MIDTERM

I.
a. Does the JVA entered into by and between TKB and
Prime create a separate taxable entity?
NO, TKB and Prime did not create a separate taxable entity.
Under the National Internal Revenue Code, the following are
subject to corporate income tax:
1. Partnerships, no matter how created or organized
2. Joint Stock Companies
3. Joint Accounts, Associations
4. Insurance Companies
However, the following are exempt from paying CIT:
1. Joint construction venture
2. General professional partnership (GPP)
3. Joint venture for engaging in petroleum, coal,
geothermal and other energy operations pursuant
to a consortium agreement with the government.
The parties in the case at bar formed a Joint construction
venture hence not liable to pay tax.
b. Are the allocation and distribution of the saleable lots
to TKB and Prime subject to income tax and to
Expanded Witholding tax?
NO, since the two companies did not create a separate
taxable entity, it follows that they are not taxpayers per se.
the allocation and distribution of the saleable lots to the
owners and developers thereof such as TKB and Prime are
not subject neither to income tax nor to expanded
withholding tax.
c. Is the sale by TKB or Prime of their respective shares
in the saleable lots to third parties subject to income tax
and to expanded withholding tax?
Should TKB or Prime sell their lots to third parties, the
transaction shall be subjected to income tax and to
expanded withholding tax.
The seller of real property is presumed by law to have
acquired gain from its dealings with the property. That gain
or income from the transaction will form part of the gross
income of the seller.
The buyer of the property may withhold taxes from the above
transaction.
II.
Is the income derived by an airline with no landing
rights in the Philippines from sales of tickets considered
taxable income of the said international carrier from
Philippine sources under the Tax Code.

The source of an income is the property, activity, or service

that produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient
that the income is derived from activity within the Philippines.
Herein, the sale of tickets in the Philippines is the activity
that produced the income. The tickets exchanged hands
here and payment for fares were also made here in the
Philippine currency.
Hence, the income derived within the Philippine jurisdiction
is subject to income tax. (CIR vs BOAC)
III.
PJ received the following on account of injury sustained
from a plane crash:
1.
2.
3.
4.

P500,000 for hospitalization

P250,000 for moral damages
P300,00 for his income during the treatment
P200,000 representing the cash equivalent of
the earned vacation leave or sick leave.

Which of the amounts he received are subject to income

tax?

The 200,000 representing the cash equivalent of the of the

earned vacation leave. However, the money equivalent of
his 10 days vacation leave is tax exempt under RR 2-98.
As to the amount other amounts received, they will not form
part of his taxable income as they are compensation for the
personal injuries suffered by PJ.
IV.
a.

Is working capital part of the reasonable

needs of the business?

No, the contention of P&G is not meritorious. Working

Capital is not considered as reasonable need of the
business. The enumeration of valid grounds of retention of
accumulated surplus is exclusive.
How to prove the reasonable needs of the business
The corporation should prove that there is
1. an immediate need for the accumulation of
the earnings and profits; or
2. a direct correlation of anticipated needs to
such accumulation of profits.

b.

State valid grounds

accumulated surplus.

for

retention

of

The following constitute accumulation of earnings for the

reasonable needs of the business:
1. Earnings
reserved
for
definite
corporate
Expansion projects or programs requiring
considerable capital expenditure as approved by
the Board of Directors or equivalent body;

2.

3.

4.

5.

Earnings reserved for Building, Plant or Equipment

Acquisition as approved by the Board of Directors
or equivalent body;
Earnings reserved for compliance with any Loan
Covenant or pre-existing obligation established
under a legitimate business agreement;
Earnings required by Law or applicable regulations
to be retained by the corporation or in respect of
which there is legal prohibition against its
distribution;
In the case of subsidiaries of foreign corporations
in the Philippines, all undistributed earnings
intended or reserved for Investments within the
Philippines as can be proven by corporate records
and/or relevant documentary evidence.

V.
Can a taxpayer who opted to carry over the excess tax
credit subsequently apply for a tax refund instead?
NO, the claim of tax refund will not prosper.
ABC Corps option to avail of tax credit instead of the refund
is irrevocable for that particular taxable year. It cannot later
on opt to get a tax refund after they have communicated
their preference.
Pursuant to the life-blood theory, it is highly preferred that
there will no cash-out from the government to the taxpayer.

both the items of deduction allowed to the GPP and

its partners.
Since one-layer of income tax is imposed on the income of
the GPP and the individual partners where the law had
placed the statutory incidence of the tax in the hands of the
latter, the type of deduction chosen by the GPP must be the
same type of deduction that can be availed of by the
partners.
Accordingly, if the GPP claims itemized deductions, all items
of deduction allowed under Sec. 34 can be claimed both at
the level of the GPP and at the level of the partner in order to
determine the taxable income. On the other hand, should the
GPP opt to claim the OSD, the individual partners are
deemed to have availed also of the OSD because the OSD
is in lieu of the itemized deductions that can be claimed in
computing taxable income.
If the partner also derives other gross income from trade,
business or practice of profession apart and distinct from his
share in the net income of the GPP, the deduction that he
can claim from his other gross income would follow the same
deduction availed of from his partnership income as
explained in the foregoing rules. Provided, however, that if
the GPP opts for the OSD, the individual partner may still
claim 40% of its gross income from trade, business or
practice of profession but not to include his share from the
net income of the GPP. (RR 2-2010)
VII.
In a sale of principal residence, the following are the
considerations observed:
a.

VI.
Can a partner in a GPP claim deductions that were not
claimed by the partnership?
A partner may claim as a deduction items that were not
claimed by the GPP of which he is a partner of provided that
the GPP opted Itemized deductions and not Optional
Standard Deductions. Should the partnership choose
Optional Standard Deduction, the partner may no longer
claim additional deductions.
General Professional Partnerships (GPP)
If the GPP availed of itemized deductions, the partners are
not allowed to claim the OSD from their share in the net
income because the OSD is a proxy for all the items of
deductions allowed in arriving at taxable income. This means
that the OSD is in lieu of the items of deductions claimed by
the GPP and the items of deduction claimed by the partners.
If the GPP avails of OSD in computing its net income, the
partners comprising it can no longer claim further deduction
from their share in the said net income for the following
reasons:
a.

b.

The partners distributive share in the GPP is

treated as his gross income not his gross
sales/receipts and the 40% OSD allowed to
individuals is specifically mandated to be deducted
not from his gross income but from his gross
sales/receipts; and,
The OSD being in lieu of the itemized deductions
allowed in computing taxable income as defined
under Section 32 of the Tax Code, it will answer for

b.

c.
d.

If the proceeds of which is fully utilized in (a)

acquiring or (b) constructing a new principal
residence within eighteen (18) months from date
of sale or disposition;
If the seller notified the Commissioner within thirty
(30) days from the date of sale or disposition
through a prescribed return of his intention to avail
the tax exemption;
Did he avail of the benefit once every ten (10)
years;
If there is no full utilization, the portion of the gains
presumed to have been realized shall be subject
to capital gains tax.