2013 Taxation Law Exam Essay Questions

ON OCTOBER 21, 2013

I.
In its final adjustment return for the 2010 taxable year, !" "or#. had ex$ess tax $redits arisin% from its o&er'
withholdin% of in$ome #ayments. It o#ted to $arry o&er the ex$ess tax $redits to the followin% year. (ubse)uently,
!" "or#. $han%ed its mind and a##lied for a refund of the ex$ess tax $redits.
*ill the $laim for refund #ros#er+ ,-./
II.
%rou# of #hilanthro#ists or%ani0ed a non'sto$1, non'#rofit hos#ital for $haritable #ur#oses to #ro&ide medi$al
ser&i$es to the #oor. The hos#ital also a$$e#ted #ayin% #atients althou%h none of its in$ome a$$rued to any #ri&ate
indi&idual2 all in$ome were #lowed ba$1 for the hos#ital3s use and not more than 30. of its funds were used for
administrati&e #ur#oses.
Is the hos#ital subje$t to tax on its in$ome+ If it is, at what rate+ ,-./
III.
!" "or#oration is re%istered as a holdin% $om#any and has an offi$e in the "ity of 4a1ati. It has no a$tual business
o#erations. It in&ested in another $om#any and its earnin%s are limited to di&idends from this in&estment, interests on
its ban1 de#osits, and forei%n ex$han%e %ains from its forei%n $urren$y a$$ount. The "ity of 4a1ati assessed !"
"or#oration as a $ontra$tor or one that sells ser&i$es for a fee. Is the "ity of 4a1ati $orre$t+ ,-./
I5.
tty. 6ambino is a #artner in a %eneral #rofessional #artnershi#. The #artnershi# $om#utes its %ross re&enues,
$laims dedu$tions allowed under the Tax "ode, and distributes the net in$ome to the #artners, in$ludin% tty.
6ambino, in a$$ordan$e with its arti$les of #artnershi#.
In filin% his own in$ome tax return, tty. 6ambino $laimed dedu$tions that the #artnershi# did not $laim, su$h as
#ur$hase of law boo1s, entertainment ex#enses, $ar insuran$e and $ar de#re$iation. The !I7 disallowed the
dedu$tions.
*as the !I7 $orre$t+ ,-./
5.
4r. %ustin, 89 years old and sufferin% from an in$urable disease, de$ided to sell for &aluable and suffi$ient
$onsideration a house and lot to his son. :e died one year later.
In the settlement of 4r. %ustin3s estate, the !I7 ar%ued that the house and lot were transferred in $ontem#lation of
death and should therefore form #art of the %ross estate for estate tax #ur#oses.
Is the !I7 $orre$t+ ,8./
5I.
;n ;$tober 19, 2009, !" "or#. im#orted 1,000 1ilos of steel in%ots and #aid $ustoms duties and 5T to the !ureau
of "ustoms on the im#ortation. ;n <ebruary 18, 200=, the !ureau of "ustoms, $itin% #ro&isions of the Tariff and
"ustoms "ode on #ost'audit, in&esti%ated and assessed !" "or#. for defi$ien$y $ustoms duties and 5T.
Is the !ureau of "ustoms $orre$t+ ,8./
5II.
>?@ Law ;ffi$es, a law #artnershi# in the Ahili##ines and a 5T're%istered tax#ayer, re$ei&ed a )uery by e'mail from
6ainsbur% "or#oration, a $or#oration or%ani0ed under the laws of Belaware, but the e'mail $ame from "alifornia
where 6ainsbur% has an offi$e. 6ainsbur% has no offi$e in the Ahili##ines and does no business in the Ahili##ines.
>?@ Law ;ffi$es rendered its o#inion on the )uery and billed 6ainsbur% C(D1,000 for the o#inion. 6ainsbur%
remitted its #ayment throu%h "itiban1 whi$h $on&erted the remitted C(D1 ,000 to #esos and de#osited the $on&erted
amount in the >?@ Law ;ffi$es a$$ount.
*hat are the tax im#li$ations of the #ayment to >?@ Law ;ffi$es in terms of 5T and in$ome taxes+ ,8./
5III.
4r. mado leased a #ie$e of land owned by the 4uni$i#ality of Aina%sabitan and built a warehouse on the #ro#erty
for his business o#erations. The 4uni$i#al ssessor assessed 4r. mado for real #ro#erty taxes on the land and the
warehouse. 4r. mado obje$ted to the assessment, $ontendin% that he should not be as1ed to #ay realty taxes on
the land sin$e it is muni$i#al #ro#erty.
*as the assessment #ro#er+ ,9./
I>.
In the settlement of the estate of 4r. !arbera who died intestate, his wife renoun$ed her inheritan$e and her share of
the $onju%al #ro#erty in fa&or of their $hildren. The !I7 determined that there was a taxable %ift and thus assessed
4rs. !arbera as a donor.
*as the !I7 $orre$t+ ,8./
>.
In 2010, #ursuant to a Letter of uthority ,L/ issued by the 7e%ional Bire$tor, 4r. b$ede was assessed defi$ien$y
in$ome taxes by the !I7 for the year 200=. :e #aid the defi$ien$y. In 2011, 4r. b$ede re$ei&ed another L for the
same year 200=, this time from the Eational In&esti%ation Bi&ision, on the %round that 4r. b$ede3s 200= return was
fraudulent.
4r. b$ede $ontested the L on the %round that he $an only be in&esti%ated on$e in a taxable year. Be$ide. ,8./
>I.
In 2000, 4r. !elen bou%ht a residential house and lot for A1,000,000. :e used the #ro#erty as his and his family3s
#rin$i#al residen$e. It is now year 2013 and he is thin1in% of sellin% the #ro#erty to buy a new one. :e see1s your
ad&i$e on how mu$h in$ome tax he would #ay if he sells the #ro#erty. The total 0onal &alue of the #ro#erty
isA9,000,000 and the fair mar1et &alue #er the tax de$laration is A2,900,000. :e intends to sell it for A-,000,000.
*hat material $onsiderations will you ta1e into a$$ount in $om#utin% the in$ome tax+ Alease ex#lain the le%al
rele&an$e of ea$h of these $onsiderations. ,8./
>II.
?ou are the retained tax $ounsel of !" "or#. ?our $lient informed you that they ha&e been dire$tly a##roa$hed with
a #ro#osal by a !I7 insider ,i.e., a middle ran1 !I7 offi$ial/ on the tax matter they ha&e referred to you for handlin%.
The !I7 insider3s #ro#osal is to settle the matter by si%nifi$antly redu$in% the assessment, but he will %et 90. of the
sa&in%s arisin% from the redu$ed assessment.
*hat tax, $riminal and ethi$al $onsiderations will you ta1e into a$$ount in %i&in% your ad&i$e+ Ex#lain the rele&an$e
of ea$h of these $onsiderations. ,=./
2013 Taxation Law Exam 4"Qs
ON OCTOBER 21, 2013
F!elow are the 4ulti#le "hoi$e Questions as1ed in the 2013 !ar Exams in Labor Law. nswers are hi%hli%hted.G
1. ABC Corp. was dissolved and liquidating dividends were declared and paid to the stockholders.
What tax consequence follows? (1%
,/ !" "or#. should dedu$t a final tax of 10. from the di&idends.
,!/ The sto$1holders should de$lare their %ain from their in&estment and #ay in$ome tax at the ordinary rates.
,"/ The di&idends are exem#t from tax.
,B/ !" "or#. should withhold a 10. $reditable tax.
!. "#C Corp. secured an inco$e tax holida% for & %ears as a pioneer industr%. 'n the fourth %ear of the tax
holida%( "#C Corp. declared and paid cash dividends to its stockholders( all of who$ are individuals.
Are the dividends taxa)le? (1%
,/ The di&idends are taxable2 the tax exem#tion of 46" "or#. does not extend to its sto$1holders.
,!/ The di&idends are tax exem#t be$ause of 46" "or#.3s in$ome tax holiday.
,"/ The di&idends are taxable if they ex$eed 90. of 46" "or#.3s retained earnin%s.
,B/ The di&idends are exem#t if #aid before the end of 46" "or#.3s fis$al year.
*. "r. Alas sells shoes in "akati through a retail store. +e pa%s the ,A- on his gross sales to the B./ and the
$unicipal license tax )ased on the sa$e gross sales to the Cit% of "akati. +e co$es to %ou for advice
)ecause he thinks he is )eing su)0ected to dou)le taxation.
What advice will %ou give hi$? (1%
,/ ?es, there is double taxation and it is o##ressi&e.
,!/ The "ity of 4a1ati does not ha&e this #ower.
,"/ ?es, there is double taxation and this is ille%al m the Ahili##ines.
,B/ Bouble taxation is allowed where one tax is im#osed by the national %o&ernment and the other by the lo$al
%o&ernment.
1. Congress passed a sin tax law that increased the tax rates on cigarettes )% 1(222%. -he law was thought
to )e sufficient to drive $an% cigarette co$panies out of )usiness( and was questioned in court )% a
cigarette co$pan% that would go out of )usiness )ecause it would not )e a)le to pa% the increased tax.
-he cigarette co$pan% is 3333333333 (1%
,/ wron% be$ause taxes are the lifeblood of the %o&ernment
,!/ wron% be$ause the law re$o%ni0es that the #ower to tax is the #ower to destroy
,"/ $orre$t be$ause no %o&ernment $an de#ri&e a #erson of his li&elihood
,B/ $orre$t be$ause "on%ress, in this $ase, ex$eeded its #ower to tax
&. "r. Alvare4 is in the retail )usiness. +e received a deficienc% tax assess$ent fro$ the B./ containing onl%
the co$putation of the deficienc% tax and the penalties( without an% explanation of the factual and legal
)ases for the assess$ent.
.s the assess$ent valid? (1%
,/ The assessment is &alid2 all that 4r. l&are0 has to 1now is the amount of the tax.
,!/ The assessment is in&alid2 the law re)uires a statement of the fa$ts and the law u#on whi$h the assessment is
based.
,"/ The assessment is &alid but 4r. l&are0 $an still $ontest it.
,B/ The assessment is in&alid be$ause 4r. l&are0 has no way to determine if the $om#utation is erroneous.
5. .n !212( "r. 6laton sent his sister +elen 71 (222 via a telegraphic transfer through the Bank of 6.. -he
)ank8s re$ittance clerk $ade a $istake and credited +elen with 71(222(222 which she pro$ptl% withdrew.
-he )ank de$anded the return of the $istakenl% credited excess( )ut +elen refused. -he B./ entered the
picture and investigated +elen.
Would the B./ )e correct if it deter$ines that +elen earned taxa)le inco$e under these facts? (1%
,/ Eo, she had no in$ome be$ause she had no ri%ht to the mista1enly $redited funds.
,!/ ?es, in$ome is in$ome re%ardless of the sour$e.
,"/ Eo, it was not her fault that the funds in ex$ess of D1,000 were $redited to her.
,B/ Eo, the funds in ex$ess ofD1,000 were in effe$t donated to her.
9. -he $unicipalit% of :an .sidro passed an ordinance i$posing a tax on installation $anagers. At that ti$e(
there was onl% one installation $anager in the $unicipalit%; thus( onl% he would )e lia)le for the tax.
.s the law constitutional? (1%
,/ It is un$onstitutional be$ause it $learly dis$riminates a%ainst this #erson.
,!/ It is un$onstitutional for la$1 of le%al basis.
,"/ It is $onstitutional as it a##lies to all #ersons in that $lass.
,B/ It is $onstitutional be$ause the #ower to tax is the #ower to destroy.
<. =>? Corporation $anufactures glass panels and is al$ost at the point of insolvenc%. .t has no $ore cash
and all it has are unsold glass panels. .t received an assess$ent fro$ the B./ for deficienc% inco$e taxes. .t
wants to pa% )ut due to lack of cash( it seeks per$ission to pa% in kind with glass panels.
:hould the B./ grant the requested per$ission? (1%
,/ It should %rant #ermission to ma1e #ayment $on&enient to tax#ayers.
,!/ It should not %rant #ermission be$ause a tax is %enerally a #e$uniary burden.
,"/ It should %rant #ermission2 otherwise, >?@ "or#oration would not be able to #ay.
,B/ It should not %rant #ermission be$ause the %o&ernment does not ha&e the stora%e fa$ilities for %lass #anels.
@. 6rior to the ,A- law( sales of cars were su)0ect to a sales tax )ut the tax applied onl% to the original or the
first sale; the second and su)sequent sales were not su)0ect to tax.
Aeltoid "otors( .nc. (Aeltoid hit on the idea of setting up a wholl%Bowned su)sidiar%( #on$ad "otors( .nc.
(#on$ad( and of selling its asse$)led cars to #on$ad at a low price so it would pa% a lower tax on the first
sale. #on$ad would then sell the cars to the pu)lic at a higher price without pa%ing an% sales tax on this
su)sequent sale.
Characteri4e the arrange$ent. (1%
. The #lan is a le%itimate exer$ise of tax #lannin% and merely ta1es ad&anta%e of a loo#hole in the law.
!. The #lan is le%al be$ause the %o&ernment $olle$ts taxes anyway.
". The #lan is im#ro#er2 the &eil of $or#orate fi$tion $an be #ier$ed so that the se$ond sale will be $onsidered the
taxable sale.
B. The %o&ernment must res#e$t 6onmad3s se#arate juridi$al #ersonality and Beltoid3s taxable sale to it.
12. 6/- Corp. purchased a residential house and lot with a swi$$ing pool in an upscale su)division and
required the co$pan% president to sta% there without pa%ing rent; it reasoned out that the co$pan%
president $ust $aintain a certain i$age and )e a)le to entertain guests at the house to pro$ote the
co$pan%8s )usiness. -he co$pan% president declared that )ecause the% are childless( he and his wife could
ver% well live in a s$aller house.
Was there a taxa)le fringe )enefit? (1%
,/ There was no taxable frin%e benefit sin$e it was for the $on&enien$e of the em#loyer and was ne$essary for its
business.
,!/ There was a taxable frin%e benefit sin$e the stay at the house was for free.
,"/ There was a taxable frin%e benefit be$ause the house was &ery luxurious.
,B/ There was no taxable frin%e benefit be$ause the $om#any #resident was only re)uired to stay there and did not
demand free housin%.
11. -axpa%er A was required )% the B./ to sign and su)$it a waiver of the statute of li$itations on the
assess$ent period( to give the B./ $ore ti$e to co$plete its investigation. -he B./ accepted the waiver )ut
failed to indicate the date of its acceptance.
What is the legal status of the waiver? (1%
,/ The wai&er is &alid be$ause the date of a$$e#tan$e is immaterial and unim#ortant.
,!/ The wai&er is in&alid2 the tax#ayer $annot be re)uired to wai&e the statute of limitations.
,"/ The wai&er is in&alid2 the date of a$$e#tan$e is $ru$ial in $ountin% the start of the #eriod of sus#ension of the
#res$ri#ti&e #eriod.
,B/ The wai&er is &alid, ha&in% been a$$e#ted by the !I7.
1!. -axpa%er And% received on Canuar% *( !212 a preli$inar% assess$ent notice (6AD fro$ the B./( stating
that he had fifteen (1& da%s fro$ its receipt to co$$ent or to file a protest. Eight (< da%s later (or on
Canuar%11( !212( )efore he could co$$ent or file a protest( And% received the final assess$ent notice
(FAD.
Aecide on the validit% of the FAD. (1%
,/ The <E is in&alid2 ndy was not %i&en the $han$e to res#ond to the AE, in &iolation of his due #ro$ess ri%hts.
,!/ The <E is in&alid for bein% #remature.
,"/ The <E is &alid sin$e it was issued before the ri%ht to assess #res$ribed.
,B/ The <E is &alid. There is no le%al re)uirement that the <E should await the #rotest to the AE be$ause #rotest
to the AE is not mandatory.
1*. ":. Corp. i$ports orange and le$on concentrates as raw $aterials for the fruit drinks it sells locall%. -he
Bureau of Custo$s (B'C i$posed a 1% dut% rate on the concentrates. :u)sequentl%( the B'C changed its
position and held that the concentrates should )e taxed at 9% dut% rate. ":. disagreed with the ruling and
questioned it in the C-A which upheld ":.8s position. -he Co$$issioner of Custo$s appealed to the C-A en
)ane without filing a $otion for reconsideration.
/esolve the appeal. (1%
,/ The a##eal should be dismissed be$ause a motion for re$onsideration is mandatory.
,!/ The a##eal should be dismissed for ha&in% been filed out of time.
,"/ The a##eal should be %i&en due $ourse sin$e a motion for re$onsideration is a useless exer$ise.
,B/ The a##eal should be u#held to be fair to the %o&ernment whi$h needs taxes.
11. -he spouses Cun and Elvira :andoval purchased a piece of land for 6&(222(222 and included their two (!
$inor children as coBpurchasers in the Aeed of A)solute :ale. -he Co$$issioner of .nternal /evenue (C./
ruled that there was an i$plied donation and assessed donors8 taxes against the spouses.
/ule on the C./8s action. (1%
,/ The "I7 is wron%2 a donation must be ex#ress.
,!/ The "I7 is wron%2 finan$ial $a#a$ity is not a re)uirement for a &alid sale.
,"/ The "I7 is $orre$t2 the amount in&ol&ed is hu%e and ultimately ends u# with the $hildren.
,B/ The "I7 is $orre$t2 there was animus donandi sin$e the $hildren had no finan$ial $a#a$ity to be $o'#ur$hasers.
1&. 6heleco is a power generation and distri)ution co$pan% operating $ainl% fro$ the Cit% of -aguig. .t
owns electric poles which it also rents out to other co$panies that use poles such as telephone and ca)le
co$panies. -aguig passed an ordinance i$posing a fee equivalent to 1% of the annual rental for these poles.
6heleco questioned Gthe legalit% of the ordinance on the ground that it i$poses an inco$e tax which local
govern$ent units (H#Is are prohi)ited fro$ i$posing.
/ule on the validit% of the ordinance. (1%
,/ The ordinan$e is &oid2 the fee is based on rental in$ome and is therefore a tax on in$ome.
,!/ The ordinan$e is &alid as a le%itimate exer$ise of #oli$e #ower to re%ulate ele$tri$ #oles.
,"/ The ordinan$e is &oid2 1. of annual rental is ex$essi&e and o##ressi&e.
,B/ The ordinan$e is &alid2 an L6C may im#ose a tax on in$ome.
15. Aleta sued Bo)o% for )reach of pro$ise to $arr%. Bo)o% lost the case and dul% paid the court8s award
that included( a$ong others( 6l22(222 as $oral da$ages for the $ental anguish Aleta suffered.
Aid Aleta earn a taxa)le inco$e? (1%
,/ (he had a taxable in$ome of A100,000 sin$e in$ome is in$ome from whate&er sour$e.
,!/ (he had no taxable in$ome be$ause it was a donation.
,"/ (he had taxable in$ome sin$e she made a #rofit.
,B/ (he had no taxable in$ome sin$e moral dama%es are $om#ensatory.
19. "r. "a%uga donated his residential house and lot to his son and dul% paid the donor8s tax. .n the Aeed of
Aonation( "r. "a%uga expressl% reserved for hi$self the usufruct over the propert% for as long as he lived.
Aescri)e the donated propert% fro$ the taxation perspective. (1%
,/ The #ro#erty will form #art of 4r. 4ayu%a3s %ross estate when he dies.
,!/ The #ro#erty will not fom1 #art of 4r. 4ayu%a3s %ross estate when he dies be$ause he #aid the donor3s tax.
,"/ The #ro#erty will form #art of 4r. 4ayu%a3s %ross estate be$ause he died soon after the donation.
,B/ The #ro#erty will not form #art of 4r. 4ayu%a3s %ross estate be$ause it is no lon%er his.
1<. "r. ? $ade an i$portation which he declared at the Bureau of Custo$s (B'C as JIsed -ruck
/eplace$ent 6artsK. Ipon investigation( the container vans contained 1& units of 6orsche and Ferrari cars.
Characteri4e "r. ?8s action. (1%
,/ 4r. @ $ommitted smu%%lin%.
,!/ 4r. @ did not $ommit smu%%lin% be$ause he submitted his shi#ment to !;" examination.
,"/ 4r. @ only made a misde$laration, but did not $ommit smu%%lin%.
,B/ 4r. @ did not $ommit smu%%lin% be$ause the shi#ment has not left the $ustoms area.
1@. "r. A was preparing his inco$e tax return and had so$e dou)t on whether a co$$ission he earned
should )e declared for the current %ear or for the succeeding %ear. +e sought the opinion of his law%er who
advised hi$ to report the co$$ission in the succeeding %ear. +e heeded his law%er8s advice and reported
the co$$ission in the succeeding %ear. -he law%er8s advice turned out to )e wrong; in "r. A8s petition
against the B./ assess$ent( the court ruled against "r. A.
.s "r. A guilt% of fraud? (1%
,/ 4r. is not %uilty of fraud as he sim#ly followed the ad&i$e of his lawyer.
,!/ 4r. is %uilty of fraud2 he deliberately did not re#ort the $ommission in the $urrent year when he should ha&e
done so.
,"/ 4r. 3s lawyer should #ay the tax for %i&in% the wron% ad&i$e.
,B/ 4r. is %uilty for failin% to $onsult his a$$ountant.
!2. -he B./( through the Co$$issioner( instituted a s%ste$ requiring taxpa%ers to su)$it to the B./ a
su$$ar% list of their sales and purchases during the %ear( indicating the na$e of the seller or the )u%er and
the a$ount. Based on these lists( the B./ discovered that in !221 ABC Corp. purchased fro$ =>? Corp.
goods worth6&(222(222. =>? Corp. did not declare these for inco$e tax purposes as its reported gross sales
for !221was onl% 6l(222(222.
Which of the following defenses $a% =>? Corp. interpose in an assess$ent against it )% the B./? (1%
,/ The !I7 has no authority to obtain third #arty information to assess tax#ayers.
,!/ The third #arty information is inadmissible as hearsay e&iden$e.
,"/ The system of re)uirin% tax#ayers to submit third #arty information is ille%al for &iolatin% the ri%ht to #ri&a$y.
,B/ Eone of the abo&e.