last month, the BIR effected a levy on the
real properties of the estate to pay the
delinquent tax. VCC filed a motion with the
probate court to stop the enforcement and
collection of the tax on the ground that the
BIR should have secured first the
approval of the probate court, which had
jurisdiction over the estate, before levying
on its real properties. Is VCC's contention
correct? (5%)
SUGGGESTED ANSWER:
No. VCC's contention is not correct. The
approval of the probate court is not
necessary. Payment of estate taxes is a
condition precedent for the distribution of
the properties of the decedent and the
collection of estate taxes is executive in
nature for which the court is devoid of any
jurisdiction. Hence, the approval of the
court, sitting in probate, or as a settlement
tribunal is not a mandatory requirement in
the collection of estate taxes (Marcos H v.
Court of Appeals, 273 SCRA 47 [1997]).
Estate Tax: Situs of Taxation: Non-Resident

Decedent
(2000
)
Discuss the rule on situs of taxation with
respect to the
imposition of the estate tax on property left
behind by a non-resident decedent. (2%)
SUGGESTED ANSWER:
The value of the gross estate of a non-
resident decedent who is a Filipino citizen
SUGGESTED ANSWER:
ANSWER: The value-added tax has the following
Vanishing deductions or property characteristics:
previously taxed in estate taxation refers 1) It is an indirect tax where tax
to the diminishing deducibility/ exemption, shifting is always
at the rate of 20% over a period of five (5) presumed:
years until it is lost after the fifth year, of 2) It is consumption-
any property (situated in the Philippines) based;
forming part of the gross estate, acquired 3) It is imposed on the value-added in
by the decedent from a prior decedent each stage of distribution;
who died within a period of five (5) years 4) It is a credit-invoice method value-
from the decedent's death. added tax; and
5) It is not a
Estate Tax; Payment vs. Probate Proceedings cascading tax.
(2005)
Is the approval of the court, sitting as VAT: Exempted Transactions
probate or estate (1996)
settlement court, required in the Give at least three (3) real estate
enforcement and collection of estate tax? transactions which are not subject to the
Explain. Value-Added Tax.
SUGGESTED SUGGESTED ANSWER:
ANSWER: Real estate transactions which are exempt
No, the approval of the court, sitting in from the value- added tax are:
probate, or as a settlement tribunal over (a) Sale of real property not primarily
the deceased is not a mandatory held for sale or lease in the ordinary
requirement in the collection of estate course of trade or business;
taxes. There is nothing in the Tax Code,
and in the pertinent remedial laws that
implies the necessity of the probate or
estate settlement court's approval of the
state's claim for estate taxes, before the
same can be enforced and collected.
(Marcos v. Court of Appeals, G.R. No.
120880, June 5, 1997)
BUSINESS
TAXES
VAT: Basis of VAT
(1996)
What is the basis of the Value-Added
Tax on taxable sales of real property?
SUGGESTED
ANSWER:
The basis of the Value-Added Tax on
taxable sale of real property is "GROSS
SELLING PRICE" which is either selling
price stated in the sale document or the
"Zonal Value", whichever is higher. In
the absence of zonal values, the gross
selling price shall refer to the market
value as shown in the latest tax declaration
or the consideration, whichever is higher.
VAT: Characteristics of VAT

(1996)
What are the characteristics of the
Value-Added Tax?
SUGGESTED
ANSWER:
The value-added tax is an indirect tax and
the amount of tax may be shifted or passed
on to the buyer, transferee or lessee of the
goods, properties or services.
ALTERNATIVE
(b) Sale of real property utilized for in the course of business;
socialized housing
under RA. No. 7279; b) Distribution or transfer to:
(c) Sale of real property utilized under (1) Shareholders or investors as
the low-cost share in the
housing under BP Big. 220. profits of VAT-registered
persons; or
Note: The other real estate transactions (2) Creditors in payment of debt;
which are exempt from the value-added tax
which may be cited by the bar candidates c) Consignment of goods if actual sale is
are as follows: not made within 60 days following the
(a) Transfer of real property to a trustee date such goods were consigned; and
if the property
is to be held merely in trust for the d) Retirement from or cessation of
trustor. business, with respect to inventories of
(b) Transfer of real property to a taxable goods existing as of such
corporation in retirement or cessation.
exchange for its shares of stock
under Section VAT; Covered Transactions (1998)
34(c)(2) and (6)(2) of the Tax Code.
(c) Advance payment by the lessee in a
lease contract, when the same is
actually a loan to the lessor from the
lessee.
(d) Security deposits for lease
arrangements to insure
the faithful performance of certain
obligations of the lessee to the lessor.
(e) Lease of residential units, boarding
houses, dormitories, rooms and bed
spaces offered for rent by their owners
at a monthly rental not exceeding
P3,950.00 per unit.
VAT: Liable for Payment (1996)

Who are liable for the payment of
Value-Added Tax?
SUGGESTED ANSWER:
The persons liable for the value-added tax
are:
a. Sellers of goods and properties in the
course of trade
or business;
b. Sellers of services in the course of
trade or business,
including lessors of goods and properties;
c. Importers of taxable goods, whether in
the course of
business or not
VAT: Transactions "Deemed Sales” (1997)

Under the Value Added tax (VAT), the tax is
imposed on
sales, barter, or exchange of goods and
services. The VAT
is also imposed on certain transactions
"deemed-sales". What are these so-called
transactions "deemed sales'? SUGGESTED
ANSWER:
The following transactions shall be deemed
sale:
a) Transfer, use, or consumption not in
the course of business of goods
originally intended for sale or for use
State whether the following residential units with a monthly rental
transactions are a) per unit not exceeding Php 8,000, which
VAT Exempt, b) subject to VAT at 10%; or Is exempt from VAT regardless of
c) subject to the amount of aggregate rentals
VAT at received by the lessor during the year.
0%: (Sec. 109(x), NIRC). The term unit shall
1) Sale of fresh vegetables by Aling mean per person in the case of
Ining at the dormitories, boarding houses and bed
Pamilihang Bayan ng Trece Martirez. spaces (Sec. 4.103-1, RRNo. 7-95).
[1%]
2) Services rendered by Jake's COMMENT: The problems do not call for a yes
Construction Company, a contractor or no answer. Accordingly, a bar candidate who
to the World Health Organization in answered only VAT exempt. VAT at 10% or VAT
the renovation of its offices in Manila. at 0%. as called for in the problem without
[1%] further reasons, should be given full credit.
3) Sale of tractors and other agricultural
implements by VAT; Exemption: Constitutionality
Bungkal Incorporated to local farmers. (2004)
[1%] A law was passed exempting doctors and
4) Sale of RTW by Cely's Boutique, a lawyers from the operation of the value
Filipino dress added tax. Other professionals complained
designer, in her dress shop and other and filed a suit questioning the law for being
outlets. [1%] discriminatory and violative of the equal
5) Fees for lodging paid by students to protection clause of the Constitution since
Bahay-Bahayan complainants were not given the
Dormitory, a private entity
operating a student dormitory
(monthly fee PI,500). [1%]
SUGGESTED
ANSWER:
1) VAT exempt. Sale of agricultural
products, such as fresh vegetables, in
their original state, of a kind generally
used as, or producing foods for human
consumption is exempt from VAT.
(Section 109(c), NIRC).
2) VAT at 0%. Since Jake's Construction

Company has rendered services to the
World Health Organization, which is
an entity exempted from taxation
under international agreements to
which the Philippines is a signatory,
the supply of services is subject to
zero percent (0%) rate. (Sec.
108[B1(3), NIRC).
3) VAT at 10%. Tractors and other

agricultural implements fall under the
definition of goods which include all
tangible objects which are capable of
pecuniary estimation (Sec.
106[A1(1), NIRC, the sales of which
are subject to VAT at 10%.
4) This is subject to VAT at 10%. This

transaction also falls under the
definition of goods which include all
tangible objects which are capable of
pecuniary estimation (Sec. 106[A1(1),
NIRC, the sales of which are subject
to VAT at 10%.
5) VAT Exempt. The monthly fee paid by

each student falls under the lease of
same exemption. Is the suit meritorious or manufacturer located and
not? Reason registered as a Subic Bay Freeport
briefly. Enterprise under Republic Act No. 7227 and
(5%) a non-VAT taxpayer. As such, it is exempt
SUGGESTED ANSWER:
from payment of all local and national
B. Yes, the suit is meritorious. The VAT is internal revenue taxes. During its operations,
designed for economic efficiency; hence,
it purchased various supplies and materials
should be neutral to those who belong to
necessary in the conduct of its manufacturing
the same class. Professionals are a class of
business. The suppliers of these goods shifted
taxpayers by themselves who, in compliance
to Lily's Fashion, Inc. the 10% VAT on the
with the rule of equality of taxation, must be
purchased items amounting to P
treated alike for tax purposes. Exempting
500,000.00. Lily's Fashion, Inc. filed with
lawyers and doctors from a burden to
which other professionals are subjected will the BIR a claim for refund for the input tax
make the law discriminatory and violative of shifted to it by the suppliers. If you were the
the equal protection clause of the Commissioner of Internal Revenue, will you
Constitution. While singling out a class for allow the refund? (5%)
ALTERNATIVE ANSWER:
taxationpurposeswill not infringe upon
No, I will not allow the refund. Only VAT-
this constitutional limitation
Registered taxpayers are entitled to a
(Shell v. Vano, 94 Phil. 389 [1954]),
refund of their
singling out a taxpayer from a class will no
doubt transgress the constitutional
limitation (Ormoc Sugar Co. Inc., v.
Treasurer of Ormoc City, 22 SCRA 603
[1968]). Treating doctors and lawyers as a
different class of professionals will not
comply with the requirements of a
reasonable, hence valid classification,
because the classification is not based upon
substantial distinction which makes real
differences. The classification does not
comply with the requirement that it should
be germane to the purpose of the law either.
(Pepsi-Cola Bottling Co., Inc. v. City of
Butuan, 24 SCRA 789 [1968]).
ANOTHER ANSWER:
No. The suit is not meritorious. The equal
protection clause of the Constitution merely
requires that all persons subjected to
legislation shall be treated alike, under like
circumstances and conditions, both in the
privileges conferred and in the liabilities
imposed. The equality in taxation rule is not
violated if classifications or distinctions are
made as long as the same are based on
reasonable and substantial differences.
{Pepsi-Cola Bottling Co., Inc. v. City
of Butuan, 24 SCRA 789 [1968]).
In the instant case, the professions of

doctors and lawyers are not principally
aimed at earning money but for the service
of the people. The exemption granted to
doctors and lawyers from the operation of
the VAT is justified, as it is not
discriminatory against the other
professionals because they have reasonable
and substantial differences in the conduct
of their professions.
VAT; Non-VAT taxpayer; Claim for Refund

(2006)
Lily's Fashion, Inc. is a garment
unapplied/unused Input VAT (Tax respective definite shares of the estate and
Reform Act, the income thereof, for each of them to
Section 112[A] manage and dispose of as exclusively his
[1997]). own without the intervention of the other
ALTERNATIVE
heirs, and, accordingly, he becomes liable
ANSWER:
No. The exemption of Lily's Fashion, Inc. is individually for all taxes in connection
only for taxes for which it is directly liable. therewith. If after such partition, he allows
his shares to be held in common with his
Hence, it can not claim exemption for a tax
co-heir under a single management to be
shifted to it, which is not at all considered
used with the intent of making profit
a tax to the buyer but a part of the
thereby in proportion to his share, there can
purchase price. Lily's fashion is not the
be no doubt that, even if no document or
taxpayer in so far as the passed-on tax is
instrument were executed for the purpose,
concerned and therefore, it can not claim
for tax purposes, at least, an unregistered
for a refund of a tax merely shifted to it
partnership is formed (Lorenzo Ona, et al v.
(Phil. Acetylene Co., Inc. v. CIR, L- CIR, 45 SCRA 74).
19707,Aug. 17, 1987). ALTERNATIVE ANSWER:
(NOTA BENE: This concept pertains No, the assessments are not justified. The
to the VAT law which is excluded mere sharing of income does not of itself
from the Bar coverage, Guidelines for
2006
establish a partnership absent any clear
Bar Examinations, June 15, 2006) intention of the co-owners who are only
awaiting liquidation of the estate.
REMEDIES IN BIR: Collection of Tax Deficiency
INTERNAL REVENUE (1999)
TAXES
BIR: Assessment: Unregistered Partnership
(1997)
Mr. Santos died intestate in 1989 leaving
his spouse and
five children as the only heirs. The estate
consisted of a family home and a four-door
apartment which was being rented to
tenants. Within the year, an extrajudicial
settlement of the estate was executed
from the heirs, each of them receiving
his/her due share. The surviving spouse
assumed administration of the property.
Each year, the net income from the rental
property was distributed to all,
proportionately, on which they paid
respectively, the corresponding income tax.
In 1994, the income tax returns of the

heirs were examined and deficiency
income tax assessments were issued
against each of them for the years 1989 to
1993, inclusive, as having entered into an
unregistered partnership. Were the
assessments justified?
SUGGESTED
ANSWER:
Yes, the assessments were justified
because for income tax purposes, the co-
ownership of inherited property is
automatically converted into an
unregistered partnership from the
moment the said properties are used as
a common fund with intent to produce
profits for the heirs in proportion to their
shares in the inheritance.
From the moment of such partition, the

heirs are entitled already to their
A died, survived by his wife and three involved do
children. The estate not justify the collection of the amount
tax was properly paid and the estate due. [Sec.
settled and divided and distributed among 204 (B), NIRC of 1997]
the four heirs. Later, the BIR found out
that the estate failed to report the BIR: Compromise; Extent of Authority (1996)
income received by the estate during Explain the extent of the authority of the
administration. The BIR issued a Commissioner
deficiency income tax assessment plus of Internal Revenue to compromise and
interest, surcharges and penalties. Since abate taxes?
the 3 children are residing abroad, the BIR SUGGESTED ANSWER:
sought to collect the full tax deficiency The authority of the Commissioner to
only against the widow. Is the BIR correct? compromise encompasses both civil and
(10%) SUGGESTED ANSWER: criminal liabilities of the taxpayer. The civil
Yes, the BIR is correct. In a case where compromise is allowed only in cases
the estate has been distributed to the heirs, 12) where the tax assessment is of doubtful
the collection remedies available to the BIR validity, or
in collecting tax liabilities of an estate may 13) when the financial position of the
either (1) sue all the heirs and collect from taxpayer demonstrates a clear inability to
each of them the amount of tax pay the tax.
proportionate to the inheritance received or
(2) by virtue of the lien created under The compromise of the tax liability is possible
Section at any stage of litigation and the amount of
219, sue only one heir and subject the compromise is left to the discretion of the
property he Commissioner except with respect to
received from the estate to the payment of
the estate tax. The BIR, therefore, is correct
in pursuing the second remedy although this
will give rise to the right of the heir who
pays to seek reimbursement from the other
heirs. (CIR v. Pineda, 21 SCRA 105). In no
case, however, can the BIR enforce the tax
liability in excess of the share of the widow
in the inheritance.
BIR: Compromise; Conditions

(2000)
Under what conditions may the
Commissioner of Internal
Revenue be
authorized to:
A. Compromise the payment of any
internal revenue
tax? (2%)
SUGGESTED ANSWER:
may be authorized to compromise the
payment of any internal revenue tax where:
1) A reasonable doubt as to the validity
of the claim against the taxpayer exists;
or
2) the financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax.
B. Abate or cancel a tax

liability? (3%)
SUGGESTED ANSWER:
The Commissioner of Internal Revenue may
abate or cancel a tax liability when:
1) The tax or any portion thereof appears
to be unjustly
or excessively assessed; or
2) The administration and collection costs
final assessments issued against filed an injunctive suit in the Regional Trial
large taxpayers Court to compel the BIR to hold the
wherein the Commissioner cannot collection of the tax in abeyance until the
compromise for less than fifty percent decision on the protest was rendered.
(50%). Any compromise involving large A. Can the BIR file the civil action for
taxpayers lower than fifty percent (50%) collection, pending decision on the
shall be subject to the approval of the administrative protest? Explain. (3%)
Secretary of Finance. SUGGESTED ANSWER:
A. Yes, because there is no
All criminal violations except those prohibition for this procedure considering
involving fraud, can be compromised by that the filing of a civil action for collection
the Commissioner but only prior to the during the pendency of an administrative
filing of the information with the Court. protest constitutes the final decision of the
The Commissioner may also abate or Commissioner on the protest (CIR v. Union
cancel a tax liability when Shipping Corp., 85 SCRA
1. the tax or any portion thereof appears 548
to have been unjustly or excessively [1990]).
assessed; or
2. the administrative and collection
costs involved do not Justify collection
of the amount due. (Sec. 204, NIRC)
BIR: Compromise; Withholding Agent

(1998)
May the Commissioner of the Internal
Revenue compro-
mise the payment of withholding tax (tax
deducted and withheld at source) where
the financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax? [5%1
SUGGESTED
ANSWER:
No. A taxpayer who is constituted as
withholding agent who has deducted and
withheld at source the tax on the income
payment made by him holds the taxes as
trust funds for the government (Sec. 58[D])
and is obligated to remit them to the BIR.
The subsequent inability of the withholding
agent to pay/remit the tax withheld is not a
ground for compromise because the
withholding tax is not a tax upon the
withholding agent but it is only a
procedure for the collection of a tax.
BIR: Corporation: Distraint & Levy

(2002)
On March 15, 2000, the BIR issued a
deficiency income
tax assessment for the taxable year 1997
against the Valera Group of Companies
(Valera) in the amount of P10 million.
Counsel for Valera protested the
assessment and requested a
reinvestigation of the case. During the
investigation, it was shown that Valera had
been transferring its properties to other
persons. As no additional evidence to
dispute the assessment had been
presented, the BIR issued on June 16, 2000
warrants of distraint and levy on the
properties and ordered the filing of an
action in the Regional Trial Court for the
collection of the tax. Counsel for Valera
B. As counsel for Valera, what action may be prosecuted for willfully attempting in
would you take any manner to evade or defeat any tax
in order to protect the interest of imposed by the Internal Revenue Code? [5%)
your client? Explain your answer. (2%) SUGGESTED ANSWER:
SUGGESTED ANSWER: No. Assessment is not necessary before a
B. I will wait for the filing of the civil taxpayer maybe prosecuted if there is a prima
action for collection and consider the facie showing of a willful attempt to evade
same as an appealable decision. I will taxes as in the taxpayer's failure to
not file an injunctive suit because it is not declare a specific item of taxable income in
an available remedy. I would then appeal the his income tax returns (Ungab v. Cusi 97
case to the Court of Tax Appeals and move SCRA 877). On the contrary, if the taxes
for the dismissal of the collection case with alleged to have been evaded is computed
the RTC. Once the appeal to the CTA is filed based on reports approved by the BIR there
on time, the CTA has exclusive jurisdiction is a presumption of regularity of the
over the case. Hence, the collection case in previous payment of taxes, so that unless
the RTC should be dismissed (Tabes v. and until the BIR has made a final
Flojo, 115 SCRA 278 [1982]). determination of what is supposed to be the
correct taxes, the taxpayer should not be
BIR: Court of Tax Appeals: Collection of Taxes; Grounds placed in the crucible of
for Compromise (1996)
1. May the Court of Tax Appeals issue an
injunction to
enjoin the collection of taxes by the
Bureau of
Internal Revenue? Explain.
SUGGESTED ANSWER:
Yes. When a decision of the
Commissioner on a tax protest is appealed
to the CTA pursuant to Sec. 11 of RA. No.
1125 (law creating the CTA) in relation to
Sec. 229 of the NIRC, such appeal does not
suspend the payment, levy, distraint and/or
sale of any of the taxpayer's property for the
satisfaction of his tax liability. However,
when in the opinion of the CTA the
collection of the tax may jeopardize the
interest of the Government and/or the
taxpayer, the Court at any stage of the
proceedings may suspend or restrain the
collection of the tax and require the
taxpayer either to deposit the amount
claimed or to file a surety bond for not more
than double the amount with the Court.
2. May the tax liability of a taxpayer be

compromised during the pendency of an
appeal? Explain.
SUGGESTED ANSWER:
Yes. During the pendency of the appeal, the
taxpayer may still enter into a compromise
settlement of his tax liability for as long as
any of the grounds for a compromise i.e.;
doubtful validity of assessment and
financial incapacity of taxpayer, is present.
A compromise of a tax liability is possible
at any stage of litigation, even during
appeal, although legal propriety demands
that prior leave of court should be obtained
(Pasudeco vs. CIR L-39387, June 29,
1982).
BIR: Criminal Prosecution: Tax Evasion

(1998)
Is assessment necessary before a taxpayer
criminal prosecution (CIR v. 3. Commissioner of
Fortune Tobacco Customs
Corp., GR No. 119322, 4. Regional Trial
June 4, 1996). Court
5. Metropolitan Trial
BIR: Extinction; Criminal Liability of the Taxpayer Court
(2002) Mr. Chan, a manufacturer of 6. Court of
garments, was investigated for failure to Appeals
file tax returns and to pay taxes for the 7. Supreme
taxable year 1997. Despite the subpoena Court
duces tecum issued to him, he refused to SUGGESTED ANSWER:
present and submit his books of 1. Protest with the Collector of Customs
accounts and allied records. (Sec. 2308, TCC)
Investigators, therefore, raided his 2. Appeal to the Commissioner of
factory and seized several bundles Customs (Sec. 2313, TCC).
of manufactured garments, supplies and 3. Appeal to the CTA (RA
unpaid imported textile materials. After 9282)
his apprehension and based on the 4. Petition for Review on Certiorari
testimony of a former employee, Supreme Court (Rule
deficiency income and business taxes 45 of the 1997 Rules of Civil
were assessed against Mr. Chan on April Procedure (RA 9282).
15, 2000. It was then that he paid the
taxes. Criminal Taxpayer; Prescriptive Period; Assessment;
action was nonetheless instituted against Deficiency
him in the Regional Trial Court for Income Tax
violation of the Tax Code. Mr. Chan moved (2006)
to dismiss the criminal case on the ground The Commissioner of Internal Revenue
that he had already paid the taxes assessed issued an assess-
against him. He also demanded the return ment for deficiency income tax for taxable
of the garments and materials seized from year 2000 last
his factory. How will you resolve Mr. Chan's July 31, 2006 in the amount of P 10 Million
inclusive of
motion? (5%)
SUGGESTED
ANSWER:
The motion to dismiss should be denied.
The satisfaction of the civil liability is not
one of the grounds for the extinction of
criminal action (People v. Ildefonso
Tierra, 12 SCRA 666 [1964]).
Likewise, the payment of the tax due after
apprehension shall not constitute a valid
defense in any prosecution for violation of
any provision of the Tax Code (Sec. 253[a],
NIRC). However, the garments and
materials seized from the factory should be
ordered returned because the payment of
the tax had released them from any lien
that the Government has over them.
Customs; Jurisdiction; Assessment; Unpaid

Customs
Duties/Taxes
(2006)
The Collector of Customs issued an
assessment for un-
paid customs duties and taxes on the
importation of your client in the amount of
P980,000.00. Where will you file your case
to protect your client's right? Choose the
correct courts/ agencies, observing their
proper hierarchy. (5%)
1. Court of Tax
Appeals
2. Collector of
Customs
surcharge and interests. If the delinquent January 4, 2000; See also Revised CTA Rules,
taxpayer is your approved by the Supreme Court on
client, what steps will you take? What is December
your defense? (10%) 15,
ALTERNATIVE ANSWER: 2005).
As Counsel, I shall move to cancel the ALTERNATIVE ANSWER:
Assessment because of prescription. The I will advice the Bank to promptly pay
three (3) year period of assessment for the the deficiency documentary stamp tax and
Income Tax Returns of 2000 starts on April the interest charges to avoid any further
15, 2001 and ends on April 16, 2004. increase in the tax liability. The Bank should
The assessment of July 31, 2006 is beyond have appealed to the Court of Tax Appeals
the three (3) year prescriptive period and when the BIR failed to decide on its Request
can no longer have any legal, binding effect for Reconsideration within thirty (30) days
(Tax Reform Act, Title VIII, Chapter I, after the inaction of the BIR for one hundred
Section eighty (180) days or on December 31, 2003.
203 The Tax Assessment has already become
[1997]). final, executory and unappealable at that
ALTERNATIVE ANSWER: point (BPI v. CIR, G.R. No. 139736, October
Since my client has lost his right to protest, 17, 2005).
I will advise him to wait for a collection
action by the Commissioner. Then, I will file Taxpayer; VAT-registered; Claim for Tax Refund (2006)
a petition for review with the CTA to
question the collection. Since the
assessment was issued beyond the
prescriptive period to assess, the action to
collect an invalid assessment is not
warranted (Phil. Jour- nalists, Inc. v. CIR,
G.R. No. 162852, December 16, 2004).
Taxpayer; Assessment; Deficiency Tax

(2006)
On June 1, 2003, Global Bank received a
final notice of
assessment from the BIR for deficiency
documentary stamp tax in the amount of P5
Million. On June 30, 2003, Global Bank filed
a request for reconsideration with the
Commissioner of Internal Revenue. The
Commissioner denied the request for
reconsideration only on May 30,
2006, at the same time serving on Global
Bank a warrant
of distraint to collect the deficiency tax. If
you were its counsel, what will be your
advice to the bank? Explain. (5%)
ALTERNATIVE ANSWER:
The denial for the request for
reconsideration is the final decision of the
CIR.. I would advise Global Bank to
appeal the denial to the Court of Tax
Appeals (CTA) within 30 days from receipt.
I will further advise the bank to file a motion
for injunction with the Court of Tax Appeals
to enjoin the Commissioner from enforcing
the assessment pending resolution of the
appeal. While an appeal to the CTA will not
suspend the payment, levy, distraint, and/or
sale of any property of the taxpayer for the
satisfaction of its tax liability, the CTA is
authorized to give injunctive relief if the
enforcement would jeopardize the interest
of the taxpayer, as in this case, where the
assessment has not become final (Lascona
Land Co. v, CIR, CTA Case No. 5777,
Royal Mining is a VAT- respectively, and will justify the imposition
registered domestic of the 50% surcharge on the deficiency tax
mining entity. One of its products is silver due from the taxpayer. (Sec. 248, NIRC).
being sold to the Bangko Sentral ng
Pilipinas. It filed a claim with the BIR for BIR: Garnishment: Bank Account of a Taxpayer
tax refund on the ground that under (1998)
Section 106 of the Tax Code, sales of Is the BIR authorized to issue a warrant of
precious metals to the Bangko Sentral ng garnishment against the bank account of
Pilipinas are considered export sales a taxpayer despite the pendency of his
subject to zero-rated VAT. Is Royal protest against the assessment with the
Mining's claim meritorious? Explain. (5%) BIR or appeal with the Court of Tax
SUGGESTED Appeals? [5%] SUGGESTED ANSWER:
ANSWER:
The BIR is authorized to issue a warrant of
No, Royal Mining's claim is not meritorious
garnishment against the bank account of a
because it is the sale to the Bangko Sentral
taxpayer despite the pendency of protest
ng Pilipinas of gold and not silver which is
considered export sales at Zero-rated VAT (Yabes v. Flojo, 15 SCRA 278).
(Tax Reform Act, Title IV, Section 106[2][a] Nowhere in the Tax Code is the
[4]). Commissioner required to rule first on
(NOTA BENE: EVAT is excluded from the Bar the protest before he can institute
coverage, Guidelines collection proceedings on the tax assessed.
for 2006 Bar Examinations, The legislative policy is to give the
June 15, 2006) Commissioner much latitude in the speedy
and prompt collection of taxes because it is
BIR: Fraudulent Return; Prima Facie Evidence in taxation that the Government depends
(1998) to obtain the
What constitutes prima facie evidence
of a false or
fraudulent
return? [2%]
SUGGESTED
ANSWER:
There is prima facie evidence of a false
or fraudulent return when the taxpayer
has willfully and knowingly filed it with
the intent to evade a part or all of the tax
legally due from him (Ungab v. Cusi,,
97 SCRA 877). There must appear a
design to mislead or deceive on the part of
the taxpayer, or at least culpable
negligence. A mistake not culpable in
respect of its value would not constitute a
false return. (Words and Phrases, Vol. 16,
page 173).
BIR: Fraudulent Return; Prima Facie Evidence

(2002)
What constitutes prima facie evidence
of a false or
fraudulent return to justify the imposition
of a 50% surcharge on the deficiency tax
due from a taxpayer? Explain. (5%)
SUGGESTED
ANSWER:
There is a prima facie evidence of false
or fraudulent return when the taxpayer
SUBSTANTIALLY UNDER- DECLARED his
taxable sales, receipts or income, or
SUBSTANTIALLY OVERSTATED his
deductions, the taxpayer's failure to report
sales, receipts or income in an amount
exceeding 30% of that declared per return,
and a claim of deduction in an amount
exceeding 30% of actual deduction shall
render the taxpayer liable for substantial
underdeclaration and overdeclaration,
means to carry on its operations (Republic same. The power to issue writ of injunction
u. Tim Tian provided for under Section 11 of RA 1125 is
Teng Sons, Inc., 16 only ancillary to its appellate jurisdiction. The
SCRA 584). CTA is not vested with original jurisdiction to
ALTERNATIVE ANSWER: issue writs of prohibition or injunction
No, because the assessment has not yet independently of and apart from an appealed
become final, executory and demandable. case. The remedy is to appeal the decision of
The basic consideration in the collection of the BIR. (Collector v. Yuseco, 3 SCRA 313
taxes is whether the assessment is final and [1961]).
unappealable or the decision of the
Commissioner is final, executory and BIR: Prescriptive Period: Civil Action (2002)
demandable, the BIR has legal basis to On August 5, 1997, Adamson Co., Inc.
collect the tax liability by either (Adamson) filed a
administrative or judicial action. request for reconsideration of the deficiency
withholding
BIR: Pre-Assessment Notice not Necessary tax assessment on July 10, 1997, covering
(2002) the taxable year
In the investigation of the withholding tax 1994. After administrative hearings,
returns of AZ the original
Medina Security Agency (AZ Medina) for assessment of P150,000.00 was reduced to
the taxable years 1997 and 1998, a P75.000.00 and a modified assessment was
discrepancy between the taxes withheld thereafter issued on August 05,
from its employees and the amounts actually 1999. Despite repeated demands,
remitted to the government was found. Adamson failed and
Accordingly, before the period of
prescription commenced to run, the BIR
issued an assessment and a demand letter
calling for the immediate payment of the
deficiency withholding taxes in the total
amount of P250,000.00. Counsel for AZ
Medina protested the assessment for being
null and void on the ground that no pre-
assessment notice had been issued.
However, the protest was denied. Counsel
then filed a petition for prohibition with
the Court of Tax Appeals to restrain the
collection of the tax.
A. Is the contention of the counsel
tenable? Explain
(2%)
SUGGESTED ANSWER:
A. No, the contention of the counsel is
untenable. Section 228 of the Tax Code
expressly provides that no pre-assessment
notice is required when a discrepancy has
been determined between the tax
withheld and the amount actually remitted
by the withholding agent. Since the amount
assessed relates to deficiency withholding
taxes, the BIR is correct in issuing the
assessment and demand letter calling for
the immediate payment of the deficiency
withholding taxes. (Sec. 228, NIRC).
B. Will the special civil action for

prohibition brought before the CTA
under Sec. 11 of R.A, No. 1125
prosper? Discuss your answer. (3%)
SUGGESTED ANSWER:
B. The special civil action for
prohibition will not prosper, because the
CTA has no jurisdiction to entertain the
refused to pay the loss from operations. After investigation, the
modified assessment. BIR issued a pre- assessment notice on
Consequently, the BIR brought an action March 30, 1996. A final notice and demand
for collection in the Regional Trial letter dated April 15, 1997 was issued,
Court on September 15, 2000. personally delivered to and received by the
Adamson moved to dismiss the action on company's chief accountant. For willful
the ground that the government's right to refusal and failure of TY Corporation to pay
collect the tax by judicial action has the tax, warrants of distraint and levy on its
prescribed. Decide the case. (5%) properties were issued and served upon it.
SUGGESTED On January 10, 2002, a criminal charge
ANSWER:
The right of the Government to collect by for violation of the Tax Code was instituted
judicial action has not prescribed. The in the Regional Trial Court with the
filing of the request for reconsideration approval of the Commissioner.
suspended the running of the prescriptive
period and commenced to run again when The company moved to dismiss the criminal
a decision on the protest was made on complaint on the ground that an act for
August 5, 1999. It must be noted that in all violation of any provision of the Tax Code
cases covered by an assessment, the prescribes after five (5) years and, in this
period to collect shall be five (5) years from case, the period commenced to run on
the date of the assessment but this period March 30, 1996 when the pre-assessment
is suspended by the filing of a request for was issued. How will you resolve the
reconsideration which was acted upon by motion? Explain your answer. (5%)
the Commissioner of Internal Revenue
(CIR v. Wyeth Suaco Laboratories, Inc.,
202 SCRA 125 [1991]).
BIR: Prescriptive Period; Assessment & Collection

(1999) A Co., a Philippine Corporation,
filed its 1995 Income Tax Return (ITR) on
April 15, 1996 showing a net loss. On
November 10, 1996, it amended its 1995
ITR to show more losses. After a tax
investigation, the BIR disallowed certain
deductions claimed by A Co., putting A
Co. in a net income position. As a result,
on August 5, 1999, the BIR issued a
deficiency income assessment against A
Co. A Co. protested the assessment on the
ground that it has prescribed: Decide.
(5%)
SUGGESTED
ANSWER:
The right of the BIR to assess the tax has
not prescribed. The rule is that internal
revenue taxes shall be assessed within
three years after the last day prescribed by
law for the filing of the return. (Section
203, NIRC), However, if the return
originally filed is amended substantially,
the counting of the three-year period starts
from the date the amended return was
filed. (CIR v. Phoenix Assurance Co., Ltd.,
14 SCRA 52). There is a substantial
amendment in this case because a new
return was filed declaring more losses,
which can only be done either (1) in
reducing gross income or (2) in increasing
the items of deductions, claimed.
BIR: Prescriptive Period; Criminal Action

(2002)
TY Corporation filed its final adjusted
income tax return
for 1993 on April 12, 1994 showing a net
P2.0 Million as the selling price. Discuss the
tax
SUGGESTED ANSWER: financial position demonstrates a clear
The motion to dismiss should not be inability to pay the tax assessed, his
granted. It is only when the assessment has application shall not be considered unless
become final and unappealable that the 5- and until he waives in writing his privilege
year period to file a criminal action under R.A. No. 1405, and such waiver shall
commences to run (Tupaz v. Ulop, 316 constitute the authority of the Commissioner
SCRA 118 [1999]). The pre- assessment to inquire into the bank deposits of the
notice issued on March 30, 1996 is not a taxpayer.
final assessment which is enforceable by the
BIR. It is the issuance of the final notice and BIR; Consequence; Taxpayer guilty of Tax Evasion (2005)
demand letter dated April Josel agreed to sell his condominium unit to
15, 1997 and the failure of the taxpayer to Jess for P2.5
protest within Million. At the time of the sale, the property
30 days from receipt thereof that made had a zonal value of P2.0 Million. Upon the
the assessment advice of a tax consultant, the parties agreed
final and unappealable. The earliest date to execute two deeds of sale, one indicating
that the assessment has become final is May the zonal value of P2.0 Million as the selling
16, 1997 and since the criminal charge was price and the other showing the true selling
instituted on January 10, 2002, the same price of P2.5
was timely filed. Million. The tax consultant filed the
capital gains tax
BIR: Secrecy of Bank Deposits Law return using the deed of sale showing the
(1998) zonal value of
Can the Commissioner of Internal Revenue
inquire into the bank deposits of a
taxpayer? If so, does this power of the
Commissioner conflict with R.A. 1405
(Secrecy of Bank Deposits Law) [5%]
SUGGESTED ANSWER:
The Commissioner of Internal Revenue is
authorized to inquire into the bank deposits
of:
1) a decedent to determine his
gross estate;
2) any taxpayer who has filed an

application for compromise of his tax
liability by means of financial incapacity
to pay his tax liability (Sec. 6(F). NIRC).
3) Where the taxpayer has signed a

waiver authorizing the
Commissioner or his duly
authorized representatives to
Inquire into the bank deposits. (Note:
This answer was not part of the
answers enumerated in the UP Law
Answers to the Bar in this but was later
added in the recent UP Law Answers
to the Bar as a result of AMLA Law of
2001)
The limited power of the Commissioner does

not conflict with R.A. No. 1405 because the
provisions of the Tax Code granting this
power is an exception to the Secrecy of
Bank Deposits Law as embodied in a later
legislation.
Furthermore, in case a taxpayer applies for

an application to compromise the payment
of his tax liabilities on his claim that his
implications and consequences of levy upon and sale of real properties of the
the action. (5%) decedent without first securing the
ALTERNATIVE authority of the court sitting in probate over
ANSWER:
the supposed will of the decedent?
The action of the parties constitutes tax SUGGESTED ANSWER:
evasion and exposes Josel to: Yes. The BIR is authorized to collect estate
(1) DEFICIENCY FINAL INCOME TAX on tax deficiency through the summary remedy
the sale of real property in the of levying upon and sale of real properties of
Philippines classified as a capital a decedent, without the cognition and
asset. Under Sec. 24(D) of the NIRC, authority of the court sitting in probate over
the final tax of six percent (6%) shall be the supposed will of the deceased, because
based on the gross selling price of the collection of estate tax is executive in
P2.5 Million or zonal value of P2.0 character. As such the estate tax is
Million, whichever is higher, i.e., exempted from the application of the statute
P2.5 Million; of non-claims, and this is justified by the
(2) FRAUD PENALTY amounting to 50% necessity of government funding,
surcharge on the amount evaded (Sec. immortalized in the maxim that taxes are
248[B] NIRC); and the lifeblood of the government (Marcos v.
(3) DEFICIENCY INTEREST of 20% per CIR, G.R. No. 120880, June
annum on the deficiency. (Sec. 249[A] 5,
[B], NIRC) 1997)
ALTERNATIVE
ANSWER:
.
ALTERNATIVE ANSWER:
There is tax evasion because of the
concurrence of the following factors:
1) The payment of less than that known by
the taxpayer to
be legally due, or the non-payment of tax
when it is shown that a tax is due. It is
evident that the parties that the tax due
should be computed based on the valuation
of P2.5 million and not P2.0 million;
2) An accompanying state of mind
which is described as being "evil" on "bad
faith," "willful," or "deliberate and not
accidental." Despite the above knowledge,
the parties deliberately misrepresented the
true basis of the sale; and
3) A course of action or failure of
action which is unlawful. This is shown by
the preparation of the two deeds
of sale which showed different
values. (Commissioner of Internal
Revenue v. The Estate ofBenigno P,
Tbda, Jr., G.R. No. 147188, September
14,
20
04
)
The tax evasion committed should

result to the imposition of a 50%
fraud surcharge on the amount evaded
(Sec. 248[B], NIRC) payment of the
Deficiency Tax, and interest of 20% per
annum on the deficiency. (Sec. 249[A][B],
NIRC) The parties may likewise be
subject to criminal prosecution for willfully
failing to pay the tax, as well as for filing a
false and fraudulent return. (Sees. 254,
255 and 257, NIRC)
BIR: Summary Remedy: Estate Tax Deficiencies

(1998)
Is the BIR authorized to collect estate tax
deficiencies by the summary remedy of
Yes, if the tax assessment has already Department of Justice (DOJ) a criminal
become final, complaint against a corporation and its
executory and enforceable. The approval of officers for alleged evasion of taxes. The
the court sitting in probate over the complaint was supported by a sworn
supposed will of the deceased is not a statement of the BIR examiners showing the
mandatory requirement for the collection of computation of the tax liabilities of the erring
the estate tax. The probate court is taxpayer. The corporation filed a motion to
determining issues which are not against dismiss the criminal complaint on the ground
the property of the decedent, or a claim that there has been, as yet, no assessment of
against the estate as such, but is against the its tax liability; hence, the criminal complaint
interest or property right which the heir, was premature. The DOJ denied the motion
legatee, devisee, etc. has in the property
on the ground that an assessment of the tax
formerly held by the decedent. (Marcos v. deficiency of the corporation is not a
CIR, G.R, No. 120880, June 5, 1997). precondition to the filing of a criminal
complaint and that in any event, the joint
BIR: Unpaid Taxes vs. Claims for Unpaid Wages affidavit of the BIR examiners may be
(1995) considered as an assessment of the tax
For failure of Oceanic Company, Inc.
liability of the corporation. Is the ruling of the
(OCEANIC), to
DOJ correct? Explain. (5%)
pay deficiency taxes of P20 Million, the SUGGESTED ANSWER:
Commissioner of Internal Revenue issued The DOJ is correct in ruling that an
warrants of distraint on OCEANIC's assessment of the tax deficiency of the
personal properties and levied on its real corporation is not a precondition to the filing
properties. Meanwhile, the Department of of a criminal complaint. There is no need
Labor through the Labor for an
Arbiter rendered a
decision ordering OCEANIC to pay
unpaid wages and other benefits to its
employees. Four barges belonging to
OCEANIC were levied upon by the sheriff
and later sold at public auction.

filed a motion with the Labor Arbiter to
annul the sale and enjoin the sheriff from
disposing the proceeds thereof. The
employees of OCEANIC opposed the motion
contending that Art. 110 of the Labor Code
gives first preference to claims for unpaid
wages.
Resolve the motion.
Explain.
SUGGESTED ANSWER:
The motion filed by the Commissioner
should be granted because the claim of the
government for unpaid taxes are generally
preferred over the claims of laborers for
unpaid wages. The provision of Article 110
of the Labor Code, which gives laborers'
claims for preference applies only in case of
bankruptcy or liquidation of the employer's
business. In the instant case, Oceanic is not
under bankruptcy or liquidation at the time
the warrants of distraint and levy were
issued hence, the opposition of the
employees is unwarranted. (CIR vs. NLRC
et al G.R. No.
74965, November
9, 1994).
BIR; Assessment; Criminal Complaint

(2005)
In 1995, the BIR filed before the
assessment so long as there is a the tax due from NX. After several years, a
prima facie decision was rendered by the court
showing of violation of the provisions of ordering NX to pay the tax due plus
the Tax Code. After all, a criminal charge is penalties and surcharges. The judgment
instituted not to demand payment, but to became final and executory, but attempts
penalize the tax payer for violation of the to execute the judgment award were futile.
Tax Code. (Commissioner of Internal
Revenue v. Pascor Realty and Subsequently, NX offered
Development Corporation, G.R. No. the Commissioner a
128315, June 29, 1999) Furthermore, compromise settlement of 50% of the
there is nothing in the problem that judgment award, representing that this
shows that the BIR in filing the case is amount is all he could really afford. Does the
also interested in collecting the tax Commissioner have the power to accept the
deficiency. compromise offer? Is it legal and ethical?
Explain briefly. (5%)
However, it is in error when it ruled that SUGGESTED ANSWER:
the joint affidavit of the BIR examiners may Yes. The Commissioner has the power to
be considered as an assessment of the tax accept the offer of compromise if the
liability of the corporation. The joint financial position of the taxpayer clearly
affidavit showing the computation of the demonstrates a clear inability to pay the
tax liabilities of the erring taxpayer is not a tax (Section 204, NIRC).
tax assessment because it was not sent to
the taxpayer, and does not demand
payment of the tax within a certain period
of time. An assessment is deemed made
only when the BIR releases, mails or sends
such notice to the taxpayer.
(Commissioner of Internal Revenue v.
Pascor Realty and Development
Corporation, G.R. No.
128315, June
29, 1999)
Notes and Comments: A plea is made
for liberality in
correcting the examinees answers
because the examination is very
lo
n
g.
BIR; Authority; Refund or Credit of Taxes

(2005)
State the conditions required by the Tax
Code before the Commissioner of Internal
Revenue could authorize the refund or
credit of taxes erroneously or illegally
received. SUGGESTED ANSWER:
Under Sec. 204(C), NIRC, the following
conditions must be met:
1. There must be a written claim for
refund filed by the taxpayer with the
Commissioner.
2. The claim for refund must be a
categorical demand for reimbursement.
3. The claim for refund must be filed
within two (2) years from date of
payment of the tax or penalty
regardless of any supervening cause.
BIR; Compromise
(2004)
After the tax assessment had
become final and
unappealable, the Commissioner of
Internal Revenue
initiated the filing of a civil action to collect
As represented by NX in his offer, only 50% of the
judgment award is all he could really The followingcases MAY NO LONGER
afford. This is an offer for compromise BE COMPROMISED (R.R. 30-02 [2002])
based on financial incapacity which the because the taxpayer has not paid his taxes
Commissioner shall not accept unless for reasons other than his financial incapacity
accompanied by a waiver of the secrecy of or the doubtful validity of the assessment:
bank deposits (Section 6[F}, NIRC). The a) CRIMINAL TAX FRAUD cases as
waiver will enable the Commissioner to may be
ascertain the financial position of the determined by the Commissioner or his
taxpayer, although the inquiry need not be authorized agents may not be compromised;
limited only to the bank deposits of the b) CRIMINAL VIOLATIONS ALREADY
taxpayer but also as to his financial position FILED IN COURT so that the taxpayer will
as reflected in his financial statements or not profit from his fraud which would
other records upon which his property encourage tax evasion; and
holdings can be ascertained. c) Cases where final reports of
reinvestigation or
If indeed, the financial position of NX as reconsideration have been issued
determined by the Commissioner resulting in the reduction of the original
demonstrates a clear inability to pay the tax, assessment agreed to by the taxpayer when
the acceptance of the offer is legal and he signed the required agreement form.
ethical because the ground upon which the The taxpayer is estopped from
compromise was anchored is within the applying for a compromise.
context of the law and the rate of
compromise is well within and far exceeds
the minimum prescribed by law which is
only 10% of the basic tax assessed.
BIR; Compromise
(2005)
State and discuss briefly whether the
following cases may be compromised or may
not be compromised:
a) Delinquent
accounts;
b) Cases under administrative protest,
after issuance of
the final assessment notice to the
taxpayer, which are still pending;
c) Criminal tax fraud
cases;
d) Criminal violations already
filed in court;
e) Cases where final reports of
reinvestigation or reconsideration have
been issued resulting in the reduction of
the original assessment agreed to by the
taxpayer when he signed the
required agreement form. (5%)
SUGGESTED ANSWERS:
The following cases may still be
compromised (R.R. 30-02 [2002]) because
of the taxpayer's financial incapacity to
pay the tax due or the assessment's doubtful
validity:
a) DELINQUENT ACCOUNTS
may be
compromised because there is no showing
that there is a duly-approved schedule of
installment payments; and
b) Cases under administrative protest,
after issuance of the final assessment notice
to the taxpayer, which are still pending.
BIR; Deficiency Tax Assessment vs. Tax Refund / taxes paid to arrive at his adjusted income
Tax during the year. His adjusted income will be
Credit subject to the graduated tax rates of 1% to
(2005) 3%. (Sec. 21 (b), Tax Code of
Is a deficiency tax assessment a bar to a 1986[PD 1158], as amended
claim for tax by PD 1994).
refund or tax credit?
Explain. [Note: The bar candidates are not expected to
SUGGESTED be familiar with tax history. Considering that
ANSWER: this is already the fourth year of
Yes, the deficiency tax assessment is a bar implementation of the Tax Code of 1997, bar
to a tax refund or credit. The Taxpayer candidates were taught and prepared to
cannot be entitled to a refund and at the answer questions based on the present law. It
same time liable for a tax deficiency is therefore requested that the examiner be
assessment for the same year. The more lenient in checking the answers to this
deficiency assessment creates a doubt as question. Perhaps, an answer based on the
to the truth and accuracy of the Tax present law be given full credit.]
Return. Said Return cannot therefore be
the basis of the refund (Commissioner of B. If you are the lawyer of Mr. and Mrs.
Internal Revenue v. Alltel [2002], citing Sebastian, what possible defense or
Commissioner of Internal Revenue v. defenses will you raise in behalf of
Court of Appeals, City Trust Banking your clients against the action of the
Corporation and Court of Tax Appeals, G.R. BIR in enforcing collection of the tax
No. 106611, July 21, 1994) by the summary remedies of
warrants of distraints and levy?
BIR; Distraint; Prescription of the Action Explain your answer. (3%)
(2002) SUGGESTED ANSWER:
Mr. Sebastian is a Filipino seaman
employed by a Norwegian company which
is engaged exclusively in international
shipping. He and his wife, who
manages their business, filed a joint
income tax return for 1997 on March 15,
1998. After an audit of the return, the BIR
issued on April 20, 2001 a deficiency
income tax assessment for the sum of
P250.000.00, inclusive of interest and
penalty. For failure of Mr. and Mrs.
Sebastian to pay the tax within the period
stated in the notice of assessment, the BIR
issued on August 19, 2001 warrants of
distraint and levy to enforce collection of
the tax.
A. What is the rule of income taxation
with respect to
Mr. Sebastian's income in 1997 as a
seaman on board the
Norwegian vessel engaged
in international shipping?
Explain your answer. (2%)
SUGGESTED
ANSWER:
A. The income of Mr. Sebastian as a
seaman is considered as income of a non-
resident citizen derived from without the
Philippines. The total gross income, in US
dollars (or if in other foreign currency, its
dollar equivalent) from without shall be
declared by him for income tax purposes
using a separate income tax return which
will not include his income from business
derived within (to be covered by another
return). He is entitled to deduct from his
dollar gross income a personal exemption
of $4,500 and foreign national income
B. I will raise the defense of prescription. of the Commissioner is lodged with the
The right of the Court of Tax Appeals and not with the
BIR to assess prescribes after three years Regional Trial Court (CIR v. Josefina Leal,
counted from the last day prescribed by law G.R. No. 113459, November 18, 2002; Tax
for the filing of the income tax returns when Reform Act, RA 8424, Title I, Sec. 4 [1997]).
the said return is filed on time. (Section (NOTA BENE: This concept pertains to
203, NIRC). The last day for filing the the VAT law
1997 income tax which is excluded from the bar coverage,
Guidelines for 2006
return is April 15, 1998. Since the
Bar Examinations, June 15, 2006)
assessment was issued only on April 20,
2001, the BIR's right to assess has
BIR; Prescriptive Period; Assessment; Fraudulent Return
already prescribed. (2002)
Mr. Castro inherited from his father, who died
BIR; False vs. Fraudulent Return on June 10,
(1996) 1994, several pieces of real property in Metro
Distinguish a false return from a
Manila. The estate tax return was filed and
fraudulent return.
SUGGESTED ANSWER:
the estate tax due in the amount of
The distinction between a false return and a P250.000.00 was paid on December 06, 1994.
fraudulent return is that the first merely The Tax Fraud Division of the BIR
implies a deviation from the truth or fact investigated the case on the basis of
whether intentional or not, whereas the confidential information given by Mr. Santos
second is intentional and deceitful with the on January 06, 1998 that the return filed by
sole aim of evading the correct tax due Mr. Castro was fraudulent and that he
(Aznar us. Commissioner, L-20569, failed to declare all
August 23, 1974).
ALTERNATIVE ANSWER:
A false return contains deviations from the
truth which may be due to mistakes,
carelessness or ignorance of the person
preparing the return. A fraudulent return
contains an intentional wrongdoing with the
sole object of avoiding the tax and it
may consist in the
intentional underdeclaration of income,
intentional overdeclaration of deductions or
the recurrence of both. A false return is not
necessarily tainted with fraud because the
fraud contemplated by law is actual and not
constructive. Any deviation from the truth
on the other hand, whether intentional or
not, constitutes falsity. (Aznar vs.
Commissioner, L-20569, August 23,
1974)
BIR; Jurisdiction; Review Rulings of the

Commissioner
(2006
)
Mr. Abraham Eugenio, a pawnshop
operator, after having
been required by the Revenue District
Officer to pay value added tax pursuant to
a Revenue Memorandum Order (RMO) of
the Commissioner of Internal Revenue, filed
with the Regional Trial Court an action
questioning the validity of the RMO. If you
were the judge, will you dismiss the case?
(5%)
SUGGESTED ANSWER:
Yes. The RMO is in reality a ruling of the
Commissioner in implementing the
provisions of the Tax Code on the taxability
of pawnshops. Jurisdiction to review rulings
properties left by his father with ANSWER:
intent to evade No. The trial court can exercise
payment of the correct tax. As a result, a jurisdiction. Prescription of a criminal
deficiency estate tax assessment for action begins to run from the day of the
P1,250,000.00, inclusive of 50% surcharge violation of the law. The crime was
for fraud, interest and penalty, was committed when Gerry willfully refused to
issued against him on January 10, 2001. pay despite repeated demands in
Mr. Castro protested the assessment on the 2002. Since the information was filed in
ground of prescription. June 2006, the
A. Decide Mr. Castro's criminal case was instituted within the five-
protest. (2%) year period required by law (Tupaz v. Ulep,
SUGGESTED G.R. No. 127777, October
ANSWER: 1, 1999; Section
A. The protest should be resolved 281, NIRC).
against Mr. Castro. What was filed is a
fraudulent return making the prescriptive BIR; Taxpayer: Civil Action & Criminal Action (2002)
period for assessment ten (10) years from Minolta Philippines, Inc. (Minolta) is an
discovery of the fraud (Section 222, NIRC). EPZA-registered enterprise enjoying
Accordingly, the assessment was issued preferential tax treatment under a
within that prescriptive period to make an special law. After investigation of its
assessment based on a fraudulent return. withholding tax returns for the taxable
year 1997, the BIR issued a deficiency
B. What legal requirement/s must Mr. withholding tax assessment in the amount
Santos comply with so that he can of P150.000.00. On May 15, 1999,
claim his reward? Explain. (3%) because of financial difficulty, the
SUGGESTED
ANSWER:
deficiency tax remained unpaid, as a result
The legal requirements that must be of which the assessment became final and
complied by Mr. Santos to entitle him to executory. The
reward are as follows:
1) He should voluntarily file a
confidential information
under oath with the Law Division of the
Bureau of Internal Revenue alleging
therein the specific violations
constituting fraud;
2) The information must not yet be in the
possession of
the Bureau of Internal Revenue, or
refer to a case already pending or
previously investigated by the Bureau
of Internal Revenue;
3) Mr. Santos should not be a government
employee or
a relative of a government employee
within the sixth degree of
consanguinity; and
4) The information must result to
collections of revenues and/or fines
and penalties. (Sec. 282, NIRC)
BIR; Prescriptive Period; Criminal Action

(2006)
Gerry was being prosecuted by the BIR
for failure to pay
his income tax liability for Calendar Year
1999 despite
several demands by the BIR in 2002. The
Information was filed with the RTC only
last June 2006. Gerry filed a motion to
quash the Information on the ground of
prescription, the Information having been
filed beyond the 5-year reglementary
period. If you were the judge, will you
dismiss the Information? Why? (5%)
SUGGESTED
BIR also found that, in violation of the
provisions of the Custom: Violation of Tax & Custom Duties (2002)
National Internal Revenue Code, Minolta did The Collector of Customs of the Port of
not file its final corporate income tax Cebu issued
return for the taxable year warrants of seizure and detention against the
1998, because it allegedly incurred net loss importation of machineries and equipment
from its operations. On May 17, 2002, the by LLD Import and Export Co. (LLD) for
BIR filed with the Regional Trial Court an alleged nonpayment of tax and customs
action for collection of the deficiency duties in violation of customs laws. LLD was
withholding tax for 1997. notified of the seizure, but, before it could be
A. Will the BIR's action for collection heard, the Collector of Customs issued a
prosper? As counsel of Minolta, what notice of sale of the articles. In order to
action will you take? Explain your restrain the Collector from carrying out the
answer. (5%) order to sell, LLD filed with the Court of Tax
SUGGESTED ANSWER:
Appeals a petition for review with application
A. Yes, BIR's action for collection will for the issuance of a writ of prohibition. It
prosper because the assessment is already also filed with the CTA an appeal for refund
final and executory, it can already be of overpaid taxes on its other importations of
enforced through judicial action. raw materials which has been pending
As counsel of Minolta, I will introduce
evidence that the income payment was
reported by the payee and the income
tax was paid thereon in 1997 so that my
client may only be allowed to pay the civil
penalties for non- withholding pursuant to
RMO No. 38-83.
[Note: It is not clear whether this
is a case of non-
withholding/ underwithholding or non-
remittance of tax withheld. As such,
the tax counsel may be open to other
remedies against the assessment.]
B. May criminal violations of the Tax

Code be compromised? If Minolta
makes a voluntary offer to
compromise the criminal violations for
non- filing and non-payment of taxes
for the year 1998, may the
Commissioner accept the offer?
Explain (5%)
SUGGESTED ANSWER:
B. All criminal violations of the Tax
Code may be compromised except those
already filed in court or those involving
fraud (Section 204, NIRC). Accordingly, if
Minolta makes a voluntary offer to
compromise the criminal violations for
non-filing and non-payment of taxes for
the year 1998, the Commissioner may
accept the offer which is allowed by law.
However, if it can be established that a tax
has not been paid as a consequence of non-
filing of the return, the civil liability for
taxes may be dealt with independently of
the criminal violations. The compromise
settlement of the criminal violations will not
relieve the taxpayer from its civil liability.
But the civil liability for taxes may also be
compromised if the financial position of the
taxpayer demonstrates a clear inability to
pay the tax.
with the Collector of Customs. The collection of taxes and customs duties in
Bureau of seizure and protest cases. Without such
Customs moved to dismiss the case for lack automatic review, neither the
of jurisdiction of the Court of Tax Appeals. Commissioner of Customs nor the
Secretary of Finance would know about the
A. Does the Court of Tax Appeals have decision laid down by the Collector favoring
jurisdiction over the petition for the taxpayer. The power to decide seizure
review and writ of prohibition? and protest cases may be abused if no
Explain (3%) checks are instituted. Automatic review is
SUGGESTED necessary because nobody is expected to
ANSWER:
A. No, because there is no decision appeal the decision of the Collector which is
as yet by the Commissioner of Customs favorable to the taxpayer and adverse to
which can be appealed to the CTA. Neither the Government. This is the reason why
the remedy of prohibition would lie whenever the decision of the Collector is
because the CTA has not acquired adverse to the Government, the said
any appellate jurisdiction over the seizure decision is automatically elevated to the
case. The writ of prohibition being merely Commissioner for review; and if such
ancillary to the appellate jurisdiction, decision is affirmed by the Commissioner,
the CTA has no jurisdiction over it until it the same shall be automatically elevated to
has acquired jurisdiction on the petition for and be finally reviewed by the Secretary of
review. Since there is no appealable Finance (Yaokasin v. Commissioner of
decision, the CTA has no jurisdiction over Customs, 180
the petition for review and SCRA 591
writ of prohibition. [1989]).
(Commissioner of Customs v.
Alikpala, 36 SCRA 208 [1970]).
B. Will an appeal to the CTA for tax

refund be possible?
Explain
(2%)
SUGGESTED
ANSWER:
B. No, because the Commissioner of
Customs has not yet rendered a decision
on the claim for refund. The jurisdiction of
the Commissioner and the CTA are not
concurrent in so far as claims for refund
are concerned. The only exception is when
the Collector has not acted on the
protested payment for a long time, the
continued inaction of the Collector or
Commissioner should not be allowed to
prejudice the taxpayer. (Nestle Phils., Inc.
v. Court of Appeals, GR No. 134114, July 6,
2001).
Customs; Basis; Automatic Review

(2002)
Whenever the decision of the Collector
of Customs is
adverse to the government, it is
automatically elevated to the
Commissioner for review and, if it is
affirmed by him, it is automatically
elevated to the Secretary of Finance for
review. What is the basis of the
automatic review procedure in the
Bureau of Customs? Explain your
answer. (5%)
SUGGESTED
ANSWER:
Automatic review is intended to protect the
interest of the Government in the
Delinquent Tax Return No. The legislators intended to divest the
(1998) Regional Trial Courts of the jurisdiction to
When is a revenue tax considered replevin a property which is a subject of
delinquent? [3%) seizure and forfeiture proceedings for
SUGGESTED ANSWER: violation of the Tariff and Customs Code
A revenue tax is considered delinquent otherwise, actions for forfeiture of property
when it is unpaid after the lapse of the last for violation of the Customs laws could easily
day prescribed by law for its payment. be undermined by the simple device of
Likewise, it could also be considered as replevin. (De la Fuente v. De Veyra, et.
delinquent where an assessment for al, 120 SCRA
deficiency tax has become final and the 455
taxpayer has not paid it within the period )
given in the notice of assessment.
There should be no unnecessary hindrance on
Jurisdiction: Customs vs. CTA the government's drive to prevent smuggling
(2000) and other frauds upon the Customs.
a) On the basis of a warrant of seizure Furthermore, the Regional Trial Court do not
and detention have Jurisdiction in order to render effective
issued by the Collector of Customs for the and efficient the collection of Import and
purpose of enforcing the Tariff and export duties due the State, which enables
Customs Laws, assorted brands of the government to carry out the
cigarettes said to have been illegally
imported into the Philippines were
seized from a store where they were
openly offered for sale. Dissatisfied with
the decision rendered after hearing by the
Collector of Customs on the confiscation
of the articles, the importer filed a
petition for review with the Court of Tax
Appeals. The Collector moved to dismiss
the petition for lack of Jurisdiction. Rule
on the motion. (2%)
SUGGESTED ANSWER:
Motion granted. The Court of Tax
Appeals has jurisdiction only over decisions
of the Commissioner of Customs in cases
involving seizures, detention or release of
property affected. (Sec. 7, R.A. No. 1125).
There is no decision yet of the
Commissioner which is subject to review by
the Court of Tax Appeals.
ALTERNATIVE ANSWER:
Motion granted. The Court of Tax Appeals
has no jurisdiction because there is no
decision rendered by the Commissioner of
Customs on the seizure and forfeiture case.
The taxpayer should have appealed the
decision rendered by the Collector within
fifteen (15) days from receipt of the decision
to the Commissioner of Customs. The
Commissioner’s adverse decision would
then be the subject of an appeal to the Court
of Tax Appeals.
b) Under the same facts, could the importer

file an action in the Regional Trial Court
for replevin on the ground that the
articles are being wrongfully detained by
the Collector of Customs since the
importation was not illegal and therefore
exempt from seizure? Explain. (3%)
SUGGESTED ANSWER:
functions It has been Instituted to Notice, he must within fifteen (15) days
perform. (Jao, from receipt explain why no additional
et al, Court of Appeals, et al, and taxes should be assessed against him.
companion case,
249 SCRA b. If the Commissioner of Internal
35, 43) Revenue issues an assessment notice,
the taxpayer must administratively
LGU: Collection of Taxes, Fees & Charges protest or dispute the assessment by
(1997) filing a motion for reconsideration or
Give the remedies available to local reinvestigation within thirty (30) days
government units to enforce the collection from receipt of the notice of
of taxes, fees, and charges? SUGGESTED assessment. (4th par.. Sec. 228, NIRC of
ANSWER:
1997)
The remedies available to the local
government units to enforce collection of
c. Within sixty (60) days from filing of the
taxes, fees, and charges are:
1) ADMINISTRATIVE REMEDIES of protest, the taxpayer shall submit
distraint of all relevant supporting
personal property of whatever kind documents.
whether tangible or intangible, and levy
The JUDICIAL REMEDIES of an
of real property and interest therein;
aggrieved taxpayer relative to an
and
ASSESSMENT NOTICE are as follows:
2) JUDICIAL REMEDY by institution of
an ordinary
civil action for collection with the
regular courts of proper jurisdiction.
Tax Amnesty vs. Tax Exemption

(2001)
Distinguish a tax amnesty from a tax
exemption. (3%)
SUGGESTED
ANSWER:
Tax amnesty is an immunity from all
criminal, civil and administrative liabilities
arising from nonpayment of taxes. It is a
general pardon given to all taxpayers. It
applies only to past tax periods, hence of
retroactive application. (People v.
Costonedo, G.R. No. L-46881, 1988).
Tax exemption is an immunity from the

civil liability only. It is an immunity or
privilege, a freedom from a charge or
burden to which others are
subjected. (Florer v. Sheridan, 137
Ind. 28, 36 ME 365). It is generally
prospective in application.
Taxpayer: Administrative & Judicial Remedies (2000)

Describe separately the procedures on the
legal remedies under the Tax Code
available to an aggrieved taxpayer both
at the administrative and judicial levels.
(5%) SUGGESTED ANSWER:
The legal remedies of an aggrieved
taxpayer under the Tax Code, both at the
administrative and judicial levels, may be
classified into those for assessment,
collection and refund.
The procedures for the

ADMINISTRATIVE REMEDIES for
ASSESSMENT are as follows:
a. After receipt of the Pre-Assessment
a. Where the Commissioner of Internal Taxpayer: Assessment: Protest: Claims for refund (2000)
Revenue has On June 16, 1997, the Bureau of Internal
not acted on the taxpayer's protest Revenue (BIR) issued against the Estate of
within a period of one hundred eighty Jose de la Cruz a notice of deficiency estate
(180) days from submission of all tax assessment, inclusive of surcharge,
relevant documents, then the taxpayer interest and compromise penalty. The
has a period of thirty (30) days from the Executor of the Estate of Jose de la Cruz
lapse of said 180 days within which to (Executor) filed a timely protest against the
interpose a petition for review with assessment and requested for waiver of the
the Court of Tax Appeals. surcharge, interest and penalty. The protest
was denied by the Commissioner of Internal
b. Should the Commissioner deny the Revenue (Commissioner) with finality on
taxpayer's protest, then he has a period September 13, 1997. Consequently, the
of thirty (30) days from receipt of said Executor was made to pay the deficiency
denial within which to interpose a assessment on October 10, 1997. The
petition for review with the Court of Tax following day, the Executor filed a Petition
Appeals. with the Court of Tax Appeals (CTA) praying
for
In both cases the taxpayer must apply with
the Court of Tax Appeals for the Issuance of
an Injunctive writ to enjoin the Bureau of
Internal Revenue from collecting the
disputed tax during the pendency of the
proceedings.
NOTE: A 2004 Amendment - The

decision of the division of CTA is in turn
appeallable within fifteen (15) days to the
CTA en banc. The decision of the CTA en
banc is directly appeallable to the Supreme
Court on question of law on certiorari.
The employment by the Bureau of Internal

Revenue of any of the Administrative
Remedies for the collection of the tax
like distraint, levy, etc. may be
administratively appealed by the taxpayer to
the Commissioner whose decision is
appealable to the Court of Tax Appeals
under other matter arising under the
provisions of the National Internal Revenue
Code.
The judicial appeals starts with the Court of

Tax Appeals, and continues in the same
manner as shown above.
Should the Bureau of Internal Revenue

decide to utilize its Judicial tax remedies for
collecting the taxes by means of an
ordinary suit filed with the regular courts
for the collection of a sum of money, the
taxpayer could oppose the same going up
the ladder of judicial processes from the
Municipal Trial Court (as the case may be)
to the Regional Trial Court, to the Court of
Appeals, thence to the Supreme Court.
The remedies of an aggrieved taxpayer on a

claim for refund is to appeal the adverse
decision of the Commissioner to the CTA in
the same manner outlined above.
the refund of the surcharge, the Court of Tax Appeals to stop the
interest and administrative collection process. An appeal
compromise penalty. The CTA took to the CTA shall not suspend the
cognizance of the case and ordered the enforcement of the tax liability, unless a
Commissioner to make a refund. The motion to that effect shall have been
Commissioner filed a Petition for Review presented in court and granted by it on the
with the Court of Appeals assailing the basis that such collection will jeopardize the
jurisdiction of the CTA and the Order to interest of the taxpayer or the Government
make refund to the Estate on the ground (Pirovano v. CIR, 14 SCRA 832
that no claim for refund was filed with the [1965]).
BIR.
A. Is the stand of the Commissioner The CTA is empowered to suspend the
correct? Reason. (2%) collection of internal revenue taxes and
SUGGESTED customs duties in cases pending appeal only
ANSWER:
when: (1) in the opinion of the court the
Yes. There was no claim for refund or
collection by the BIR will jeopardize the
credit that has been duly filed with the
interest of the Government and/or the
Commissioner of Internal Revenue which is
taxpayer; and (2) the taxpayer is willing to
required before a suit or proceeding can
deposit the amount being collected or to file
be filed in any court (Sec. 229. NIRC of
a surety bond for not more than double the
1997). The denial of the claim by the
amount of the tax to be fixed by the court
Commissioner is the one which will vest
(Section 11, JR.A. No. 1125).
the Court of Tax Appeals jurisdiction over
the refund case should the taxpayer decide
Taxpayer: BIR Audit or Investigation
to appeal on time.
(1999)
B. Why is the filing of an administrative
claim with the
BIR necessary? (3%)
SUGGESTED
ANSWER:
The filing of an administrative claim for
refund with the
BIR is necessary
in order:
1) To afford the Commissioner an
opportunity to consider the claim and
to have a chance to correct the
errors of subordinate officers
(Gonzales v. CTA, et al, 14 SCRA
79); and
2) To notify the Government that such
taxes have been questioned and the
notice should be borne in
mind in estimating the revenue
available for expenditures. (Bermejo
v. Collector, G.R. No. L-
3028. July 29, 1950)
Taxpayer: Assessment; Injunction

(2004)
RR disputed a deficiency tax assessment
and upon receipt
of an adverse decision by the
Commissioner of Internal
Revenue, filed an appeal with the Court of
Tax Appeals. While the appeal is pending,
the BIR served a warrant of levy on the
real properties of RR to enforce the
collection of the disputed tax. Granting
arguendo that the BIR can legally levy on
the properties, what could RR do to stop
the process? Explain briefly. (5%)
SUGGESTED
ANSWER:
RR should file a motion for injunction with
A Co., a Philippine corporation, is a big 50466, May 31,
manufacturer of 1982).
consumer goods and has several suppliers of
raw materials. The BIR suspects that some Taxpayer: Claim for Refund; Procedure (2002)
of the suppliers are not properly reporting A. What must a taxpayer do in order to claim
their income on their sales to A Co. The a refund of,
CIR therefore: or tax credit for, taxes and penalties which
1) Issued an access letter to A Co. to he alleges to
furnish the BIR have been erroneously, illegally or
information on sales and payments to excessively assessed or collected? (3%)
its suppliers. SUGGESTED ANSWER:
2) Issued an access letter to a bank The taxpayer must comply with the following
(CX Bank) to furnish the BIR on procedures in claiming a refund of, or tax
deposits of some suppliers of A Co. on credit for, taxes and penalties which he
the alleged ground that the suppliers alleges to have been erroneously, illegally or
are committing tax evasion. excessively assessed or collected:
2. He should file a written claim for
A Co., X Bank and the suppliers have not refund with the
been issued by the BIR letter of authority to Commissioner within two years after
examine. A Co. and X Bank believe that the the date of payment of the tax or penalty
BIR is on a "fishing expedition" and come to (Sec. 204, NIRC);
you for counsel. What is your advice? (10%)
SUGGESTED ANSWER:
I will advise A Co. and B Co. that the BIR is
justified only in getting information from the
former but not from the latter. The BIR is
authorized to obtain information from other
persons other than those whose internal
revenue tax liability is subject to audit or
investigation. However, this power
shall not be construed as
granting the Commissioner the
authority to inquire into bank deposits.
(Section 5. NIRC).
Taxpayer: City Board of Assessment Decision; Where to

appeal (1999)
A Co., a Philippine corporation, is the
owner of machin-
ery, equipment and fixtures located at
its plant in
Muntinlupa City. The City Assessor
characterized all these properties as real
properties subject to the real property tax.
A Co. appealed the matter to the
Muntinlupa Board of Assessment Appeals.
The Board ruled in favor of the City. In
accordance with RA 1125 (An Act creating
the Court of Tax Appeals). A Co. brought
a petition for review before the CTA to
appeal the decision of the City Board of
Assessment Appeals. Is the Petition for
Review proper? Explain. (5%)
SUGGESTED ANSWER:
No. The CTA’s devoid of jurisdiction to
entertain appeals from the decision of the
City Board of Assessment Appeals. Said
decision is instead appealable to the Central
Board of Assessment Appeals, which under
the Local Government Code, has appellate
jurisdiction over decisions of Local Board
of Assessment Appeals. (Caltex Phils, foe.
v. Central Board of Assessment Appeals,
L-
3. The claim filed must state a correct? Explain.
categorical 2) If you were the lawyer of Stephen Yang,
demand for reimbursement (Bermejo what would
v. Collector, 87 you have advised your client before he
Phil. 96 included in his 1994 return the amount
[1950]).
of P50.000.00 as 1993 income to avoid
the fraud surcharge? Explain.
4. The suit or proceeding for 3) Considering that Stephen Yang had
recovery must be commenced in already been
court within two years from date of
assessed a deficiency income tax for
payment of the tax or penalty
1993 for his failure to report the
regardless of any supervening event
P50.000.00 income, what would you
that will arise after payment (Sec.
advise him to do to avoid the penalties
229, for tax delinquency? Explain.
NIRC). 4) What would you advise Stephen Yang
to do with regard to the income tax he
[Note: If the answer given is only number
1, it is suggested that the same shall be
paid for the P50.000.00 in his 1994
given full credit considering that this is return? In case your remedy fails, what
the only requirement for the is your other recourse? Explain.
Commissioner to acquire jurisdiction SUGGESTED ANSWERS:
over the claim.] 1) The examiner is correct in assessing
a deficiency income tax for taxable year
B. Can the Commissioner grant a refund 1993 but not in imposing the
or tax credit even without a written 50% fraud surcharge. The amount of all
claim for it? (2%) items of gross
SUGGESTED income must be included in gross income
ANSWER: during the year in which received or
B. Yes. When the taxpayer files a return realized (Sec. 38, NIRC). The 50%
which on its face shows an overpayment of
the tax and the option to refund/ claim a
tax credit was chosen by the taxpayer, the
Commissioner shall grant the refund or tax
credit without the need for a written claim.
This is so, because a return filed showing
an overpayment shall be considered as a
written claim for credit or refund.
(Sees. 76 and 204, NIRC).
Moreover,the law provides that
the Commissioner may, even
without a written claim therefor, refund or
credit any tax where on the face of the
return upon which payment was made,
such payment appears clearly to have been
erroneously paid. (Sec. 229, NIRC).
Taxpayer: Deficiency Income Tax

(1995)
Businessman Stephen Yang filed an
income tax return for
1993 showing business net income of
P350,000.00 on which he paid an income
tax of P61,000.00. After filing the return
he realized that he forgot to include an
item of business income in 1993 for
P50.000.00. Being an honest taxpayer, he
included this income in his return for
1994 and paid the corresponding income
tax thereon. In the examination of his 1993
return the BIR examiner found that
Stephen Yang failed to report this item of
P50.000.00 and assessed him a deficiency
income tax on this item, plus a 50% fraud
surcharge.
1) Is the examiner
fraud surcharge attaches only if a false SUGGESTED ANSWER:
or fraudulent (a) No. Before taxpayer can avail of Judicial
return is willfully made by Mr. Yang remedy he must first exhaust administrative
(Sec.248, NIRC). The fact that Mr. Yang remedies by filing a protest within 30 days
included the income in his 1994 return from receipt of the assessment. It is the
belies any claim of willfulness but is rather Commissioner's decision on the protest that
indicative of an honest mistake which was give the Tax Court jurisdiction over the case
sought to be rectified by a subsequent act, provided that the appeal is filed within 30
that is the filing of the 1994 return. days from receipt of the Commissioner's
decision. An assessment by the BIR is not
2) Mr. Yang should have amended his 1993 the Commissioner's decision from which a
Income tax return to allow for the inclusion petition for review may be filed with the
of the P50.000 income during the taxable Court of Tax Appeals. Rather, it is the action
period it was realized. taken by the Commissioner in response to the
taxpayer's protest on the assessment that
3) Mr. Yang should file a protest would constitute the appealable decision
questioning the 50% surcharge and ask for (Section 7, RA
the abatement thereof. ALTERNATIVE ANSWER: 1125).
Mr. Yang should pay the deficiency income
tax on or before the day prescribed for its (b) No, the petition for review can not be
payment per notice of demand. After entertained by the Court of
payment and within two years thereafter, Appeals, since decisions of the
he should file a claim for refund of taxes
erroneously paid to recover the excessive
surcharge imposed.
4) Mr. Yang should file a written claim for

refund with the Commissioner of Internal
Revenue of the taxes paid on the P50.000
income included in 1994 within two years
from payment pursuant to Section 204(3)
of the Tax Code. Should this remedy fail in
the administrative level, a judicial claim for
refund can be instituted before the
expiration of the two year period.
Taxpayer: Exhaustion of Administrative Remedies

(1997)
(a) A taxpayer received, on 15 January
1996 an as-
sessment for an internal revenue tax
deficiency. On
10 February 1996, the taxpayer
forthwith filed a
petition for review with the Court of
Tax Appeals. Could the Tax Court
entertain the petition?
(b) Under the above factual setting, the

taxpayer, instead of questioning the
assessment he received on 15
January 1996 paid, on 01 March 1996
the "deficiency
tax" assessed. The taxpayer requested a
refund from the Commissioner by
submitting a written claim on
01 March 1997. It was denied. The
taxpayer, on 15
March 1997, filed a petition for
review with the
Court of Appeals. Could the
petition still be entertained?
Commissioner on cases involving taxes on grounds that they are
claim for tax erroneously paid within two years from
refunds are within the exclusive and date of payment.
primary jurisdiction of the Court of Tax (e) If there is a denial of the claim, appeal
Appeals (Section 7.RA1125). to the CTA shall be made within 30 days
from denial but within two years from
Taxpayer: Failure to Withheld & Remit Tax date of payment.
(2000) ¾ If the Commissioner fails to act on
A domestic corporation failed to withhold the claim for
and remit the tax on income received from refund or tax credit and the two-year
Philippine sources by a non- resident period is about to expire, the
foreign corporation. In addition to the civil taxpayer should consider the
penalties provided for under the Tax Code, continuous inaction of the
a compromise penalty was imposed for Commissioner as a denial and
violation of the withholding tax provisions. elevate the case to the CTA before
May the Commissioner of Internal Revenue the expiration of the two-year period.
legally enforce the collection of
compromise penalty? (5%) Under the Tariff and Customs Code,
SUGGESTED taxpayer's remedies arise only after
ANSWER:
payment of duties.
No. There is no showing that the
compromise penalty was imposed by the 4) The administrative remedies consist of
Commissioner of Internal Revenue with filing a claim for refund which may take
the agreement and conformity of the the form of abatement or drawback.
taxpayer. (Wonder Mechanical 5) The taxpayer can also file a protest
within 15 days
Engineering Corporation u. Court of
Tax Appeals, et. al., 64 SCRA 555). from payment if he disagrees with the
ruling or decision of the Collector of
Customs regarding the legality or
Taxpayer: NIRC vs. TCC Remedies
correctness of the assessment of
(1996)
Compare the taxpayer's remedies customs duties.
under the National
Internal Revenue Code and the Tariff and
Customs Code.
SUGGESTED
ANSWER:
The taxpayer's remedies under the
NATIONAL INTERNAL REVENUE
CODE may be categorized into
remedies before payment and
remedies after payment. The remedy
BEFORE PAYMENT consists of (a)
Administrative Remedy which is the
filing of protest within 30 days from
receipt of assessment,
a
n
d
(b) Judicial Remedy which is the
appeal of the adverse
decision of the Commissioner on the
protest with the
Court of Tax Appeals, and finally with
the Supreme
Co
urt.
The remedy AFTER PAYMENT

is availed of
(c) by paying the assessed tax within
30 days from
receipt of
assessment and
(d) the filing of a claim for refund or tax
credit of these
6) If the decision of the Collector is Mr. Reyes, a Filipino citizen engaged in
adverse to the the real estate
taxpayer, he can notify the Collector business, filed his 1994 income tax return
within 15 days from receipt of said on March 20,
decision of his desire to have his case 1995. On December 15, 1995, he left the
reviewed by the Commissioner. Philippines as an
¾ The decision of the Collector on the immigrant to join his family in Canada.
taxpayer's After the investigation of said return/the
protest, if adverse to the BIR issued a notice of deficiency income
Government, is automatically tax assessment on April 15, 1998. Mr. Reyes
elevated to the Commissioner for returned to the Philippines as a
review; and if such decision is balikbayan on December 8, 1998. Finding
affirmed by the Commissioner, the his name to be in the list of delinquent
same shall be automatically elevated taxpayers, he filed a protest against
to and finally reviewed by the the assessment on the ground that he did
Secretary of Finance. not receive the notice of assessment and
that the assessment had prescribed. Will
¾ Resort to judicial relief can be the protest prosper? Explain. (5%) SUGGESTED
had by the taxpayer by appealing ANSWER:
the decision of the Commissioner or No. Prescription has not set in because
of the Secretary of Finance (for the period of limitations for the Bureau of
cases subject to automatic review) Internal Revenue to issue an assessment was
within 30 days from the SUSPENDED during the time that Mr. Reyes
promulgation of the adverse decision was out of the Philippines or from the
to the CTA. period
Taxpayer: Overwitholding Claim for Refund

(1999)
A Co. is the wholly owned subsidiary of B
Co., a non- resident German company. A
Co. has a trademark licensing agreement
with B Co. On Feb. 10, 1995, A Co. remitted
to B Co. royalties of P 10,000,000, which A
Co. subjected to a withholding tax of
25% or P2,500,000. Upon advice of
counsel, A Co. realized that the proper
withholding tax rate is 10%. On March 20,
1996, A Co. filed a claim for refund of
P2.500.000 with the BIR. The BIR denied
the claim on Nov. 15, 1996. On Nov. 28,
1996, A Co. filed a petition for review with
the CTA. The
BIR attacked the capacity of A Co., as agent,
to bring the refund case. Decide the issue.
(5%)
SUGGESTED ANSWER:
A Co., the withholding agent of the non-
resident foreign corporation is entitled to
claim the refund of excess withholding tax
paid on the income of said corporation in
the Philippines. Being a withholding agent,
it is the one held liable for any violation of
the withholding tax law should such a
violation occur. In the same vein, it should
be allowed to claim a refund in case of
overwitholding. (CIR v. Wander Phils. Inc.,
GR No. 68378, April 15, 1988,
160 SCRA 573; CIR v. Procter & Gamble
PMC, 2O4 SCRA
37
7).
Taxpayer: Prescriptive Period: Suspended

(2000)
December 15, 1995 up to P500.000.00 on May 15, 1985. In the
December 8, 1998. subsequent quarters, XCEL suffered losses
(Sec. 223 in relation to Sec. 203, both so that on April 15, 1986 it declared a net
of the NIRC of 1997) loss of P1,000,000.00 in its annual income
tax return. After failing to get a refund,
Taxpayer: Prescriptive Period; Claim for Refund XCEL filed on March 1, 1988 a case with
(1997) the Court of Tax Appeals to recover the
A corporation files its income tax return P500.000.00 in taxes paid on May 15, 1985.
on a calendar Is the action to recover the taxes
year basis. For the first quarter of 1993, it filed timely?
paid on 30 May SUGGESTED ANSWER:
1993 its quarterly income tax in the The action for refund was filed in the Court
amount of P3.0 of Tax Appeals on time. In the case of
million. On 20 August 1993, it paid the Commissioner v. TMX Sales, Inc., 205
second quarterly income tax of P0.5 SCRA 184, which is similar to this case, the
million. The third quarter resulted in a net Supreme Court ruled that in the case of
loss, and no tax was paid. For the fourth overpaid quarterly corporate income tax,
and final return for 1993, the company the two-year period for filing claims for
reported a net loss for the year, and the refund in the BIR as well as in the
taxpayer indicated in the income tax return institution of an action for refund in the
that it opted to claim a refund of the CTA, the two-year prescriptive period for
quarterly income tax payments. On 10 tax refunds (Sec. 230, Tax Code) is
January 1994, the corporation filed with counted from the filing of the final,
the Bureau of Internal Revenue a written adjustment return under Sec.
claim for the refund of P3.5 million. 67 of the Tax Code, and not from the
filing of the
BIR failed to act on the claim for refund;
hence, on 02
March 1996, the corporation filed a
petition for review
with the Court of Tax Appeals on its claim
for refund of the overpayment of its 1993
quarterly income tax. BIR, in its answer to
the petition, alleged that the claim for
refund was filed beyond the reglementary
period. Did the claim for refund prescribe?
SUGGESTED
ANSWER:
The claim for refund has prescribed. The
counting of the two-year prescriptive
period for filing a claim for refund
is counted not from the date when the
quarterly income taxes were paid but on
the date when the final adjustment return
or annual income tax return was filed (CIR
v. TMX Sales Inc., G.R. No. 83736,
January 15, 1992; CIR v. Phi/Am Life
Insurance Co., Inc., G.R. No. 105208, May
29, 1995). It is obvious that the annual
income tax return was filed before
January 10, 1994 because the written
claim for refund was filed with the BIR on
January
10, 1994. Since the two-year prescriptive
period is not only a limitation of action in
the administrative stage but also a
limitation of action for bringing the case to
the judicial stage, the petition for review
filed with the CTA on March 02, 1996 is
beyond the reglementary period.
Taxpayer: Prescriptive Period; Claims for Refund

(1994) XCEL Corporation filed its quarterly
income tax return for the first quarter of
1985 and paid an income tax of
quarterly return and payment of the considered as a denial by the BIR of the
quarterly tax. The protest filed by CFB Corporation (CIR v.
CTA action on March 1, 1988 was clearly Union Shipping Corp., 185 SCRA 547).
within the reglementary two-year period
from the filing of the final adjustment return Within thirty (30) days from receipt of such
of the corporation on April 15, 1986. denial "in clear and unequivocal language," I
shall then file a petition for review with the
Taxpayer: Prescriptive Period; Claims for Refund (2004) Court of Tax Appeals. ALTERNATIVE
On March 12, 2001, REN paid his taxes. ANSWER:
Ten months later, he realized that he Within thirty (30) days from receipt of the
had overpaid and so he immediately warrant of
filed a claim for refund with distraint and levy, I shall file a petition for
the Commissioner of Internal review with the Court of Tax Appeals with an
Revenue. application for issuance of a writ of
preliminary injunction to enjoin the Bureau
On February 27, 2003, he received the of Internal Revenue from enforcing the
decision of the Commissioner denying warrant.
REN's claim for refund. On March 24,
2003, REN filed an appeal with the Court This is the action I shall take because I shall
of Tax Appeals. Was his appeal filed on time consider the issuance of the warrant as a final
or not? Reason. (5%) decision of the Commissioner of Internal
SUGGESTED ANSWER:
Revenue which could be the
The appeal was not filed on time. The two-
year period of limitation for filing a claim for
refund is not only a limitation for pursuing
the claim at the administrative level but also
a limitation for appealing the case to the
Court of Tax Appeals. The law provides that
"no suit or proceeding shall be filed after
the expiration of two years from the date
of the payment of the tax or penalty
regardless of any supervening cause that
may arise after payment (Section
229, JVZRCJ. Since the appeal was only
made on March
24, 2003, more than two years had already
elapsed from
the time the taxes were paid on March 12,
2003. Accordingly, REN had lost his judicial
remedy because of prescription.
Taxpayer: Protest against Assessment

(1998)
CFB Corporation, a domestic corporation
engaged in
food processing and other allied activities,
received a letter
from the BIR assessing it for delinquency
income taxes. CFB filed a letter of protest.
One month after, a warrant of distraint and
levy was served on CFB Corporation. If you
were the lawyer engaged by CFB
Corporation to contest the assessment made
by the BIR, what steps will you take to
protect your client? (5%)
SUGGESTED ANSWER:
I shall immediately file a motion for
reconsideration of the issuance of the
warrant of distraint and levy and seek from
the BIR Commissioner a denial of the
protest "in clear and unequivocal
language." This is so because the issuance
of a warrant of distraint and levy is not
subject of appeal to the Court of of the Government's action to collect the tax
Tax Appeals liability under dispute. (Yabes v. Flojo, 15
(Yobes u. Flojo, 15 SCRA 278). The CTA SCRA 278; San Juan v. Vasquez, 3 SCRA
may, however, 92). There is no final, executory and
remand the case to the BIR and require demandable assessment which can be
the Commissioner enforced by the BIR, once a timely appeal is
to specifically rule on the protest. The filed.
decision of the Commissioner, if adverse to
my client, would then constitute an Taxpayer: Protest against Assessment
appealable decision. (1999)
A Co., a Philippine corporation, received an
Taxpayer: Protest against Assessment income tax deficiency assessment from the
(1999) BIR on November 25,
A Co., a Philippine corporation, received 1996. On December 10, 1996, A Co. filed its
an income tax protest with the BIR On May 20, 1997, the
deficiency assessment from the BIR on BIR issued a warrant of distraint to enforce
May 5, 1995. On May 31, 1995, A Co. the assessment. This warrant was served on
filed its protest with the BIR. On July 30, A Co. on May 25, 1997. In a letter dated
1995, A Co. submitted to the BIR all June 4,
relevant supporting documents. The CIR 1997 and received by A Co. 5 days later, the
did not formally rule on the protest but on CIR formally denied A Co.'s protest stating
January 25, 1996, A Co. was served a that it constitutes his final decision on the
summons and a copy of the complaint for matter. On July 6, 1997, A Co. filed a Petition
collection of the tax deficiency filed by the for Review with the CTA. The BIR moved
BIR with the Regional Trial Court (RTC). to
On February 20, 1996, A Co. brought a
Petition for Review before the CTA. The
BIR contended that the Petition is
premature since there was no formal
denial of the protest of A Co. and should
therefore be dismissed.
1. Has the CTA jurisdiction
over the case?
SUGGESTED
ANSWER;
Yes, the CTA has jurisdiction over the case
because this qualifies as an appeal from
the Commissioner's decision on disputed
assessment. When the Commissioner
decided to collect the tax assessed without
first deciding on the taxpayer's protest, the
effect of the Commissioner’s action of
filing a judicial action for collection is a
decision of denial of the protest, in which
event the taxpayer may file an appeal with
the CTA. (Republic v. Lim Tian Teng &
Sons, Inc., 16 SCRA 584; Dayrit v.
Cruz, L-39910, Sept. 26, 1988).
2. Has the RTC jurisdiction over the

collection case filed by the BIR?
Explain.
SUGGESTED
ANSWER;
The RTC has no jurisdiction over the
collection case filed by the BIR. The filing
of an appeal with the CTA has the effect of
divesting the RTC of jurisdiction over the
collection case. At the moment the
taxpayer appeals the case to the Court of
Tax Appeals in view of the Commissioner's
filing of the collection case with the RTC
which was considered as a decision of
denial, it gives a justifiable basis for the
taxpayer to move for dismissal in the RTC
dismiss the Petition on the ground that the CTA has no
jurisdiction over the case. requested for a reconsideration stating the
Decide. (10%) grounds therefor. Instead of resolving the
SUGGESTED ANSWER: request for reconsideration, the BIR sent a
The CTA has jurisdiction over the case. The Final Notice before Seizure to the taxpayer.
appealable decision is the one which May this action of the Commissioner of
categorically stated that the Commissioner's Internal Revenue be deemed a denial of the
action on the disputed assessment is final request for reconsideration of the taxpayer to
and, therefore, the reckoning of the 30- entitle him to appeal to the Court of Tax
day period to appeal was on June 9, 1999. Appeals? Decide with reasons. (5%)
The filing of the petition for review with SUGGESTED ANSWER:
the CTA was timely made. The Supreme Yes, the final notice before seizure was in
Court has ruled that the CIR must effect a denial of the taxpayer's request for
categorically state that his action on a reconsideration, not only was the notice the
disputed assessment is final; otherwise, the only response received, its nature, content
period to appeal will not commence to run. and tenor supports the theory that it was
That final action cannot be implied from the the BIR's final act regarding the request
mere issuance of a warrant "of distraint and for reconsideration. (CIR v. Isabela
levy. (CIR v. Union Shipping Cultural Corporation, G.R. No. 135210,
Corporation, 185 SCRA 547). July 11,
2001
)
Taxpayer: Protest; Claim of Refund
(1996)
Is protest at the time of payment of taxes
and duties a requirement to preserve the
taxpayers' right to claim a refund? Explain.
SUGGESTED ANSWER:
For TAXES imposed under the NIRC,
protest at the time of payment is not
required to preserve the taxpayers' right to
claim refund. This is clear under Section
230 of the NIRC which provides that a suit
or proceeding maybe maintained for the
recovery of national internal revenue tax
or penalty alleged to have been
erroneously assessed or collected, whether
such tax or penalty has been paid under
protest or not.
For DUTIES imposed under the Tariff and

Customs Code, a protest at the time of
payment is required to preserve the
taxpayers' claim for refund. The procedure
under the TCC is to the effect that when a
ruling or decision of the Collector of
Customs is made whereby liability for duties
is determined, the party adversely affected
may protest such ruling or decision by
presenting to the Collector, at the time when
payment is made, or within 15 days
thereafter, a written protest setting forth
his objections to the ruling or decision in
question (Sec.
2308.
TCC).
Taxpayer; Appeal to the Court of Tax Appeals

(2005)
A taxpayer received a tax deficiency
assessment of P1.2
Million from the BIR demanding payment
within 10 days, otherwise, it would collect
through summary remedies. The taxpayer
Taxpayer; Claim for Tax Credits revoked anytime.
(2006)
Congress enacts a law granting grade Taxpayer; Compromise after Criminal Action
school and high (1998)
school students a 10% discount on all An information was filed in court for willful
school-prescribed textbooks purchased non-payment
from any bookstore. The law allows of income tax the assessment of which has
bookstores to claim in full the discount as a become final. The accused, through counsel,
tax credit. presented a motion that he be allowed to
1. If in a taxable year a bookstore has compromise his tax liability subject of the
no tax due on information. The prosecutor indicated his
which to apply the tax credits, can the conformity to the motion. Is this procedure
bookstore claim from the BIR a tax refund correct? [5%]
in lieu of tax credit? Explain. (2.5%) SUGGESTED ANSWER:
SUGGESTED No. Criminal violations, if already filed in
ANSWER: court, may not be compromised (Sec.
No, the bookstore cannot claim from 204[B], NIRC). Furthermore, the payment of
the BIR a tax refund in lieu of tax the tax due after apprehension shall not
credit. There is nothing in the law that constitute a valid defense in any prosecution
grants a refund when the bookstore has no for violation of any provisions of the Tax
tax liability against which the tax credit Code (Sec. 247(a), NIRC). Finally, there is
can be used (CIR v. Central Luzon Drug, no showing that the prosecutor in the
G.R. No 159647, April 15, 2005). A tax problem is a legal officer of the
credit is in the nature of a tax exemption Bureau of Internal
and in case of doubt, the doubt should be
resolved in strictissimi juris against the
claimant.
2. Can the BIR require the bookstores

to deduct the amount of the discount from
their gross income? Explain. (2.5%)
SUGGESTED
ANSWER:
No. Tax credit which reduces the tax
liability is different from a tax deduction
which merely reduces the tax base. Since
the law allowed the bookstores to claim in
full the discount as a tax credit, the BIR is
not allowed to expand or contract the
legislative mandate (CIR v. Bicolandia
Drug Corp., G.R. No. 148083, July 21,
2006; CIR v. Central Luzon Drug Corp.,
G.R. No. 159647, April 15, 2005).
3. If a bookstore closes its business due

to losses without being able to recoup the
discount, can it claim reimbursement of
the discount from the government on the
ground that without such reimbursement,
the law constitutes taking of private
property for public use without just
compensation? Explain. (5%)
SUGGESTED
ANSWER:
A bookstore, closing its business due to
losses, cannot claim reimbursement
of the discount from
the government. If the business
continues to operate at a loss and no other
taxes are due, thus compelling it to close
shop, the credit can never be applied and
will be lost altogether (CIR v. Central
Luzon Drug, G.R. No. 159647, April 15,
2005). The grant of the discount to the
taxpayer is a mere privilege and can be
Revenue to whom the conduct of criminal Taxpayer; Withholding Agent; Claim of Tax Refund (2005)
actions are Does a withholding agent have the right to
lodged by the Tax file an application for tax refund? Explain.
Code. SUGGESTED ANSWER:
ALTERNATIVE ANSWER: Yes. A taxpayer is "any person subject to tax."
No. If the compromise referred to is the civil Since, the withholding tax agent who is
aspect, the procedure followed is not "required to deduct and withheld any tax" is
correct. Compromise for the payment of any made "personally liable for such tax" should
internal revenue tax shall be made only by the amount of the tax withheld be finally
the Commissioner of Internal Revenue or in found to be less than that required to be
a proper case the Evaluation Board of the withheld by law, then he is a taxpayer. Thus,
BIR (Sec. 204, NIRC). Applying the law he has sufficient legal interest to file an
to the case at bar, compromise application for refund, of the amount he
settlement can only be effected by leave of believes was illegally collected from him.
Court. (Commissioner of Internal Revenue v.
Procter & Gamble, G.R. No. 66838,
Taxpayer; Protest against Assessment; Donor’s December
Tax 2,
(1995 1991)
)
Mr. Rodrigo, an 80-year old retired
businessman, fell in
love with 20-year old Tetchie Sonora, a night
club hospitality girl. Although she refused to
marry him she agreed to be his "live-in"
partner. In gratitude, Mr. Rodrigo
transferred to her a condominium unit,
where they both live, under a deed of sale
for P10 Million. Mr. Rodrigo paid the capital
gains tax of 5% of P10 Million.

found that the property was transferred to
Tetchie Sonora by Mr. Rodrigo because of
the companionship she was providing him.
Accordingly,the Commissioner
made a 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.
Tetchie Sonora protests the assessment

and claims that the transfer of the
condominium unit was a gift and therefore
excluded from income. How will you rule on
the protest of Tetchie Sonora? Explain.
SUGGESTED ANSWER:
I will grant the protest and cancel the
assessment. The transfer of the property
by Mr. Rodrigo to Ms. Sonora was
gratuitous. The deed of sale indicating a P10
million consideration was simulated because
Mr. Rodrigo did not receive anything from
the sale. The problem categorically states
that the transfer was made in gratitude to
Ms. Sonora's companionship. The transfer
being gratuitous is subject to donor's tax.
Mr. Rodrigo should be assessed deficiency
donor's tax and a 50% surcharge imposed
for fraudulently simulating a contract of sale
to evade donor's tax. (Sec. 91(b), NIRC).
LOCAL & REAL (Sec. 240).
PROPERTY [Note: The question is susceptible to dual
TAXE interpretation because it is asking for three
S other taxes and not three other real
property taxes. Accordingly, an alternative
answer should be considered and given full
Local Taxation: Actual Use of Property
credit]
(2002)
The real property of Mr. and Mrs A. The following taxes, aside from basic
Angeles, situated in a real estate tax, may be imposed by:
commercial area in front of the public 1. Provincial
market, was Government
declared in their Tax Declaration as a. Printer's or publisher's tax
residential because it had been used by b. Franchise Tax
them as their family residence from the c. Professional tax
time of its construction in 1990. However, 2. City Government - may levy taxes which
since January the province or municipality are authorized
1997, when the spouses left for the to levy (Sec. 151, LGC)
United States to stay a. Printer's or
there permanently with their children, the publisher's tax b.
property has been rented to a single Franchise tax
proprietor engaged in the sale of c. Professional tax
appliances and agri-products. The
Provincial Assessor reclassified the
property as commercial for tax purposes
starting January 1998. Mr. and Mrs.
Angeles appealed to the Local Board of
Assessment Appeals, contending that the
Tax Declaration previously classifying
their property as residential is binding.
How should the appeal be decided? (5%)
SUGGESTED
ANSWER:
The appeal should be decided against Mr.
and Mrs. Angeles. The law focuses on the
actual use of the property for classification,
valuation and assessment purposes
regardless of ownership. Section 217 of the
Local Government Code provides that "real
property shall be classified, valued, and
assessed on the basis of its actual use
regardless of where located, whoever owns
it, and whoever uses it".
Local Taxation: Coverage

(2002)
Aside from the basic real estate tax, give
three (3) other
taxes which may be imposed by provincial
and city governments as well as by
municipalities in the Metro Manila area.
(3%)
SUGGESTED
ANSWER:
The following real property taxes aside
from the basic real property tax may be
imposed by provincial and city
governments as well as by
municipalities in the Metro Manila area:
1. Additional levy on real property for
the Special
Education Fund (Sec. 235, LGC);
2. Additional Ad-valorem tax on Idle
lands (Sec. 23§, LGC); and
3. Special levy
3. Municipalities in the Metro Manila idle or vacant
Area - may levy lots located in residential subdivisions
taxes at rates which shall not exceed by within their respective territorial
50% the maximum rates prescribed in jurisdictions? (3%)
the Local Government Code. SUGGESTED ANSWER:
a. Annual fixed tax on Not all local government units may do so.
manufacturers, assemblers, Only provinces, cities, and municipalities
repackers, processors, brewers, within the Metro Manila area (Sec.
distillers, rectifiers and compounders of 232, Local Government Code) may impose
liquors, distilled spirits, and wines or an ad valorem
manufacture of any article of commerce tax not exceeding five percent (5%) of the
of whatever kind or nature; assessed value
b. Annual fixed tax on wholesalers, (Sec. 236, Ibid.) of idle or vacant
distributors, or dealers in any article of residential lots in a
commerce of whatever kind or nature; subdivision, duly approved by
c. Percentage tax on retailers proper authorities
regardless of area. (Sec.237, Ibid.)
[Note: Other taxes may comprise the
enumeration because many other taxes are
authorized to be imposed by LGUs.]
Local Taxation: Exemption; Real Property Taxes (2002)

Under the Local Government Code, what
properties are exempt from real property
taxes? (5%)
SUGGESTED ANSWER:
The following properties are exempt from
real property taxes: (Sec. 234, LGC).
1. Real property owned by the
Republic of the
Philippines or any of its political
subdivisions except when the beneficial
use thereof has been granted, for
consideration or otherwise, to a taxable
person;
2. All lands, buildings and

improvements actually, directly, and
exclusively used for religious, charitable
or educational purposes by charitable
institutions, churches, parsonages or
convents appurtenant thereto, mosques,
nonprofit or religious cemeteries;
3. All machineries and equipment that

are actually, directly and exclusively
used by local water districts and
government-owned or controlled
corporations engaged in the supply and
distribution of water and/or generation
and transmission of electric power;
4. All real property owned by duly

registered cooperatives as provided
for under R.A. No. 6938; and
5. Machinery and equipment used for

pollution control and environmental
protection.
Local Taxation: Imposition of Ad Valorem Tax (2000)

May local governments impose an annual
realty tax in
addition to the basic real property tax on
Local Taxation: Legality/ Constitutionality; defects on its enactment, it would seem that
Tax if the taxpayer had presented evidence to
Ordinance support the allegation that no public hearing
(2003) was conducted, the Court should have ruled
X, a taxpayer who believes that an that the tax ordinance is invalid. (Belen
ordinance passed by Figuerres v. Court of Appeals, GRNo.
the City Council of Pasay is
119172, March
unconstitutional for being 25,
discriminatory against him, want to know 1999).
from you, his tax lawyer, whether or not he
can file an appeal. In the affirmative, he Local Taxation: Power to Impose
asks you where such appeal should be (2003)
made: the Secretary of Finance, or the In order to raise revenue for the repair
Secretary of Justice, or the Court of Tax and maintenance of the newly constructed
Appeals, or the regular courts. What would City Hall of Makati, the City Mayor ordered
your advice be to your client, X? (8%) the collection of P1.00, called "elevator tax",
SUGGESTED
ANSWER: every time a person rides any of the high-
The appeal should be made with the tech elevators in the city hall during the
Secretary of Justice. Any question on the hours of 8:00 a.m. to
constitutionality or legality of a tax 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the
ordinance may be raised on appeal with "elevator tax"
the Secretary of Justice within 30 days a valid imposition?
from the effectivity thereof. (Sec. Explain. (8%)
SUGGESTED ANSWER:
187, LGC; Hagonoy Market Vendor
Association v. No. The imposition of a tax, fee or charge or
Municipality of Hagonoy, 376 the generation of revenue under the Local
SCRA 376 [2002]). Government Code, shall be exercised by the
SANGUNIAN of the local government unit
Local Taxation: Legality; Imposition of Real Property concerned through an appropriate
Tax
Rate
(2002)
An Ordinance was passed by the
Provincial Board of a
Province in the North, increasing the
rate of basic real
property tax from 0.006% to 1 % of the
assessed value of the real property
effective January 1, 2000. Residents of
the municipalities of the said province
protested the Ordinance on the ground
that no public hearing was conducted and,
therefore, any increase in the rate of real
property tax is void. Is there merit in the
protest? Explain your answer. (2%)
SUGGESTED
ANSWER:
The protest is devoid of merit. No public
hearing is required before the enactment
of a local tax ordinance levying the basic
real property tax (Art. 324, LGC
Regulations).
ALTERNATIVE
ANSWER:
Yes, there is merit in the protest provided
that sufficient proof could be introduced
for the non-observance of public hearing.
By implication, the Supreme Court
recognized that public hearings are
required to be conducted prior to the
enactment of an ordinance imposing real
property taxes. Although it was concluded
by the highest tribunal that presumption
of validity of a tax ordinance can not be
overcome by bare assertions of procedural
ordinance (Section 132 of the Local standard used in the classification by the City
Government Code). The city of Makati.
mayor alone could not order the collection
of the tax; as such, the "elevator tax" is an Another issue is the fact that the tax is
invalid imposition. imposed on the driver of the vehicle and not
on the registered owner of the same. The tax
Local Taxation: Remission/Condonation of Taxes (2004) does not only violate the requirement of
RC is a law-abiding citizen who pays his uniformity, but the same is also unjust
real estate taxes promptly. Due to a because it places the burden on someone
series of typhoons and adverse economic who has no control over the route of the
conditions, an ordinance is passed by MM vehicle. The ordinance is, therefore, invalid
City granting a 50% discount for payment of for violating the rule of uniformity and
unpaid real estate taxes for the preceding equality as well as for being unjust.
year and the condonation of all penalties
on fines resulting from the late Local Taxation; Situs of Professional Taxes (2005)
payment. Arguing that the ordinance Mr. Fermin, a resident of Quezon City, is
rewards delinquent taxpayers and a Certified
discriminates against prompt ones, RC Public Accountant-Lawyer engaged in the
demands that he be refunded an amount practice of his
equivalent to one-half of the real taxes he
paid. The municipal attorney rendered an
opinion that RC cannot be reimbursed
because the ordinance did not provide for
such reimbursement. RC files suit to
declare the ordinance void on the ground
that it is a class legislation. Will his suit
prosper? Explain your answer briefly. (5%)
SUGGESTED ANSWER:
The suit will not prosper. The remission or
condonation of taxes due and payable to the
exclusion of taxes already collected does not
constitute unfair discrimination. Each set of
taxes is a class by itself and the law would
be open to attack as class legislation only if
all taxpayers belonging to one class were
not treated alike (Juan Luna Subdivision,
Inc., v. Sarmiento, 91 Phil. 371 [1952]).
Local Taxation: Rule of Uniformity and Equality

(2003)
The City of Makati, in order to solve the
traffic problem
in its business districts, decided to impose a
tax, to be paid by the driver, on all private
cars entering the city during peak hours
from 8:00 a.m. to 9:00 a.m. from Mondays
to Fridays, but exempts those cars carrying
more than two occupants, excluding the
driver. Is the ordinance valid? Explain. (8%)
SUGGESTED ANSWER:
The ordinance is in violation of the Rule of
Uniformity and Equality, which requires that
all subjects or objects of taxation, similarly
situated must be treated alike in equal
footing and must not classify the subjects in
an arbitrary manner. In the case at bar, the
ordinance exempts cars carrying more than
two occupants from coverage of the said
ordinance. Furthermore, the ordinance only
imposes the tax on private cars and exempts
public vehicles from the imposition of the
tax, although both contribute to the traffic
problem. There exists no substantial
two professions. He has his individual owners who shall be liable for the
main office in additional tax. (Last par., Sec. 237)
Makati City and maintains a branch office
in Pasig City. Mr. Fermin pays his The term "Idle Lands" means, land not
professional tax as a CPA in Makati City devoted directly to any crop or to any
and his professional tax as a lawyer in definite purpose for at least one year prior
Pasig City. (5%) to the notice of expropriation, except for
a) May Makati City, where he has his reasons other than force majeure or any
main office, require him to pay his fortuitous event, but used to be devoted or
professional tax as a lawyer? Explain. is suitable to such crop or is contiguous to
SUGGESTED ANSWER:
land devoted directly to any crop and
No. Makati City where Mr. Fermin has
does not include land devoted permanently
his main office may not require him to
or regularly to other essential and more
pay his professional tax as a lawyer. Mr.
productive purpose. (Philippine Legal
Fermin has the option of paying his
Encyclopedia, by Sibal, 1986 Ed.)
professional tax as a lawyer in Pasig
City where he practices law or in Makati
Finally, I would advise them to construct or
City where he maintains his principal
place improvements on their idle lands by
office. (Sec. 139[b], Local Government
making valuable additions to the property
Code)
or ameliorations in the land's
b) May Quezon City, where he has his
residence and where he also practices his
two professions, go after him for the
payment of his professional tax as a CPA
and a lawyer? Explain.
SUGGESTED
ANSWER:
No, the situs of the professional tax is the
city where the professional practices his
profession or where he maintains his
principal office in case he practices his
profession in several places. The local
government of Quezon City has no right to
collect the professional tax from Mr.
Fermin as the place of residence of the
taxpayer is not the proper situs in the
collection of the professional tax.
Local Taxation; Special Levy on Idle Lands

(2005)
A city outside of Metro Manila plans
to enact an
ordinance that will impose a special levy
on idle lands
located in residential subdivisions within
its territorial jurisdiction in addition to the
basic real property tax. If the lot owners of
a subdivision located in the said city seek
your legal advice on the matter, what
would your advice be? Discuss. (5%)
SUGGESTED
ANSWER:
I would advise the lot owners that a city,
even if it is outside Metro Manila, may levy
an annual tax on idle lands at the rate not
exceeding five percent (5%) of the
assessed value of the property which
shall be in addition to the basic real
property tax. (Sec. 236, Local Government
Code) I would likewise advise them that
the levy may apply to residential lots,
regardless of land area, in subdivisions
duly approved by proper authorities, the
ownership of which has been transferred to
conditions so the lands would not be considered as idle.
(Sec. 199[m]) In this manner their personal notice. For his part, the City
properties would not be subject to the ad Treasurer maintains that the publication and
valorem tax on idle lands. posting of notice are sufficient compliance
with the requirements of the law.
Real Property Tax: Underground Gasoline Tanks (2003) 1. If you were the judge, how will you
Under Article 415 of the Civil Code, resolve this
in order for machinery and equipment to issue?
be considered real property, the pieces (2.5%)
must be placed by the owner of the land SUGGESTED ANSWER:
and, in addition, must tend to directly I will resolve the issue in favor of Joachin. In
meet the needs of the industry or works auction sales of property for tax delinquency,
carried on by the owner. Oil companies notice to delinquent landowners and to the
install underground tanks in the gasoline public in general is an essential and
stations located on land leased by the oil indispensable requirement of law, the non-
companies from the owners of the land fulfillment of which vitiates the same
where the gasoline stations [are] located. (Tiongco v. Phil. Veterans Bank, G.R. No.
Are those underground tanks, which were 82782, Aug. 5, 1992). The failure to give
not placed there by the owner of the land notice to the right person i.e., the real owner,
but which were instead placed there by the will render an auction sale void (Tan v.
lessee of the land, considered real Bantegui, G.R. No, 154027, October 24,
2005; City Treasurer of Q.C. v. CA, G.R. No.
property for purposes of real property
120974, Dec.
taxation under the local Government 22,
Code? Explain. (8%) 1997).
SUGGESTED ANSWER:
Yes. The properties are considered as
necessary fixtures of the gasoline station,
without which the gasoline station would be
useless. Machinery and equipment
installed by the
lessee of leased land is not real property for
purposes of execution of a final judgment
only. They are considered as real property
for real property tax purposes as "other
improvements to affixed or attached real
property under the Assessment Law and the
Real Property Tax Code. (Caltex v. Central
Board of Assessment Appeals, 114 SCRA
296
[1982]).
Real Property Tax; Requirements; Auction Sales

of
Property for Tax Delinquency
(2006)
Quezon City published on January 30, 2006
a list of delinquent real property taxpayers
in 2 newspapers of general circulation and
posted this in the main lobby of the City
Hall. The notice requires all owners of real
properties in the list to pay the real
property tax due within 30 days from the
date of publication, otherwise the properties
listed shall be sold at public auction.
Joachin is one of those named in the list. He

purchased a real property in 1996 but
failed to register the document of sale with
the register of Deeds and secure a new real
property tax declaration in his name. He
alleged that the auction sale of his property
is void for lack of due process considering
that the City Treasurer did not send him
2. Assuming Joachin is a registered include? [2%]
owner, will your answer be the same? SUGGESTED ANSWER:
(2.5%) The term ordinary income includes any gain
SUGGESTED from the sale or exchange of property which
ANSWER: is not a capital asset. These are the gains
Yes. The law requires that a notice of derived from the sale or exchange of
the auction sale must be properly sent to property such as stock in trade of the
Joachin and not merely through publication taxpayer or other property of a kind which
(Tan v. Bantegui, G.R. No, 154027, would properly be included in the inventory
October of the taxpayer if on hand at the close of the
24,2005; Estate of Mercedes Jacob v. CA, taxable year, or property held by the
G.R. No. 120435, Dec. 22, 1997).
taxpayer primarily for sale to customers in
the course of his trade or business, or
Real Property Taxation: Capital Asset vs. Ordinary
property used in trade or business of a
Asset
(199 character which is subject to the allowance
5) for depreciation, or real property used in
In 1990, Mr. Naval bought a lot for trade or business of the taxpayer. (Sec. 22
P1,000,000.00 In a [Z] in relation to Sec. 39[A](1), both of the
subdivision with the intention of building NIRC).
ALTERNATIVE ANSWER:
his residence on it. In 1994, he abandoned
The term ordinary income includes income
his plan to build his residence on it
from performance of services, whether
because the surrounding area became a professional or personal, gains accruing
depressed area and land values in the from business, and profit arising from the
subdivision went down; instead, he sold it sale or exchange of ordinary assets.
for P800.000.00. At the time of the sale,
the zonal value was P500.000.00.
1) Is the land a capital asset or an
ordinary asset? Explain.
2) Is there any income tax due on the
sale? Explain.
SUGGESTED
ANSWERS:
1) The land is a capital asset because it is
neither for sale in the ordinary course of
business nor a property used in the trade
or business of the taxpayer. (Sec. 33.
NIRC).
2) Yes, Mr. Naval is liable to the 5%

capital gains tax imposed under Section
21(e) of the Tax Code based on the gross
selling price of P800.000.00 which is an
amount higher than the zonal value.
Real Property Taxation: Capital Gains vs. Ordinary

Gains
(199
8)
What is the difference between capital
gains and ordinary
gains?
[3%]
SUGGESTED
ANSWER:
CAPITAL GAINS are gains realized from
the sale or exchange of capital assets,
while ORDINARY GAINS refer to gains
realized from the sale or disposition of
ordinary assets.
Real Property Taxation: Coverage of Ordinary

Income
(199
8)
What does the term "ordinary income"
Real Property Taxation: Exchange of Lot; Capital where their houses are erected. Through
Gain Ordinance No. 2, Series of 1998, the said
Tax municipal government ordained that the lots
(1997) awarded to the awardees/donees be finally
A corporation, engaged in real estate' transferred and donated to them.
development, Determine the tax consequence of the
executed deeds of sale on various foregoing dispositions with respect to Ace
subdivided lots. One Tobacco Corporation, the Municipal
buyer, after going around the subdivision, Government of Pateros, and the
bought a corner lot with a good view of the occupants/beneficiaries. [5%] SUGGESTED
surrounding terrain. He paid P1.2 million, ANSWER:
and the title to the property was issued. A The donation by Ace Tobacco Corporation is
year later, the value of the lot exempt from the donor's tax because it
appreciated to a market value of P1.6 qualifies as a gift to or
million, and the buyer decided to build his for the use of any political subdivision of the
house thereon. Upon inspection, however, National Government (Section 101(2), NIRC).
he discovered that a huge tower antennae The conveyance is likewise exempt from
had been erected on the lot frontage totally documentary stamp tax because it is a
blocking his view. When he complained, the transfer without consideration.
realty company exchanged his lot with
another corner lot with an equal area but Since the donation is to be used as a
affording a better view. Is the buyer liable relocation site for the less fortunate
for capital gains tax on the exchange of the constituents of the municipality. It may be
lots? considered as an undertaking for human
SUGGESTED ANSWER: settlements,
Yes, the buyer is subject to capital gains tax
on the exchange of lots on the basis of
prevailing fair market value of the property
transferred at the time of the exchange or
the fair market value of the property
received, whichever is higher (Section
21(e), NIRC). Real property transactions
subject to capital gains tax are not limited to
sales but also exchanges of property unless
exempted by a specific provision of law.
ALTERNATIVE ANSWER:
No. The exchange is not subject to
capital gains tax because it is merely done
to comply with the intentions of the parties
to the previous contract regarding the sale
and acquisition of a property with a
good view. This is a simple substitution of
the object of sale and since the previous
transaction was already subjected to tax, no
new tax should be imposed on the
exchange (BIR Ruling No.
21(e) 053-89
008-95).
Real Property Taxation: Exemption/Deductions;

Donor’s
Tax
(1998)
Ace Tobacco Corporation bought a parcel of
land situated at Pateros and donated it to
the Municipal Government of Pateros for the
sole purpose of devoting the said land as a
relocation site for the less fortunate
constituents of said municipality. In
accordance therewith, the Municipal Gov-
ernment of Pateros issued to the
occupants/beneficiaries Certificates of
Award giving to them the respective areas
hence the value of the land may Camacho sold their
be deductible principal residence situated in Tandang
in full from the gross income of Sora, Quezon City for Ten Million Pesos
Ace Tobacco (P10,000,000.00) with the intention of using
Corporation if in accordance to a the proceeds to acquire or construct a new
National Priority Plan principal residence in Aurora Hills, Baguio
determined by the National Economic City. What conditions must be met in order
Development Authority. (Sec. 34{H](2)(a), that the capital gains presumed to have
NIRC). If the utilization is not in been realized from such sale may not be
accordance to a National Priority Plan subject to capital gains tax? (5%)
determined by the National Economic SUGGESTED ANSWER:
Development Authority, then Ace Tobacco The conditions
Corporation may deduct the value of the are:
land donated only to the extent of five (5%) 1. The proceeds are fully utilized in
percent of its taxable income derived acquiring or
from trade or business as computed constructing a new principal
without the benefit of the donation. residence within eighteen (18) calendar
(Sec. months from the sale or disposition of
34[H](2)(a) in relation to Sec. the principal residence or eighteen (18)
34[H](1), NIRC). months from July 12, 2000.
The Municipality of Pateros is not subject

to any donor's tax on the value of land it
subsequently donated, it being exempt
from taxes as a political subdivision of
the National Government.
The occupants/beneficiaries are subject to

real property taxes because they now own
the land.
ALTERNATIVE ANSWER on Taxability of

Municipality and
Awar
dees:
The awarding by the Municipal
Government of lots to
specific awardees or donees is likewise
exempt from the donor's tax because it is
only an implementation of the purpose for
which the property was given by Ace
Tobacco Corporation. The purpose of the
first donation is to devote the land as a
relocation site for the less fortunate
constituents. If later on the Municipality
gives out Certificates of Award over
specific lots occupied by the qualified
occupants/beneficiaries, this is intended to
perpetuate the purpose of the previous
donor, the Mu- nicipality acting merely as
a conduit and not the true donor. This is
simply a donation by the Municipality in
form but not in substance.
The receipt by the occupant

beneficiaries of their respective lots
through the Certificate of Award has no
tax implications. They are, however, liable
for real property taxes.
Real Property Taxation: Exemption: Acquiring

New
Principal Residence
(2000)
Last July 12, 2000, Mr. & Mrs. Peter
2. The historical cost or adjusted basis The examinee should be given credit if he
of the real chooses the above two (2) or any two (2) of
property sold or disposed shall be those enumerated below:
carried over to the new principal 1) Assessment must be on the basis
residence built or acquired. of uniform
classification;
3. The Commissioner of Internal Revenue 2) Appraisal, assessment, levy and
must have been informed by Mr. & Mrs. collection shall not be
Peter Camacho within thirty (30) days let to private persons; and
from the date of sale or disposition on 3) Appraisal and assessment must be
July 12, 2000 through a prescribed equitable. (Sec. 198,
return of their intention to avail of the Local Government Code)
tax exemption.
4. That the said exemption can only be

availed of once every ten (10) years.
5. If there is no full utilization of the

proceeds of sale or disposition, the
portion of the gain presumed to have
been realized from the sale or
disposition shall be subject to capital
gains tax [Sec. 24 (D) (2), NIRC of
1997]
Real Property Taxation: Fundamental Principles (1997)

State the fundamental principles
underlying real property taxation in the
Philippines.
SUGGESTED ANSWER:
The following are the fundamental
principles governing real property taxation:
1) Real property shall be appraised at its
current and fair market value;
2) Real property shall be classified for
assessment purposes on the basis of its
actual use:
3) Real property shall be assessed on
the basis of a uniform classification
within each local government unit;
4) The appraisal, assessment, levy, and
collection of
real property tax shall not be let to
any private person; and
5) The appraisal and assessment of real
property shall be equitable.
Real Property Taxation: Principles & Limitations:

LGU (2000)
Give at least two (2) fundamental principles
governing real
property taxation, which are limitations
on the taxing
power of local governments insofar as the
levying of the realty tax is concerned. (2%)
SUGGESTED ANSWER:
Two (2) fundamental principles governing
real property taxation are:
1) The appraisal must be at the current
and fair market value; and
2) Classification for assessment must be
on the basis of actual use. (Sec. 198,
Local Government Code)
ALTERNATIVE ANSWER:
Real Property Taxation: Property Sold is real property tax?
an (5%
Ordinary Asset )
(1998) SUGGESTED ANSWER:
An individual taxpayer who owns a ten The following properties are exempt
(10) door apart- from the real property tax (Section 234,
ment with a monthly rental of P10,000 Local Government Code):
each residential (1) Real property owned by the
unit, sold this property to another REPUBLIC OF THE
individual taxpayer. Is the seller liable to PHILIPPINES or any of its political
pay the capital gains tax? [5%] SUGGESTED subdivisions except when the beneficial
ANSWER: use thereof has been granted for
No. The seller is not liable to pay the consideration or otherwise to a taxable
capital gains tax because the property sold person;
is an ordinary asset, i.e. real property used (2) CHARITABLE
in trade or business. It is apparent that the INSTITUTIONS, churches,
taxpayer is engaged in the real estate parsonages or convents
business, regularly renting out the ten (10) appurtenant thereto,
door apartment. mosques, non-profit or religious
cemeteries, and all lands, buildings, and
Real Property Taxation: Underground Gasoline improvements actually, directly and
Tanks exclusively used for religious, charitable
(200 or educational purposes;
1) (3) All machineries and equipment that
Under Article 415 of the Civil Code, are actually, directly and exclusively
in order for used by LOCAL WATER UTILITIES and
machinery and equipment to be government-owned or controlled
considered real property, corporations engaged in the supply and
they must be placed by the owner of the distribution
land and, in addition, must tend to directly
meet the needs of the industry or works
carried on by the owner. Oil companies,
such as Caltex and Shell, install
underground tanks in the gasoline stations
located on land leased by the oil companies
from others. Are those underground tanks
which were not placed there by the owner
of the land but which were instead placed
there by the lessee of the land, considered
real property for purposes of real property
taxation under the Local Government
Code? Explain your answer. (5%)
SUGGESTED
ANSWER:
Yes. The underground tanks although
installed by the lessee, Shell and Caltex,
are considered as real property for
purposes of the imposition of real
property taxes. It is only for purposes of
executing a final judgment that these
machinery and equipment, installed by the
lessee on a leased land, would not be
considered as real property. But in the
imposition of the real property tax,
the underground tanks are taxable as
necessary fixtures of the gasoline station
without which the gasoline station would
not be operational. (Caltex Phils., Inc
v. CBAA, 114
SCRA.
296).
Real Property Taxation; Exempted Properties

(2006)
What properties are exempt from the
of water and/or generation and forfeiture may still be exercised by the
transmission of Bureau of Customs even if the goods are no
electric power; longer in its custody.
(4) All real property owned by duly
REGISTERED (b) On the other hand, when the goods are
COOPERATIVES as provided for under properly released and thus beyond the reach
R.A. 6938; of tax lien, the government can seek
and payment of the tax liability through judicial
(5) Machinery and equipment used for action since the tax liability of the importer
POLLUTION CONTROL and constitutes a personal debt to the
ENVIRONMENTAL government, therefore, enforceable by
PROTECTION. action. In this case judicial remedy is
normally availed of instead of the
administrative remedy.
TARIFF AND CUSTOMS DUTIES
Customs: Importation (1995)
Customs: “Flexible Tariff Clause” When does importation begin and when
(2001) does it end?
What do you understand by the term SUGGESTED ANSWER:
"flexible tariff clause" as used in the Tariff IMPORTATION begins from the time the
and Customs Code? (5%) SUGGESTED carrying vessel or aircraft enters Philippine
ANSWER: territorial jurisdiction with the intention to
The term "flexible tarif clause "refers unload therein and ends at the time the goods
to the authority are released or withdrawn from the
given to the President to adjust tariff rates customhouse upon
under Section
401 of the Tariff and Customs Code,
which is the
enabling law that made effective the
delegation of the taxing power to the
President under the Constitution.
[Note: It is suggested that if the
examinee cites the entire provision of
Sec. 401 of the Tariff &, Customs
Code, he should also be given full
credit.]
Customs: Administrative vs. Judicial Remedies

(1997)
The Tariff and Customs Code allows the
Bureau of
Customs to resort to the administrative
remedy of seizure,
such as by enforcing the tax lien on the
imported article, and to the judicial remedy
of filing an action in court. When does the
Bureau of Customs normally avail itself;
(a) of the administrative, instead of the
judicial remedy,
or
(b) of the latter, instead of the
former, remedy?
SUGGESTED ANSWER:
(a) The Bureau of Customs normally avails
itself of the ADMINISTRATIVE REMEDY of
seizure, such as by enforcing the tax lien on
the imported articles, instead of the judicial
remedy when the goods to which the tax
lien attaches, regardless of ownership, is
still in the custody or control of the
Government. In the case, however, of
importations which are prohibited or
undeclared, the remedy of seizure and
payment of the customs duties Under the Tariff and Customs
or with legal Code, what are a) dumping duties
permit to withdraw (Viduya vs. b) countervailing
Berdiago, 73 SCRA duties c) marking
5 duties
5 d) discriminatory
3). duties?
Customs: Jurisdiction; Seizure & Forfeiture SUGGESTED ANSWER:
Proceedings 6) Dumping duties are special duties
(199 imposed by the
6) Secretary of Finance upon
On January 1, 1996, armed with warrants recommendation of the
of seizure and Tariff Commission when it is found that
detention issued by the Bureau of the price of the imported articles is
Customs, members of deliberately or continually fixed at less
the customs enforcement and than the fair market value or cost of
security services coordinated with the production, and the importation
Quezon City police to search the premises would cause or likely cause an injury
owned by a certain Mr. Ho along Kalayaan to local industries engaged in the
Avenue, Quezon City, which allegedly manufacture or production of the
contained untaxed vehicles and parts. same or similar articles or prevent
While inside the premises, the member of their establishment.
the customs enforcement and security
services noted articles which were not
included in the list contained in the
warrant. Hence, on January 15, 1996, an
amended warrant and seizure was issued.
On January 25, 1996, the customs

personnel started hauling the articles
pursuant to the amended warrant. This
prompted Mr. Ho to file a case for
injunction and damages with a prayer for
a restraining order before the Regional
Trial Court of Quezon City against the
Bureau of Customs on January 27, 1996.
On the same date, the Trial Court issued a
temporary restraining order.
A motion to dismiss was filed by the

Bureau of Customs on the ground that the
Regional Trial Court has no jurisdiction
over the subject matter of the complaint
claiming that it was the Bureau of Customs
that has exclusive jurisdiction over it.
Decide.
SUGGESTED
ANSWER:
The motion to dismiss should be granted.
Seizure and forfeiture proceedings are
within the exclusive jurisdiction of the
Collector of Customs to the exclusion of
regular Courts. Regional Trial Courts are
devoid of competence to pass upon the
validity or regularity of seizure and
forfeiture proceedings conducted by the
Bureau of Customs and to enjoin or
otherwise interfere with these proceedings
(Republic vs. CFI of Manila
[Branch XXII], G.R. No. 43747,
September 2, 1992; Jao vs. CA, G.R.
No. 104604, October 6, 1995).
Customs: Kinds of Custom Duties (1995)

7) Countervailing duties are special (c) Marking Duty - This is a duty on an
duties imposed ad valorem basis imposed for improperly
by the Secretary of Finance upon prior marked articles. The law requires that
investigation foreign importations must be marked in
and report of the Tariff Commission to any official language of the Philippines the
offset an name of the country of origin of the
excise or inland revenue tax upon article;
articles of the same class
manufactured at home or subsidies to (d) Discriminatory or Retaliatory Duty -
foreign producers or manufacturers by This is a duty imposed on imported goods
their respective governments. whenever it is found as a fact that the
country of origin discriminates against the
8) Marking duties are special duties commerce of the Philippines in such a
equivalent to 5% ad valorem imposed manner as to place the commerce of the
on articles not properly marked. Philippines at a disadvantage compared
These are collected by the with the commerce of any foreign country.
Commissioner of Customs except
when the improperly marked Customs: Remedies of an Importer (1996)
articles are exported or destroyed Discuss briefly the remedies of an importer
under customs supervision and prior to during the
final liquidation of the corresponding pendency of seizure proceedings.
entry. These duties are designed to
prevent possible deception of the
customers.
9) Discriminatory duties are special

duties collected in an amount not
exceeding 100% ad valorem, imposed
by the President of the Philippines
against goods of a foreign country
which discriminates against Philippine
commerce or against goods coming
from the Philippines and shipped to
a foreign country.
Customs: Kinds of Custom Duties (1997)

Explain briefly each of the special
customs duties
authorized under the Tariff and Customs
Code.
SUGGESTED ANSWER:
The following are the Special Duties
imposed under the
Tariff and Customs Code:
(a) Dumping Duty - This is a duty levied
on imported
goods where it appears that a specific
kind or class of
foreign article is being imported into or
sold or is likely to be sold in the
Philippines at a price less than its fair
value;
(b) Countervailing Duty - This is a duty

equal to the ascertained or estimated
amount of the subsidy or bounty or
subvention granted by the foreign
country on the production, manufacture,
or exportation into the Philippines of any
article likely to injure an industry in the
Philippines or retard or considerable
retard the establishment of such
industry;
SUGGESTED residents, treating their personal
ANSWER: effects, not in commercial
During the pendency of seizure quantities, as conditionally free
proceedings the importer may secure the importation.]
release of the imported property for
legitimate use by posting a bond in an Customs: Seizure & Forfeiture: Effects
amount to be fixed by the Collector, (1994)
conditioned for the payment of the In smuggling a shipment of garlic, the
appraised value of the article and/or any smugglers used an
fine, expenses and costs which may be eight-wheeler truck which they hired for
adjudged in the case; provided, that the purpose of
articles the importation of which is taking out the shipment from the customs
prohibited by law shall not be released zone. Danny, the truck owner, did not have a
under bond. certificate of public convenience to operate
his trucking business. Danny did not know
The importer may also offer to pay to the that the shipment of garlic was illegally
collector a fine imposed by him upon the imported.
property to secure its release or in case of Can the Collector of Customs of the port
forfeiture, the importer shall offer to pay seize and forfeit
for the domestic market value of the seized the truck as an instrument in the
article, which offer subject to the approval smuggling?
of the Commissioner may be accepted by SUGGESTED ANSWER:
the Collector in settlement of the seizure Yes, the Collector of Customs of the port can
case, except when there is fraud. Upon seize and forfeit the truck as an instrument
payment of the fine or domestic market in the smuggling activity, since the same
value, the property shall be forthwith was used unlawfully in the importation of
released and all liabilities which may or
might attach to the property by virtue of
the offense which was the occasion of the
seizure and all liability which might have
been incurred under any bond given by the
importer in respect to such property shall
thereupon be deemed to be discharged.
Customs: Returning Residents: Tourist/Travelers

(2003)
X and his wife, Y, Filipinos living in the
Philippines, went
on a three-month pleasure trip around
the world during the months of June, July
and August 2002. In the course of their
trip, they accumulated some personal
effects which were necessary, appropriate
and normally used in leisure trips, as well
as souvenirs in non-commercial quantities.
Are they "returning residents" for
purposes of Section 105 of the Tariff and
Customs Code? Explain. (8%)
SUGGESTED
ANSWER:
No. The term "returning residents"
refers to nationals who have stayed in a
foreign country for a period of at least six
(6) months. (Section 105(f) of the Tariff
and Customs Code). Due to their limited
duration of stay abroad X and Y are not
considered as "returning residents" but
they are merely considered as travelers or
tourists who enjoy the benefit of
conditionally free importation.
[Note: Credit must likewise be given if
the candidate answered
in the affirmative, considering that
travelers or tourists are given the same
tax treatment as that of returning
smuggled articles. The mere carrying of fifteen (15) days which may be extended
such articles on for another fifteen (15) days or such
board the truck (in commercial quantities) period as the Court of Tax Appeals may
shall subject the truck to forfeiture, since decide.
it was not being used as a duly authorized
common carrier, which was chartered or Customs; Basis of Dutiable Value; Imported Article (2005)
leased as such. (Sec. 2530 [a], TCC) State and explain the basis of dutiable
value of an imported article subject to an ad
Moreover, although forfeiture of the vehicle valorem tax under the Tariff and Customs
will not be effected if it is established that Code.
the owner thereof had no knowledge of or ALTERNATIVE ANSWER:
participation in the unlawful act, there The basis of dutiable value of an imported
arises a prima facie presumption or article subject to an ad valorem tax under the
knowledge or participation if the owner is Tariff and Customs Code is its
not in the business for which the TRANSACTION VALUE. (Sec. 201[A], Tariff
conveyance is generally used. Thus, not and Customs Code, as amended by R.A. No.
having a certificate of public convenience to 9135) If such value could not be determined,
operate a trucking business, he is legally then the following values are to be utilized in
deemed not to have been engaged in the their sequence: Transaction value of
trucking business. (Sec. 2531, Tariff and identical goods (Sec. 201[B]);
Customs Code) Transaction value of
Customs: Steps involving Protest Cases

(1994)
The Collector of Customs instituted seizure
proceedings against a shipment of motor
vehicles for having been misdeclared as
second-hand vehicles. State the procedure
for the review of the decision up to the
Supreme Court of the Collector of Customs
adverse to the importer. SUGGESTED ANSWER:
The procedure in seizure cases may be
summarized as follows:
(a) The collector issues a warrant for the
detention or forfeiture of the imported
articles; (Sec. 2301, Tariff and Customs
Code)
(b) The Collector gives the importer a
written notice of
the seizure and fixes a hearing date to
give the importer an opportunity to be
heard; (Sec. 2303, TCC)
(c) A formal hearing is conducted;
(Sec. 2312, TCC)
(d) The Collector renders a declaration
of forfeiture; (Sec. 2312, TCC)
(e) The Importer aggrieved by the
action of the Collector in any case of
seizure may appeal to the Commissioner
for his review within fifteen (15) days
from written notice of the Collector's
decision; (Sec.
2313,
TCC)
(f) The importer aggrieved by the action
or ruling of the
Commissioner in any case of seizure
may appeal to the Court of Tax Appeals;
(Sec. 2402, TCC)
(g) The importer adversely affected by
the decision of the Court of Tax
Appeals (Division) may appeal to the
Court of Tax Appeals (en banc) within
similar goods (Sec. 201[C]); effects including a personal computer and a
Deductive value car. Would Jacob be liable for taxes on these
(Sec. II.E.1, CA.O. No. 4-2004); items? Discuss fully. (5%)
Computed value (Sec., SUGGESTED ANSWER:
II.F.l, C.A.O. No. 1-20040) and No, Jacob is not liable for taxes on his
Fallback value. (Sec. personal computer and the car because he
201 is tax-exempt by law. He has met the
[F]) following requirements for exemption under
ALTERNATIVE P.D. No.
ANSWER:
922
The basis of dutiable value of an imported (1976):
article subject to an ad valorem tax under
a) He was a military attache
the Tariff and Customs Code is its
assigned to Jakarta;
transaction value, which shall be the b) He has served abroad for not less than
price actually paid or payable for the two (2) years;
goods when sold for export to the c) He is returning to the Philippines
Philippines, adjusted by adding certain after serving his tour of duty; and
cost elements to the extent that they are d) He has not availed of the tax exemption
incurred by the buyer but are not included for the past four (4) years.
in the price actually paid or payable for the
imported goods. (Sec. 201[A], Tariff and He is entitled to tax exemption on his
Customs Code, as amended by R.A. 9135) personal and household effects including a
car; provided,
If such value could not be determined, then
the following values are to be utilized in
their sequence: Transaction value of
identical goods (Sec. 201[B]); Transaction
value of similar goods (Sec. 201[C]);
Deductive value (Sec. II.E.1, CA.O. No. 4-
2004); Computed value (Sec. II.F.l, C.A.O.
No. 1-20040) and Fallback value. (Sec.
201[F])
Customs; Countervailing Duty vs. Dumping Duty

(2005) Distinguish countervailing duty from
dumping duty. (5%) SUGGESTED ANSWER:
The distinctions between
countervailing duty and dumping duty
are the following:
(1) Basis: The countervailing duty is
imposed whenever
there is granted upon the imported article
by the country of origin a specific subsidy
upon its production, manufacture or
exportation and this results or threatens
injury to local industry while the basis for
the imposition of dumping duty is the
importation and sale of imported items at
below their normal value causing or
likely to cause injury to local industry.
(2) Amount: The countervailing duty
imposed is
equivalent to the value of the specific
subsidy while the dumping duty is
equivalent to the margin of dumping
which is equal to the difference between
the export price to the Philippines and the
normal value of the imported article.
Customs; Taxability; Personal Effects

(2005)
Jacob, after serving a 5-year tour of
duty as military
attache in Jakarta, returned to the
Philippines bringing with him his personal
a) The car must have been ordered or c) Where the taxpayer has signed a
purchased prior waiver
to the receipt by the Philippine mission authorizing the
or consulate in Jakarta of Jacob's recall Commissioner or his
order; duly authorized
b) the car is registered in representatives to Inquire into the bank
Jacob's name; deposits.
c) the exemption shall apply to the
value of the car; BIR: Secrecy of Bank Deposit Law (2003)
d) the exemption shall apply to the X dies in year 2000 leaving a bank
aggregate value of his personal and deposit of
household effects (including the personal P2,000,000.00 under joint account with his
computer) not exceeding thirty per associates in a law office. Learning of X's
centum (30%) of the total amount death from the newspapers, the
received by Jacob as salary and Commissioner of Internal Revenue wrote
allowances during his assignment in to every bank in the country asking them
Jakarta, but not to exceed four (4) years; to disclose to him the amount of deposits
e) Jacob must not have availed of the that might be outstanding in his name or
exemption more oftener than one every jointly with others at the date of his
four years. (Last par., Sec. 105, Tariff death. May the bank holding the deposit
and Customs Code) refuse to comply on the ground of the
Secrecy of Bank Deposit Law? Explain. (8%)
SUGGESTED ANSWER:
OTHER RELATED MATTERS No. The Commissioner of Internal Revenue
BIR: Bank Deposits Secrecy Violation has the authority to inquire into bank
(2000) deposit accounts of a decedent to
A taxpayer is suspected not to have declared determine his gross estate
his correct gross income in his return filed notwithstanding the provisions of the Bank
for 1997. The examiner requested the Secrecy Law. Hence, the banks holding the
Commissioner to authorize him to inquire deposits in question may not refuse to
into the bank deposits of the taxpayer so disclose the amount of deposits on the
that he could proceed with the net worth ground of secrecy of bank deposits.
method of investigation to establish fraud. (Section 6(F) of the 1997 Tax Code). The
May the examiner be allowed to look into fact that the deposit is a joint account
the taxpayer's bank deposits? In what cases will not preclude the Commissioner
may the Commissioner or his duly from inquiring thereon because the law
authorized representative be allowed to mandates that if a bank has knowledge of
inquire or look into the bank deposits of a the death of a person, who maintained a
taxpayer? (5%) bank deposit account alone, or jointly with
SUGGESTED ANSWER:
another, it shall not allow any withdrawal
No. as this would be violative of Republic
Act No. 1405, the Bank Deposits Secrecy from the said deposit account, unless the
Law. Commissioner has certified that the
The Commissioner of Internal Revenue or taxes imposed thereon have been paid.
his duly authorized representative may be (Section 97 of the 1997 Tax Code).
allowed to inquire or look into the bank Hence, to be able to give the required
deposits of a taxpayer in the following certification, the inclusion of the deposit is
cases: imperative, which may be made possible
a) For the purpose of determining the only through the inquiry made by the
gross estate of a decedent; Commissioner.
b) Where the taxpayer has filed an
application for compromise of his tax
liability by reason of financial
incapacity to pay such tax liability. (Sec.
6 (F), NIRC of 1997]

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Answers to the BAR: Taxation 1994-2006 (Arranged by Topics) sirdondee@gmail.

Edited and Arranged by:

From the ANSWERS TO BAR EXAMINATION QUESTIONS

is ADVISABLE to protect the interest of the ORIGINAL SOURCES/REFERENCES of

unscrupulous law schools and students.

for a number of typographical errors in this work.

Detailed Table of Contents

(b) The individual income tax system

(c) It has retained MORE

b. The income tax is generally imposed

c. The corporate income tax is a one-layer

Direct Tax vs. Indirect Tax (1994)

An INDIRECT TAX is one paid by a person

Direct Tax vs. Indirect Tax

ALTERNATIVE ANSWER: Double Taxation: What Constitutes DT?

Direct Tax vs. Indirect Tax

Double Taxation; License Fee vs. Local Tax

Double Taxation; Methods of Avoiding DT

The period to collect the tax is within

(b) Tarif and Customs Code - It does not

(c) Local Government Code - Local

Power of Taxation: Equal Protection of the Law

Power of Taxation: Legality; Local Gov’t Taxation

Power of Taxation: Legislative in Nature

Power of Taxation: Limitations: Passing of Revenue

Power of Taxation: Revocation of Exempting Taxation is the inherent power of a State to

Neither of these were issued by the taxing

Power of Taxation; Inherent in a Sovereign State

Purpose of Taxation; Interpretation

Rule on Set-Off or Compensation of Taxes

Rule on Set-Off or Compensation of Taxes

2) The payment of taxes is not a contractual

However, there is a possibility that set-off

Tax Avoidance vs. Tax Evasion (1996)

Tax Avoidance vs. Tax Evasion

Assume arguendo that XYZ had to and did

Tax Laws; BIR Ruling; Non-Retroactivity of Rulings

Subsequently, however, the BIR reversed the

Basic: Principle of Mobilia Sequuntur Personam (1994)

Basic: Proper Allowance of Depreciation (1998)

Basic: Tax Benefit Rule

2) If the employer is an obstetrician who

Basic; Gross Income: Define

Under the GLOBAL SYSTEM, all income

Compensation; Income Tax: Due to Profitable

Corporate: Income: Donor’s tax; Tax Liability

To determine the reasonableness of the

Corporate; Income: Coverage; "Off-Line" Airline (1994)

Based on the foregoing, the international

Dividends: Disguised dividends

Effect; Condonation of Loan in Taxation

Interest: Deficiency Interest: define (1995

If for example after the audit of the books of

Interest: Delinquency Interest: define

ITR; Domestic Corporate Taxation

The other items of revenue will not be

b) What is the reason for such

ITR; Personal Income: Two Employment

ITR; Personal Income; Married Individual