Вы находитесь на странице: 1из 325

ANSWER TO BAR EXAMINATION QUESTIONS IN

TAXATION

PART I
A. In civil cases involving the collection of internal revenue taxes, prescription is
construed strictly against the government and liberally in favor of the taxpayer. (1%)
SUGGESTED ANSWER:
TRUE.
[CIR v. BF Goddrich., Phils. Inc., GR No. 104171, Feb 24, 1999; Phil. Journalists
Inc. v. CIR G.R. No. 162852, Dec. 16, 2004]
B. In criminal cases involving tax offenses punishable under the National Internal
Revenue Code (NIRC), prescription is construed strictly against the government. (1%)
SUGGESTED ANSWER:
FALSE.
[Lim v. Court of Appeals, GR No. 48134-37, Oct 18, 1990.]
C. In criminal cases where the Court of Tax Appeals (CTA) has exclusive original
jurisdiction , the right to file a separate civil action for the recovery of taxes may be
reserved. (1%)
SUGGESTED ANSWER:
FALSE.
[Sec. 11, Rule 9, 2005 Rules of the Tax Appeals, as amended.]
D. The proceeding before the CTA in the exercise of its exclusive original jurisdiction are
in the nature of trial de novo. (1%)
SUGGESTED ANSWER:
TRUE.
[CIR v.Manila Mining Corp. GR No.153204, Aug 31, 2005]
E. Judgments, resolutions or orders of the Regional Trial Court in the Exercise of its
original jurisdiction involving criminal offenses arising from violations of the NIRC are
appealable to the CTA, which shall hear the cases en banc. (1%)
1

SUGGESTED ANSWER:
FALSE.
[Sec. 3(b)(2), Rule 4, 2005 Revised Rules of the Court of Tax Appeals.]
PART II
A. What is the all event test? Explain Briefly. (2%)
SUGGESTED ANSWER:
The all events test is a test applied in the realization of income and
expense by an accrual-basic taxpayer. The test requires (1) the fixing to the right
to the income or liability to pay; and (2) the availability of reasonably accurate
determination of such income or liability, to warrant the inclusion of the income
or expense I the gross income or deductions during the taxable year. (CIR v.
Isabela Cultural Corporation, GR No. 172231, Feb 12, 2007).
B. What is the immediacy test? Explain briefly. (2%)
SUGGESTED ANSWER:
The immediacy test is applied to determine whether the accumulation
of the tax profits by a domestic or resident foreign corporation is really for the
reasonable needs of the business. Under this test, the reasonable needs of the
business, including reasonably anticipated needs. The corporation should be able
to prove an immediate need for the accumulation of earnings and profits, or the
direct correlation of anticipated needs to such accumulation of profits to justify
the said accumulation. (Sec. 3, RR No. 2-2001; Mertens, Law of Federal Income
Taxation, Vol 7, Chapter 39, p. 103, cited in Manila Wine Merchants, Inc. v. CIR,
GR No. L-26145, Feb. 20, 1984).
C. What is the rational basis test? Explain briefly. (2%)
SUGGESTED ANSWER:
The rational basis test is applied to gauge the constitutionality of an
assailed law in the face of an equal protection challenge. It has been held that
2

in areas of social and economic policy, a statutory classification that neither


proceeds along suspect lines nor infringes constitutional rights must be upheld
against equal protection challenge if there is any reasonably conceivable state of
facts that could provide a rational basis for the classification. Under the
rational basis test, it is sufficient that the legislative classification is rationally
related to achieving some legitimate State interest (British American Tobacco v.
Camacho and Parayno, GR No. 163583, April 15, 2009).
D. What is the effect of the execution by a taxpayer of a waiver of the statute of
limitations on his defense of prescription? (2%)
SUGGESTED ANSWER:
The waiver of the statute of limitation executed by a taxpayer is not a
waiver of the right to invoke the defense of prescription. The waiver of the
statute of limitation is merely an agreement in writing between the taxpayer and
the BIR that the period to assess and collect taxes due is extended to a date
certain. If prescription has already set in at the time of the execution of the
waiver is invalid, the taxpayer can still raise prescription as a defense (Phil.
Journalists Inc., v. CIR, GR No. 162852, Dec. 16, 2004)
E. What is the basis for the computation of business tax on contractors under the local
government code? (2%)
SUGGESTED ANSWER:
The business tax on contractors is a graduated annual fixed tax based on
the gross receipts for the preceding calendar year. However, when the gross
receipts amount to P2 million or more, the business tax on contractors is
imposed as a percentage tax at the rate of 50% of 1% (Sec. 143(e), LGC).
F. How are retiring businesses taxed under the Local Government Code? (2%)
SUGGESTED ANSWER:

Retiring business under the LGC are taxed on their gross sales or gross
receipts in the current year and not on the preceding year. If the tax paid in the
current year is less than the tax due on gross sales or receipts of the current
year, the difference shall be paid before the business is considered officially
retired (Sec. 145, LGC).
III
Mirador, Inc., a domestic corporation, filed its Annual Income Tax Return for its
taxable year 2008 on April 15, 2009.

In the Return, it reflected an income tax

overpayment of PI,000,000.00 and indicated its choice to carry-over the overpayment


as an automatic tax credit against its income tax liabilities in subsequent years.
On April 15,2010, it filed its Annual Income Tax Return for its taxable year
2009 reflecting a taxable loss and an income tax overpayment for the current year
2009 in the amount of P500,000.00 and its income tax overpayment for the prior year
2008 of PI ,000,000.00.
In its 2009 Return, the corporation indicated its option to claim for refund the
total income tax overpayment of PI,500,000.00
Choose which of the following statements is correct.
A.

Mirador, Inc. may claim as refund the total income tax overpayment of

PI,500,000.00 reflected in its income tax return for its taxable year 2009;
B.

It may claim as refund the amount of P500,000.00 representing its

income tax overpayment for its taxable year 2009; or


C.

No amount may be claimed as refund. Explain the basis of your answer.

(5%)
ANSWER:
B.

It may claim as refund the amount of P500,000 representing its

income tax overpayment for its taxable year 2009.

Since the taxpayer has opted to carry-over the PI million overpaid income
tax for taxable year 2008, said option is considered irrevocable and no
application for cash refund shall be allowed for it (Sec. 76, NIRC; CIR v. Bank of
Philippine Island, G.R. No. 178490, July 7, 2009).
On March 10, 2010, Continental, Inc. received a preliminary assessment
notice (PAN) dated March 1, 2010 issued by the Commissioner of Internal
Revenue (CIR) for deficiency income tax for its taxable year 2008. It failed to
protest the PAN. The CIR thereupon issued a final assessment notice (FAN) with
letter of demand on April 30, 2010.
The FAN was received by the corporation on May 10, 2010, following
which or on May 25, 2010, it filed its protest against it.
The CIR denied the protest on the ground that the assessment had already
become final and executory, the corporation having failed to protest the PAN.
Is the CIR correct? Explain. (5%)
SUGGESTED ANSWER:
No. The issuance of preliminary assessment notice (PAN) does not give rise
to the right of the taxpayer to protest. What can be protested by a taxpayer is
the final assessment notice (FAN) or that assessment issued following the PAN.
Since the FAN was timely protested (within 30 days from receipt thereof, the
assessment did not become final and executory (Sec. 228, NIRC; RR No. 12-99).

V
Does the Court of Appeals have the power to review compromise agreements forged by
the Commissioner of Internal Revenue and a taxpayer? Explain. (5%)
SUGGESTED ANSWER:
No, for either of two reasons (1) In instances in which the Commissioner of
Internal Revenue is vested with authority to compromise, such authority should
5

be exercised in accordance with the Commissioner's discretion, and courts have


no power, as a general rule, to compel him to exercise such discretion one way or
another. (Koppel Phils., Inc. v. CIR, 87 Phil. 351 [1950ft, (2) If the Commissioner
abuses his discretion by not following the parameters set by law, the CTA, not
the Court of Appeals, may correct such abuse if the matter is appealed to it. In
case of arbitrary or capricious exercise by the Commissioner of the power to
compromise, the compromise can be attacked and reversed though the judicial
process. It must be noted however, that a compromise is considered as other
matters arising under the NIRC which vests the CTA with jurisdiction, and since
the decision of the CTA is appealable to the Supreme Court, the Court of Appeals
is devoid of any power of review a compromise settlement forged by the
Commissioner (PNOCv. Savellano, G.R. No. 109976, April 26, 2005; RA No. 9282
on jurisdiction of the CTA).
Note:
It is respectfully requested that if the examinee gives any one of the two reasons
presented above, the answer should be given full credit.
VI
Based on the Affidavit of the Commissioner of Internal Revenue (CIR), an
Information for failure to file income tax return under Section 255 of the National
Internal Revenue Code (NIRC) was filed by the Department of Justice (DOJ) with the
Manila Regional Trial Court (RTC) against XX, a Manila resident.
XX moved to quash the Information on the ground that the RTC has no
jurisdiction in view of the absence of a formal deficiency tax assessment issued by the
CIR.
Is a prior assessment necessary before an Information for violation of Section
255 of the NIRC could be filed in court? Explain. (4%)
SUGGESTED ANSWER:
No. In the case of failure to file a return, a proceeding in court for the
collection of the tax may be filed without an assessment. (Sec. 222(a), NIRC). The
tax can be collected by filing a criminal action with the RTC because a criminal
action is a mode of collecting the tax liability. (Sec. 205, NIRC). Besides, the
6

Commissioner is empowered to prepare a return on the basis of his own


knowledge, and upon such information as he can obtain from testimony or
otherwise, which shall be prima facie correct and sufficient for legal purposes
(Sec. 6(B), NIRC; The issuance of a formal deficiency tax assessment, therefore is
not required.
VII
What are the conditions that must be complied with before the Court of Tax
Appeals may suspend the collection of national internal revenue taxes? (3%)
SUGGESTED ANSWER:
The CTA may suspend the collection of internal revenue taxes if the
following conditions are met:
1.
2.

the case is pending appeal with the CTA;


in the opinion of the Court the collection will jeopardize the

interest of the Government and/ or the taxpayer; and


3.

the taxpayer is willing to deposit in Court the amount being

collected or to file a surety bond for not more than double the amount of the tax
(Sec. 11, RA 1125, as amended by RA 9282).
VIII
What is the rule on appeal from decisions of the Collector of Customs in protest
and seizure cases? When is the decision of the Collector of Customs appealable to the
Court of Tax Appeals? Explain. (5%)
SUGGESTED ANSWER:
Decisions of the Collector of Customs in protest and seizure cases are
appealable to the Commissioner of Customs within 15 days from receipt of
notice of the written decision.
As a rule, decisions of the Collector of Customs are not appealable to the
Court of Tax Appeals. If the Collector of Customs, however, does not decide a
protest for a long period of time, the inaction may be considered as an adverse
decision by the Collector of Customs and the aggrieved taxpayer may appeal to
7

the CTA even without the Collectors and Commissioners actual decision
(Commissioner of Customs v. Planters Products, Inc. G.R. No. 82018, March 16,
1989).
IX
On May 15, 2009, La Manga Trading Corporation received a deficiency business
tax assessment of PI,500,000.00 from the Pasay City Treasurer. On June 30, 2009, the
corporation contested the assessment by filing a written protest with the City
Treasurer.
On October 10, 2009, the corporation received a collection letter from the City
Treasurer, drawing it to file on October 25, 2009 an appeal against the assessment
before the Pasay Regional Trial Court (RTC).
A.

Was the protest of the corporation filed on time? Explain. (3%)


SUGGESTED ANSWER:
The protest was filed on time. The taxpayer has the right to protest an
assessment within 60 days from receipt thereof (Sec. 195, LGC).
B.

Was the appeal with the Pasay RTC filed on time? Explain. (3%)

SUGGESTED ANSWER:
The appeal was not filed on time. When an assessment is protested, the
treasurer has 60 days within which to The taxpayer has 30 days from receipt of
the denial of the protest or from the lapse of the 60-day period decide,
whichever comes first, otherwise the assessment becomes conclusive and
unappeallable. Since no decision on the protest was made, the taxpayer should
have appealed to the RTC within 30 days from the lapse of the period to decide
the protest (Sec. 195, LGC).
PART II
X
True or False. (1% each)
A.

Gains realized by the investor upon redemption of shares of stock in a

mutual fund company are exempt from income tax.


8

SUGGESTED ANSWER:
TRUE
[Sec 32(B)(7)(h),NIRC]
B.

A corporation can claim the optional standard deduction equivalent to

40% of its gross sales or receipts, as the case may be.


SUGGESTED ANSWER:
FALSE
[Sec. 34(L), NIRC, as amended by RA No. 9504.]
C.

Premium payment for health insurance of an individual who is an

employee in an amount of P2,500 per year may be deducted from gross income if his
gross salary per year is not more than P250.000.
SUGGESTED ANSWER:
FALSE
[Sec. 34(M), NIRC.]
D.

The Tax Code allows an individual taxpayer to pay in two equal

installments, the first installment to be paid at the time the return is filed, and the
second on or before July 15 of the same year, if his tax due exceeds P2,000.
SUGGESTED ANSWER:
TRUE.
[Sec. 56(A)(2), NIRC.]
E. An individual taxpayer can adopt either the calendar or fiscal period for
purposes of filing his income tax return.
SUGGESTED ANSWER:
FALSE.
[Sec. 43, NIRC.]

F.

The capitalization rules may be resorted to by the BIR in order to compel

corporate taxpayers to declare dividends to their stockholders regularly.


SUGGESTED ANSWER:
TRUE.
[Sec. 244, NIRC; Rev. Reg. No. 2-2001 implementing Sec. 29, NIRC.]
G.

Informers reward is subject to a final withholding tax of 10%.

SUGGESTED ANSWER:
TRUE.
[Sec. 282, NIRC.}
H.

A non-resident alien who stays in the Philippines for less than 180 days

during the calendar year shall be entitled to personal exemption not to exceed the
amount allowed to citizens of the Philippines by the country of which he is subject or
citizen.
SUGGESTED ANSWER:
FALSE.
[Sec. 25(A)(1) in relation to Sec. 35, NIRC.)
XI
Are the following transactions subject to VAT? If yes, what is the applicable rate
for each transaction. State the relevant authority/ies for your answer.
A.

Construction by XYZ Construction Co. of concrete barriers for the Asian

Development Bank in Ortigas Center to prevent car bombs from ramming the ADB
gates along ADB Avenue in Mandaluyong City. (3%)
SUGGESTED ANSWER:

10

The transaction is subject to VAT at the rate of zero percent (0%). ADB is exempt
from direct and indirect taxes under a special law, thereby making the sale of
services to it by a VAT-registered construction company, effectively zero-rated
(Sec. 108(B)(3), NIRC).
B.

Call Center operated by a domestic enterprise in Makati that handles

exclusively the reservations of a hotel chain which are all located in North America.
The services are paid for in US$ and duly accounted for with the Bangko Sentral ng
Pilipinas. (3%)
SUGGESTED ANSWER:
The sale of services is subject to VAT at zero percent (0%). Zero-rated sale
of services includes services rendered to a person engaged in business outside
the Philippines and the consideration is paid in acceptable foreign currency duly
accounted for by the Bangko Sentral ng Pilipinas (Sec. 108(B)(2), NIRC).
C.

Sale of orchids by a flower shop which raises its flowers in Tagaytay. (3%)

SUGGESTED ANSWER:
The sale of orchids is subject to VAT at 12%. This is a sale of agricultural
non-food product in its original state which is no longer one of the exempt
transactions. (Sec. 109, NIRC, as amended by RA No. 9337).
XII
Ferremaro, Inc., a manufacturer of handcrafted shoes, maintains its principal
office in Cubao, Quezon City. It has branches/sales offices in Cebu and Davao. Its
factory is located in Marikina City where most of its workers live. Its principal office in
Quezon City is also a sales office.
Sales of finished products for calendar year 2009 in the amount of P10 million
were made at the following locations:
i)

Cebu branch

25%

ii)

Davao branch

15%
11

iii)

Quezon City branch


Total

60%
100%

Where should the applicable local taxes on the shoes be paid? Explain. (3%)
SUGGESTED ANSWER:
Twenty five percent (25%) of total sales or P2.5 million shall be taxed in
Cebu, and 15% of total sales or PI.5 million shall be taxed in Davao. For the
remaining 60% sales amounting to P6 million which are recorded in the
principal office, 30% thereof or P1.8 million is taxable in Quezon City where the
principal office is located and 70% or P4.2 million is taxable in Marikina City
where the factory is located.
Under the law, manufacturers maintaining a branch or sales outlet shall
record the sale in the branch or sales outlet making the sale and pay the tax in
the city or municipality where the branch or sales outlet is located. Since
Ferremaro, Inc., maintains one factory, the sales recorded in the principal office
shall be allocated and 30% of said sales are taxable in the place where the
principal office is located while 70% is taxable in the place where the factory is
located (Sec. 150, LGC).
XIII
XYZ Shipping Corporation is a branch of an international shipping line with
voyages between Manila and the West Coast of the U.S. The companys vessels load
and unload cargoes at the Port of Manila, albeit it does not have a branch or sales
office in Manila. All the bills of lading and invoices are issued by the branch office in
Makati which is also the companys principal office.
The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping
lines using the Port of Manila.
Can the City Government of Manila legally impose said levy on the corporation?
Explain. (3%)
SUGGESTED ANSWER:
12

No, Manila cannot legally levy the 2% Gross Receipts Tax on the shipping
line, because taxes on the gross receipts of transportation contractors and
persons engaged in the transportation of passengers or freight by hire and
common carriers by air, land or water is a limitation on the exercise of taxing
powers by local government units (Sec, 133(f), LGC).
XIV
A inherited a two-storey building in Makati from his father, a real estate broker
in the bOs. A group of Tibetan monks approached A and offered to lease the building
in order to use it as a venue for their Buddhist rituals and ceremonies. A accepted the
rental of PI million for the whole year.
The following year, the City Assessor issued an assessment against A for nonpayment of real property taxes.
Is the assessor justified in assessing As deficiency real property taxes? Explain.
(3%)
SUGGESTED ANSWER:
No. The property is exempt from real property tax by virtue of the
beneficial use thereof by the Tibetan monks for their religious rituals and
ceremonies. A property that is actually, directly and exclusively used for
religious purposes is exempt from the real property tax (Sec. 234, LGC; Sec.
28(3), Article IV, Phil. Constitution). The test of exemption from the tax is not
ownership but the beneficial use of the property (City of Baguio v. Busuego, L29772, Sept. 18, 1980).
XV
Don Sebastian, single but head of the family, Filipino, and resident of Pasig
City, died intestate on November 15, 2009.
He left the following properties and interests:
13

House and lot (family home) in Pasig

Vacation house and lot in Florida, USA

800,000
1,500,000

Agricultural land in Naic, Cavite which he inherited from


his father

2,000,000

Car which is being used by his brother in Cavite

500,000

Proceeds of life insurance where he named his estate as


irrevocable beneficiary

1,000,000

Household furnitures and appliances

1,000,000

Claims against a cousin who has assets of P10,000 and


liabilities of PI00,000

100,000

Shares of stock in ABC Corp, a domestic enterprise

100,000

The expenses and charges on the estate are as follows:


Funeral Expenses

250,000

Legal fees for the settlement of the estate 500,000


Medical expenses of last illness
Claims against the estate

600,000
300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance
in the settlement of his estate for which they have agreed to the above-stated
professional fees. Specifically, they request you to explain and discuss with them the
following questions. You oblige:
A.

What are the properties and interests that should be included in the

computation of the gross estate of the decedent? Explain. (2.5%)


SUGGESTED ANSWER:
All the properties and interests enumerated in the problem should be
included in the gross estate of the decedent. The composition of the gross estate
of the decedent who is a citizen of the Philippines includes all properties, real or
personal, tangible or intangible, wherever situated and to the extent of the
interest that he has thereon at the time of his death (Sec. 85, NIRC).
B.

What is the net taxable estate of the decedent? Explain. (2.5%)

14

SUGGESTED ANSWER:
The net taxable estate of the decedent is P3,700,000.00. From the gross
estate of P7 million the following deductions are allowed: (1) funeral expenses of
P200,000 which is the maximum allowed by law; (2) legal fees amounting to
P500,000; (3) medical expenses not to exceed P500,000; (4) Claims against the
estate of P300,000; (5) family home equivalent to its fair market value (not to
exceed PI million) of P800,000; and (6) standard deduction of PI million, or a
total allowable deduction of P3,300,000 (Sec. 86, NIRC).
The claim against the cousin amounting to P100,000, although includable
in the gross estate, cannot be claimed as a deduction because the debtor is not
yet declared insolvent. Likewise, the inherited property cannot give rise to a
vanishing deduction for want of sufficient factual basis (Sec. 86, NIRC).
C.

When is the due date for filing and payment of the applicable tax return

and tax? Are these dates extendible? If so, under what conditions or requirements?
(2.5%)
SUGGESTED ANSWER:
The filing of the return and payment of the tax is within 6 months from
date of death following the pay-as- you-file concept. The period to file the return
is extendible for a maximum of 30 days under meritorious cases as maybe
determined by the Commissioner. The payment of the estate tax may also be
extended when the Commissioner finds that the payment of the tax on the due
date would impose undue hardship upon the estate or any of the heirs. The
period of extension to pay shall not exceed 5 years if the estate is settled
through the courts, or shall not exceed 2 years if settled extrajudicially. The
Commissioner may require the executor, or administrator, or the beneficiary to
furnish a bond in an amount not more than double the amount of estate tax due
(Sec. 92, NIRC).

15

D.

If X, one of the compulsory heirs, renounces his share in the inheritance

in favor of the other co-heirs, is there any tax implication of Xs renunciation? What
about the other coheirs? (2.5%)
SUGGESTED ANSWER:
If the renunciation is a general renunciation such that the share of the
heir who waives his right to the inheritance goes to the other co-heirs in
accordance with their respective interest in the inheritance, the law on
accretion applies and the property waived is considered to pass through the
other co-heirs by inheritance; hence, it has no tax implication. Undoubtedly,
when the compulsory heir renounced his share in the inheritance, he did not
donate the property which had never become his. Such being the case, the
renunciation is not subject to the donor's tax.
If it is not a general renunciation in favor of the other co-heirs, the heir
renouncing his right is considered to have made a donation and the renunciation
is subject to donors tax. In both cases, however, the renunciation has no tax
implication to the other co-heirs (BIR Ruling No. DA-(DT-039) 396-09, dated July
23, 2009).
XVI
A is a travelling salesman working full time for Nu Skin Products. He receives a
monthly salary plus 3% commission on his sales in a Southern province where he is
based. He regularly uses his own car to maximize his visits even to far flung areas.
One fine day a group of militants seized his car. He was notified the- following day by
the police that the marines and the militants had a bloody encounter and his car was
completely destroyed after a grenade hit it.
A wants to file a claim for casualty loss. Explain the legal basis of your tax
advice. (3%)
SUGGESTED ANSWER:

16

A is not entitled to claim a casualty loss because all of his income partake
the nature of compensation income. Taxpayers earning compensation income
arising from personal services under an employer-employee relationship are not
allowed to claim deduction except that allowed under Section 34(M) referring
only to the P2,400 health and/or hospitalization insurance premium; perforce,
the claim of casualty loss has no legal basis (Sec. 34, NIRC).
XVII
In 2009, Caruso, a resident Filipino citizen, received dividend income from a
U.S.-based corporation which owns a chain of Filipino restaurants in the West Coast,
U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax with respect
to a non-resident alien like Caruso.
A.

What will be your advice to Caruso in order to lessen the impact of

possible double taxation on the same income? (3%)


SUGGESTED ANSWER:
Caruso has the option either to claim the amount of income tax withheld
in U.S. as a deduction from his gross income in the Philippines, or to claim it as
a tax credit (Sec. 34(C)(1)(b), NIRC).
B.

Would your answer in A. be the same if Caruso became a U.S.

immigrant in 2008 and had become a non-resident Filipino citizen? Explain the
difference in treatment for Philippine income tax purposes. (3%)
SUGGESTED ANSWER:
No. The income from abroad of a non-resident citizen is exempt from the
Philippine income tax; hence, there is no international double taxation on said
income (Sec. 23, NIRC).
XVII
ABC, a domestic corporation, entered into a software license agreement with
XYZ, a non-resident foreign corporation based in the U.S. Under the agreement which
17

the parties forged in the U.S., XYZ granted ABC the right to use a computer system
program and to avail of technical know-how relative to such program. In consideration
for such rights, ABC agreed to pay 5% of the revenues it receives from customers who
will use and apply the program in the Philippines.
Discuss the tax implication of the transaction. (5%)
SUGGESTED ANSWER:
The amount payable under the agreement is in the nature of a royalty. The
term royalty is broad enough to include compensation for the use of an
intellectual property and supply of technical know-how as a means of enabling
the application or enjoyment of any such property or right (Sec. 42(4), NIRC).
The royalties paid to the non-resident U.S. corporation, equivalent to 5% of the
revenues derived by ABC for the use of the program in the Philippines, is subject
to a 30% final withholding tax, unless a lower tax rate is prescribed under an
existing tax treaty. (Sec. 28(B)(1), NIRC).

2009 BAR EXAMINATION


PART I

TRUE or FALSE.
Answer TRUE if the statement is true, or FALSE if the statement is false.
Explain your answer in not more than two (2) sentences. (5%)
[a]

A law that allows taxes to be paid either in cash or in kind is valid.

SUGGESTED ANSWER:
True. There is no law which requires the payment of taxes in cash only.
However, a law allowing payment of taxes in kind, although valid, may pose
problems of valuation, hence, will violate the principle of administrative
feasibility.
18

[b]

When the financial position of the taxpayer demonstrates a clear

inability to pay the tax, the Commissioner of Internal Revenue may validly
compromise the tax liability.
SUGGESTED ANSWER:
True. Financial incapacity is a ground allowed by law in order that the
Commissioner of Internal Revenue may compromise a tax liability (Section 204,
NIRC),
[c]

The doctrine of equitable recoupment allows a taxpayer whose

claim for refund has prescribed to offset tax liabilities with his claim of
overpayment.
SUGGESTED ANSWER:
True. The doctrine arose from common law allowing offsetting of a
prescribed claim for refund against a tax liability arising from the same
transaction on which an overpayment is made and underpayment is due. The
doctrine finds no application to cases where the taxes involved are totally
unrelated, and although it seems equitable, it is not allowed in our jurisdiction
(CIR v. VST, 104 Phil. 1062 [1958]).
[d]

A law imposing a tax on income of religious institutions derived

from the sale of religious articles is valid.


SUGGESTED ANSWER:
False. Congress can pass a law taxing income of religious institutions from
its property or activities used for profit but not on their income from exercise of
religious activities. The imposition of a tax on income of a religious institution
from sale of religious articles is an infringement of religious freedom which is
not allowed under the fundamental law (American Bible Society v. City of Manila,
101 Phil. 386[1957J).
19

[e]

A false return and a fraudulent return are one and the same.

SUGGESTED ANSWER:
False. There is a difference between a false return and a fraudulent return.
The first merely implies a deviation from the truth or fact whether intentional or
not, whereas the second is intentional and deceitful with the aim of evading the
correct tax due (Aznar v. Commissioner, GR No. L-20569, August 23, 1974, 58
SCRA S19[1974]).
II
Enumerate the four (4) inherent limitations on taxation. Explain each item
briefly. (4%)
The inherent limitations on the power to tax are:
1.

Taxation is for a public purpose. - The proceeds of the tax must be

used (a) for the support of the State or (b) for some recognized objective of
the government or to directly promote the welfare of the community.
2.

Taxation is inherently legislative. - Only the legislature has full

discretion as to the persons, property, occupation or business to be taxed


provided these are all within the States territorial jurisdiction. It can also
finally determine the amount or rate of tax, the kind of tax to be imposed
and the method of collection (1 Cooley 176184).
3.

Taxation is territorial. - Taxation may be exercised only within the

territorial jurisdiction of the taxing authority (61 Am. Jur. 88). Within the
territorial jurisdiction, the taxing authority may determine the uplace of
taxation or tax situs",
4.

Taxation is subject to international comity. - This is a limitation

which is founded on reciprocity designed to maintain a harmonious and


20

productive relationships among the various states. Under international


comity,

state

must

recognize

the

generally-accepted

tenets

of

international law, among which are the principles of sovereign equality


among states and of their freedom from suit without their consent, that
limit the authority of a government to effectively impose taxes on a
sovereign state and its instrumentalities, as well as on its property held,
and activities undertaken in that capacity.
III
Melissa inherited from her father a 300-square-meter lot. At the time of her
fathers death on March 14, 1995, the property was valued at P720,000.00. On
February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold
the lot for P600.000.00, on cash basis. The prevailing market value of the property at
the time of the sale was P3.000.00 per square meter.
[a]

Is Melissa liable to pay capital gains tax on the transaction? If so, how

much and why? If not, why not? (4%)


SUGGESTED ANSWER:
Yes. The capital gains tax is 6% of the higher value between the selling
price (P600,000.00) and fair market value of the real property (P900,000.00) or a
tax in the amount of P54,000.00. The capital gains tax is due on the sale of a
real property classified as a capital asset (Section 24(D)(1), NIRC).
[b]

Is Melissa liable to pay Value Added Tax (VAT) on the sale of the

property? If so, how much and why? If not, why not? (4%)
SUGGESTED ANSWER:
No. The real property sold, being in the nature of a capital asset, is not
subject to VAT. The sale is subject to VAT only if the real property sold is held
primarily for sale to customers or held for lease in the ordinary course of trade
or business. A real property classified as a capital asset does not include a real

21

property held for sale or for lease, hence, its sale is not subject to VAT (Section
39 and Section 106, NIRC).
SUGGESTED ANSWER:
No, Melissa is not liable to pay the VAT because she is not in the real
estate business. A sale, of real property not in the course of trade or business is
not subject to VAT (Section 105 and Section 109(1)(P), NIRC).

IV
International Technologies, Inc. (ITI) filed a claim for refund for unutilized input
VAT with the Court of Tax Appeals (CTA). In the course of the trial, ITI engaged the
services of an independent Certified Public Accountant (CPA) who examined the
voluminous invoices and receipts of ITI. ITI offered in evidence only the summary
prepared by the CPA, without the invoices and the receipts, and then submitted the
case for decision.
Can the CTA grant ITIs claim for refund based only on the CPAs summary?
Explain. (4%)
SUGGESTED ANSWER:
No. The summary prepared by the CPA does not prove anything unless the
documents which were the basis of the summary are submitted to the CTA and
adduced in evidence. The invoices and receipts must be presented because they
are the only real and direct evidence that would enable the Court to determine
with particular certainty the basis of the refund (CIR v. Rio Tuba Nickel Mining
Corp., 207SCRA S49[l992]).
V
Jessie brought into the Philippines a foreign-made luxury car, and paid less
than the actual taxes and duties due. Due to the discrepancy, the Bureau of Customs
instituted seizure proceedings and issued a warrant of seizure and detention. The car,
22

then parked inside a pay parking garage, was seized and brought by government
agents to a government impounding facility. The Collector of Customs denied Jessies
request for the withdrawal of the warrant.
Aggrieved, Jessie filed against the Collector a criminal complaint for usurpation of
judicial functions on the ground that only a judge may issue a warrant of search and
seizure.
[a]

Resolve with reasons Jessies criminal complaint. (4%)

SUGGESTED ANSWER:
The criminal complaint is bereft of merit. The issuance of a warrant of
seizure and detention by the Collector of Customs for goods released contrary to
law, as when there is underpayment of taxes and duties, is his primary and
exclusive jurisdiction and precludes the judge of regular courts from taking
cognizance of the subject matter. Accordingly, what was done by the Collector
could not be a basis of a prosecution for the usurpation of judicial functions
(Commissioner v. Navarro, 77 SCRA 264[1977]).
[b]

Would your answer be the same if the luxury car was seized while

parked inside the garage of Jessies residence? Why or why not? (4%)
SUGGESTED ANSWER:
No. The luxury car being in a dwelling house, cannot be seized by officers
of the Bureau of Customs exercising police authority without a search warrant
issued by a judge of a competent court (Section 2209, TCC; Pads v. Pamaran, 56
SCRA 16 [1974]).
VI
The Sangguniang Bayan of the Municipality of Sampaloc, Quezon, passed an
ordinance imposing a storage fee of ten centavos (PO. 10) for every 100 kilos of copra
deposited in any bodega within the Municipalitys jurisdiction. The Metropolitan
Manufacturing Corporation (MMC), with principal office in Makati, is engaged in the
manufacture of soap, edible oil, margarine, and other coconut oil-based products. It
has a warehouse in Sampaloc, Quezon, used as storage space for the copra purchased
23

in Sampaloc and nearby towns before the same is shipped to Makati. MMC goes to
court to challenge the validity of the ordinance, demanding the refund of the storage
fees it paid under protest.
Is the ordinance valid? Explain your answer. (4%)
SUGGESTED ANSWER:
Yes. The municipality is authorized to impose reasonable fees and charges
as a regulatory measure in an amount commensurate with the cost of regulation,
inspection and licensing (Section 147, LGC). In the case at bar, the storage of
copra in any warehouse within the municipality can be the proper subject of
regulation pursuant to the police power granted to municipalities under the
Revised Administrative Code or the general welfare clause. A warehouse used
for keeping or storing copra is an establishment likely to endanger the public
safety or likely to give rise to conflagration because the oil content of the copra,
when ignited, is difficult to put under control by water and the use of chemicals
is necessary to put out the fire. It is, thus, reasonable that the Municipality
impose storage fees for its own surveillance and lookout (Procter & Gamble
Philippine Manufacturing Corporation v. Municipality of Jagna, Province of
Bohol, 94 SCRA 894 [1979]).
VII
Kenya International Airlines (KIA) is a foreign corporation, organized under the
laws of Kenya. It is not licensed to do business in the Philippines. Its commercial
airplanes do not operate within Philippine territory, or service passengers embarking
from Philippine airports. The firm is represented in the Philippines by its general
agent, Philippine Airlines (PAL), a Philippine corporation.
KIA sells airplane tickets through PAL, and these tickets are serviced by KIA
airplanes outside the Philippines. The total sales of airline tickets transacted by PAL
for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue
assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding
that KIAs airline ticket sales constituted income derived from sources within the
Philippines.

24

KIA filed a protest on the ground that the P2,968,156.00 should be considered
as income derived exclusively from sources outside the Philippines since KIA only
serviced passengers outside Philippine territory.
Is the position of KIA tenable? Reasons. (4%)
SUGGESTED ANSWER:
KIAs position is not tenable. The revenue it derived in 1997 from sales of
airplane tickets in the Philippines, through its agent PAL, is considered as
income from within the Philippines, subject to the 35% tax based on its taxable
income pursuant to Section 25(a)( 1) of the Tax Code of 1977. The transacting of
business in the Philippines through its local sales agent, makes KIA a resident
foreign corporation despite the absence of landing rights, thus, it is taxable on
income derived from within. The source of an income is the property, activity or
service that produced the income. In the instant case, it is the sale of tickets in
the Philippines which is the activity that produced the income. KIAs income
being derived from within, is subject to Philippine income tax (CIR v. British
Overseas Airways Corporation, 149 SCRA 395, [1987]).
Note: The taxable year involved in the problem is 1997, hence, the
suggested answer above follows the applicable provision of the old Tax Code
(National Internal Revenue Code of1977) then in effect and the prevailing
jurisprudence on the matter. However, with the adoption of the National Internal
Revenue Code ofl997(RA 8424) which took effect on January 1, 1998, it is
expected that the bar candidates have lost track of the change in the tax law
which transpired more than a decade ago. For this reason, it is respectfully
requested that an answer based on the provisions of the New Tax Code shall be
given full credit. Accordingly, an answer framed in this wise should also be
considered as a correct answer, viz:
ANOTHER SUGGESTED ANSWER:
Yes. KIA is a non-resident foreign corporation which is taxable only on
income from within. The income of KIA as an international air carrier is derived
from the sale of transportation services. Compensation for services is an income
25

from within if the services are performed in the Philippines (Section 42(A)(3),
NIRC). The origination of the flight is determinative of the source of the income
of the international air carrier. If the flight originates in the Philippines to a
foreign destination, the income is an income from within; if it originates in a
foreign country to any destination, the income is from without. In the case at
bar, no flight will originate from the Philippines because KIA is not licensed to
do business here. Hence, the income is not taxable in the Philippines (Section
28(A)(3)(a), NIRC).
VII
The City of Manila enacted Ordinance No. 55-66 which imposes a municipal
occupation tax on persons practicing various professions in the city. Among those
subjected to the occupation tax were lawyers. Atty. Mariano Batas, who has a law
office in Manila, pays the ordinance-imposed occupation tax under protest. He goes to
court to assail the validity of the ordinance for being discriminatory. Decide with
reasons. (3%)
SUGGESTED ANSWER:
The ordinance is valid. The tax imposed by the ordinance is in the nature
of a professional tax which is authorized by law to be imposed by cities (Section
151 in relation to Section 139, LGC). The ordinance is not discriminatory
because the City Council has the power to select the subjects of taxation and
impose the same tax on those belonging to the same class. The authority given
by law to cities is to impose a professional tax only on persons engaged in the
practice of their profession requiring government examination and lawyers are
included within that class of professionals.
SUGGESTED ANSWER:
The ordinance is valid. The ordinance is not discriminatory because it
complies with the rule of equality and uniformity in taxation. Equality and
uniformity in local taxation means that all subjects or objects of taxation
belonging to the same class shall be taxed at the same rate within the territorial
jurisdiction of the taxing authority or local government unit and not necessarily
26

in comparison with other units although belonging to the same political


subdivision. In fine, uniformity is required only within the geographical limits of
the taxing authority. It is not for the Court to judge what particular cities or
municipalities should be empowered to impose occupation tax. In the case at
bar, the imposition of the occupation tax to persons exercising various
professions in the city is well within the authority ofthe City of Manila
(Punsalanet. al. v. City of Manila, 95 Phil. 46 [1954]).
IX
Republic Power Corporation (RPC) is a government- owned and controlled
corporation engaged in the supply, generation and transmission of electric power. In
2005, in order to provide electricity to Southern Tagalog provinces, RPC entered into
an agreement with Jethro Energy Corporation (JEC), for the lease of JECs power
barges which shall be berthed at the port of Batangas City. The contract provides that
JEC shall own the power barges and the fixtures, fittings, machinery, and equipment
therein, all of which JEC shall supply at its own cost, and that JEC shall operate,
manage and maintain the power barges for the purpose of converting the fuel of RPC
into electricity. The contract also stipulates that all real estate taxes and assessments,
rates and other charges, in respect of the power barges, shall be for the account of
RPC.
In 2007, JEC received an assessment of real property taxes on the power barges
from the Assessor of Batangas City. JEC sought reconsideration of the assessment on
the ground that the power barges are exempt from real estate taxes under Section 234
[c] of R.A. 7160 as they are actually, directly and exclusively used by RPC, a
government-owned and controlled corporation. Furthermore, even assuming that the
power barges are subject to real property tax, RPC should be held liable therefore, in
accordance with the terms of the lease agreement. Is the contention of JEC correct?
Explain your answer. (4%)
SUGGESTED ANSWER:
The contention of JEC is not correct. The owner of the power barges is
JEC which is required to operate, manage and maintain the power barges for the
purpose the claim that RPC, a government-owned and controlled corporation
engaged in the supply, generation and transmission of electric power, is the
27

actual, direct and exclusive user of the barge, hence, does not fall within the
purview of the exempting provision of Section 234[c] of R.A. 7160. Likewise, the
argument that RPC should be liable to the real property taxes consonant with
the contract is devoid of merit. The liability for the payment of the real estate
taxes is determined by law and not by the agreement of the parties (FELS Energy
Inc. P. The Province of Batangas, 516 SCRA 186 [2007]).
X
ABCD Corporation (ABCD) is a domestic corporation with individual and
corporate shareholders who are residents of the United States. For the 2nd quarter of
1983, these U.S.- based individual and corporate stockholders received cash dividends
from the corporation. The corresponding withholding tax on dividend income 30%
for individual and 35% for corporate non-resident stockholders was deducted at
source and remitted to the BIR.
On May 15,1984, ABCD filed with the Commissioner of Internal Revenue a
formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction
withheld at source as tax on dividends earned was fixed at 25% of said income. Thus,
ABCD asserted that it overpaid the withholding tax due on the cash dividends given to
its non-resident stockholders in the U.S. the Commissioner denied the claim.
On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals
(CTA) reiterating its demand for refund.
[a]

Does ABCD Corporation have the legal personality to file the refund on

behalf of its non-resident stockholders? Why or why not? (3%)


SUGGESTED ANSWER:
Yes, withholding agents is not only an agent of the government but is also
an agent of the taxpayer/income earner. Hence, ABCD ia also an agent of the
beneficial owner of the dividends with respect to the actual payment of the tax
to the government, such authority may reasonably be held to include the
authority to file a claim for refund and to bring an action for recovery of such for
refund and to bring an action for recovery of such claim (CIR v. Procter &
Gamble, 204 SCRA 377, {1991})
28

[b] Is the contention of ABCD Corporation correct? Why or why not? (3%)
SUGGESTED ANSWER:
Yes. The provision of a treaty must take precedence over and above the
provisions of the local taxing statute consonant with the principle of the
international comity. Tax treaties are accepted limitations to the power of
taxation. Thus, the CTA should apply the treaty provision so that the claim for
refund representing the difference between the amount actually withheld and
paid to the BIR and the amount due and payable under the treaty, should be
granted (Hawaiian-Philippine Company v. CIR, CTA Case No. 3887, May 31,
1988).
ANOTHER SUGGESTED ANSWER:
The contention of ABCD Corporation that it overpaid the withholding tax
is correct provided it can establish: (1) The existence of RP-US Tax Treaty is
imposing a lower rate of tax of 25%; (2) the said tax treaty is applicable to its
case; and (3) its payment with the BIR of a tax based on a higher rate of 30% and
35%, respectively.
PART II
XI
Raffy and Wena; husband and wife, are both employed by XXX Corporation.
After office hours, they jointly manage a coffee shop at the ground floor of their house.
The coffee shop is registered in the name of both spouses. Which of the following is the
correct way to prepare their income tax return? Write the letter only. DO NOT
EXPLAIN YOUR ANSWER. (2%)
[a] Raffy will declare as his income the salaries of both spouses, while Wena will
declare he income from the coffee shop.
[b] Wena wil declare the combined compensation income of he spouses, and
Raffy will declare the income from the coffee shop.
29

[c] All the income will be declared by raffy alone, because only one consolidated
return is required to be filed by the spouses.
[d] Raffy will declare his own compensation income and Wena will declare hers.
The income from the coffee shop shall be equally divided between them. Each
spouse shall be taxed separately on their corresponding taxable income to be
covered by one consolidated return for the spouses.
[e] Raffy will declare his own compensation income and Wena will declare hers.
The income from the coffee shop shall be equally divided between them. Raffy
will file one income tax return to cover all the income of both spouses, and the
tax is computed on the aggregate taxable income of the spouses.
SUGGESTED ANSWER:
[d] Raffy will declare his own compensation and Wena will declare hers.
The income from the coffee shop shall be equally divided between them. Bach
spouse shall be taxed separately on their corresponding taxable income to be
covered by one consolidated return for the spouses.
XII
YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to
defend the corporations title over a property used in the business. For the legal
services rendered in 2007, the law firm billed the corporation only in 2008. The
corporation duly paid.
YYY Corporation claimed this expense as a deduction from gross income in its
2008 return, because the exact amount of the expense was determined only in 2008.
Is YYYs claim of deduction proper? Reasons. (4%)
SUGGESTED ANSWER:
No. The expense is deductible in the year it complies with the all-events
test. The test is considered met if the liability is fixed, and the amount of such
liability is determined with reasonable accuracy. The liability to pay is already
fixed in 2007 when the services were rendered, and the amount of such liability
30

is determinable with reasonable accuracy in the same year. Hence the deduction
should have been claimed in 2007 and not in 2008. (CIR v. Isabela Cultural
Corporation, SIS SCRA 556 [2007]).
XIII
In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00.
The fair market value (FMV) of the painting at the time of the purchase was PI-million.
Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his
last will and testament, Xavier bequeathed the painting, already worth PI.5-million, to
his only son, Zandro. The will also granted Zandro the power to appoint his wife,
Wilma, as successor to the painting in the event of Zandros death. Zandro died in
2007, and Wilma succeeded to the property.
[a] Should the painting be included in the gross estate of Xavier in 2001 and
thus, be subject to estate tax? Explain. (3%)
SUGGESTED ANSWER:
Yes. The transmission of the property from Xavier to Zandro is subject to
the estate tax because this is a property within Xavier's control to dispose upon
his death. The composition of the gross estate pertains to properties owned and
existing as of the time of death and to be transferred by the owner by death
(Section 85, NIRC),
[b]

Should the painting be included in the gross estate of Zandro in 2007

and thus, be subject to estate tax? Explain. (3%)


SUGGESTED ANSWER:
No. The transmission from the first heir, legatee or donee in favor of
another beneficiary, in accordance with the desire of the predecessor is an
exempt transfer (Section 87, NIRC), Zandro has no control over the disposition of
the property at the time of his death; hence, the estate tax which imposed the
privilege of transmitting properties upon his death will not apply.

31

ALTERNATIVE ANSWER:
No. The property passes from Zandro to Wilma by virtue of the special
power of appointment granted by Xavier. The law includes as part of the gross
estate of the decedent a property passing under general (not special) power of
appointment. The grantee of the power to appoint, Zandro, has no control over
the disposition of the property because it is the desire of the grantor of the
power that the property will go to a specific person. This being so, the painting
should not be included in the gross estate of Zandro, hence, it is not subject to
estate tax (Section 85(D), NIRC).
[c] May a vanishing deduction be allowed in either or both of the estates?
Explain. (3%)
SUGGESTED ANSWER:
Vanishing deduction shall be allowed to the estate of Xavier but only to
the extent of Ya of the property which is the portion acquired by gift (Section
100, NIRC), The donation took place within 5 years (1999 to 2001) from the
death of Xavier; hence, there is a vanishing deduction. However, Zandros estate
will not be entitled to claim vanishing deduction because, first and foremost, the
property previously taxed is not includable in his gross estate and second, even
if it is includable, the present decedent died more than 5 years from the death of
the previous decedent, and that;a vanishing deduction is already claimed by the
previous estate involving the same property.
XIV
Emiliano Paupahan is engaged in the business of leasing out several residential
apartment units he owns. The monthly rental for each unit ranges from P8,000.00 to
PI0,000.00. His gross rental income for one year is PI,650,000.00. He consults you on
whether it is necessary for him to register as a VAT taxpayer. What legal advice will you
give him, and why? (4%)
SUGGESTED ANSWER:

32

I will advise Emiliano ttyat he is not required to register as a VAT


taxpayer. His transactions of leasing residential units for an amount not
exceeding P10,000.00 per unit per month are exempt from VAT irrespective of
the aggregate amount of rentals received annually (Section 109(1X0,b NIRC).
XV
Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks
in Barack Motors Corporation, a Mexican company, to his legitimate son, Miguelito,
who is residing in the Philippines and about to be married to a Filipino girlfriend.
Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers
of property.
[a] Is Miguel entitled to claim a dowry exclusion? Why or why not? (3%)
SUGGESTED ANSWER:
Miguel, a non-resident alien, is not allowed any dowry exclusion. The
dowry applies only to a donor who is either a citizen or resident of the
Philippines (Section 101(AX1), NIRC).
lb] Is Miguel entitled to the rule of reciprocity in order to be exempt from
the Philippine donors tax? Why or why not? (3%)
SUGGESTED ANSWER:
No. The donation is not subject to the Philippine donor's tax because the
donor is a non-resident alien and the property donated is a property not situated
in the Philippines. The rule of reciprocity applies only if the property transferred
by a non- resident alien is an intangible personal property situated in the
Philippines. This is designed to reciprocate the exemption from donor's tax
granted by a foreign country to Filipinos who are not residing thereat. (Section
104, NIRC).
XVI

33

Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return
for 2007 claiming optional standard deductions. Realizing that he has enough
documents to substantiate his profession-connected expenses, he now plans to file an
amended income tax return for 2007, in order to claim itemized deductions, since no
audit has been commenced by the BIR on the return he previously filed. Will Ernesto
be allowed to amend his return? Why or why not? (4%)
SUGGESTED ANSWER:
No. Since Ernesto has elected to claim the optional standard deduction,
said election is irrevocable for the taxable year for which the return is made
(Section 34(L), NIRC).
XVII
A final assessment notice was issued by the BIR on June 13, 2000, and
received by the taxpayer on June 15, 2000. The taxpayer protested the assessment on
July 31, 2000. The protest was initially given due course, but was eventually denied by
the Commissioner of Internal Revenue in a decision dated June 15, 2005. The
taxpayer then filed a petition for review with the Court of Tax Appeals (CTA), but the
CTA dismissed the same.
[a]

Is the CTA correct in dismissing the petition for review? Explain your

answer. (4%)
SUGGESTED ANSWER:
Yes. The protest was filed out of time, hence the CTA does not acquire
jurisdiction over the matter (CIR v. Atlas Mining and Development Corp. [2000]).
[b]

Assume that the CTAs decision dismissing the petition for review

has become final. May the Commissioner legally enforce collection of the
delinquent tax? Explain. (4%)
SUGGESTED ANSWER:

34

No. The protest was filed out of time and, therefore, did not suspend the
running of the prescriptive period for the collection of the tax. Once the right to
collect has prescribed, the Commissioner can no longer enforce collection of the
tax liability against the taxpayer (CIR v. Atlas Mining and Development Corp.,
February 14,2000).
XVIII
A taxpayer received an assessment notice from the BIR on February 3, 2009.
The following day, he filed a protest, in the form of a request for reinvestigation, against
the assessment and submitted all relevant documents in support of the protest. On
September 11, 2009, the taxpayer, apprehensive because he had not yet received
notice of a decision by the Commissioner on his protest, sought your advice.
What remedy or remedies are available to the taxpayer? Explain. (4%)
SUGGESTED ANSWER:
The remedy of a taxpayer is to avail of either of two options:
1.

File a petition for review with the CTA within 30 days after the

expiration of the 180-day period from submission of all relevant


documents; or
2.

Await the final decision of the Commissioner on the disputed

assessment and appeal such final decision to the CTA within 30 days after
receipt of a copy of such decision.
These options are mutually exclusive such that resort to one bars the
application of the other (RCBC v. OR, 522SCRA 144(2007]).
XIX
Johnny transferred a valuable 10-door commercial apartment to a designated
trustee, Miriam, naming in the trust instrument Santino, Johnnys 10-year old son, as
the sole beneficiary. The trustee is instructed to distribute the yearly rentals
35

amounting to P720,000.00. The trustee consults you if she has to pay the annual
income tax on the rentals received from the commercial apartment.
[a]

What advice will you give the trustee? Explain. (3%)

SUGGESTED ANSWER:
I will advise the trustee that she has nothing to pay in annual income
taxes because the trusts taxable income is zero. This is so because the amount
of income to be distributed annually to the beneficiary is a deduction from the
gross income of the trust but must be reported as income of the beneficiary
(Section 61(A), NIRC).
[b]

Will your advice be the same if the trustee is directed to

accumulate the rental income and distribute the same only when the
beneficiary reaches the age of majority? Why or why not? (3%)
SUGGESTED ANSWER:
No, the trustee has to pay the income tax on the trusts net income
determined annually if the income is required to be accumulated. Once a taxable
trust is established , its net income is either taxable to the trust, represented by
the trustee, or o the beneficiary depending on the provision for distribution of
income following the one-layer taxation scheme (Section 61(A), NIRC).
XX
Masarap Food Corporation (MFC) incurred substantial advertising expenses in
order to protect its brand franchise for one of its line products. In its income tax
return, MFC included the advertising expense as deduction from gross income,
claiming it as an ordinary business expense. Is MFC correct? Explain. (3%)
SUGGESTED ANSWER:
No. The protection of taxpayers brand franchise is analogous to the
maintenance of goodwill or title to ones property which is in the nature of a
36

capital expenditure. An advertising expense, of such nature does not qualify as


an ordinary business expense, because the benefit to be enjoyed by the taxpayer
goes beyond one taxable year fCIR v. General Foods Inc., 401 SCRA 545 [2003]).

2008 BAR EXAMINATION


I
In January 1970, Juan Gonzales bought one hectare of agricultural land in
Laguna for PI00,000. This property has a current fair market value of P10 million in
view of the construction of a concrete road traversing the property. Juan Gonzales
agreed to exchange his agricultural lot in Laguna for a one-half hectare residential
property located in Batangas, with a fair market value of P10 million, owned by Alpha
Corporation, a domestic corporation engaged in the purchase and sale of real property.
Alpha Corporation acquired the property in 2007 for P9 million.
a)

What is the nature of the real properties exchanged for tax purposes -

capital asset or ordinary asset? Explain (3%)


SUGGESTED ANSWER:
a)

The one hectare agricultural land owned by Juan Gonzales is a

capital asset because it is not a real property used in trade or business. The onehalf hectare residential property owned by Alpha Corporation is an ordinary
asset because the owner is engaged in the purchase and sale of real property.
(Section 39, NIRC, Revenue Regulations No. 7-03).
b)

Is Juan Gonzales subject to income tax on the exchange of

property? If so, what is the tax base and rate? Explain. (3%)
SUGGESTED ANSWER:
b)

Yes. The tax base in a taxable disposition of a real property

classified as a capital asset is the higher between two values: the fair market
value of the property received in exchange and the fair market value of the
37

property exchanged. Since the fair market value of two properties are the same,
the said fair market value should be taken as the tax base which is P10 million.
The income tax rate is 6%. (Section 24(D) (1), NIRC).
c)

Is Alpha Corporation subject to income tax on the exchange of

property? If so, what is the tax base and rate? Explain. (3%)
SUGGESTED ANSWER:
c)

Yes. The gain from the exchange constitutes an item of gross

income, and being a business income, it must be reported in the annual income
tax return of Alpha Corporation. From the pertinent items of gross income,
deductions allowed by law from gross income can be claimed to arrive at the net
income which is the tax base for the corporate income tax rate of 35%. (Section
27 (A) and Section 31, NIRC).
II
Jose Ceman, Filipino citizen, married to Maria Ceman, died in a vehicular
accident in NLEX on July 10, 2007. The spouses owned, among others, a 100-hectare
agricultural land in Sta. Rosa, Laguna with current fair market value of P20 million,
which was the subject matter of a Joint Venture Agreement about to be implemented
with Star Land Corporation (SLC), a well-known real estate development company. He
bought the said real property for P2 million fifty years ago. On January 5, 2008, the
administrator of the estate and SLC jointly announced their big plans to start
conversion and development of the agricultural lands in Sta. Rosa, Laguna, into firstclass residential and commercial centers. As a result, the prices of real properties in
the locality have doubled.
The Administrator of the Estate of Jose Ceman filed the estate tax return on
January 9,2008, by including in the gross estate the real property at P2 million. After
9 months, the BIR issued deficiency estate tax assessment, by valuing the real
property at P40 million.
a)

Is the BIR correct in valuing the real property at P40 million? Explain.

(3%)
38

SUGGESTED ANSWER:
a)

No. The value of the property for estate tax purposes shall be the

fair market value thereof at the time of death. (Section 88(B), NIRC).
b)

If you disagree, what is the correct value to use for estate tax purposes?

Explain. (3%)
SUGGESTED ANSWER:
b)

The correct value to use for estate tax purposes is P20 million which

is the current fair market value of the property at the time of the decedent's
death. (Section 88(B), NIRC).
III
DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA.
Starting December 15, 2004. DEF Corporation paid annual royalties to DEF, Inc., for
the use of the latter's software, for which the former, as withholding agent of the
government, withheld and remitted to the BIR the 15% final tax based on the gross
royalty payments. The withholding tax return was filed and the tax remitted to the BIR
on January 10 of the following year. On April 10, 2007, DEF Corporation filed a
written claim for tax credit with the BIR, arising from erroneously paid income taxes
covering the years 2004 and 2005. The following day, DEF Corporation filed a petition
for review with the Court of Tax Appeals . involving the tax credit claim for 2004 and
2005.
a)

As a BIR lawyer handling the case, would you raise the defense of

prescription in your answer to the claim for tax credit? Explain. (3%)
SUGGESTED ANSWER:
a)

Yes. The claim for rehmd for the2004erroneously paid income tax

was filed out of time because the claim was only filed after more than two years
had elapsed from the payment thereof. (Section 204 (c) and 229, NIRC).

39

b)

Can the BIR lawyer raise the defense that DEF Corporation is not the

proper party to file such claim for tax credit? Explain. (3%)
SUGGESTED ANSWER:
b)

No. The withholding agent who is mandated by law to withhold and

remit the tax on the income of a non* resident in the Philippines becomes
directly liable for the payment of the tax. Therefore, it is the proper party to file
a claim for refund in case of over-withholding. (Commissioner v. Wander
Philippines, Inc., 160SCRA 573 [1988]).
IV
JKL Corporation is a domestic corporation engaged in the importation and sale
of motor vehicles in the Philippines and is duly registered with the Subic Bay
Metropolitan Authority (SBMA). In December 2007, it imported several second-hand
motor vehicles from Japan and Korea, which it stores in a warehouse in Subic Bay. It
sold these motor vehicles in April 2008, to persons residing in the customs territory.
A) Are the importations of motor vehicles from abroad subject to customs duties
and value added taxes? Explain. (4%)
SUGGESTED ANSWER:
a)

No. The importation from abroad to the Subic Bay Freeport Zone is

exempt from customs duties and value-added taxes. The Freeport Zone is an
extension of a foreign territory so that the vehicles imported while still within
its secured perimeter is not subject to Philippine taxes. (RMC No. 50-2007;
Seagate Technology Inc., v. Commissioner, 451 SCRA 132 [2005]).
b)

If they are taxable, upon sale to custom territory, when must the duties

and taxes be paid? What are the bases for and purposes of computing customs duties
and VAT? To whom must the duties and VAT be paid? Explain. (3%)
SUGGESTED ANSWER:

40

b)

When these motor vehicles are sold to the customs territory, the

duties and taxes must be paid before they are physically brought out of the
Freeport Zone. The introduction of the motor vehicles to the customs territory
is considered as technical importation subject to the customs duties and VAT.
The tax base for the customs duties is the transaction value while for VAT
purposes, the tax base is the value used in computing customs duties plus
customs duties, excise taxes and other charges incident to importation. (Section
107 (A), NIRC). These taxes on importation must be paid to the Bureau of
Customs before the Authority to Release Imported Goods will be issued by the
BIR. (Revenue Regulations No. 16-2005).
V
Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a
price of PI million. Said property has been leased to MAS Corporation, a domestic
corporation engaged in manufacturing paper products, owned 99% by Maria Suerte.
In October 2007, EIP Corporation, a real estate developer, expressed its desire to buy
the Makati property at its fair market value of P300 million, payable as follows: (a) P60
million down payment; and (b) balance, payable equally in twenty four (24) monthly
consecutive installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her
Makati property for shares of stock of MAS Corporation. A BIR ruling, confirming the
tax-free exchange of property for shares of stock, was secured from the BIR National
Office and a Certificate Authorizing Registration was issued by the Revenue District
Officer (RDO) where the property was located. Subsequently, she sold her entire
stockholdings in MAS Corporation to EIP Corporation for P300 million. In view of the
tax advice, Maria Suerte paid only the capital gains tax of P29,895,000 (P100,000x 5%
plus P298,900,000 x 10%), instead of the corporate income tax of PI04,650,000 (35%
on P299 million gain from sale of real property). After evaluating the capital gains tax
payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax
evasion.
Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte
had resorted to? Explain. (6%)
SUGGESTED ANSWER:
The contention of the RDO is not tenable. Maria Suerte resorted to tax
avoidance and not tax evasion. Tax avoidance is the use of legal means to reduce
41

tax liability and it is the legal right of a taxpayer to decrease the amount of what
otherwise would be his taxes by means which the law permits. (Heng Tong
Textiles Co., Inc. v. Commissioner, 24 SCRA 767 [1968J\. There is nothing
illegal about transferring first the property to' a corporation in a tax free
exchange and later selling the shares obtained in the exchange at a lower tax
than what could have been imposed if the property was sold directly.

ANOTHER SUGGESTED ANSWER:


The contention is devoid of basis. To constitute tax amount of tax less
than what is known by the taxpayer to be legally due; 2) an accompanying state
of mind which is described as being evil, in bad faith, willful or deliberate and
not merely accidental; and 3) a course of action or failure of action which is
unlawful. The second and third factors are not present in the instant case, hence
there is no tax evasion that was committed. The means employed to reduce
taxes being allowed by law, it was a case of tax avoidance that was resorted to.
(Commissioner v. Toda, 438 SCRA 290 [2004]).
VI
While driving his car to Baguio last month, Pedro Asuncion, together with his
wife Assunta, and only son, Jaime, met an accident that caused the instantaneous
death of Jaime. The following day, Assunta also died in the hospital. The spouses and
their son had the following assets and liabilities at the time of death:
Assunta Jaime
Exclusive

Conjugal

Exclusive

Cash

P 10,000,000

P I,200,000

Cars

P 2,000,000

500,000

Land

P 5,000,000

2,000,000

Residential house

4,000,000

Mortgage payable

2,500,000

Funeral expenses

300,000

42

a)

Is the Estate of Jaime Asuncion liable for estate tax? Explain. (4%)

SUGGESTED ANSWER:
a)

No. The estate comprised of properties of only PI.2 million is not

liable to any estate tax. The estate is entitled to a standard deduction of PI


million deductible from the gross estate without the benefit of substantiation,
thereby placing the net estate at only P200,000. Under the graduated tax rates
of the estate tax, a net estate of P200,000 is exempt. (Section 86(A)(5) and
Section 84, NIRC).
b)

Is vanishing deduction applicable to the Estate of Assunta Asuncion?

Explain. (4%)
SUGGESTED ANSWERS:
b)

Yes. The cash amount of PI .2 million transferred to his parents by

his death is a property previously taxed in so far as that portion attributable to


his mother who died a day later is concerned. An estate tax is considered to have
been paid in the previous estate if a return was filed even if there was no tax due
in that return. The filing of a return is a means employed for the payment of the
tax under the pay-as-you-file system. Considering that all the legal requirements
of vanishing deduction are present, the estate of Assunta can validly claim the
same. (Section 86, NIRC).
VII
After examining the books and records of EDS Corporation, the 2004 final
assessment notice, showing basic tax of PI ,000,000., deficiency interest of P400,000,
and due date for payment of April 30, 2007 but without the demand letter, was mailed
and released by the BIR on April 15, 2007. The registered letter, containing the tax
assessment, was received by the EDS Corporation on April 25, 2007.
a)

What is an assessment notice? What are the requisites of a valid

assessment? Explain. (3%)

43

SUGGESTED ANSWER:
a)

An assessment notice is a formal notice to the taxpayer stating that the

amount thereon is due as a tax and containing a demand for the payment
thereof. {Alhambra Cigar and Cigarette Mfg. Co.v. Collector, 10S PR 1337[1959];
CIR v. Pascor Realty and Development Corp., 309 SCRA 402 [1999]). To be valid,
the taxpayer must be informed in writing of the law and the facts on which the
assessment is made. (Section 228, NIRC).
ANOTHER SUGGESTED ANSWER:
a)

An assessment is a written notice and demand made by the Bureau

on the taxpayer for the settlement of a tax liability that is due, definitely set and
fixed therein. The requisites of a valid assessment are:
1.

It must be made within the prescriptive period to assess; (Section

203, NIRC)
2.

There must be a preliminary assessment previously issued, except

in those instances allowed by law; (Section 228, NIRC)


3.

The taxpayer must be informed in writing about the law and facts

on which the assessment is based; (Section 228, NIRC) and


4.

It must be served upon the taxpayer or any of his authorized

representatives. (Estate of Juliana Diez vda. De Gabriel v. CIR, 421 SCRA


266[2004]).
b)

As tax lawyer of EDS Corporation, what legal defense(s) would you raise

against the assessment? Explain. (3%)


SUGGESTED ANSWERS:
b)

I will question the validity of the assessment because of the failure

to send the demand letter which contains a statement of the law and the facts
upon which the assessment is based. If an assessment notice is sent without
44

informing the taxpayer in writing about the law and facts on which the
assessment is made, the assessment is void. (Section 228, NIRC; Azucena T. Reyes
v. CIR, 480 SCRA 382 [2006]).
VIII
The City of Manila enacted an ordinance, imposing a 5% tax on gross receipts
on rentals of space in privately- owned public markets. BAT Corporation questioned
the validity of the ordinance, stating that the tax is an income tax, which cannot be
imposed by the city government. Do you agree with the position of BAT Corporation?
Explain. (5%)
SUGGESTED ANSWER:
No. The tax imposed is not an income tax but a license tax or fee for the
regulation of the business in which'the taxpayers are engaged, that is the leasing
of

spaces

in

privately-owned

public

markets.

(Progressive

Development

Corporation v. Quezon City, 172 SCRA 629 [1989]). The income tax imposed
under the National Internal Revenue Code which preempts the imposition by the
City is one which is imposed on the privilege enjoyed by a taxpayer in earning
income and not a tax on business.
IX
William Antonio imported into the Philippines a luxury car worth US$100,000.
This car was, however, declared only for US$20,000 and corresponding customs duties
and taxes were paid thereon. Subsequently, the Collector of Customs discovered the
underdeclaration and he initiated forfeiture proceedings of the imported car.
a)

May the Collector of Cu stom s declare the imported car forfeited in favor

of the government? Explain. (3%)


SUGGESTED ANSWER:
a)

Yes. The Collector of Customs may declare forfeiture on imported

goods which are undervalued or entered and valued through fraudulent means or
device to the prejudice of the Government. Since the undervaluation is more

45

than 30% of the actual value of the vehicle, it gives rise to a prima facie
evidence of fraud which subjects the vehicle to forfeiture. (Section 2530, TCC).
b)

Are forfeiture proceedings of goods illegally imported criminal in nature?

Explain. (3%)
SUGGESTED ANSWER:
b)

No. Anaction for forfeiture is enaction in rent, or an action directed

against the imported goods themselves independently of any criminal action,


which is in the nature of an action in personam, that may result as a
consequence of a violation of an existing law. (C.F. Sharp and Co. Inc., v.
Commissioner of Customs, 22 SCRA 760 [1968]).
X
John McDonald, a U.S. citizen residing in Makati City, bought shares of stock of
a domestic corporation whose shares are listed and traded in the Philippines Stock
Exchange at the price of P2 million. Yesterday, he sold the shares of stock through his
favorite Makati stockbroker at a gain of P200,000.
a)

Is John McDonald subject to Philippine income tax on the sale of his

shares through his stockbroker? Is he liable for any other tax? Explain. (3%)
SUGGESTED ANSWER:
a)

No. The gain on the sale or disposition of shares of stock of a

domestic corporation held as capital assets will not be subject to income tax if
these shares sold are listed and traded in the stock exchange. (Section 24(C),
NIRC). However, the seller is subject to the percentage tax of Va of 1% of the
gross selling price. (Section 127 (A), NIRC).
b)

If John McDonald directly sold the shares to his best friend, who is

another U.S. citizen residing in Makati, at a gain of P200,000, is he liable for


Philippine income tax? If so, what is the tax base and rate? Explain. (3%)

46

SUGGESTED ANSWERS:
b)

Yes. The sale of shares of stocks of a domestic corporation held as

capital asset, not through a trading in the local stock exchange, is subject to
capital gains tax based on the net capital gain during the taxable year. The tax
rate is 5% for a net capital gain not exceeding P100,000 and 10% for any excess.
(Section 24(C), NIRC).
XI
Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house
and lot in San Francisco, California, U.S.A, which he acquired in 2000 for P15 million.
On January 10, 2006, he sold said real property to Juan Mayaman, another Filipino
citizen residing in Quezon City, for P20 million. On February 9,2006, Manalo filed the
capital gains tax return and paid PI.2 million representing 6% capital gains tax. Since
Manalo did not derive any ordinary income, no income tax return was.filed by him for
2006." After the tax audit conducted in 2007, the BIR officer assessed Manalo for
deficiency income tax computed as follows: P5 million (P20 million less PI5 million) x
35% = PI.75 million, without the capital gains tax paid being allowed as tax credit.
Manalo consulted a real estate broker who said that the PI.2 million capital gains tax
should be credited from the PI.75 million deficiency income tax.
a)

Is the BIR officers tax assessment correct? Explain.

SUGGESTED ANSWER:
a)

The BIR officers tax assessment is wrong for two reasons. First, the

rate of income tax used Is the corporate income tax although the taxpayer Is an
Individual. Second, the computation of the gain recognized from the sale did not
consider the holding period of the asset. The capital asset having been held for
more than twelve months, only 50% of the gain is recognized. (Section 39(B),
NIRC).
b)

If you were hired by Manalo as his tax consultant, what advice would you

give him to protect his interest? Explain. (3%)

47

SUGGESTED ANSWERS:
b)

I will advise him to ask for the Issuance of the final assessment

notice and request for the crediting of the capital gains tax paid against the
income tax due. The taxpayer should explain that the capital gains tax was paid
in good faith because the property sold is a capital asset, and considering that
what was paid is also an income tax it should be credited on grounds of equity
against the income tax assessment. Once the final assessment is made, 1 will
advise him to protest it within thirty days from receipt, invoking the holding
period and the wrong rate used.
XII
Greenhills Condominium Corporation incorporated in 2001 is a non-stock, nonprofit association of unit owners in Greenhills Tower, San Juan City. To be able to
reduce the association dues being collected from the unit owners, the Board of
Directors of the corporation agreed to lease part of the ground floor of the
condominium building to DEF Savings Bank for P120,000 a month or P1.44 million
for the year, starting January 2007.
a)

Is the non-stock, non-profit association liable for value added tax in

2007? If your answer is in the negative, is it liable for another kind of business tax?
(4%)
SUGGESTED ANSWER:
a)

No. Since the associations annual gross receipts do not exceed PI.5

million, it is exempt from the VAT. (Section 109(V), NIRC). It is, however, liable
to the 3% percentage tax which is the imposed on persons exempt from valueadded tax on account of failure to reach the P1.5 million treshhold. (Section
116, NIRC).
b)

Will the association be liable for value added tax in 2008 if it increases

the rental to PI50,000 a month beginning January 2008? Explain. (3%)


SUGGESTED ANSWERS:
48

b)

Yes. When it increased the rentals to P150,000 per month, its gross

annual receipts will now exceed PI.5 million. It is liable to the VAT beginning
January 2008. (Section 109(V), NIRC).
XIII
MNO Corporation was organized on July 1, 2006, to engage in trading of school
supplies, with principal place of business in Cubao, Quezon City. Its books of
accounts and income statement showing gross sales as follows:
July 1, 2006 to December 31, 2006

P 5,000,000

January 1, 2007 to June 30, 2007

P10,000,000

JULY 1, 2007 TO DECEMBER 31, 2007

PI 5,000,000

Since MNO Corporation adopted fiscal year ending June 30 as its taxable year
for income tax purposes, it paid its 2% business tax for fiscal year ending June 30,
City Treasurer assessed the corporation for deficiency business tax for 2007 based on
gross sales of P25 million alleging that local business taxes shall be computed based
on calendar year.
a)

Is the position of the city treasurer tenable? Explain. (3%)

SUGGESTED ANSWER:
a)

Yes. The tax period for local taxes is generally the calendar year.

(Section 165, LGC).


b) May the deficiency business tax be paid in installments without surcharge
and interest? Explain. (3%)
SUGGESTED ANSWER:
b)

Yes.

Local

government

units

may,

through

ordinances

duly

approved, grant reliefs to taxpayers under such terms and conditions as they
may deem necessary. Such reliefs may take the form of condonation or
extension of time for payment or non-imposition of surcharge or interest.
(Section 192, LGC). Accordingly, the deficiency business taxes may be paid in
49

installment without surcharge and interest through the passage of an ordinance


for that purpose.
XIV
Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the
owners of a residential house and lot in Quezon City. After the recent wedding of their
son, Mario, to Maria, the spouses donated said real property to them. At the time of
donation, the real property has a fair market value of P2 million.
a)

Are Mario and Maria subject to income tax for the value of the property

donated to them? Explain. (4%)


SUGGESTED ANSWER:
a)

No. The value of a property acquired by gift is an exclusion from

gross income. (Section 32(B)(3), NIRC).


b)

Are Jose and Clara subject to donors tax? If so, how much is the taxable

gift of each spouse and what rate shall be applied to the gift? Explain. (4%)
SUGGESTED ANSWERS:
b)

Yes. Jose and Clara are subject to donors tax. Since the real

property is either conjugal or absolute community property, each spouse is


deemed to have made separate donation of one-half of the value of the property
[Tang Ho v. Board of Tax appeals, 97 Phil. 899 [1955]).
For Jose, he is considered to have made two donations: one, is in favor of
his son who is a relative, and two, in favor of his sons wife who is a stranger. The
taxable gift to the son is P490,000 computed by deducting from the gross gift
the dowry exclusion of P10,000. The net gift is subject to the graduated tax rates
of 2% to 15%. The taxable gift to his sons wife is P500,000 subject to the 30%
flat rate on donation to strangers. (Sections 99 and 101, NIRC).

50

Clara is subject to the donors tax in exactly the same manner as Jose,
being considered to have effected likewise two donations.
XV
In 2007, spouses Renato and Judy Garcia opened peso and dollar deposits at
the Philippine branch of the Hong Kong Bank in Manila. Renato is an overseas worker
in Hong Kong while Judy lives and works in Manila. During the year, the bank paid
interest income of P10,000 on the peso deposit and US$ 1,000 on the dollar deposit.
The bank withheld final income tax equivalent to 20% of the entire income and
remitted the same to the BIR.
a)

Are the interest incomes on the bank deposits of spouses Renato and

Judy Garcia subject to income tax? Explain. (4%)


SUGGESTED ANSWER:
a)

Yes. The Interest income from the peso bank deposit is subject to

20% final withholding tax. The interest income from the dollar deposit is subject
to 7.5% final withholding tax but only on the portion of the interest attributable
to Judy or $500. The interest on the dollar deposit attributable to Renato, a nonresident, is exempt from income tax. (Section 24(B)(1), NIRC).
b)

Is the bank correct in withholding the 20% final tax on the entire interest

income? Explain. (3%)


SUGGESTED ANSWER:
b)

No. Only the interest income on a peso deposit is subject to 20%.

The interest income from a dollar deposit is subject to 7.5% if the earner is a
resident individual. (Section 24(B), NIRC).
2007 BAR EXAMINATION
I
(5%)
51

What is the nature of the taxing power of the provinces, municipalities and
cities? How will the local government units be able to exercise their taxing powers?
SUGGESTED ANSWER:
The taxing power of the provinces, municipalities and cities is directly
conferred by the Constitution by giving them the authority to create their own
sources of revenue. The local government units do not exercise the power to tax
as an inherent power or by a valid delegation of the power by Congress, but
pursuant to a direct authority conferred by the Constitution. (Mactan Cebu
International Airport Authority v. Marcos, 261 SCRA 667 [1996]; NPC v. City of
Cabanatuan, 401 SCRA 259 [2003]).
The local government units exercise the power to tax by levying taxes,
fees and charges consistent with the basic policy of local autonomy, and to
assess and collect all these taxes, fees and charges which will exclusively accrue
to them. The local government units are authorized to pass tax ordinances (levy)
and to pursue actions for the assessment and collection of the taxes imposed in
said ordinances. (Section 129, and 132, Local Government Code).
II
(10%)
The Local Government Code took effect on January 1, 1992.
PLDTs legislative franchise was granted sometime before 1992. Its franchise
provides that PLDT will only pay 3% franchise tax in lieu of all taxes. The legislative
franchises of Smart and Globe Telecoms were granted in 1998. Their legislative
franchises state that they will pay only 5% franchise tax in lieu of all taxes.
The Province of Zamboanga del Norte passed an ordinance in 1997 that
imposes a local franchise tax on all telecommunication companies operating within the
province. The tax is 50% of 1% of the gross annual receipts of the preceding calendar
year based on the incoming receipts, or receipts realized, within its territorial
jurisdiction.
52

Is the ordinance valid? Are PLDT, Smart and Globe liable to pay franchise
taxes? Reason briefly.
SUGGESTED ANSWER:
The ordinance is valid. The Local Government Code explicitly authorizes
provincial governments, notwithstanding any law or other special law, to impose
a tax on business enjoying a franchise at the rate of 50% of 1% based on the
gross annual receipts during the preceding year within the province. (Section
137, LGC).
PLDT is liable to the franchise tax levied by the province of Zamboanga del
Norte. The tax exemption privileges on franchises granted before the passage of
the Local Government Code are effectively repealed by the latter law. (PLDT v.
City of Davao, 363 SCRA 522 12001J).
Smart and Globe, however, are not liable to the franchise tax imposed
under the provincial ordinance. The legislative franchises of Smart and Globe
were granted in 1998, long after the Local Government Code took effect.
Congress is deemed to have been aware of the provisions of the earlier law. When
it granted the exemption. Accordingly, the latest will of the legislature to grant
tax exemption must be granted.
III
(5%)
What kind of taxes, fees and charges are considered as National Internal
Revenue Taxes under the National Internal Revenue Code (NIRC)?
SUGGESTED ANSWER:
The following taxes, fees and charges are considered to be National
Internal Revenue Taxes under the National Internal Revenue Code:
a)

Income tax;
53

b)

Estate and donors taxes;

c)

Value-added tax;

d)

Other percentage taxes;

e)

Excise taxes;

f)

Documentary stamp taxes; and

Such other taxes as are or hereafter may be imposed and collected by the
Bureau of Internal Revenue. (Section 21, NIRC).
IV
(10%)
XYZ Corporation, an export-oriented company, was able to secure a Bureau of
Internal Revenue (BIR) ruling in June 2005 that exempts from tax the importation of
some of its raw materials. The ruling is of first impression, which means the
interpretations made by the Commissioner of Internal Revenue are one without
established precedents. Subsequently, however, the BIR issued another ruling which
in effect would subject to tax such kind of importation. XYZ Corporation is concerned
that said ruling may have a retroactive effect, which means that all their importations
done before the issuance of the second ruling could be subject to tax.
a)

What are BIR rulings?

SUGGESTED ANSWERS:
BIR rulings are administrative opinions issued by the Commissioner of
Internal Revenue interpretative of a provision of a tax law.
ALTERNATIVE ANSWER:
They are the best guess of the moment and incidentally often contain
such well-considered and sound law, but the courts have held that they do not
prevent an entire change of front at any time and are merely advisory - sort of
an information service to the taxpayer. (Aban, Law of Basic Taxation in the
Philippines, p. 149 citing Quiazon and Lukban).

54

b)

What is required to make a BIR ruling of first impression a valid one?

SUGGESTED ANSWER:
A BIR ruling of first impression to be valid must not be against the law and
it must be issued only by the Commissioner of Internal Revenue. (Philippine
Bank of Communications v. CIR, 302 SCRA 241 [1999]; Section 7, NIRC).
c)

Does a BIR ruling have a retroactive effect, considering the principle that

tax exemptions should be interpreted strictly against the taxpayer?


SUGGESTED ANSWER:
No. A BIR ruling cannot be given retroactive effect if its retroactive
application is prejudicial to the taxpayer. (Section 246, NIRC; CIR v. Court of
Appeals et. al. 267 SCRA 557[1997]).
ALTERNATIVE ANSWER:
The general rule is that a BIR ruling does not have a retroactive effect if
giving it a retroactive application is prejudicial to the taxpayer. However, if the
first ruling is tainted with either of the following: (1) misstatement or omission
of material facts, (2) the facts gathered by the BIR are materially different from
the facts upon which the ruling is based, or (3) the taxpayer acted in bad faith, a
subsequent ruling can have a retroactive application. (ABS-CBN Broadcasting Co.
v. CTA & CIR, 08 SCRA 142 [1981]; Sec 246, NIRC).
V
(10%)
ABC Corporation sold a real property in Malolos, Bulacan to XYZ Corporation.
The property has been classified as residential and with a zonal valuation of PI,000 per
square meter. The capital gains tax was paid based on the zonal value. The Revenue
District Officer (RDO), however, refused to issue the Certificate Authorizing
Registration for the reason that based on his ocular inspection the property should
have a higher zonal valuation determined by the Commissioner of Internal Revenue
55

because the area is already a commercial area. Accordingly, the RDO wanted to make
a recomputation of the taxes due by using the fair market value appearing in a nearby
banks valuation list which is practically double the existing zonal value. The RDO also
wanted to assess a donors tax on the difference between the selling price based on the
zonal value and the fair market value appearing in a nearby banks valuation list.
a)

Does the RDO have the authority or discretion to unilaterally use the fair

market value as the basis for determining the capital gains tax and not the zonal value
as determined by the Commissioner of Internal Revenue? Reason briefly.
SUGGESTED ANSWER:
No. The RDO has no authority to use a fair market value other than that
prescribed in the Tax Code. The fair

market value prescribed for the

computation of any internal revenue tax shall be, whichever is the higher of: (1)
the fair market value as determined by the Commissioner (referred to as zonal
value); or (2) the fair market value as shown in the schedule of values of the
provincial and city assessors (FMV per tax declaration). (Section 6(B), NIRC). The
use of the fair market value appearing in a nearby banks valuation list, therefor,
is not allowed for purposes of computing internal revenue taxes.
b)

Should the difference in the supposed taxable value be legally subject to

donors tax? Reason briefly.


SUGGESTED ANSWER:
No. The difference in the supposed taxable value cannot be legally subject
to the donors tax, because the use of a fair market value other than that
prescribed by the Tax Code is not allowed for computing any internal revenue
tax. (Section 6(E), NIRC).
ALTERNATIVE ANSWER:
The difference in value is not subject to donors tax, because the sale is
not for an insufficient consideration. A deemed gift subject to tax arises only if a
tax is avoided as a result of selling a property at a price lower than its fair
56

market value. In a sale subject to the 6% capital gains tax, the tax is always
based on the gross selling price or fair market value, whichever is higher, and
therefore, the seller cannot avoid any tax by selling his property below its fair
market value. This means that the deemed gift provision provided for under the
Tax Code will not apply to a sale of real property subject to the 6% capital gains
tax. (Section 100, NIRC).
VI
(5%)
Z is a Filipino immigrant living in the United States for more than 10 years. He
is retired and he came back to the Philippines as a balikbayan. Every time he comes to
the Philippines, he stays here for about a month. He regularly receives a pension from
his former employer in the United States, amounting to US$1,000 a month. While in
the Philippines, with his pension pay from his former employer, he purchased three
condominium units in Makati which he is renting out for P15,000 a month each.
a)

Does the US$1,000 pension become taxable because he is now residing in the

Philippines? Reason briefly.


SUGGESTED ANSWER:
Yes. The purchase will be subject to the capital tax imposed on the sale of real
property and the documentary stamp tax on conveyance of real property, if
these units are acquired from individual unit owners or domestic corporations
who hold them as capital assets. (Section 24(D), 27(D)(5) and 196, NIRC). If these
properties, however, were acquired from dealers and/or lessors of real property
the purchase will give rise to the imposition of the regular income tax, valueadded tax and documentary stamp tax. (Section 24-28 and 196, NIRC).
ALTERNATIVE ANSWER:
Yes, the purchase of the three condominium units is subject to the
following taxes:

57

i.

capital gains tax, if held as capital assets by the seller (Section 24(D)

and 27(D)(5), NIRC), otherwise, the regular income tax (Section 24-28,
NIRC);
ii.

documentary stamp tax (Section 196, NIRC);

iii.

local transfer tax (Section 135, LGC); and

iv.

value-added tax if acquired from real estate developers or lessors of

real property.
Note:
Value-added tax and documentary stamp taxes are outside the coverage of the
BAR Examination. It is requested that full credit be given even if these two tcuces are
not mentioned in the answer.
ALTERNATIVE ANSWER:
The purchase is only subject to the documentary stamp tax, a tax that is
imposed indifferently on the parties to a transaction (Section 173 and 196,
NIRC).
Other taxes that may be due on the transaction, other than the
documentary stamp tax , are the legal liabilities of the seller which cannot be
considered as a tax on the purchase but a tax on the sale. To the purchaser,
these taxes are not taxes but merely part of the purchase price if, by the nature
of the tax, the economic incidence can be shifted to him.
c)

Will Z be liable to pay income tax on the P45.000 monthly income?

Reason briefly.
SUGGESTED ANSWER:
Yes. The rental income from property located in the Philippines is
considered as income derived from within. Z, a non-resident citizen is taxable on
58

income derived from sources within the Philippines. (Section 42 in relation to


Section 23, NIRC).
VII
(10%)
Antonia Santos, 30 years old, gainfully employed, is the sister of Eduardo
Santos. She died in an airplane crash. Edgardo is a lawyer and he negotiated with the
airline company and insurance company and they were able to agree to a total
settlement of P10 Million. This is what Antonia would have earned as somebody who
was gainfully employed. Edgardo was her only heir.
a)

Is the P10 Million subject to estate tax? Reason briefly.

SUGGESTED ANSWER:
No. The estate tax is a tax on the privilege enjoyed by an individual in
controlling the disposition of her properties to take effect upon her death. The
PIOM is not a property existing as of the time of decedents death; hence, it
cannot be said that she exercised control over its disposition. Since the privilege
to transmit the property is not exercised by the decedent, the estate tax cannot
be imposed thereon. (Definition of Estate Tax p. 184, Vitug, Compendium of Tax
Law and Jurisprudence, Third Revised Edition).
b)

Should Edgardo report the 10 Million as his income being Antonias

only heir? Reason briefly.


SUGGESTED ANSWER:
The PIOM should not be reported by Edgardo as his income. The amount
received in a settlement agreement with the airline company and insurance
company is an amount received from the accident insurance covering the
passengers of the airline company and is in the nature of compensation for
personal injuries and for damages sustained on account of such injuries, which is
excluded from the gross income of the recipient. (Section 32(B)(4), NIRC).

59

ALTERNATIVE ANSWER:
No. The P10M having been received for the loss of life, is compensatory in
nature, hence, is not considered as an income but a mere return of capital.
Income is any wealth which flows to the taxpayer other than a mere return of
capital. (Madrigal v. Rafferty, 38 Phil. 414 [1918]).
VIII
(5%)
Nutrition Chippy Corporation gives all its employees (rank and file, supervisors
and managers) one sack of rice every month valued at P800 per sack. During an audit
investigation made by the Bureau of Internal Revenue (BIR), the BIR assessed the
company for failure to withhold the corresponding withholding tax on the amount
equivalent to the one sack of rice received by all the employees, contending that the
sack of rice is considered as additional compensation for the rank and file employees
and additional fringe benefit for the supervisors and managers. Therefore, the value of
the one sack of rice every month should be considered as part of the compensation of
the rank and file subject to tax. For the supervisors and managers, the employer
should be the one assessed pursuant to Section 33 (a) of the NIRC. Is there a legal
basis for the assessment made by the BIR? Explain your answer.
SUGGESTED ANSWER:
There is no legal basis for the assessment. The one sack of rice given to
the supervisors and managers are considered de minimis fringe benefits
considering that the value per sack does not exceed PI,000, hence exempted
from the fringe benefits tax. (Section 33, NIRC as implemented by RR No. 102000).
The one sack of rice per month given to the rank and file employees is,
likewise, not subject to tax as part of compensation income. This is a benefit of
relatively small value intended to promote the health, goodwill, contentment
and efficiency of the employee which will not constitute taxable income of the
recipient. (Section 2.78.1(A)(3) of RR No. 2-98).

60

IX
(10%)
Weber Realty Company which owns a three-hectare land in Antipolo entered
into a Joint Venture Agreement (JVA) with Prime Development Company for the
development of said parcel of land. Weber Realty as owner of the land contributed the
land to the Joint Venture and Prime Development agreed to develop the same into a
residential subdivision and construct residential houses thereon. They agreed that
they would divide the lots between them.
a)

Does the JVA entered into by and between Weber and Prime create a

separate taxable entity? Explain briefly.


SUGGESTED ANSWER:
The JVA entered into between Weber and Prime does not create a separate
taxable entity. The joint venture is formed for the purpose of undertaking
construction projects; hence, is not considered as a corporation for income tax
purposes. (Section 22(B), NIRC).
b)

Are the allocation and distribution of the saleable lots to Weber and

Prime subject to income tax and to expanded withholding tax? Explain briefly.
SUGGESTED ANSWER:
No. The allocation and distribution of the saleable lots to Weber and Prime
is a mere return of their capital contribution. The income tax and the expanded
withholding tax is not due on ai capital transaction because no income is
realized from it. (BIR Ruling No. DA-192- 2001, October 17, 2001).
c)

Is the sale by Weber or Prime of their respective shares in the saleable

lots to third parties subject to income tax and to expanded withholding tax? Explain
briefly.
SUGGESTED ANSWER:

61

Yes. The sale by Weber and Prime of their respective shares to third
parties is a closed and completed transaction resulting in the realization of
income, subject to income tax and to the expanded withholding tax. (BIR Ruling
DA-228-2006)
X
(10%)
Noel Santos is a veiy bright computer science graduate. He was hired by Hewlett
Packard. To entice him to accept the offer of employment, he was offered the
arrangement that part of his compensation would be an insurance policy with a face
value of P20 Million. The parents of Noel are made the beneficiaries of the insurance
policy.
a)

Will the proceeds of the insurance form part of the income of the parents

of Noel and be subject to income tax? Reason briefly.


SUGGESTED ANSWER:
No. The proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured are not included as part of the gross
income of the recipient. (Section 32(B)(1), NIRC). There is no income realized
because nothing flows to Noels parents other than a mere return of capital, the
capital being the life of the insured.
b)

Can the company deduct from its gross income the amount of the

premium? Reason briefly.


SUGGESTED ANSWER:
Yes. The premiums paid are ordinary and necessary business expenses of
the company. They are allowed as a deduction from gross income so long as the
employer is not a direct or indirect beneficiary under the policy of insurance.
(Section 36(A)(4), NIRC). Since the parents of the employee were made the
beneficiaries, the prohibition for their deduction does not exist.

62

XI
(5%)
The Congregation of the Mary Immaculate donated a land and a dormitory
building located along Espana St. in favor of the Sisters of the Holy Cross, a group of
nuns operating a free clinic and high school teaching basic spiritual values. Is the
donation subject to donors tax? Reason briefly.
SUGGESTED ANSWER:
No. Gifts in favor of an educational and/or charitable, religious, social
welfare

corporation,

or

cultural

institution,

accredited

non-government

organization, trust or philanthropic organization or research institution or


organization are exempt from the donor's tax, provided, that, not more than 30%
of the gifts are used for administration purposes. The donation being in the
nature of a real property complies with the utilization requirement. (Section
101(A)(3), NIRC).
XII
(10%)
Remedios, a resident citizen, died on November 10, 2006. She died leaving three
condominium units in Quezon City valued at P5 Million each. Rodolfo was her only
heir. He reported her death on December 5, 2006 and filed the estate tax return on
March 30,2007. Because he needed to sell one unit of the condominium to pay for the
estate tax, he asked the Commissioner of Internal Revenue to give him one year to pay
the estate tax due. The Commissioner approved the request for extension of time
provided that the estate tax be computed on the basis of the value of the property at
the time of payment of the tax.
a)

Does the Commissioner of Internal Revenue have the power to extend

the payment of estate tax? If so, what are the requirements to allow such extension?
SUGGESTED ANSWER:
Yes. The Commissioner may allow an extension of time to pay the estate
tax if the payment on the due date would impose undue hardship upon the
estate or any of the heirs. The extension, in any case, will not exceed two years
63

if the estate is hot under judicial settlement or five years if it is under judicial
settlement. The Commissioner may also require the posting of a bond to secure
the payment of the tax. (Section 91(B), NIRC).
ALTERNATIVE ANSWER:
Yes. The requirements to be complied with so that an extension may be
allowed are: (1) a request for extension must be filed before the expiration of the
original period to pay which is within 6 months from death; (2) there must be a
finding that the payment on the due date of the estate tax would impose undue
hardship upon the estate or any of the heirs; (3) the extension must be for a
period of not exceeding 5 years if the estate is settled judicially or 2 years if
settled extrajudicially; and (4) the Commissioner may require the posting of a
bond in an amount not exceeding double the amount of tax to secure the
payment thereof. (Section 91(B), NIRC).
b)

Does the condition that the basis of the estate tax will be the value at the

time of the payment have legal basis? Reason briefly.


SUGGESTED ANSWER:
No. The valuation of properties comprising the estate of a decedent is the
fair market as of the time of death. No other valuation date is allowed by law.
(Section 88, NIRC).
XIII
(5%)
ABC Corporation won a tax refund case for P50 Million. Upon execution of the
judgment and when trying to get the Tax Credit Certificates (TCC) representing the
refund, the Bureau of Internal Revenue (BIR) refused to issue the TCC on the basis of
the fact that the corporation is under audit by the BIR and it has a potential tax
liability. Is there a valid justification for the BIR to withhold the issuance of the TCC?
Explain your answer briefly.
SUGGESTED ANSWER:
64

The BIR has no valid justification to withhold the TCC. Offsetting the
amount of TCC against a potential tax liability is not allowed, because both
obligations are not yet fully-liquidated. While the amount of the TCC has been
determined, the amount of deficiency tax is yet to be determined through the
completion of the audit. (PhilexMining Corporation v. CIR, 294 SCRA 687[1998]).
ALTERNATIVE ANSWER:
There is no valid justification to withhold the TCC. The requirement, that
the claim for refund/TCC and liability for deficiency taxes must be settled under
one proceeding to avoid multiplicity of suits, will not apply since the
determination of the entitlement to the refund was already removed from the
BIR. To reopen the claim for refund in order to give way to the introduction of
evidence of a deficiency assessment will lead to an endless litigation, which is
not allowed. (CIR v. Citytrust Banking Corporation, 499 SCRA 477[2006]).
2006 BAR EXAMINATION
I
1)

Enumerate the 3 stages or aspects of taxation. Explain each. 5%

2)

Distinguish direct taxes from indirect taxes". Give examples. 5%

SUGGESTED ANSWER:
1)

The three stages or aspects of taxation are:


a.

Levy. This refers to the enactment of a law by Congress authorizing

the imposition of a tax.


b.

Assessment and Collection. This is the act of administration and

implementation of the tax law by the executive through its administrative


agencies.
65

c.

Payment. This is the act of compliance by the taxpayer, including

such options, schemes or remedies as may be legally available to him.


Direct taxes are demanded from the very person who, as intended, should pay
the tax which he cannot shift to another; while an indirect tax is demanded in the first
instance 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 (Maceda v. Macaraig, Jr.,
223 SCRA 217 [1993]). Examples of direct taxes are income tax, estate tax and donors
tax. Examples of indirect taxes are value-added tax, percentage tax and excise tax on
excisable articles.
II
What is tax pyramiding? What is its basis in law? 5%
SUGGESTED ANSWER:
Tax pyramiding refers to the imposition of a tax upon a tax. This occurs
when the tax is added as part of the tax base. It has no basis in law (People v.
Sandiganbayan, 467 SCRA 137 [2005]; CIR v. American Rubber Co., 18 SCRA 842
[1966]).
ANOTHER SUGGESTED ANSWER:
Tax pyramiding refers to a situation where some or all of the stages of
distribution of goods or services are taxed, with the accumulation borne by the
final consumer. There is tax pyramiding when sales taxes are applied to both
inputs and outputs, thus shifting the tax burden to the ultimate consumer. It
has no basis in law because it violates the principle of uniformity and neutrality
in taxation (R.G. Holcombe, Taxing Services, 30 Fla. St. U.L. Rev. 467 [19966])..
Note:
It is respectfully requested that any answer be given full credit as the term lltax
pyramiding was first used only in People v. Sandiganbayan 82. Commissioner Tan
decided on Aug. 16, 2005, which date is beyond the cut-off date for cases.
66

III
What properties are exempt from the real property tax? 5%
SUGGESTED ANSWER:
The following properties are exempt from the real property tax:
a.

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;
b.

Charitable

institutions,

churches,

parsonages

or

convents

appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands,


buildings, and improvements actually, directly and exclusively used for religious,
charitable or educational purposes;
c.

All machineries and equipment that are actually, directly and

exclusively used by local water utilities and government-owned or controlled


corporations engaged in the supply and distribution of water and/or generation
and transmission of electric power;
d.

All real property owned by duly registered cooperatives as provided

for under R.A. 6938; and


e.

Machinery

and

equipment

used

for

pollution

control

and

environmental protection. [Sec. 234, Local Government Code]


IV
Royal Mining is a VAT-registered domestic mining entity. One of its products is
silver being sold to the Bangko Sentral rig Pilipinas. It filed a claim with the BIR for
tax refund on the ground that under Section 106 of the Tax Code, sales of precious
metals to the Bangko Sentral are considered export sales subject to zero-rated VAT.

67

Is Royal Minings claim meritorious? Explain. 5%


SUGGESTED ANSWER:
No, Royal Mining's claim is not meritorious because it is the sale to the
Bangko Sentral ng Pilipinas of gold and not silver which is considered as export
sale subject to zero-rated VAT fSection 106(2XaX4)t NIRC).
Note:
There seems to be coiifusion as to the inclusion of the E-VA T Law in the
coverage of the examination. The first notice given during the Chairmans meeting with
the Law Deans explicitly excludes the E-VAT Law from the coverage. The subsequent
notice includes E-VAT Law but the reference to the ABAKADA Guro case gave many
bar review lecturers in Taxation the impression that only the said case is included and
not the entire EVAT Law, as it has been excluded for several years now. For the above
reason, it is respectfully recommended that any answer be given credit.
V
1) Vanishing deduction is availed of by taxpayers to:
a.

correct his accounting records to reflect the actual deductions made

b.

reduce his gross income

c.

reduce his output value-added

d.

reduce his gross estate

tax liability

Choose the correct answer. Explain. 5%


2)

The Constitution provides charitable institutions, churches, parsonages or

convents appurtenant thereto, mosques, and non-profit cemeteries and all lands,
buildings, and improvements actually, directly and 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%
68

a.

from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and

real property tax


b.

from income tax only

c.

from value-added tax only

d.

from real property tax only

e.

from capital gains tax only

SUGGESTED ANSWER:
1)

I choose (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(AX2) and 86(3X2), NIRC]).
2)

1 choose (d), from real

property tax only. This is the connotation

of the phrase and all lands, buildings and improvements" thereby limiting the
exemption to real property taxes only (CIRv. CA, 298 SCRA 83 [1998]; Lladoc v.
Commissioner, 14 SCRA 292 [1967]; Hodges v. Municipal Board of Iloilo City, 19
SCRA 28 [1965]).
VI
Congress enacts a law granting grade school and high school students a 10%
discount on all school-prescribed textbooks purchased from any bookstore. The law
allows bookstores to claim in full the discount as a tax credit.
1.

If in a taxable year a bookstore has no tax due on which to apply the tax

credits, can the bookstore claim from the BIR a tax refund in lieu of tax credit?
Explain. 2.5%
2.

Can the BIR require the bookstores to deduct the amount of the

discount from their gross income? Explain. 2.5%

69

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:
1.

No. The law is clear that bookstores can only claim the discount as a

tax credit. The term tax credit connotes that the amount when claimed shall
only be treated as a reduction from any tax liability, plain and simple. There is
nothing in the law that grants a refund when the bookstore has no tax liability
against which the tax credit can be used (CIR v. Central Luzon Drug Corp., 456
SCRA 414 [2005]).
2.

No. Tax credit which reduces the tax liability is different from a tax

deduction which merely reduces the income to arrive at the tax base. Since the
law allowed 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. Central Luzon
Drug Corp., Id.).
3.

No, the bookstore cannot claim reimbursement. The tax credit

privilege given to it is the compensation for the subsidy taken by the


government for the benefit of a class of taxpayers to which the students belong.
However, the privilege granted is limited only to the reduction of a present or
future tax liability because by its nature, it is the existence or lack of a tax
liability that determines whether the discount can be used as a tax credit.
Accordingly, if the business continues to operate at a loss and no other taxes are
due, compelling the business to close shop, the credit can never be applied and
will be lost altogether. (CIR v. Central Luzon Drug Corp., Id.)
Note:
There seems to be confusion as to the inclusion of the E-VAT Law in the
coverage of the examination. The first notice given during the Chairmens meeting with
the Law Deans explicitly excludes the E-VAT Law from the coverage. The subsequent
notice includes E-VAT Law but the reference to the ABAKADA Guro case gave many
70

bar review lecturers in Taxation the impression that only the said case is included and
not the entire EVAT Law, as it has been excluded for several years now.
VII
Congress enacts a law imposing a 5% tax on the 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 PI 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%
SUGGESTED ANSWER:
Yes. The term gross receipts is broad enough to include income not
physically received but constructively received by the taxpayer. After all, the
amount withheld is paid to the government on its behalf, in satisfaction of its
withholding taxes. The fact that it did not actually receive the amount does not
alter the fact that it is remitted for its benefit in satisfaction of its tax
obligations. Since the income withheld is an income owned by Express
Transport, the same forms part of its gross receipts. (CIR v. Bank of Commerce,
459 SCRA 638 (20051; CIR v. Solidbank Corp., 416 SCRA 436 [2003]; cm v.
China Bank, 403 SCRA 634 [20030.
VIII
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 Globed 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%
SUGGESTED ANSWER:

71

The denial of the request for reconsideration is a final decision of the


Commissioner of Internal Revenue. 1 would advise Global Bank to appeal the
Commissioners denial to the Court of Tax Appeals (CTA) within 30 days from
receipt, if the remedy of appeal is still available. 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.
ANOTHER SUGGESTED ANSWER:
Since the denial of the protest was made on May 30, . 2006,1 would
assume that Global Bank has already lost its right to appeal. The assessment
having become final for failure to file a timely appeal, I will now advise my client
to file a request with the Commissioner of Internal Revenue for a compromise
settlement of the tax assessed, which has already become final by invoking
doubtful validity of the assessment (Sec. 204, NIRC).
ANOTHER SUGGESTED ANSWER:
Since the assessment has already become final, I will now advise Global
Bank to pay the assessment in order to save on the 20% interest which
continues to run indefinitely until the entire obligation is paid (Sec. 249, NIRC).
This will also save the taxpayer and its officers from possible criminal
prosecution for non-payment of taxes considering that in taxation, criminal
liability arises as a result of the civil liability to pay taxes (Republic v. Patanao,L22356, 20 SCRA 712 [1967]).
IX
The Commissioner of Internal Revenue issued an assessment for deficiency
income tax for taxable year 2000 last July 31, 2006 in the amount of P10 Million
72

inclusive of surcharge and interests. If the delinquent taxpayer is your client, what
steps will you take? What is your defense? 10%
SUGGESTED ANSWER:
Since my client has already lost his right to protest the assessment having
been issued on Juky 31, 2006 and that he is already categorized as a delinquent
tax payer). I will advise him to wait for a collection action to be instituted by the
commissioner. Once colletion is pursued. I will file a petition for review with the
CTA to question the validity of the commissioners action. My defense would be
prescription. Since the assessment was issued beyond the prescriptive period to
assess, the assessment is invalid and any action to collect an invalid assessment
is not warranted (Phil. Journalists, Inc. v. CIR, 447 SCRA 214 [2004])
ANOTHER SUGGESTED ANSWER:
I will advise my client, who is a delinquent taxpayer, to file a request with
the Commissioner of Internal Revenue for the abatement of the entire
assessment on the ground that the same is unjustly assessed (Sec, 204, NIRC), I
will invoke prescription as a defense against the assessment. I will tell the
Commissioner that the assessment having been issued beyond the prescriptive
period, the deficiency income tax would appear to be unjustly assessed which
would justify the abatement or cancellation of the entire assessment.
ANOTHER SUGGESTED ANSWER:
I will immediately file a protest within thirty (30) days from receipt of the
assessment by my client addressed to the Commissioner of Internal Revenue,
alleging prescription as my defense because the assessment was issued beyond
three (3) years as required by law (Sec. 228 and 203, NIRC).
Should the Commissioner deny my protest, I will file an appeal to the
Court of Tax Appeals (CTA) within thirty (30) days from receipt of the decision
(Sec. 228, NIRC).

73

Should the CTA Division deny my petition for review, I will file a Motion
for Reconsideration within 15 days from receipt of the denial. Should the
Division deny my Motion for Reconsideration, I will appeal to the CTA en banc
and from the latters denial, I will appeal to the Supreme Court by way of a
petition for certiorari within 15 days from receipt of the en banc decision.
X
The Collector of Customs issued an assessment for unpaid 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 clients right? Choose the correct courts/ agencies,
observing their proper hierarchy. 5%
1.

Court of Tax Appeals

2.

Collector of Customs

3.

Commissioner of Customs

4.

Regional Trial Court

5.

Metropolitan Trial Court

6.

Court of Appeals

7.

Supreme Court

SUGGESTED ANSWER:
I will file a protest with the Collector of Customs (Sec. 230S, TCC). Should
the Collector promulgate a decision adverse to my client, I will give a written
notice to the Collector, copy furnished the Commissioner of Customs, of my
clients desire to have the matter reviewed by the Commissioner (Sec. 2313,
TCC). If the Commissioner affirms the decision of the Collector I will file an
appeal with the Court of Tax Appeals within 30 days from receipt of the decision
(1997 Rules of Civil Procedure, RA 9282). If the Court of Tax Appeals issues a
decision adverse to my client, I will file with the Supreme Court a verified
petition for review on certiorari pursuant to Rule 45 (RA 9282).
ANOTHER SUGGESTED ANSWER:
I will file my case as follows:

74

1.

Protest with the Collector of Customs (Sec. 2308, TCC);

2.

Review by the Commissioner of Customs (Sec. 2313, TCC);

3.

Appeal to the Court of Tax Appeals (RJL 9282); and

4.

Petition for Review on Certiorari with the Supreme Court (RJL

9282).
XI
Charlie, a widower, has two sons by his previous marriage. Charlie lives with
Jane who is legally married to Mario. They have a child name Jill. The children are all
minors and not gainfully employed.
1.

How much personal exemption can Charlie claim? Explain. 2.5%

2.

How much additional exemption can Charlie claim? Explain. 2.5%

SUGGESTED ANSWER:
1.

Charlie can claim the personal exemption of a Head of a Family or

P25,000.00 provided that, at least one of his minor and not gainfully employed
children is unmarried and living with and dependent upon him for chief support
(Sec. 35(A)t NIRC).
2.

Each legitimate children from his previous marriage and his

illegitimate child with Jane entitled him to additional personal exemption of


P8.000.00 for each dependent, if apart from being minor and not gainfully
employed, they are unmarried, living with and dependent upon Charlie for their
chief support (Sec. 35(B), NIRC).
XII
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
75

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. A RMO is in reality a ruling or an opinion issued by the Commissioner
in implementing the provisions of the Tax Code dealing with the taxability of
pawnshops. The power to review rulings issued by the Commissioner is lodged
with the Court of Tax Appeals (CTA) and not with the Regional Trial Court. A
ruling falls within the purview of other matters arising under the Tax Code,
appealable only to the CTA (CIR v. Leal, 392 SCRA 9 [2002]).
XIII
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. Geriy 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 ANSWER:
No. The trial court can exercise jurisdiction. Prescription of a criminal
action begins to run from the day of the commission of the violation of the law.
The criminal violation was committed when Gerry willfully refused to pay
despite repeated demands in 2002. Since the information was filed in June
2006, the criminal case was instituted within the five-year period required by
law (Tupaz v. Ulep, 316 SCRA 118 [1999]; Sec. 281, NIRC).
XIV
Gold and Silver Corporation gave extra 14th month bonus to all its official and
employees in the total amount of P75 Million. When it filed its corporate income tax
76

return the following year, the corporation declared a net operating loss. When the
income tax return of the corporation was reviewed by the BIR the following year, it
disallowed as item of deduction the P75 Million bonus the corporation gave its officials
and employees on the ground of unreasonableness. The corporation claimed that the
bonus is an ordinarily and necessary expense that should be allowed.
If you were the BIR Commissioner, how will you resolve the issue? 5%
SUGGESTED ANSWER:
I will rule against the deductibility of the bonus. The extra bonus is both
not normal to the business and unreasonable. Admittedly, there is no fixed test
for determining the reasonableness of a bonus as an additional compensation.
This depends upon many factors such as: the payment must be made in good
faith; the character of the taxpayers 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 (C.M Hoskins and Co., Inc. v. CIR, 30 SCRA 434 [1969]. Giving an
extra bonus at a time that the company suffers operating losses is not a payment
in good faith and is not normal to the business, hence unreasonable and would
not qualify as ordinary and necessary expense.
XV
Lilys Fashion, Inc. is a garment manufacturer located and registered as a Subic
Bay Freeport Enterprise under Republic Act No. 7227 and a non-VAT taxpayer. As
such, it is exempt from payment of all local and national internal revenue taxes.
During its operations, it purchased various supplies and materials necessary , in the
conduct of its manufacturing business. The suppliers of these goods shifted to Lilys
Fashion, Inc. the 10% VAT on the purchased items amounting to P500,000.00. Lilys
Fashion, Inc. filed with the BIR a claim for refund for the input tax shifted to it by the
suppliers.
If you were the Commissioner of Internal Revenue, will you allow the refund?
5%

77

SUGGESTED ANSWER:
No. The exemption of lily's Fashion, Inc. is only for taxes for which it is
directly liable, hence, it cannot claim exemption for a tax shifted to it, which is
not at all considered a tax to the buyer but a part of the purchase price. Lily's
Fashion, Inc. is not the taxpayer in so far as the passed-on tax is concerned and
therefore, it cannot claim for a refund of a tax merely shifted to it. Only
taxpayers are allowed to file a claim for refund (Phil. Acetylene Co., Inc. v. CR,
20 SCRA 1056 [1987]).
XVI
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 saile 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 personal notice. For his part, the City Treasurer maintains that the
publication and posting of notice are sufficient compliance with the requirements of
the law.
1.
2.

If you were the judge, how will you resolve this issue? 2.5%
Assuming Joachin is a registered owner, will your answer be the same?

2.5%
SUGGESTED ANSWER:
1.

I will resolve the issue in favor of the City Treasurer. For purposes

of the real property tax, the registered owner of the property is deemed the
taxpayer. Hence, only the registered owner is entitled to a notice of tax
delinquency and other proceedings relative to a tax sale (Talusan v. Tayag and
78

Hernandez, 356 SCRA 263 [2001]). Not being the registered owner of the
property, Joachin cannot claim to have been deprived of such notice, in fact, he
was not entitled to it. He brought the misfortune upon himself, because he did
not register the Deed of Sale with the Register of Deeds upon its execution or
secure a tax declaration in his name. He did not take the necessary steps to
protect and legitimize his interest. The auction sale of his property is, therefore,
valid.
2.

No, my answer will not be the same. The law requires that a notice

of the auction sale must be properly sent to the registered owner. A mere
publication of the notice of delinquency would not suffice, considering that the
procedure in tax sales is in personam. An auction sale, although preceded by
advertisement and publication but without an actual notice to the delinquent
taxpayer, is void. (Tan v. Bantegui, 473 SCRA 663 [2005]; Estate of Mercedes
Jacob v. CA, 283 SCRA 474 [19971).
2005 BAR EXAMINATION
I
a)

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 of
tax? Explain.
b)
c)

May taxes be the subject of set-off or compensation? Explain.


Can an assessment for a local tax be the subject of set-off or

compensation against a final judgment for a sum of money obtained by the taxpayer
against the local government that made the assessment? Explain.
d)

Is a deficiency tax assessment a bar to a claim for tax refund or tax

credit? Explain.
e)

Is the approval of the court, sitting as probate or estate settlement court,

required in the enforcement and collection of estate tax? Explain. (10%)

79

SUGGESTED ANSWER:
a)

The power of taxation is inherent in the State being an attribute of

sovereignty. As an incident of sovereignty, the power to tax has been described


as unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who are to pay it. [Mactan
Cebu International Airport Authority v. Marcos, 261 SCRA 667, (1996)].
SUGGESTED ANSWER:
a)

The power of taxation is inherent in the State being an attribute of

sovereignty. As an incident of sovereignty, the power to tax has been described


as unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who are to pay it. [Mactan
Cebu International Airport Authority v. Marcos, 261 SCRA 667, (1996)].
Being an inherent power, the legislature can enact laws to raise revenues
even without the grant of said power in the Constitution. It must be noted that
Constitutional provisions relating to the power of taxation do not operate as
grants of the power of taxation to the Government, but instead merely
constitute limitations upon a power which would otherwise be practically
without limit. [Cooley, Constitutional Limitations, 1927 8th Ed., p. 787]
b)

No. Taxes cannot be the subject of set-off or compensation for the

following reasons: (1) taxes are of distinct kind, essence and nature, and these
impositions cannot be classed in merely the same category as ordinary
obligations; (2) the applicable laws and. principles governing each are peculiar,
not necessarily common, to each; and (3) public policy is better subserved if the
integrity and independence of taxes are maintained. [Republic v. Mambulao
Lumber Company, 4 SCRA 622 (1962)].
However, if the obligation to pay taxes and the taxpayers claim against
the government are both overdue, demandable, as well as fully liquidated,
80

compensation takes place by operation of law and both obligations are


extinguished to their concurrent amounts. [Domingo v. Garlitos, 8 SCRA 443
(1963)].
c)

No. Taxes and debts are of different nature and character; hence, no

set-off or compensation between these two different classes of obligations is


allowed. The taxes assessed are the obligations of the taxpayer arising from law,
while the money judgment against the government is an obligation arising from
contract, whether express or implied. Inasmuch that taxes are not debts, it
follows that the two obligations are not susceptible to set-off or legal
compensation. [Francia v. Intermediate Appellate Court, 162 SCRA 753 (1988)].
It is only when the local tax assessment and the final judgment are both
overdue, demandable, as well fully liquidated may set-off or compensation be
allowed. [Domingo v. Garlitos, 8 SCRA 443, (1963)].
d)

No. As a general rule, a deficiency tax assessment is not a bar to a

claim for tax refund or tax credit. It is logically appropriate; however, that if the
deficiency tax assessment is already final, the Commissioner should not grant
the claim unless the taxpayer pays the deficiency. Likewise, no tax refund or tax
credit will be granted as long as there is pending a deficiency tax assessment for
the same taxable period. To award a tax refund or tax credit despite the
existence of deficiency assessment for the same taxable period is an absurdity
and a polarity in conceptual effects. A taxpayer cannot be entitled to a refund
and at the same time be liable for a tax deficiency assessment. In order to avoid
multiplicity of suits, it is logically necessary and legally appropriate that the
issue of deficiency tax assessment be resolved jointly with the taxpayers claim
for tax refund, to determine once and for all in a single proceeding the true and
correct amount of tax due or refundable. [CIR v. CA, City trust Banking Corp.
and CTA, 234 SCRA 348 (1994)].
e) No. The approval of the court, sitting in probate, is not a mandatory
requirement in the collection of estate tax. On the contrary, under Section 94 of
the NIRC, it is the probate or settlement court which is forbidden to authorize
the executor or judicial administrator of the decedents estate, to deliver any
81

distributive share to any party interested in the estate, unless a certification


from the Commissioner of Internal Revenue that the estate tax has been paid is
shown. [Marcos U v. Court of Appeals, 273 SCRA 47 (1997)].
II
(1)

Explain briefly whether the following items are taxable or non- taxable:
a)

Income from jueteng;

b)

Gain arising from expropriation of property:

c)

Taxes paid and subsequently refunded;

d)

Recovery of bad debts previously charged off;

e)

Gain on the sale of a car used for personal purposes. (5%)

SUGGESTED ANSWER:
1.

a) It is taxable. The law imposes a tax on income from any source

whatever* which means that it includes income whether legal or illegal. (Sec.
32(A), NIRC).
b)

Taxable. There is a material gain, not excluded by law, realized out

of a closed and completed transaction. Gains from dealings in property are part
of gross income. (Sec. 32(A)(3), NIRC).
c)

It depends. Taxes paid which are allowed as a deduction from gross

income are taxable when subsequently refunded but only to the extent of the
income tax benefit of said deduction. (Sec. 34(C)(1), NIRC). It follows that taxes
paid which are not allowed as deduction from gross income, i.e., income tax,
donor's tax and estate tax, are not taxable when refunded.
d)

Recovery of bad debts previously charged off is taxable to the

extent of income tax benefit of said deduction. (Sec. 34(E)(1), NIRC).


82

e)

Gain on the sale of a car used for personal purposes is

taxable. This is a gain derived from dealings in property which is part of


the taxpayer's gross income. (Sec. 32(A)(3), NIRC). There is a material gain,
not excluded by law, realized out of a closed and completed transaction.
(2.) State and discuss briefly whether the following cases may be compromised or may
not be compromised:
a)
b)

Delinquent accounts:
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 ANSWER:
2.

a) Delinquent accounts may be compromised if either of the two

conditions is present: (1) the assessment is of doubtful validity, or (2) the


financial position of the taxpayer demonstrates a clear inability to pay the tax.
(Sec. 204(A), NIRC; Sec. 2 of Revenue Regulations No. 30- 2002).
b)

These may be compromised, provided that it is premised upon

doubtful validity of the assessment or financial incapacity to pay (ibid).


c)

These may not be compromised, so that the taxpayer may not profit

from his fraud, thereby discouraging its commission (ibid).

83

d)

These may not be compromised in order that the taxpayer will not

profit from his criminal acts (ibid).


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, cannot be compromised. By giving his conformity to the
revised assessment, the taxpayer admits the validity of the assessment
and his capacity to pay the same. (Sec. 2 of Revenue Regulations No. 302002).
III
(1)

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
territorialjurisdiction 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:
1.

My advice would be that the city's plan to enact an ordinance that

will impose such special levy on idle lands is not legally allowed, unless these
lands are specially benefited by a public works projects or improvements funded
by the city government. (Sec. 240, Local Government Code). I will likewise
advise them that before the city council could enact an ordinance imposing a
special levy, it shall conduct a public hearing thereon; notify in writing the
owners of the real property to be affected or the persons having legal interest
therein as to the date and place thereof and afford the latter the opportunity to
express their positions or objections relative to the proposed ordinance. (Sec.
242, Local Government Code).
ANOTHER SUGGESTED ANSWER:

84

I would advise the lot owners that the imposition is valid because 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 Gov't. 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 individual owners, who shall be liable for the
additional tax. (last par., Sec. 237, ibid.)
Finally, I would advise them to construct or place improvements on their
idle lands by making valuable additions to the property or ameliorations in the
lands conditions so the lands would not be considered as idle. (Sec. 199(m),
ibid.) In this manner their properties would not be subject to the ad valorem tax
on idle lands.
Note:
The special levy referred to in the problem might be interpreted by the examinee
in two ways: (l)An additional Ad valorem taxon idle lands (Sec. 236, LGC) or: (2)
Special levy by Local Government Units (Sec. 240, LGC). This is so because both
provisions fall under Chapter V of the bocal Government Code dealing with Real
Property Taxation. The caption or heading used in Chapter V upon which both
impositions fall is "Special Levies on Real Propertu. Hence, it is requested that any of
foregoing suggested answers should be given full credit.
(2)

a)

State and explain the basis of dutiable value of an imported article

subject to an ad valorem tax under the Tariff and Customs Code.


b)

Distinguish countervailing duty from dumping duty. (5%)

SUGGESTED ANSWER:
2.

a.) The basis of dutiable value of an imported article subject to an ad

valorem tax under the Tariff and Customs Code is its transaction value. (Sec.
201 (A), Tariff and Customs Code, as amended by R.A. No. 9135). If such value
could not be determined, then the following values are to be utilized in their
sequence: Transaction value of identical goods (Secs. 201 (B), Ibid; Sec. II. C.l,
85

C.A.O. No. 4-2004); Transaction value of similar goods (Sec. 201 (C), Ibid.; Sec. II,
D. 1, C.A.O. No. 4-2004); Deductive .value (Sec. II, E. 1, C.A.O. No. 4-2004);
Computed value (Sec. n, F.l, C.A.O. No. 1-20040) and Fallback value (Sec. 201 (F),
Ibid.)
ANOTHER SUGGESTED ANSWER:
The basis of dutiable value of an imported article subject to an ad valorem
tax under the Tariff and Customs Code is its transaction value which shall be the
price actually paid or payable for the goods when sold for export to the
Philippines, adjusted by adding certain cost elements to the extent that they are
incurred by the buyer but are not included in the price actually paid or payable
for the imported goods (Sec. 201(A), Tariff and Customs Code, as amended by
R.A. No. 9135) 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) ibid; Sec. n, C. 1, C.A.O. No. 4-2004); Transaction value of similar goods
(Sec. 201 (C), Ibid,; Sec. n, D.l, C.A.O. No. 4-2004); Deductive value (Sec. 11, E.l,
C.A.O. No. 4-2004); Computed value (Sec. II, F.l, C.A.O. No. 1-20040) and
Fallback value (Sec. 201 (F) ibid.)
SUGGESTED ANSWER:
2.

b.) Countervailing duty is a duty imposed in an amount 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 considerably retard the establishment of such industry. (Section 302, Tariff
and Customs Code). On the other hand. Dumping Duty 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. (Section 301, Tariff and Customs Code).
(3.) Jacob, after serving a 5-year tour of duty as military attache in Jakarta,
returned to the Philippines bringing with him his personal effects including a personal
computer and a car. Would Jacob be liable for taxes on these items? Discuss fully.
(5%)
86

SUGGESTED ANSWER:
3.

No. Jacob will be exempted provided he complies with the

requirements under Sec. 105 of the Tariff and Customs Code.


ANOTHER SUGGESTED ANSWER:
No. Jacob is entitled to the tax and duty-free importation of his personal
effects, personal computer and car provided the following requirements are met:
a)

The car must have been ordered or purchased prior to the receipt by

the Philippine mission or consulate in Jakarta of Jacob's recall order;


b)

The car is registered in Jacob's name;

c)

The exemption shall apply to the value of the car;

d)

The exemption shall apply to the aggregate value of his personal

and household effects (including the personal computer) not exceeding thirty
percentum (30%) of the total amount received by Jacob as salary and allowances
during his assignment in Jakarta, but not to exceed four (4) years;
(e) Jacob must not have availed of the exemption more oftener than once
every four years, (last par.. Sec. 105, Tariff and Customs Code)
IV
(1) State with reasons the tax treatment of the following in the preparation of annualincome tax returns:
a)

Proceeds of life insurance received by a child as irrevocable beneficiary;

b)

13th month pay and de minimis benefits;

87

c)

Dividends received by a domestic corporation from (i) another domestic

corporation; and (ii) a foreign corporation;


d)

Interest on deposits with (i) BPI Family Bank; and (ii) a local offshore

banking unit of a foreign bank;


e)

Income realized from sale of (i) capital assets; and (ii) ordinary assets.

(5%)
SUGGESTED ANSWER:
a)

The proceeds of life insurance received by a child as irrevocable

beneficiary are not to be reported in the annual income tax returns, because
they are excluded from gross income. This kind of receipt does not fall within
the definition of income - Many wealth which flows into the taxpayer other than
a mere return of capital. Since insurance is compensatory in nature, the receipt
is merely considered as a return of capital. (Section 32(B)(1), NIRC; Fisher v.
Trinidad, 43 Phil. 73 (19221).
b)

13th month pay is excluded from the gross income for income tax

purposes to the extent of P30,000.00. Any excess will be included in the gross
income per income tax return as part of gross compensation income. (Sec. 32(B)
(7)(e), NIRC).
De minimis benefits are non-taxable fringe benefits. They are not to be reported
in the income tax return because they are tax exempt. They are also exempt
from the imposition of the fringe benefits tax. (Sec. 33(C), NIRC).
c)

Dividends received by a domestic corporation from another

domestic corporation are not subject to income tax hence should not be declared
in the income tax return. (Sec. 27 (D)(4), NIRC).
Dividends received by a domestic corporation from a foreign corporation is
subject to income tax and shall form part of the gross income. There is no law
exempting this type of dividend from income tax. (Section 32 (7), NIRC).

88

d)

Interest on deposit with BPI Family Bank is a passive income

subject to a final withholding tax rate of 20%; the interest on deposit with a
local offshore banking unit of a foreign bank is a passive income subject to a
final withholding tax rate of 7.5%. (Sec. 24(B)(1), NIRC). Both interest incomes
are not to be declared as part of gross income in the income tax return.
e)

(i) Generally, income realized from the sale of capital assets are not

to be reported in the income tax return as they are already subject to final taxes
(capital gains tax on real property and shares of stocks). What are to be reported
in the annual income tax return are the capital gains derived from the
disposition of capital assets other than real property or shares of stocks in
domestic corporations which are not subject to final taxes.
(ii) Income realized from the sale of ordinary assets is taxable and the said
income shall be declared in the annual income tax return. The income
constitutes either income derived from the conduct of trade or business or a
gain derived from dealings in property. (Sec. 32 A(2) and (3), NIRC).
(2.)

a)

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.
b)

Does a withholding agent have the right to file an application for

tax refund? Explain. (5%)


SUGGESTED ANSWER:
2.

a.) The conditions are:


(1)

a written claim for refund is filed by the taxpayer with the

Commissioner of Internal Revenue. (Sec. 204, NIRC);


(2)

the

claim

for

refund

must

be

categorical

demand

for

reimbursement. [Bermejo v. Collector of Internal Revenue, 87 Phil. 96


(1950)];

89

(3)

the claim for refund or tax credit must be filed with the

Commissioner, or the suit or proceeding therefore must be commenced in


court within 2 years from date of payment of the tax or penalty regardless
of any supervening cause (Sec. 229, NIRC).
SUGGESTED ANSWER:
2.

b.) Yes. A withholding agent should be allowed to claim for tax refund,

because under the law said agent is the one who is held liable for any violation of
the withholding tax law should such violation occur [Commissioner of Internal
Revenue v. Wander Philippines Inc., 160 SCRA 570, (1988)1. Furthermore, since
the withholding agent is made personally liable to deduct and withhold any tax
under Section 53(c) of the Tax Code, it is imperative that he be considered the
taxpayer for all legal intents and purposes. Thus, by any reasonable standard,
such person should be regarded as a party in interest to bring suit for refund of
taxes [Commissioner of Internal Revenue v. Procter and Gamble Philippines
Manufacturing Corporation and CTA, 204 SCRA 377, (1991)1.
V
A taxpayer received a tax deficiency assessment of P 1.2 Million from the BIR
demanding payment within 10 days, otherwise, it would collect through summary
remedies. The taxpayer requested for .a reconsideration stating the grounds therefor.
Instead of resolving the request for reconsideration, the BIR sent a Final Notice Before
Seizure to the taxpayer.
May this action of the Commissioner of Internal Revenue be deemed a denial of
the request for reconsideration of the taxpayer to entitle him to appeal to the Court of
Tax Appeals? Decide with reasons. (5%)

SUGGESTED ANSWER:
Yes. The action of the Commissioner of Internal Revenue is deemed a
denial of the request for reconsideration of the taxpayer, thus entitling him to
appeal to the CTA. The Notice was the only response received by the taxpayer
90

and its content and tenor supports the theory that it was the BIRs final act
regarding the request for reconsideration. The very title of the notice indicated
that it was a Final Notice Before Seizure" which means that the taxpayers
properties will be subjected to seizure to enforce the deficiency assessment.
Thus, in one decided case, the Supreme Court ruled that the Final Notice Before
Seizure is a final decision of the Commissioner on the disputed assessment [CIR
v. Isabela Cultural Corp., 361 SCRA 71 (2001)].
ANOTHER SUGGESTED ANSWER:
No, the Final Notice Before Seizure does not constitute a denial of the
request for reconsideration. The Commissioner is mandated to come out with a
decision clearly stating the facts and the law upon which it is based and that the
same

constitutes

his

final

decision.

(Revenue

Regulations

No.

12-99,

Implementing Sec. 228, NIRC). It cannot merely be implied from the issuance of
a Warrant of Distraint and Levy. [CIR v. Union Shipping Corp., 185 SCRA 547,
(1990)]. Since the final notice before seizure is issued ahead of a Warrant of
Distraint and Levy, with more reason that this earlier action cannot be
considered as a denial of the protest.
VI
Danilo, who is engaged in the trading business, entrusted to his accountant the
preparation of his income tax return and the payment of the tax due. The accountant
filed a falsified tax return by underdeclaring the sales and overstating the expense
deductions by Danilo.
Is Danilo liable for the deficiency tax and the penalties thereon? What is the
liability, if any, of the accountant? Discuss. (5%)
SUGGESTED ANSWER:
Yes, Danilo is liable for the deficiency tax as well as for the deficiency
interest. However, he is not liable to the fraud penalty because the accountant
acted beyond the limits of his authority. A tax return which does not correctly

91

reflect taxable income may only be false but not necessarily fraudulent where it
appears that the return was not prepared by the taxpayer himself but by his
accountant. Accordingly, the 50% surcharge for fraud could not be imposed.
[Aznar v. CTA, 58 SCRA 719, (1974)].
On the other hand, the accountant may be held criminally liable for
violation of the Tax Code when he falsified the tax return by underdeclaring the
sale and overstating the expense deductions. (Sec. 257, NIRC). If Danny's
accountant is a Certified Public Accountant, his certificate as CPA shall
automatically be revoked or cancelled upon conviction.
VII
An international airline with no landing rights in the Philippines sold tickets in
the Philippines for air transportation. Is income derived from such sales of tickets
considered taxable income of the said international air carrier from Philippine sources
under the Tax Code? Explain. (5%)
SUGGESTED ANSWER:
No. While the tickets are sold here by the international airline, this is for
carriage of persons, excess baggage, cargo and mail not originating from the
Philippines because the airline has no landing rights in the Philippines. The
income from the sale of tickets is actually the gross revenue derived from the
carriage of persons, excess baggage, cargo and mail and these revenues are
considered as income from Philippine sources only if the flight originates from
the Philippines in a continuous and uninterrupted flight, irrespective of the
place of payment of the ticket or passage document. (Sec. 28(A)(3)(a), NIRC).
Accordingly, the income mentioned is not derived from Philippine sources.
VIII
JR was a passenger of an airline that crashed. He survived the accident but
sustained serious physical injuries which required hospitalization for 3 months.
Following negotiations with the airline and its insurer, an agreement was reached
under the terms of which JR was paid the following amounts: P500, 000.00 for his
92

hospitalization: P250, 000.00 as moral damages: P300, 000.00 for loss of income
during the period of his treatment and recuperation. In addition, JR received from his
employer the amount of P200,000.00 representing the cash equivalent of his earned
vacation and sick leaves.
Which, if any, of the amounts he received are subject to income tax? Explain. (5%)
SUGGESTED ANSWER:
The amount of P200,000.00 that JR received from his employer is subject
to income tax except the money equivalent of ten (10) days unutilized vacation
leave credits which is not taxable. Amounts of vacation allowances or sick leave
credits which are paid to an employee constitutes compensation (Sec. 2.78(A)(7),
RR No. 2-98, as amended by RR No. 10-2000).
The amounts that JR received from the airline are excluded from gross
income and not subject to income tax because they are compensation for
personal injuries suffered from an accident as well as damages received as a
result of an agreement (negotiation) on account of such injuries. (Sec. 32(B)(4),
NIRC).
IX
Company A decides to close its operations due to continuing losses and to
terminate the services of its employees. Under the Labor Code, employees who are
separated from service for such cause are entitled to a minimum of one-half month
pay for every year of service. Company A paid the equivalent of one month pay for
every year of service and the cash equivalent of unused vacation and sick leaves as
separation benefits.
Are such benefits taxable and subject to withholding tax under the Tax Code?
Decide with reasons. (5%)
SUGGESTED ANSWER:

93

The separation benefits paid by Company A to its employees are excluded


from gross income being in the nature of benefits given to employees whose
services were terminated due to causes beyond their control. (Sec. 32(B)(6)(b),
NIRC). The entire benefits, thus, are not taxable and not subject to withholding
tax under the Tax Code.
X
The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province.
The southern side and middle part are occupied by the Church and a convent, the
eastern side by a school run by the Church itself, the southeastern side by some
commercial establishments, while the rest of the property, in particular the
northwestern side, is idle or unoccupied.
May the Church claim tax exemption on the entire land? Decide with reasons.
(5%)
SUGGESTED ANSWER:
No. The portions of the land occupied and used by the church, convent
and school run by the church are exempt from real property taxes while the
portion of the land occupied by commercial establishments and the portion,
which is idle, are subject to real property taxes. The usage of the property and
not the ownership" is the determining factor whether or not the property is
taxable. [Lung Center of the Philippines v. Q.C., 433 SCRA 119 (2004)].
XI
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:

94

Yes. The sale is subject to tax. Section 107 (B) of the NIRC provides that:
"In the case of tax-free importation of goods into the Philippines by persons,
entities or agencies exempt from tax where such goods are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or entities,
the purchasers, transferees or recipients shall be considered the importer
thereof, who shall be liable for any internal revenue tax on such importation.
Note:
The question seems to be outside the coverage of the bar examination because it
involves an application of the provision of the VAT Law. It is suggested, therefore, that
any answer shall be given full credit.
XII
Ralph Donald, an American citizen, was a top executive of a U.S. company in
the Philippines until he retired in 1999. He came to like the Philippines so much that
following his retirement, he decided to spend the rest of his life in the country. He
applied for and was granted a permanent resident status the following year. In the
spring of 2004, while vacationing in Orlando, Florida, USA, he suffered a heart attack
and died. At the time of his death, he left the following properties: (a) bank deposits
with Citibank Makati and Citibank Orlando. Florida: (b) a resthouse in Orlando,
Florida;
(c)

a condominium unit in Makati: (d) shares of stock in the Philippine

subsidiary of the U.S. Company where he worked: (e) shares of stock in San Miguel
Corp. and PLDT; (f) shares of stock in Disney World in Florida: (g) U.S. treasury bonds;
and (g) proceeds from a life insurance policy issued by a U.S. corporation.
Which of the foregoing assets shall be included in the taxable gross estate in the
Philippines? Explain. (5%)
SUGGESTED ANSWER:
Being a resident of the Philippines at the time of his death, the gross
estate of Ralph Donald shall include all his property, real or personal, tangible or
intangible, wherever situated at the time of his death. (Section 85, NIRC). Thus,
the following shall be included in his taxable gross estate in the Philippines: .
95

a)

bank deposits with Citibank Makati and Citibank Orlando, Florida:

b)

a resthouse in Orlando, Florida;

c)

a condominium unit in Makati;

d)

shares of stock in the Philippine subsidiary of the U.S. company

where he worked;
e)

shares in San Miguel Corp. and PLDT;

f)

shares of stock in Disney World in Florida; and

g)

U.S treasury bonds

The proceeds from a life insurance policy issued by a U.S. corporation is


included as part of the gross estate of Ralph Donald, if the designation of the
beneficiary is revocable or irrespective of the nature of designation, if the
designated beneficiary is either the estate, the executor or administrator. If the
designated beneficiary is other than the estate, executor or administrator and
the designation is irrevocable, the proceeds shall not form part of his gross
estate. (Section 85 (E), NIRC).
XIII
Josel agreed to sell his condominium unit to Jess for P2. 5 Million. At the time
of the sale, the property had a zonal value of P2.0 Million. Upon the advice of a tax
consultant, the parties agreed to execute two deeds of sale, one indicating the zonal
value of P2.0 Million as the selling price and the other showing the true selling price of
P2.5 Million. The tax consultant filed the capital gains tax return using the deed of
sale showing the zonal value of' P2.0 Million as the selling price.
Discuss the tax implications and consequences of the action taken by the
parties. (5%)

96

SUGGESTED ANSWER:
The capital gains tax due on the sale shall be based on the actual selling
price of P2.5 million which is higher than the zonal value of the property.
(Section 24(D)(1), NIRC). The documentary stamp tax on the conveyance of real
property shall likewise be based on the higher value. (Sec. 196, NIRC).
Accordingly, a deficiency capital gains tax and documentary stamp tax are due
from Josel plus the 50% surcharge imposable on a fraudulent return.
Both Josel and his tax consultant, are criminally liable for tax evasion.
Here, it is clear that the three requisite factors to constitute tax evasion are
present, viz: (1) the end to be achieved which is the payment of less than that
known by them to be legally due; (2) an accompanying state of mind which is
evil, in bad faith, willfull or deliberate and not merely accidental; and (3) a
course of action which is unlawful. [CIR v. Estate of Benigno P. Toda, Jr., 438
SCRA 290 (2004)].
XIV
(1)

Mr. Fermin, a resident of Quezon City, is a Certified Public Accountant-

Lawyer engaged in the Practice of his two professions. He has his main office in Makati
City and maintains a branch office in Pasig City. Mr. Fermin pays his professional tax
as a CPA in Makati City and his professional tax as a lawyer in Pasig City.
a)

May Makati City, where he has his main office, require him to pay his

professional tax as a lawyer? Explain.


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. (5%)
SUGGESTED ANSWER:
a.

No. Mr. Fermin is given the option to pay either in the city where

he practices his profession or where he maintains his principal office in case he


practices his profession in several places. The professional tax paid as a lawyer
97

in Pasig City, a place where he practices his profession, will entitle him to
practice his profession in any part of the Philippines without being subjected to
any other national or local tax, license, or fee for the practice of such profession.
(Sec. 139 in relation to 151, Local Government Code).
b.

No. The professional tax shall be paid only once for every taxable

year and the payment shall be made either in the city where he practices his
profession or where he maintains his principal office. The city of residence
cannot require him to pay his professional taxes. (Sec. 139 in relation to Sec.
151, Local Government Code).
(2)

In 1995, the BIR filed before the Department of Justice (DOJ) a criminal

complaint against a corporation and its officers for alleged evasion of taxes. The
complaint was supported by a sworn statement of the BIR examiners showing the
computation of the tax liabilities of the erring taxpayer. The corporation filed a motion
to dismiss the criminal complaint on the ground that there has been, as yet, no
assessment of its tax liability; hence, the criminal complaint was premature. The DOJ
denied the motion on the ground that an assessment of the tax deficiency of the
corporation is not a precondition to the filing of a criminal complaint and that in any
event, the joint affidavit of the BIR examiners may be considered as an assessment of
the tax liability of the corporation.
Is the ruling of the DOJ correct? Explain. (5%)
SUGGESTED ANSWER:
(2)

Yes. The ruling of the DOJ in denying the motion is correct. The

issuance of the deficiency assessment notice prior to prosecution is not


necessary because the facts of the case show that the crime of evasion is
complete since the violator has knowingly and willfully filed a fraudulent return
with intent to evade/defeat a part or all of the tax. [Ungdb v. Cusi, Jr., 97 SCRA
877 (1980)]. What is involved here is not the collection of taxes but a criminal
prosecution for violation of the National Internal Revenue Code.
However, the contention that the joint affidavit of the BIR examiners
showing the computation of tax liabilities maybe considered an assessment is
98

erroneous. It is not an assessment which may entitle the taxpayer to protest.


[CIR v. Pascor Realty 81 Development Corp., 309 SCRA402 (1999)]. An
assessment is a formal notice to the taxpayer stating that the amount thereon is
due as a tax and containing a demand for the payment thereof. [Alhambra Cigar
& Cigarette Mfg. Co. v. Collector, 105 Phil. 1337 (1959)]
2004 BAR EXAMINATION
I
Taxes are assessed for the purpose of generating revenue to be used for public
needs. Taxation itself is the power by which the State raises revenue to defray the
expenses of government. A jurist said that a tax is what we pay for civilization.
A.

In our jurisdictions, which of the following statements may be erroneous:


1.

Taxes are pecuniary in nature.

2.

Taxes are enforced charges and contributions.

3.

Taxes are imposed on persons and property within the territorial

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.
(NPC v. Albay, 186 SCRA 198 (1990D.
B. Which of the following propositions may now be untenable:

99

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 ofTax 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:
B.

2. The court should construe a law granting a municipal corporation

the power to tax most strictly.


This proposition is now untenable. The basic rationale for the grant of tax
power to local government units is to safeguard their viability and selfsufficiency by directly granting them general and broad tax powers (Manila
Electric Company i>. Province of Laguna et. al306 SCRA 750 [1999D.
Considering that inasmuch as the power to tax may be exercised by local
legislative bodies, no longer by valid congressional delegation but by direct
authority conferred by the Constitution, in interpreting statutory provisions on
municipal fiscal powers, doubts will, therefore, have to be resolved in favor of
municipal corporations (City Government of San Pablo, Laguna v. Reyes, 305
SCRA 353 (1999]). This means that the court must adopt a liberal construction
of a law granting a municipal corporation the power to tax.
Note:
Of the examinee chose proposition no. 4 as his answer, it should be given full
credit considering that the present CTA Act (R.A. No. 9282) has made the CTA a
coequal judicial body of the Court of Appeals. The question Which of the following
propositions may now be untenable" may lead the examinee to choose a proposition
which is untenable on the basis of the new law despite the cut-off date adopted by the
Bar Examination Committee. R.A. No. 9282 was passed on March 30, 2004.

100

II
A. RC is a law-abiding citizen who pays his real estate taxes promptly. Due to a
series of typhoons and adverse economic conditions, an ordinance is passed by MM
City granting a 50% discount for payment of unpaid real estate taxes for the preceding
year and the condonation of all penalties on fines resulting from the late payment.
Arguing that the ordinance rewards delinquent taxpayers and discriminates
against prompt ones, RC demands that he be refunded an amount equivalent to onehalf 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:
A.

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)]
B.

A law was passed granting tax exemption to certain industries and

investments for a period of five years. But three years later, the law was
repealed. With the repeal, the exemptions were considered revoked by the BIR,
which assessed the investing companies for unpaid taxes effective on the date of
the repeal of the law.
NPC and KTR companies questioned the assessments on the ground that,
having made their investments in full reliance with the period of exemption granted by
the law, its repeal violated their constitutional right against the impairment of the
obligations and contracts. Is the contention of the companies tenable or not? Reason
briefly. (5%)
SUGGESTED ANSWER:
B.

The contention is not tenable. The exemption granted is in the

nature of a unilateral tax exemption. Since the exemption given is spontaneous


101

on the part of the legislature and no service or duty or other remunerative


conditions have been imposed on the taxpayers receiving the exemption, it may
be revoked at will by the legislature (Christ Church v. Philadelphia24 How. 300
[18601% What constitutes an impairment of the obligation of contracts is the
revocation of an exemption which is founded on a valuable consideration
because it takes the form and essence of a contract (Casanovas v. Hord, 8 PhiL
125 [1907]; Manila Railroad Company v. Insular Collector of Customs, 12 PhiL
146 [1915)].
III
A.

XYZColleges is a non-stock, non-profit educational institution run by the

Archdiocese of BP City. It collected and received the following:


(a)

Tuition fees

(b)

Dormitory fees

(c)

Rentals from canteen concessionaires

(d)

Interest from money-market

(e)

Donation of a lot and building by school alumni

SUGGESTED ANSWER:
A.

All of the Income derived by the non-stock, nonprofit educational

institution will be exempt from taxation provided they are used actually, directly
and exclusively for educational purposes. The Constitution provides that all
revenues and assets of non-stock, non-profit educational institution which are
actually, directly and exclusively used for educational purposes are exempt from
taxation (Section 4 par. 3, Article XIV, 1987 Constitution).
The donation is, likewise, exempt from the donor's tax if actually, directly
and exclusively used for educational purposes, provided not more than 30% of
the donation is used by the donee for administration purposes. The donee, being
a non-stock, non-profit educational institution, is a qualified entity to receive an

102

exempt donation subject to conditions prescribed by law (Section 4 par. 4, Art.


XIV, 1987 Costitution, in relation to Section 101(A)(3), NIRC).
Accordingly, none of the cited income and donation collected and received
by the non-stock, non-profit educational institution would not be exempt from
taxation.
ALTERNATIVE ANSWER:
A.

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, 1987)
(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 (1998)}.
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 XIV,
1987 Constitution).
The donation to a non-stock, non-profit educational institution will be
exempt from the donors 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. XIV, 1987 Constitutionf
in relation to Section 101(AX3), MRC).
B.

Suppose that XYZ Colleges is a proprietary educational institution owned

by the Archbishops family, rather than the Archdiocese, which of those abovecited
income and donation would be exempt from taxation? Explain briefly. (5%)
SUGGESTED ANSWER:
103

B.

If XYZ Colleges is a proprietary educational institution, all of its

income from school related and nonschool related activities will be subject to
the income tax based on its aggregate net income derived from both activities
(Section 27(B), NmC). Accordingly, all of the income enumerated in the problem
will be taxable.
The donation of lot and building will likewise be subject to the donors tax
because a donation to an educational institution is exempt only if the school is
incorporated as a non-stock entity paying no dividends.
Since the donee is a proprietary educational institution, the donation is
taxable (Section 101(A)(3), NIRC),
IV
A. 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:
A. 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 salaiy 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:
A.

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 Vm of the Constitution on the non-diminution of the salaries of members
104

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. Hence, the deduction of
withholding taxes, being a manner of collecting the income tax on their salary, is
not a diminution contemplated by the fundamental law. (Nitqfan et, al. v, CIR,
152 SCRA 284 [1987)}
B.

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:
B.

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 (Compania General de Tabacos de Filipinos v. City of Manila, 8
SCRA 367 367 [1963]).
V
A.

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

105

Printers for back taxes corresponding to the years before the new ruling? Reason
briefly. (5%)
SUGGESTED ANSWER:
A.

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 of the principle
of non-retroactivity of rulings and doing so would result in grave injustice to the
taxpayer who relied on the first ruling in good faith (Section 246, NIRC; CIR v.
Burroughs, Inc,, 142 SCRA 32411986]),
B.

PQR Corp. claimed as a deduction in its tax returns the amount of

PI,000,000 as bad debts. The corporation was assessed t>y the Commissioner of
Internal Revenue for deficiency taxes on the ground that the debts cannot be
considered as worthless," hence they do not qualify as bad debts. The company asks
for your advice on What factors will held In determining whether or not the debts are
bad debts?" Answer and explain briefly. (5%)
SUGGESTED ANSWER:
B.

In order that debts be considered as bad debts because they have

become worthless, the taxpayer should establish that during the year for which
the deduction is sought, a situation developed as a result of which it became
evident in the exercise of sound, objective business judgment that there
remained no practical, but only vaguely theoretical, prospect that the debt
would ever be paid (Collector of Internal Revenue v. Goodrich International
Rubber 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

106

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 11996]; Revenue Regs. No. 5-99).


VI
As an incentive for investors, a law was passed giving newly established
companies in certain economic zone exemption from all taxes, duties, fees, imposts
and other charges for a period of three years. ABC Corp. was organized and was
granted such incentive. In the course of business, ABC Corp. purchased mechanical
equipment from XYZ Inc. Normally, the sale is subject to a sales tax.
A.

XYZ Inc. claims, however, that since it sold the equipment to ABC Corp.

which is tax exempt, XYZ should not be liable to pay the sales tax. Is this claim
tenable? (5%)
SUGGESTED ANSWER:
A.

No. Exemption from taxes is personal in nature and covers only

taxes for which the taxpayer-grantee is directly liable. The sales tax is a tax on
the seller who is not exempt from taxes. Since XYZ Inc. is directly liable for the
sales tax and no tax exemption privilege is ever given to him, therefore, its claim
that the sale is tax exempt is not tenable. A tax exemption is construed in

107

strictissimi Juris and it cannot be permitted to exist upon vague implications


(Asiatic Petroleum Co., Ltd. V. Llanes, 49 Phil 466 [1926]).
B.

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.
VII
A.

For

failure

to

comply

with

certain

corporate

requirements,

the

stockholders of ABC Corp. were notified by the Securities and Exchange Commission
that the corporation would be subject to involuntary dissolution. The stockholders did
not do anything to comply with the requirements, and the corporation was dissolved.
Can the stockholders be held personally liable for the unpaid taxes of the dissolved
corporation? Explain briefly. (5%)
SUGGESTED ANSWER:
A.

No. As a general rule, stockholders cannot be held personally liable

for the unpaid taxes of a dissolved corporation. The rule prevailing under our
jurisdiction is that a corporation is vested bylaw with a personality that is
separate and distinct from those of the persons composing it (Sunio v. NLRC,
127 SCRA 390 [1984]).
Note:
Additional point should be given to the examinee if he answers in the following
that:

108

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. CIR, 4 SCRA 986 [1962D. 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.
B. After the tax assessment had become final and unappealable, the
Commissioner of Internal Revenue initiated the fling of a civil action to collect the tax
due from NX. After several years, a decision was rendered by the court ordering NX to
pay the tax due plus penalties and surcharges. The judgment became final and
executory, but attempts to execute the judgment award were futile.
Subsequently, NX offered the Commissioner a compromise settlement of 50% of
the judgment award, representing that this amount is all he could really afford. Does
the Commissioner have the power to accept the compromise offer? Is it legal and
ethical? Explain briefly. (5%)
SUGGESTED ANSWER:
B.

Yes. The Commissioner has the power to accept the offer of

compromise if the financial position of the taxpayer clearly demonstrates a clear


inability to pay the tax (Section 204, NIRC).
As represented by NX in his offer, only 50% of the judgment award is all he
could really afford. This is an offer for compromise based on financial incapacity
which the Commissioner shall not accept unless accompanied by a waiver of the
secrecy of bank deposits (Section 6[F], NIRC). The waiver will enable the
Commissioner to ascertain the financial position of the taxpayer, although the
inquiry need not be limited only to the bank deposits of the taxpayer but also as
to his financial position as reflected in his financial statements or other records
upon which his property holdings can be ascertained.
If indeed, the financial position of NX as determined by the Commissioner
demonstrates a clear inability to pay the tax, the acceptance of the offer is legal
and ethical because the ground upon which the compromise was anchored is
within the 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.
109

VIII
A.

RAM got married to LISA last January 2003. On November 30, 2003,

LISA gave birth to twins. Unfortunately, however, USA 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 (TTR) 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:
A.

RAM should indicate u(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 being married) as if
the spouse died at the close of such year (Section 35[C], NIRC).
B.

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 ADD. Believing
that its business outlook, goodwill and opportunities improved with OXY in the
government, ADD proposed to obtain a policy of insurance on his life. On ethical
grounds, OXY objected to the insurance purchase but ADD purchased the policy
anyway. Its annual premium amounted to P100,000. Is said premium deductible by
ADD Computers, Inc.? Reason. (5%)
SUGGESTED ANSWER:
B.

No. The premium is not deductible because it is not an ordinary

business expense. The term "ordinary* is used in the income tax law in its
common significance and it has the connotation of being normal, usual or
customary (Deputy v. Du Pont, 308 US 488 [1940D. Paying premiums for the
insurance of a person not connected to the company is not normal, usual or
customary.
Another reason for its non-deductibility is the fact that it can be
considered as an illegal compensation made to a government employee. This is
110

so because if the insured, his estate or heirs were made as the beneficiary
(because of the requirement of insurable interest), the payment of premium will
constitute bribes which are not allowed as deduction from gross income (Section
34[A][1][c], NIRC).
On the other hand, if the company was made the beneficiary, whether
directly or indirectly, the premium is not allowed as a deduction from gross
income (Section 36[A][4], NIRC).
IX
A.

VCC is the administrator of the estate of his father NGC, in the estate

proceedings pending before the MM Regional Trial Court. Last year, he received from
the Commissioner of Internal Revenue a deficiency tax assessment for the estate in the
amount of PI,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 VCCs contention
correct? (5%)
SUGGESTED ANSWER:
A.

No. VCCs 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]).
B.

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:
111

B.

RR should file a motion for injunction with the Court of Tax Appeals

to stop the administrative collection process. An appeal to the CTA shall not
suspend the enforcement of the tax liability, unless a motion to that effect shall
have been presented in court and granted by it on the basis that such collection
will jeopardize the interest of the taxpayer or the Government (Pirovano v. CIR,
14 SCRA 832 [1965]).
The CTA is empowered to suspend the collection of internal revenue taxes
and customs duties in cases pending appeal only when: (1) in the opinion of the
court the collection by the BIR will jeopardize the interest of the Government
and/or the taxpayer; and (2) the taxpayer is willing to deposit the amount being
collected or to file a surety bond for not more than double the amount of the tax
to be fixed by the court (Section 11, R.A. NO. 1125).
X
A.

On March 12, 2001, REN paid his taxes. Ten months later, he realized

that he had overpaid and so he immediately filed a claim for refund with the
Commissioner of Internal Revenue.
On February 27, 2003, he received the decision of the Commissioner denying
RENs claim for refund. On March 24, 2003, REN filed an appeal with the Court of Tax
Appeals. Was his appeal filed on time or not? Reason. (5%)
SUGGESTED ANSWER:
A.

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 uno 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,
NIRC). 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.

112

B.

A law was passed exempting doctors and lawyers from the operation of

the value added tax. Other professionals complained and filed a suit questioning the
law for being discriminatory and violative of the equal protection clause of the
Constitution since complainants were not given the same exemption. Is the suit
meritorious or not? Reason briefly. (5%)
SUGGESTED ANSWER:
B.

Yes, the suit is meritorious. The VAT is designed for economic

efficiency; hence, should be neutral to those who belong to the same class.
Professionals ARE a class of taxpayers by themselves who, in compliance with
the rule of equality of taxation, must be treated alike for tax purposes.
Exempting lawyers and doctors from a burden to which other professionals are
subjected will make the law discriminatory and violative of the equal protection
clause of the Constitution. While singling out a class for taxation purposes will
not infringe upon this constitutional limitation (Shell v. Vaho, 94 Phil. 389
[1954}), 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[1968D* 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
113

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.
2003 BAR EXAMINATION
I
(4%)
Why is the power to tax considered inherent in a sovereign State?
SUGGESTED ANSWER:
It is considered inherent in a sovereign 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).
II
(4%)
May Congress, under the 1987 Constitution, abolish the power to tax of local
governments?
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 governments exercise of the power to tax (Sec. 5, Art X,
1987 Constitution).

114

III
(4%)
A fringe benefit is defined as being any good, service or other benefit furnished
or granted in cash or in kind by an employer to an individual employee. Would it be
the employer or the employee who is legally required to pay an income tax on it?
Explain.
SUGGESTED ANSWER:
It is the employer who is legally required to pay an income tax on the
fringe benefit. The fringe benefit tax is imposed as a final withholding tax
placing the legal obligation to remit the tax on the employer, such that, if the
tax is not paid the legal 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.
IV
(8%)
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 Xs life
insurance policy.
(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 ANSWER:
115

(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 of the gross estate of the decedent to the extent of the amount
receivable by the beneficiary designated in the policy of the insurance except
when it is expressly stipulated that the designation of the beneficiary is
irrevocable. As stated in the problem, only the designation of Y is irrevocable
while the insured/decedent reserved the right to substitute Z as beneficiary for
another person. Accordingly, the proceeds received by Y shall be excluded while
the proceeds received by Z shall be included in the gross estate of X. (Section
85(E), 1997 Tax Code)
V
(8%)
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.
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
116

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 from his gross income. Obviously, these damages are
considered by law as mere return of capital. (Section 32(B)(4), 1997 Tax Code)
VI
(4%)
(a)

Distinguish a capital asset" from an ordinary asset".

(b)

What is the rationale for the rule prohibiting the deduction of capital losses

from ordinary gains? Explain.


SUGGESTED ANSWER:
(a)

The term capital asset regards all properties not specifically

excluded in the statutory definition of capital assets, the profits or loss on the
sale or the exchange of which are treated as capital gains or capital losses.
Conversely, all those properties specifically excluded are considered as ordinary
assets and the profits or losses realized must have to be treated as ordinary
gains or ordinary losses. Accordingly, capital assets includes property held by
the taxpayer whether or not connected with his trade or business, but the term
does not include any of the following, which are consequently considered
ordinary assets:
(1)

stock in trade of the taxpayer or other property of a kind which

would properly be included in the inventory of the taxpayer if on hand at the


close of the taxable year;
(2)

property held by the taxpayer primarily for sale to customers in the

ordinary course of trade or business;


(3)

property used in the trade or business of a character which is

subject to the allowance for depreciation provided in Section 34 (F) of the Tax
Code;or
(4)

real property used in trade or business of the taxpayer.

117

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.
(b)

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 expense must be business connected, which is not
the case insofar as capital losses are concerned. This is also the reason why all
nonbusiness connected expenses like personal, living and family expenses, are
not allowed as deduction from gross income (Section 36(A)(1) of the 1997 Tax
Code).
ALTERNATIVE ANSWER:
The prohibition of deduction of capital losses from ordinary gains is
designed to forestall the shifting of deductions from an area subject to lower
taxes to an area subject to higher taxes, thereby unnecessarily resulting in
leakage of tax revenues. Capital gains are generally taxed at a lower rate to
prevent, among others, the bunching of income in one taxable year which is a
liberality in the law begotten from motives of public policy (Rule on Holding
Period). It stands to reason therefore, that if the transaction results in loss, the
same should be allowed only from and to the extent of capital gains and not to
be deducted from ordinary gains which are subject to a higher rate of income
tax. (Chirelstein, Federal Income Taxation, 1977 Ed.)
VII
(8%)
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.
118

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 shareholders, the stock dividends will be subject to
income tax. (Section 24(B)(2); Section 25(A)&(B); Section 28(B)(5)(b), 1997 Tax
Code)
VIII
(4%)
(a)

What is meant by the tax benefit rule?

(b)

Give an illustration of the application of 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 extent of the tax benefit enjoyed by the taxpayer when the bad debts were
written-off and claimed as a deduction from income. It also applies to taxes
previously deducted from gross income but which were subsequently refunded or
credited. The taxpayer is also required to report as taxable income the
subsequent tax refund or tax credit granted to the extent of the tax benefit the
taxpayer enjoyed when such taxes were previously claimed as deduction from
income.
(b)

X Company has a business connected receivable amounting to

P100,000.00 from Y who was declared bankrupt by a competent court. Despite


earnest efforts to collect the same, Y was not able to pay, prompting X Company
to writeoff the entire liability. During the year of write-off, the entire amount
was claimed as a deduction for income tax purposes reducing the taxable net
income of X Company to only PI, 000,000.00. Three years later, Y voluntarily
119

paid his obligation previously written-off to X Company. In the year of recovery,


the entire amount constitutes part of gross income of X Company because it was
able to get full tax benefit three years earlier.
IX
X dies in year 2000 leaving a bank deposit of P2, 000,000.00 under joint
account with his associates in a law office. Learning of Xs death from the newspapers,
the Commissioner of Internal Revenue wrote to every bank in the country asking them
to disclose to him the amount of deposits that might be outstanding in his name or
jointly with others at the date of his death. May the bank holding the deposit refuse to
comply on the ground of the Secrecy of Bank Deposit Law? Explain.
SUGGESTED ANSWER:
No. The Commissioner of Internal Revenue has the authority to inquire
into bank deposit accounts of a decedent to determine his gross estate
notwithstanding the provisions of the Bank Secrecy Law. Hence, the banks
holding the deposits in question may not refuse to disclose the amount of
deposits on the ground of secrecy of bank deposits. (Section 6(F) of the 1997 Tax
Code). The fact that the deposit is a joint account will not preclude the
Commissioner from inquiring thereon because the law mandates that if a bank
has knowledge of the death-of a person, who maintained a bank deposit account
alone, or jointly with another, it shall not allow any withdrawal from the said
deposit account, unless the Commissioner has certified that the taxes imposed
thereon have been paid. (Section 97 of the 1997 Tax Code). Hence, to be able to
give the required certification, the inclusion of the deposit is imperative, which
may be made possible only through the inquiry made by the Commissioner.
X
(8%)
X is a friend of Y, the chairman of Political Party Z, who 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 donors 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?

120

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).
XI
(8%)
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.
SUGGESTED ANSWER:
No. The term returning residents refers to nationals who have stayed in
a foreign country fora 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
residents, treating their personal effects, not in commercial quantities, as conditionally
free importation.
XII
8%
121

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.
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 standard used in the classification by the City of Makati.
Another issue is the fact that the tax is imposed on the driver of the
vehicle and not on the registered owner of the same. The tax does not only
violate the requirement of uniformity, but the same is also unjust because it
places the burden on someone who has no control over the route of the vehicle.
The ordinance is, therefore, invalid for violating the rule of uniformity and
equality as well as for being unjust.
XIII
(8%)
In order to raise revenue for the repair and maintenance of the newly
constructed City Hall of Makati, the City Mayor ordered the collection of P1.00, called
elevator tax", every time a person rides any of the high-tech elevators in the city hall
during the hours of 8:00 a.m. to 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the elevator
tax" a valid imposition? Explain.
SUGGESTED ANSWER:
No. The imposition of a tax, fee or charge or the generation of revenue
under the Local Government Code, shall be exercised by the Sanggunian of the
122

local government unit concerned through an appropriate ordinance (Section 132


of the Local Government Code). The city mayor alone could not order the
collection of the tax; as such, the elevator tax is an invalid imposition.
XIV
(8%)
X, a taxpayer who believes that an ordinance passed by the City Council of
Pasay is unconstitutional for being discriminatory against him, want to know from
you, his tax lawyer, whether or not he can file an appeal. In the affirmative, he asks
you where such appeal should be made: the Secretary of Finance, or the Secretary of
Justice, or the Court of Tax Appeals, or the regular courts. What would your advice be
to your client, X?
SUGGESTED ANSWER:
The appeal should be made with the Secretary of Justice. Any question on
the constitutionality or legality of a tax ordinance may be raised on appeal with
the Secretary of Justice within 30 days from the effectivity thereof. (Sec. 187,
LGC; Hagonoy Market Vendor Association v. Municipality of Hagonoy, 376 SCRA
376 [ 2002]).
XV
(8%)
Under Article 415 of the Civil Code, in order for machinery and equipment to be
considered real property, the pieces must be placed by the owner of the land and, in
addition, must tend to directly meet the needs of the industry or works carried on by
the owner. Oil companies install underground tanks in the gasoline stations located on
land leased by the oil companies from the owners of the land where the gasoline
stations [are] located. 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.
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
123

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. (Cattex v.
Central Board of Assessment Appeals, 114 SCRA 296 [1982]).
2002 BAR EXAMINATION
I
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%)
B.
If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or
defenses will you raise in behalf of your clients against the action of the BIR in
enforcing collection of the tax by the summary remedies of warrants of distraints and
levy? Explain your answer. (3%)
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 taxes
paid to arrive at his adjusted income during the year. His adjusted income will be

124

subject to the graduated tax rates of 1% to 3%. (Sec. 21(b), Tax Code of 1986[PD
1158], as amended by PD 1994).
Note:

The bar candidates are not expected to be familiar with tax history. Considering

that this is already the fourth year of implementation of the Tax Code of 1997, bar
candidates were taught and prepared to answer questions based on the present law. It
is therefore requested that the examiner be more lenient in checking the answers to
this question. Perhaps, an answer based on the present law be given full credit.]
B.

I will raise the defense of prescription. The right of the BIR to

assess prescribes after three years counted from the last day prescribed by law
for the filing of the income tax returns when the said return is filed on time.
(Section 203, NIRC). The last day for filing the 1997 income tax return is April
15,1998. Since the assessment was issued only on April 20, 2001, the BIRs right
to assess has already prescribed.
II
Mr. Castro inherited from his father, who died on June 10,1994, several pieces
of real property in Metro Manila. The estate tax return was filed and the estate tax due
in the amount of P250,000.00 was paid on December 06, 1994. The Tax Fraud
Division of the BIR investigated the case on the basis of confidential information given
by Mr. Santos on January 06, 1998 that the return filed by Mr. Castro was fraudulent
and that he failed to declare all properties left by his father with intent to evade
payment of the correct tax. As a result, a deficiency estate tax assessment for
P1,250,000.00, inclusive of 50% surcharge for fraud, interest and penalty, was issued
against him on January 10, 2001. Mr. Castro protested the assessment on the ground
of prescription.
A.

Decide Mr. Castros protest. (2%)

B.

What legal requirement/s must Mr. Santos comply with so that he can

claim his reward? Explain. (3%)


SUGGESTED ANSWER:
A.

The protest should be resolved against Mr. Castro. What was filed is

a fraudulent return making the prescriptive period for assessment ten (10) years
125

from discovery of the fraud (Section 222, NIRC). Accordingly, the assessment
was issued within the prescriptive period to make an assessment based on a
fraudulent return.
B.

The legal requirements that must be complied by Mr. Santos to

entitle him to 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)


III
The MKB-Phils. is a BOI-registered domestic corporation licensed by the MKB of
the United Kingdom to distribute, support and use in the Philippines its computer
software systems, including basic and related materials for banks. The MKB-Phils.
provides consultancy and technical services incidental thereto by entering into
licensing agreements with banks. Under such agreements, the MKB-Phils. will not
acquire any proprietary rights in the licensed systems. The MKB-Phils. pays royalty to
the MKB-UK, net of 15% withholding tax prescribed by the RP-UK Tax Treaty.
Is the income of the MKB-Phils. under the licensing agreement with banks
considered royalty subject to 20% final withholding tax? Why? If not, what kind of tax
will its income be subject to? Explain. (5%)
SUGGESTED ANSWER:

126

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
rendered in 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.
IV
TY Corporation filed its final adjusted income tax return for 1993 on April
12,1994 showing a net loss from operations. After investigation, the BIR issued a preassessment notice on March 30, 1996. A final notice and demand letter dated April 15,
1997 was issued, personally delivered to and received by the companys chief
accountant. For willful refusal and failure of TY Corporation to pay the tax, warrants
of distraint and levy on its properties were issued and served upon it. On January 10,
2002, a criminal charge for violation of the Tax Code was instituted in the Regional
Trial Court with the approval of the Commissioner.
The company moved to dismiss the criminal complaint on the ground that an
act for violation of any provision of the Tax Code prescribes after five (5) years and, in
this case, the period commenced to run on March 30,1996 when the pre-assessment
was issued.
How will you resolve the motion? Explain your answer. (5%)
SUGGESTED ANSWER:
The motion to dismiss should not be granted. It is only when the
assessment has become final and unappealable that the 5-year period to file a
criminal action commences to run (Tupaz v. Ulep, 316 SCRA 118 [1999]). The
pre-assessment notice issued on March 30,1996 is not a final assessment which
is enforceable by the BIR. It is the issuance of the final notice and demand letter
dated April 15,1997 and the failure of the taxpayer to protest within 30 days
from receipt thereof that made the assessment final and unappealable. The
earliest date that the assessment has become final is May 16,1997 and since the
criminal charge was instituted on January 10, 2002, the same was timely filed.
127

V
A.

What must a taxpayer do in order to claim a refund of, or tax credit for,

taxes and penalties which he alleges to have been erroneously, illegally or excessively
assessed or collected? (3%)
B.

Can the Commissioner grant a refund or tax credit even without a

written claim for it? (2%)


SUGGESTED ANSWER:
The taxpayer must comply with the following procedures in claiming a
refund of, or tax credit for, taxes and penalties which he alleges to have been
erroneously, illegally or excessively assessed or collected:
1.

He should file a written claim for refund with the Commissioner

within two years after the date of payment of the tax or penalty (Sec. 204, NIRC);
2.
The claim filed must state a categorical demand for reimbursement
(Bermejo v. Collector, 87 Phil. 96 [1950]).
3.

The suit or proceeding for recovery must be commenced in court

within two years from date of payment of the tax or penalty regardless of any
supervening event that will arise after payment (Sec. 229, NIRC).
Note:
If the answer given is only number 1, it is suggested that the same shall be
given full credit considering that this is the only requirement for the Commissioner to
acquire jurisdiction over the claim.
B.

Yes. When the taxpayer files a return 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. (Secs. 76
and 204, NIRC). Moreover, the law provides that the Commissioner may, even
without a written claim therefore, refund or credit any tax where on the face of
128

the return upon which payment was made, such payment appears clearly to have
been erroneously paid. ('Sec. 229, NIRC).
VI
XYZ Foundation is a non-stock, non-profit association duly organized for
religious, charitable and social welfare purposes. Last January 3. 2000 it sold a
portion of its lot used for religious purposes and utilized the entire proceeds for the
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 [l]ncome 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%)
B.

Is the income derived by XYZ Foundation from the sale of a portion of its

lot, rentals from its boarding house and the operation of its canteen and gift shop
subject to tax? Explain. (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. However, if these religious, charitable or social
welfare corporations derive income from their properties or any of their
129

activities conducted for profit, the income tax shall be imposed on said items of
income irrespective of their disposition. (Sec. 30, NIRC; CIR v. YMCA, GR No.
124043, 1998).
B.

Yes. The income derived from the sale of lot and rentals from its

boarding house are considered as income from properties which are subject to
tax. Likewise, the income from the operation of the canteen and gift shop are
income from its activities conducted for profit which are subject to tax. The
income tax attaches irrespective of the disposition of these incomes. (Sec. 30,
NIRC; CIRv. YMCA, GR No. 124043, 1998).
VII
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 underdeclared his taxable sales, receipts or income, or
substantially overstated his deductions, the taxpayers 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,
respectively, and will justify the imposition of the 50% surcharge on the
deficiency tax due from the taxpayer. (Sec. 248, NIRC).
VIII
On December 06, 2001, LVN Corporation donated a piece of vacant lot situated
in Mandafuyong City to an accredited and duty registered non-stock, non-profit
educational institution to be used by the latter in building a sports complex for
students.
A.

May the donor claim in full as deduction from its gross income for the

taxable year 2001 the amount of the donated lot equivalent to its fair market
value/zonal value at the time of the donation? Explain your answer. (2%)
130

B.
in order that donations to non-stock, non-profit educational
institution may be exempt from the donors gift tax, what conditions must be met by
the donee? (3%)
SUGGESTED ANSWER:
A.

No. Donations and/or contributions made to qualified donee

institutions consisting of property other than money shall be based on the


acquisition cost of the property. The donor is not entitled to claim as full
deduction the fairmarket value/zonal value of the lot donated. (Sec. 34(H),
NIRC).
B.

In order that donations to non-stock, non-profit educational

institution may be exempt from the donors gift tax, it is required that not more
than 30% of the said gifts shall be used by the donee-institution for
administration purposes. (Sec. 101(A)(3), NIRC).
IX
A. 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%)
B. 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:
A.

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:

131

1.

Additional levy on real property for the Special Education Fund

(Sec. 235, LGC);


2.
Additional Ad-valorem tax on Idle lands (Sec. 236, LGC); and
3.

Special levy (Sec, 240),

Note:
The question is susceptible to dual interpretation because it is asking for three
other taxes ana not three other real property taxes. Accordingly, an alternative answer
should be considered and given full credit.
ALTERNATIVE ANSWER:
A.

The following taxes, aside from basic real estate tax, may be

imposed by:
1.
Provincial Government
a.
Printers or publishers tax
b.
Franchise Tax
c.
Professional tax
2.

City

Government

may

levy

taxes

which

the

province

or

municipality are authorized to levy {Sec. 151, LGC)


a.
Printers or publishers tax
b.
Franchise tax
c.
Professional tax
3.

Municipalities in the Metro Manila Area - may levy taxes at rates

which shall not exceed by 50% the maximum rates prescribed in the Local
Government Code.
a.
Annual fixed tax on manufacturers, assemblers, repackers,
processors,

brewers,

distillers,

rectifiers

and

compounders

of

liquors, distilled spirits, and wines or manufacture of any article of


commerce of whatever kind or nature;
b.
Annual fixed tax on wholesalers, distributors, or dealers in

Note:

any article of commerce of whatever kind or nature;


c.
Percentage tax on retailers

132

Other taxes may comprise the enumeration because many other taxes are
authorized to be imposed by LGUs.
B.

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 defects on its /
enactment, it would seem that if the taxpayer had presented evidence to support
the allegation that no public hearing was conducted, the Court should have ruled
that the tax ordinance is invalid. (Belen Figuerres v. Court of Appeals, GRNo.
119172, March 25,1999).
X
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;

133

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.
XI
The real property of Mr. and Mrs Angeles, situated in a commercial area in front
of the public market, was declared in their Tax Declaration as residential because it
had been used by them as their family residence from the time of its construction in
1990. However, since January 1997, when the spouses left for the United States to
stay there permanently with their children, the property has been rented to a single
proprietor engaged in the sale of 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 if.

XII

134

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 collection of taxes and customs duties in seizure and protest cases. Without
such automatic review, neither the Commissioner of Customs nor the Secretary
of Finance would know about the decision laid down by the Collector favoring
the taxpayer. The power to decide seizure and protest cases may be abused if no
checks are instituted. Automatic review is necessary because nobody is expected
to appeal the decision of the Collector which is favorable to the taxpayer and
adverse to the Government. This is the reason why whenever the decision of the
Collector is adverse to the Government, the said decision is automatically
elevated to the Commissioner for review; and if such decision is affirmed by the
Commissioner, the same shall be automatically elevated to and be finally
reviewed by the Secretary of Finance (Yaokasin v. Commissioner of Customs, 180
SCRA 591 [1989]).
XIII
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 filed an injunctive suit in
the Regional Trial Court to compel the BIR to hold the collection of the tax in abeyance
until the decision on the protest was rendered.
A. Can the BIR file the civil action for collection, pending decision on the
administrative protest? Explain. (3%)
135

B. As counsel for Valera, what action would you take in order to protect the interest of
your client? Explain your answer. (2%)
SUGGESTED ANSWER:
A.

Yes, because there is no prohibition for this procedure considering

that the filing of a civil action for collection during the pendency of an
administrative protest constitutes the final decision of the Commissioner on the
protest (CIR v. Union Shipping Corp., 85 SCRA 548 [1990]).
B.

I will wait for the filing of the civil action for collection and

consider the same as an appealable decision. I will not file an injunctive suit
because it is not an available remedy. I would then appeal the case to the Court
of Tax Appeals and move for the dismissal of the collection case with the RTC.
Once the appeal to the CTA Is filed on time, the CTA has exclusive jurisdiction
over the case. Hence, the collection case in the RTC should be dismissed (Yabes
v. Flojo, 115 SCRA 278 [1982]).
XIV
The Collector of Customs of the Port of Cebu issued warrants of seizure and
detention against the importation of machineries and equipment by LLD Import and
Export Co. (LLD) for alleged nonpayment of tax and customs duties in violation of
customs laws. LLD was notified of the seizure, but, before it could be heard, the
Collector of Customs issued a notice of sale of the articles. In order to restrain the
Collector from carrying out the order to sell, LLD filed with the Court of Tax Appeals a
petition for review with application for the issuance of a writ of prohibition. It also filed
with the CTA an appeal for refund of overpaid taxes on its other importations of raw
materials which has been pending with the Collector of Customs. The Bureau of
Customs moved to dismiss the case for lack of jurisdiction of the Court of Tax Appeals.
A.

Does the Court of Tax Appeals have jurisdiction over the petition for

review and writ of prohibition? Explain (3%)


B.

Will an appeal to the CTA for tax refund be possible? Explain (2%)

SUGGESTED ANSWER:

136

A.

No, because there is no decision as yet by the Commissioner of

Customs which can be appealed to the CTA. Neither the remedy of prohibition
would lie because the CTA has not acquired any appellate jurisdiction over the
seizure case. The writ of prohibition being merely ancillary to the appellate
jurisdiction, the CTA has no jurisdiction over it until it has acquired jurisdiction
on the petition for review. Since there is no appealable decision, the CTA has no
jurisdiction over the petition for review and writ of prohibition. (Commissioner
of Customs v. Alikpala, 36 SCRA 208 [1970]).
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).
On August 5, 1997, Adamson Co., Inc. (Adamson) filed a request for
reconsideration of the deficiency withholding tax assessment on July 10, 1997,
covering the taxable year 1994. After administrative hearings, the original assessment
of P150,000.00 was reduced to P75,000.00 and a modified assessment was thereafter
issued on August 05, 1999. Despite repeated demands, Adamson failed and refused to
pay the modified assessment. Consequently, the BIR brought an action for collection in
the Regional Trial Court on September 15,2000. Adamson moved to dismiss the action
on the ground that the governments right to collect the tax by judicial action has
prescribed.
Decide the case. (5%)
SUGGESTED ANSWER:
The right of the Government to collect by judicial action has not
prescribed. The filing of the request for reconsideration suspended the running
of the prescriptive period and commenced to run again when a decision on the
protest was made on August 5,1999. It must be noted that in all cases covered by
an assessment, the period to collect shall be five (5) years from the date of the
assessment but this period is suspended by the filing of a request for
137

reconsideration which was acted upon by the Commissioner of internal Revenue


(CIR v. Wyeth Suaco Laboratories, Inc., 202 SCRA 125 [1991]).
XVI
In the investigation of the withholding tax returns of AZ Medina Security
Agency (AZ Medina) for the taxable years 1997 and 1998, a discrepancy between the
taxes withheld from its employees and the amounts actually remitted to the
government was found. 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%)

B.

Will the special civil action for prohibition brought before the CTA under

Sec. 11 of RA No. 1125 prosper? Discuss your answer. (3%)


SUGGESTED ANSWER:
A.

No, the contention of the counsel is untenable. Section 228 of the

Tax Code expressly provides that no preassessment 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.

The special civil action for prohibition will not prosper, because the

CTA has no jurisdiction to entertain the same. The power to issue writ of
injunction provided for under Section 11 of RA 1125 is only ancillary to its
appellate jurisdiction. The CTA is not vested with original jurisdiction to issue
writs of prohibition or injunction independently of and apart from an appealed
case. The remedy is to appeal the decision of the BIR. (Collector v. Yuseco, 3
SCRA 313 [1981]).
138

XVII
Minolta Philippines, Inc. (Minolta) is an EPZA-registered enterprise enjoying
preferential tax treatment under a special law. After investigation of its withholding tax
returns for the taxable year 1997, the BIR issued a deficiency withholding tax
assessment in the amount of P150,000.00. On May 15, 1999, because of financial
difficulty, the deficiency tax remained unpaid, as a result of which the assessment
became final and executory. The BIR also found that, in violation of the provisions of
the National Internal Revenue Code, Minolta did not file its final corporate income tax
return for the taxable year 1998, because it allegedly incurred net toss from its
operations. On May 17, 2002, the BIR filed with the Regional Trial Court an action for
collection of the deficiency withholding tax for 1997.
A.

Will the BIRs action for collection prosper? As counsel of Minolta, what

action will you take? Explain your answer. (5%)


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 nonpayment of taxes for the year 1998, may the Commissioner accept the offer? Explain
(5%)
SUGGESTED ANSWER:
Yes, BIRs action for collection will prosper because the assessment is
already final and executory. It can already be enforced through judicial action.
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.

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
139

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.
XVIII
Mr. Chan, a manufacturer of garments, was investigated for failure to file tax
returns and to pay taxes for the taxable year 1997. Despite the subpoena duces tecum
issued to him, he refused to present and submit his books of accounts and allied
records. Investigators, therefore, raided his factory and seized several bundles of
manufactured garments, supplies and unpaid imported textile materials. After his
apprehension and based on the testimony of a former employee, deficiency income and
business taxes were assessed against Mr. Chan on April 15, 2000. It was then that he
paid the taxes. Criminal action was nonetheless instituted against him in the Regional
Trial Court for violation of the Tax Code. Mr. Chan moved to dismiss the criminal case
on the ground that he had already paid the taxes assessed against him. He also
demanded the return of the garments and materials seized from his factory.
How will you resolve Mr. Chans 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.
2001 BAR EXAMINATION
I
140

May a taxpayer who has pending claims for VAT input credit or refund, set-off
said claims against his other tax. liabilities? Explain your answer. (5%)
SUGGESTED ANSWER:
No. Set-off is available only if both obligations are liquidated and
demandable. Liquidated debts are those where the exact amounts have already
been determined. In the instant case, the claim of the taxpayer for VAT refund is
still pending and the amount has still to be determined. A fortiori, the liquidated
obligation of the taxpayer to the government cannot, therefore, be set-off against
the unliquidated claim which the taxpayer conceived to exist in his favor. [Philex
Mining Corp. v. CIR, GR No. 125704, August 29, 1998).
ALTERNATIVE ANSWER:
No. Taxes and claims for refund cannot be the subject of set-off for the
simple reason that the government and the taxpayer are not creditors and
debtors of each other. There is a material distinction between a tax and a claim
for refund. Claims for refunds just like debts are due from the government in its
corporate capacity, while taxe3 are due to the government in its sovereign
capacity. [Philex Mining Corp. v. CIR, GR No. 125704, August 29, 1998).
II
a)

Distinguish a tax amnesty from a tax exemption. (3%)

b)

Distinguish direct taxes from indirect taxes, and give an example for

each one. (2%)


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. Castaneda, G.R. No. L- 46881, 1988).

141

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 NE 365). It is generally prospective in
application.
b)

Direct taxes are taxes wherein either the incidence (or liability for

the payment of the tax) as well as the impact or burden of the tax falls on the
same person. An example of this tax is income tax where the person subject to
tax cannot shift the burden of the tax to another person.
Indirect taxes, on the other hand, are taxes wherein the incidence of or the
liability for the payment of the tax falls on one person but the burden thereof can be
shifted or passed on to another person. Example of this tax is the value-added tax.
(Aban, Law of Basic Taxation p. 20).
ALTERNATIVE ANSWER:
A direct tax is a tax which is demanded from the person who also
shoulders the burden of the tax. Example: corporate and individual income tax.
An indirect tax is a tax which is demanded from one person in the expectation
and intention that he shall indemnify himself at the expense of another, and the
burden finally resting on the ultimate purchaser or consumer. Example: value
added tax.

a)

III
May the collection of taxes be barred by prescription? Explain your

answer. (3%)
b)

May the courts enjoin the collection of revenue taxes? Explain your

answer. (2%)
SUGGESTED ANSWER:
a)

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.

142

b)

As a general rule, the courts have no authority to enjoin the

collection of revenue taxes. (Sec. 218, NIRC). However, the Court of Tax Appeals
is empowered to enjoin the collection of taxes through administrative remedies
when collection could jeopardize the interest of the government or taxpayer.
(Section 11, RA 1125)
IV
a)

How often does a domestic corporation file income tax return for income

earned during a single taxable year? Explain the process. (3%)


b)

What is the reason for such procedure? (2%)

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)

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.

Taxpayers whose only income consists of salaries and wages from their
employers have long been complaining that they are not allowed to deduct any item
from their gross income for purposes of computing their net taxable income. With the

143

passage of the Comprehensive Tax Reform Act of 1997, is this complaint still valid?
Explain your answer. (5%)
SUGGESTED ANSWER:
No more. Gross compensation income earners are now allowed at least an
item of deduction in the form of premium payments on health and/or
hospitalization insurance in an amount not exceeding P2.400 per annum
[Section 34(M)]. This deduction is allowed if the aggregate family income do not
exceed P250.000 and by the spouse, in case of married individual, who claims
additional personal exemption for dependents.
VI
a)

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%)
b)

Distinguish Exclusion from Gross Income" from Deductions From

Gross Income. Give an example of each. (2%)


SUGGESTED ANSWER:
a)

Income subject to ifinal taxi 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, interest from bank deposits, royalties, etc.
b)

Exclusions from gross income refer to a flow of wealth to the

taxpayer which are not treated as part of gross income, for purposes of
computing the taxpayeris taxable income, due to the following reasons: (1) It is
exempted by the fundamental law; (2) It is exempted by statute; and (3) It does
not come within the definition of income. (Section 61, RR No. 2).
Deductions from gross income, on the other hand, are the amounts, which
the law allows to be deducted from gross income in order to arrive at net
income.
144

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.
VII
What do you think is the reason why cash dividends, when received by a
resident citizen or alien from a domestic corporation, are taxed only at the final tax of
10% and not at the progressive tax rate schedule under Section 24(A) of the Tax Code?
Explain your answer. (5%)
SUGGESTED ANSWER:
The reason for imposing final withholding tax rather than the progressive
tax schedule on cash dividends received by a resident citizen or alien from a
domestic corporation, is to ensure the collection of income tax on said income.
If we subject the dividend to the progressive tax rate, which can only be done
through the filing of income tax returns, there is no assurance that the taxpayer
will declare the income, especially when there are other items of gross income
earned during the year. It would be extremely difficult for the BIR to monitor
compliance considering the huge number of stockholders. By shifting the
responsibility to remit the tax to the corporation, it is very easy to check
compliance because there are fewer withholding agents compared to the number
of income recipients.
Likewise, the imposition of a final withholding tax will make the tax
available to the government at an earlier time. Finally, the final withholding tax
145

will 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.

VIII

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.
IX
a)

What is the rationale of the law in imposing what is known as the

Minimum Corporate Income tax on Domestic Corporations? (3%)


146

b)

Is a corporation which is exempted from the minimum corporate income

tax automatically exempted from the regular corporate income tax? Explain your
answer. (2%)
SUGGESTED ANSWER:
a) 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
become liable to the MCIT whenever this tax imposed at 2% of gross income
exceeds the normal corporate Income tax imposed on net income. (Sponsorship
Speech, Chairman of Senate Ways and Means Committee).
b) No. The minimum corporate income tax is a proxy for the normal
corporate income tax, not the regular corporate income tax paid by a
corporation. For instance, a proprietary educational institution may be subject
to a regular corporate income tax of 10% (depending on its dominant income),
but it is exempt from the imposition of MCIT because the latter is not intended
to substitute special tax rates. So is with PEZA enterprises, CDA enterprises etc.
Note:

If what is meant by regular income tax is the 32% tax rate imposed on taxable

income of corporations, the answer would be in the affirmative, because domestic


corporations and resident foreign corporations are either liable for the 2% of gross
income (MCIT) or 32% of net income (the normal corporate income tax) whichever is
higher.
ALTERNATIVE ANSWER:
No. A corporation which is exempted from the minimum corporate income
tax is not automatically exempted from the regular corporate income tax. The
reason for this is that MCIT is imposed only beginning on the fourth taxable year
immediately following the year in which such corporation commenced its
147

business operations. Thus, a corporation may be exempt from MCIT because it is


only on its third year of operations following its commencement of business
operations.
X
Distinguish Allowable Deductions from Personal Exemptions. Give an example
of an allowable deduction and another example for personal exemption. (5%)
SUGGESTED ANSWER:
The distinction between allowable deductions and personal exemptions are
as follows:
1. As to amount Allowable deductions generally refer to actual expenses
incurred in the pursuit of trade, business or practice of profession while personal
exemptions are arbitrary amounts allowed by law.
2. As to nature Allowable deductions constitute business expenses while
personal exemptions pertain to personal expenses.
3. As to purpose Deductions are allowed to enable the taxpayer to
recoup his cost of doing business while personal exemptions are allowed to cover
personal, family and living expenses.
4. As to claimants Allowable deductions can be claimed by all taxpayers,
corporate or otherwise, while personal exemptions can be claimed only by
individual taxpayers.
XI
X was hired by Y to watch over Ys fishponds with a salaiyofPhp 10,000.00. To
enable him to perform his duties well, he was also provided a small hut, which he
could use as his residence in the middle of the fishponds. Is the fair market value of
the use of the small hut by X a "fringe benefit" that is subject to the 32% tax imposed
by Section 33 of the National Internal Revenue Code? Explain your answer. (5%)
SUGGESTED ANSWER:

148

No. X is neither a managerial nor a supervisory employee. Only managerial


or supervisory employees are entitled to a fringe benefit subject to the fringe
benefits tax. Even assuming that he is a managerial or supervisory employee, the
small hut is provided for the convenience of the employer, hence does not
constitute a taxable fringe benefit. (Section 33, NIRC).
XII
In order to facilitate the processing of its application for a license from a
government office, Corporation A found it necessary to pay the amount of Php
100,000 as a bribe to 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 Php 100,000 constitutes a bribe, it is not allowed as a
deduction from gross income of Corporation A- (Section 34(A)(1)(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).
XIII
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 employers does not
exceed her total personal and additional exemptions for the year 2000. Was she
required to file an income tax return last April? Explain your answer. (5%)
SUGGESTED ANSWER:
Yes. An individual deriving compensation concurrently from two or more
employers at any time during the taxable year shall file an income tax return
(Sec. 51(A)(2)(b), NIRC.)

149

ALTERNATIVE ANSWER:
It depends. An individual with pure compensation income is not required
to file an income tax returns when she meets the following conditions; (1) the
total gross compensation income does not exceed Php60,000, and
(2) the income tax has been correctly withheld, meaning the tax withheld
is equal to the tax due. (Section 51(A)(2)(b), NIRC).
There is no mention in the problem of the amount of personal and
additional personal exemption to quantify how much is that compensation
income that did not exceed the personal and additional personal exemptions.
There is no, mention, either, of whether or not the employers withheld taxes and
that the amount withheld is equal to the tax due. Whether or not she will be
required to file an income tax return last April 15 on the 2000 income will
depend on her compliance with the requirements of the law.
XIV
Is a non-resident alien who is not engaged in trade or business or in the
exercise of profession in the Philippines but who derived rental income from the
Philippines required to file an income tax return on April of the year following his
receipt of said income? If not, why not? Explain your answer. (5%)
SUGGESTED ANSWER:
No. The income tax on all income derived from Philippine sources by a
non-resident alien who is not engaged in trade or business in the Philippines is
withheld by the lessee as a Final Withholding Tax. (Section 57(A), NIRC). The
government can not require persons outside of its territorial jurisdiction to file a
return; for this reason, the income tax on income derived from within must be
collected through the withholding tax system and thus relieve the recipient of
the income the duty to file income tax returns. (Section 51, NIRC).
XV
A, aged 90 years and suffering from incurable cancer, on August 1, 2001 wrote
a will and, on the same day, made several inter-vivos gifts to his children. Ten days
150

later, he died. In your opinion, are the inter-vivos gifts considered transfers in
contemplation of death for purposes of determining properties to be included in his
gross estate? Explain your answer. (5%)
SUGGESTED ANSWER:
Yes. When the donor makes his will within a short time of, or
simultaneously with, the making of gifts, the gifts are considered as having been
made in contemplation of death. (Roces v. Posadas, 58 Phil. 108). Obviously, the
intention of the donor in making the inter-vivos gifts is to avoid the imposition
of the estate tax and since the donees are likewise his forced heirs who are
called upon to inherit, it will create a presumption juris tantum that said
donations were made mortis causa, hence, the properties donated shall be
included as part of A's gross estate.
XVI
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).
XVII

151

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 donors 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 100,000.00on Christmas 2001 and
the other Php 100,000.00 on January 1, 2002. Please explain your advice. (5%)
SUGGESTED ANSWER:
I would advice him to split the donation. Giving the Php200,000 as a onetime donation would mean that it will be subject to a higher tax bracket under
the graduated tax structure thereby necessitating the payment of donor's tax.
On the other hand, splitting the donation into two equal amounts of Php100,000
given on two different years will totally relieve the donor form the donoris tax
because the first PhplOO.OOO donation in the graduated brackets is exempt.
(Section 99, NIRC). While the donoris tax is computed on the cumulative
donations, the aggregation of all donations made by a donor is allowed only over
one calendar year.
XVIII
What do you understand by the term flexible tariff clause" as used in the Tariff
and Customs Code? (5%)
SUGGESTED ANSWER:
The term "flexible tariff clause "refers to the authority given to the
President to adjust tariff rates 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.
XIX
Congress, after much public hearing and consultations with various sectors of
society, came to the conclusion that it will be good for the country to have only one
system of taxation by centralizing the imposition and collection of all taxes in the
national government. Accordingly, it is thinking of passing a law that would abolish
152

the taxing power of all local government units. In your opinion, would such a law be
valid under the present Constitution? Explain your answer. (5%)
SUGGESTED ANSWER:
No. The law centralizing the imposition and collection of all taxes in the
national government would contravene the Constitution which mandates
that : . . . "Each local government unit shall have the power to create their own
sources of revenue and to levy taxes, fees, and charges subject to such guidelines
and limitations as Congress may provide consistent with the basic policy of local
autonomy." It is clear that Congress can only give the guidelines and limitations
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.
XX
Under Article 415 of the Civil Code, in order for machinery and equipment to be
considered real property, they must be placed by the owner of the 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).
2000 BAR EXAMINATION
153

I
Justice Holmes once said: The power to tax is not the power to destroy while
this Court (the Supreme Court) sits." Describe the power to tax and its limitations.
(5%)
SUGGESTED ANSWER:
The power to tax is an inherent power of the sovereign which is exercised
through the legislature, to impose burdens upon subjects and objects within its
jurisdiction for the purpose of raising revenues to carry out the legitimate
objects of government. The underlying basis for its exercise is governmental
necessity for without it no government can exist nor endure. Accordingly, it has
the broadest scope of all the powers of government because in the absence of
limitations, it is considered as unlimited, plenary, comprehensive and supreme.
The two limitations on the power of taxation are the inherent and constitutional
limitations which are intended to prevent abuse on the exercise of the otherwise
plenary and unlimited power. It is the Court's role to see to it that the exercise
of the power does not transgress these limitations.
II
a)

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, nonprofit educational institution whose income and assets are actually, directly and
exclusively used for educational purposes, and therefore qualified for tax exemption
under Article XTV, 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 legally pemiissive
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 donors tax. The
154

donation is the legal means employed to transfer the incidence of income tax on
the rental income.
b)

An Executive Order was issued pursuant to law, granting tax and duty

incentives only to businesses and residents within the secured area" of the Subic
Economic Special Zone, and denying said incentives to those who live within the Zone
but outside such secured area". Is the constitutional right to equal protection of the
law violated by the Executive Order? Explain. (3%)
SUGGESTED ANSWER:
No. Equal protection
classification.

Classification,

of
to

the
be

law

clause

valid,

must

is

subject

(1)

rest

to

reasonable

on

substantial

distinctions, (2) be germane to the purpose of the law, (3) not be limited to
existing conditions only, (4) apply equally to all members of the same class.
There are substantial differences between big Investors being enticed to the
"secured area" and the business operators outside that are in accord with the
equal protection clause that does not require territorial uniformity of laws. The
classification applies equally to all the resident individuals and businesses
within the secured area. The residents, being in like circumstances to
contributing directly to the achievement of the end purpose of the law, are not
categorized further. Instead, they are similarly treated, both in privileges
granted and obligations required. (T!u, et al, v. Court of Appeals. etaL, G.R. No.
127410, January 20. 19991
III
Article VII, Section 28 (3) of the 1987 Philippine Constitution provides that
charitable institutions, churches and personages or covenants appurtenant thereto,
mosques, non-profit cemeteries and all lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational purposes shall be
exempt from taxation.
a)

To what kind of tax does this exemption apply? (2%)

SUGGESTED ANSWER:

155

This exemption applies only to property taxes. What is exempted is not the
institution itself but the lands, buildings and improvements actually, directly
and

exclusively

used for

religious,

charitable

and

educational

purposes.

(Commissioner of Internal Revenue v. Court of Appeals, et aL, G.R. No. 124043,


October 14, 1998).
b)

Is proof of actual use necessary for tax exemption purposes under the

Constitution? (3%)
SUGGESTED ANSWER:
Yes, because tax exemptions are strictly construed against the taxpayer.
There must be evidence to show that the taxpayer has complied with the
requirements for exemption. Furthermore, real property taxation is based on use
and not on ownership, hence the same rule must also be applied for real property
tax exemptions.

IV

Among the taxes imposed by the Bureau of Internal Revenue are income tax,
estate and donors 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.


Direct taxes are demanded from the very person who, as intended, should
pay the tax which he cannot shift to another; while an indirect tax is demanded
in the first instance from one person with the expectation that he can shift the
burden to someone else, not as a tax but as a part of the purchase price.
V
A domestic corporation failed to withhold and remit the tax on income received
from Philippine sources by a nonresident foreign corporation. In addition to the civil
156

penalties provided for under the Tax Code, a compromise penalty was imposed for
violation of the withholding tax provisions. May the Commissioner of Internal Revenue
legally enforce the collection of compromise penalty? (5%)
SUGGESTED ANSWER:
No. There is no showing that the compromise penalty was imposed by the
Commissioner of Internal Revenue with the agreement and conformity of the
taxpayer. (Wonder Mechanical Engineering Corporation v. Court of Tax Appeals,
et oL. 64 SCRA 555).
VI
To start a business of his own, Mr. Mario de Guzman opted for an early
retirement from a private company after ten (10) years of service. Pursuant to the
company's qualified arid approved private retirement benefit plan, he was paid his
retirement benefit which was subjected to withholding tax.
Is the employer correct in withholding the tax? Explain. (2%)
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:
(a)

It depends. An employee retiring under a company's qualified and

private 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).
(b)

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:

157

1.

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 retirement; and


c.
2.

that the benefit is availed of only once.

Under Republic Act No. 7641 (those received from employers

without any retirement plan):


a.

Those received under existing collective bargaining


agreement and other agreements are exempt; and

b.

In the absence of retirement plan or agreement

providing for retirement benefits the benefits are excluded


from gross income and exempt from income tax if:
I.

retiring employee must have served at least flve (5) years; and

II.

that he is not less than sixty (60) years of age but not more than

sixty five (65).

VII

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.

158

Consequently, since Mr. Javiers 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].
VIII
Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar
year 1999, he came to the Philippines several times and stayed in 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 examinees answer only
cover the first two paragraphs.
IX
Under Article XIV, Section 4 (3) of the 1987 Philippine Constitution, all revenues
and assets of non-stock, non-profit educational institutions, used actually, directly
and exclusively for educational purposes, are exempt from taxes and duties. Are
income derived from dormitories, canteens and bookstores as well as interest income
159

on bank deposits and yields from deposit substitutes automatically exempt from
taxation? Explain. (5%)
SUGGESTED ANSWER:
No. The interest income on bank deposits and yields from deposit
substitutes are not automatically exempt from taxation. There must be a
showing that the incomes are included in the schools annual information return
and duly audited financial statements together with:
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
nonstock 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.
X
a) What is meant by taxable income? (2%)

160

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)
b)

Jose Miranda, a young artist and designer, received a prize of

P100.000.00 for winning in the on-the-spot peace poster contest sponsored by a local
Lions Club. Shall the reward be included in the gross income of the recipient for tax
purposes? Explain. (3%)
SUGGESTED ANSWER:
No. It is not includable in the gross income of the recipient because the
same is subject to a final tax of 20%, the amount thereof being in excess of
P10.000 (Sec. 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.
XI
On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the
Estate of Jose de la Cruz a notice of deficiency estate tax assessment, inclusive of
surcharge, interest and compromise penalty. The Executor of the Estate of Jose de la
Cruz (Executor) filed a timely protest against the assessment and requested for waiver
of the surcharge, interest and penalty. The protest was denied by the Commissioner of
Internal Revenue (Commissioner) with finality cn September 13, 1997. Consequently,
tne Executor was made to pay the deficiency assessment on October 10, 1997. The
following day. the Executor filed a Petition with the Court of Tax Appeals (CTA) praying
for the refund of the surcharge, interest and compromise penalty. The CTA took
cognizance of the case and ordered the Commissioner to make a refund. The
Commissioner filed a Petition for Review with the Court of Appeals assailing the
jurisdiction of the CTA and the Order to make refund to the Estate on the ground that
no claim for refund was filed with the BIR.
a)

Is the stand of the Commissioner correct? Reason. (2%)


161

SUGGESTED ANSWER:
Yes. There was no claim for refund or credit that has been duly filed with
the Commissioner of Internal Revenue which is required before a suit or
proceeding can be filed in any court (Sec. 229, NIRC of 1997). The denial of the
claim by the Commissioner is the one which will vest the Court of Tax Appeals
jurisdiction over the refund case should the taxpayer decide to appeal on time.
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. Jufy 29,
1950)
XII
a)

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:
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and
lineal descendant; or
(2) Relative by consanguinity in the collateral line within the fourth
degree of relationship." [Sec. 98 (B), NIRC of 1997]
b)

What conditions must occur in order that all grants, donations and

contributions to non-stock, non-profit private educational institutions may be exempt


from the donors tax under Section 101 (a) of the Tax Code? (3%)
162

SUGGESTED ANSWER:
The following are the conditions:
1)

Not more than thirty percent (30%) of said gifts shall be used by

such donee for administration purposes;


2)

The educational institution is incorporated as a nonstock entity,

paying no dividends, governed by trustees who receive no compensation, and


devoting all its income, whether students' fees or gifts, donations, subsidies or
other forms of philanthropy, to the accomplishment and promotion of the
purposes enumerated in its Articles of Incorporation. [Sec. 101 (A) (3), NIRC of
1997)
XIII
Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their principal residence
situated in Tandang Sora, Quezon City for Ten Million Pesos (PI0,000,000.00) with the
intention of using the proceeds to acquire or construct a new principal residence in
Aurora Hills, Baguio City.
What conditions must be met in order that the capital gains presumed to have
been realized from such sale may not be subject to capital gains tax? (5%)
SUGGESTED ANSWER:
The conditions are:
1. The proceeds are fully utilized in acquiring or constructing a new
principal residence within eighteen (18) calendar months from the sale or
disposition of the principal residence or eighteen (18) months from July 12.
2000.
2. The historical cost or adjusted basis of the real property sold or
disposed shall be carried over to the new principal residence built or acquired.
3.

The Commissioner of Internal Revenue must have been informed by

Mr. & Mrs. Peter Camacho within thirty (30) days from the date of sale or
163

disposition on July 12, 2000 through a prescribed return of their intention to


avail of the tax exemption.
4.

That the said exemption can only be availed of once every ten (10)

5.

If there is no full utilization of the proceeds of sale or disposition,

years.

the portion of the gain presumed to have been realized from the sale or
disposition shall be subject to capital gains tax ISec. 24 (D) (2). NIRC of 1997)
XV
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 at the time of his death shall be determined by including the value at the
time of his death of all property, real or personal, tangible or intangible,
wherever situated to the extent of the interest therein of the decedent at the
time of his death [Sec. 85 (A). NIRC of 1997]. These properties shall have a situs
of taxation in the Philippines hence subject to Philippine estate taxes.
On the other hand, in the case of a non-resident decedent who at the time
of his death was not a citizen of the Philippines, only that part of the entire
gross estate which is situated in the Philippines to the extent of the interest
therein of the decedent at the time of his death shall be included in his taxable
estate. Provided, that, with respect to intangible personal property, we apply the
rule of reciprocity. (Ibid)
b)

Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart

attack while on a business trip to the USA. He died intestate on June 15. 2000 in New
York City, leaving behind real properties situated in New York; his family home in Valle
Verde, Pasig City; an office condominium in Makati City; shares of stocks in San
Miguel Corporation; cash in bank; and personal belongings. The decedent is heavily
insured with Insular Life. He had no known debts at the time of his death. As the sole
heir and appointed Administrator, how would you determine the gross estate of the

164

decedent? What deductions may be claimed by the estate and when and where shall
the return be filed and estate tax paid? (3%)
SUGGESTED ANSWER:
The gross estate shall be determined by including the value at the time of
his death all of the properties mentioned, to the extent of the Interest he had at
the time of his death because he is a Filipino citizen. (Sec. 85 (A), NIRC of 1997]
With respect to the life insurance proceeds, the amount includible in the
gross estate for Philippine tax purposes would be to the extent of the amount
receivable by the estate of the deceased, his executor, or administrator, under
policies taken out by decedent upon his own life, irrespective of whether or not
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 (Ej, 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 1P200,000.00). [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 (PI,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 PI .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 decedents
death (Sec. 90 (B), NIRC of 1997], provided that the Commissioner of Internal
165

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 authorized agent bank, or Revenue
District Officer, Collection Officer, or duly authorized Treasurer of Pasig City, the
City in which the decedent Mr. de la Cruz was domiciled at the time of his death.
[Sec. 90 (D), NIRC of 1997)
XVI
Under what conditions may the Commissioner of Internal Revenue be authorized to:
a)
Compromise the payment of any internal revenue tax? (2%)
SUGGESTED ANSWER:
The Commissioner of Internal Revenue 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 involved do not justify the

collection of the amount due. (Sec. 204 (B). NIRC of 1997]


XVII

166

A taxpayer is suspected not to have declared his correct gross income in his
return filed for 1997. The examiner requested the Commissioner to authorize him to
inquire into the bank deposits of the taxpayer so that he could proceed with the net
worth method of investigation to establish fraud. May the examiner be allowed to look
into the taxpayers bank deposits? In what cases may the Commissioner or his duly
authorized representative be allowed to Inquire or look into the bank deposits of a
taxpayer? (5%)
SUGGESTED ANSWER:
No, as this would be violative of Republic Act No. 1405, the Bank Deposits
Secrecy Law.
The

Commissioner

of

Internal

Revenue

or

his

duly

authorized

representative may be allowed to inquire or look into the bank deposits of a


taxpayer in the following cases:
a)

For the purpose of determining the gross estate of a decedent;

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]
c)

Where

the

taxpayer

has

signed

waiver

authorizing

the

Commissioner or his duly authorized representatives to inquire into the bank


deposits.
XVIII
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:
167

a.

After receipt of the Pre-Assessment Notice, he must within fifteen

(15) days from receipt explain why no additional taxes should be assessed against
him.
b.

If the Commissioner of Internal Revenue Issues an assessment

notice, the taxpayer must administratively protest or dispute the assessment by


filing a motion for reconsideration or reinvestigation within thirty (30) days from
receipt of the notice of assessment. (4th par., Sec. 228, NIRC of 1997)
Within sixty (60) days from filing of the protest, the taxpayer shall submit
all relevant supporting documents.
The judicial remedies of an aggrieved taxpayer relative to an assessment
notice are as follows:
a.

Where the Commissioner of Internal Revenue has not acted on the

taxpayers protest within a period of one hundred eighty (180) days from
submission of all relevant documents, then the taxpayer has a period of thirty
(30) days from the lapse of said 180 days within which to interpose a petition for
review with the Court of Tax Appeals.
b.

Should the Commissioner deny the taxpayer's protest, then he has

a period of thirty (30) days from receipt of said denial within which to interpose
a petition for review with the Court of Tax Appeals.
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.
The adverse decision of the Court of Tax Appeals is appealable to the
Court of Appeals by means of a petition for certiorari within a period of fifteen
(15) days from receipt of the adverse decision, extendible for another period of
fifteen (15) days for compelling reasons, but the extension is not to exceed a
total of thirty (30) days in all.

168

The adverse decision of the Court of Appeals is appealable to the Supreme


Court by means of a petition for review on certiorari within a period of fifteen
(15) days from receipt of the adverse decision of the Court of Appeals.
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.
XIX
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)
2)

The appraisal must be at the current and fair market value; and
Classification for assessment must be on the basis of actual use.

(Sec. 198, Local Government Code)


ALTERNATIVE ANSWER:
169

The examinee should be given credit if he chooses the above two (2) or any two
(2) of those enumerated below:
1)

Assessment must be on the basis of uniform classification;

2)

Appraisal, assessment, levy and collection shall not be let to private

persons; and
3)

Appraisal and assesshient must be equitable. (Sec. 198, Local

Government Code)
b)

May local governments impose an annual realty tax in addition to the

basic real property tax on idle or vacant lots located in residential subdivisions within
their respective territorial jurisdictions? (3%)
SUGGESTED ANSWER:
Not all local government units may do so. Only provinces, cities, and
municipalities within the Metro Manila area (Sec. 232, Local Government
Code),may impose an ad valorem tax not exceeding five percent (5%) of the
assessed value (Sec.236, Ibid.) of idle or vacant residential lots in a subdivision,
duly approved by proper authorities regardless of area. (Sec. 237, Ibid.)
XX
On the basis of a warrant of seizure and detention issued by the Collector of
Customs for the purpose of enforcing the Tariff and Customs Laws, assorted brands of
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

170

or release of property affected. (Sec. 7, RA. 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 is 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:
No. The legislators Intended to divest the Regional Trial Courts of the
jurisdiction to replevin a property which is a subject of seizure and forfeiture
proceedings for violation of the Tariff and Customs Code otherwise, actions for
forfeiture of property for violation of the Customs laws could easily be
undermined by the simple device of replevin. (De Ia Fuente v. De Veyra, et aL,
120 SCRA 455)
There should be no unnecessary hindrance on the governments drive to
prevent smuggling and other frauds upon the Customs. Furthermore, the
Regional Trial Court do not have jurisdiction in order to render effective and
efficient the collection of import and export duties due the State, which enables
the government to carry out the functions it has been instituted to perform.
(Jiao, et aL, Court of Appeals, et aL, and companion case, 249 SCRA 35, 43)
1999 BAR EXAMINATION
I

171

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 threeyear 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.
II
A Co., a Philippine corporation. Is the owner of machinery, 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 of Review proper? Explain. (5%)
SUGGESTED ANSWER:
No. The CTA is 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

172

Assessment Appeals. (Caltex Phils. Inc. v. Central Board of Assessment Appeals,


L- 50466. May 31, 1982),
III
A, an individual, sold to B. his brother-in-law, his lot with a market value of
P1,000.000 for P600.000. As cost in the lot is P100,000. B is financially capable of
buying the lot.
A also owns X Co.. which has a fast growing business. A sold some of his shares
of stock in X Co. to his key executives in X Co. These executives are not related to A.
The selling price is P3.000.000, which is the book value of the shares sold but with a
market value of P5,000,000. As cost in the shares sold is PI ,000,000. The purpose of
A in selling the shares is to enable his key executives to acquire a propriety of A in
selling the shares is to enable his key executives to acquire a propriety interest in the
business and have a personal stake in its business.
Explain if the above transactions are subject to donor's tax. (5%)
SUGGESTED ANSWER:
The first transaction where a lot was sold by A to his brother-in-law for a
price below its fair market value will not be subject to donor's tax if the lot
qualifies as a capital asset. The transfer for less than adequate and full
consideration, which gives rise to a deemed gift, does not apply to a sale of
property subject to capital gains tax. (Section 100, NIRC). However, if the lot
sold is an ordinary asset, the excess of the fair market value over the
consideration received shall be considered as a gift subject to the donor's tax.
The sale of shares of stock below the fair market value thereof is subject to
the donor's tax pursuant to the provisions of 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
173

imposition of the donor's tax on sales for inadequate consideration does not
exist.
IV
A died, survived by his wife and three children. The estate tax was properly paid
and the estate settled and divided and distributed among the four heirs. Later, the BIR
found out that the estate failed to report the income received by the estate during
administration. The BIR issued a deficiency income tax assessment plus interest,
surcharges and penalties. Since the 3 children are residing abroad, the BIR sought to
collect the full tax deficiency only against the widow. Is the BIR correct? (10%)
A Co.. a Philippine corporation, received an income tax deficiency assessment
from the BIR on May 5, 1995. On May 31, 1995, A Co. filed its protest with the BIR.
On July 30, 1995. A Co. submitted to the BIR all relevant supporting documents. The
CIR did not formally rule on the protest but on January 25. 1996, A Co. was served a
summons and a copy of the complaint for collection of the tax deficiency filed by the
BIR with the Regional Trial Court (RTC). 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.
2.

Has the CTA jurisdiction over the case?


Has the RTC jurisdiction over the collection case filed by the BIR?

Explain.
SUGGESTED ANSWER:
Yes, the BIR is correct. In a case where the estate has been distributed to
the heirs, the collection remedies available to the BIR in collecting tax liabilities
of an estate may either (1) sue all the heirs and collect from each of them the
amount of tax proportionate to the inheritance received or (2) by virtue of the
lien created under Section 219, sue only one heir and subject the property he
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.
174

1)

Yes, the CTA has jurisdiction over the case be-cause 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 is 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)

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 of the
Government's action to collect the tax liability under dispute. {Yabesv.Flojo, 15
SCRA 278; San Juan v. Vasquez, 3 SCRA 92). There is no final, executory and
demandable assessment which can be enforced by the BIR, once a timely appeal
is filed.
V
A Co., a Philippine corporation, received an income tax deficiency assessment
from the BIR on November 25, 1996. On December 10, 1996, A Co. filed its protest
with the BIR On May 20. 1997, the BIR issued a warrant of distraint to enforce the
assessment. This warrant was served on A Co. on May 25,1997. In a letter dated June
4,1997 and received by A Co. 5 days later, the CIR formally denied A Co.s protest
stating that it constitutes his final decision on the matter. On July 6, 1997, A Co. filed
a Petition for Review with the CTA The BIR moved to dismiss the Petition on the
ground that the CTA has no jurisdiction over the case. Decide. (10%)
SUGGESTED ANSWER:
The CTA has jurisdiction over the case. The appeal* able decision is the
one which categorically stated that the Commissioner's action on the disputed
assessment is final and, therefore, the reckoning of the 30-day period to appeal
was on June 9, 1999. The filing of the petition for review with the CTA was
175

timely made. The Supreme Court has ruled that the CIR must categorically state
that his action on a disputed assessment is final; other* wise, the period to
appeal will not commence to run. That final action can not be implied from the
mere issuance of a warrant of distraint and levy. (CIR v. Union Shipping
Corporation, 185 SCRA 547).
VI
A Co., a Philippine corporation, is a big manufacturer of consumer goods and
has several suppliers of raw materials. The BIR suspects that some of the suppliers
are not properly reporting their income on their sales to A Co. The CIR therefore:
1.

Issued an access letter to A Co. to furnish the BIR information on sales

and payments to its suppliers.


2.

Issued an access letter to a bank (CX Bank) to furnish the BIR on

deposits of some suppliers of A Co. on the alleged ground that the suppliers are
committing tax evasion.
A Co., X Bank and the suppliers have not been issued by the BIR letter of
authority to examine. A Co. and X Bank believe that the BIR is on a fishing
expedition" and come to you for counsel. What is your advice? (10%)
SUGGESTED ANSWER:
I will advise A Co. and B Co. that the BER 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).
VII
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
176

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 WT. Explain your advice. (10%)
SUGGESTED ANSWER:
P Co. should not subject the payments of the pur-chase price to
withholding tax. While the seller is a nonresident 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
income tax under our jurisdiction because the income derived therefrom is
considered as a foreign- sourced income.
ALTERNATIVE ANSWER:
Yes, but only on the shares of stocks of A Co. and only on the portion of
the purchase price, which constitutes capital gains. Under the Tax Code of 1997,
the capital gains tax imposed under Section 28(B)(5)(c) is collectible via the
withholding of tax at source pursuant to Section 57 of the same Code.
Note:
The bar candidate might have relied on the provision of the Tax Code of1997
which provides that the capital gains tax is imposed as withholding taxes (Section 57,
NIRC). This procedure is impractical and, therefore, not followed in practice because
the buyer/ withholding agent will not be in a position to determine how much income
is realized by the seller from the sale.
For this reason, any of theforegoing suggested answers should be given full
credit).

177

VIII
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 aWT of 25% or
P2,500,000. Upon advice of counsel, A Co. realized that the proper WT 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, ACo. 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
overwithholding. (CIR v. Wander Phils. Inc., GR No. 68378, April 15, 1988, 160
SCRA 573; CIR v. Procter & Gamble PMC, 204 SCRA 377).
IX
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 discuss WT rates, if applicable. Focus your discussion on what is the issue.
(10%)
SUGGESTED ANSWER:
I will advise A Co. to withhold and remit the with-holding tax on the
dividends. While the general rule is that a foreign corporation is the same
juridical entity as its branch office in the Philippines, when, however, the
corporation transacts business in the Philippines directly and independently of
178

its branch, the taxpayer would be the foreign corporation itself and subject to
the dividend tax similarly imposed on non-resident foreign corporation. The
dividends attributable to the Home Office would not qualify as dividends earned
by a resident foreign corporation, which is exempt from tax. (Marubeni
Corporation v. Commissioner, GRNo. 76573, September 14, 1989).
X
A Co., a Philippine corporation, has two divisions manufacturing and
construction. Due to the economic situation, it had to close its construction division
and lay-off the employees in that division. A Co. has a retirement plan approved by the
BIR, which requires a minimum of 50 years of age and 10 years of service in the same
employer at the time of retirement.
There are 2 groups of employees to be laid off:
(a)

Employees who are at least 50 years of age and has at 10 years of

service at the time of termination of employment.


(b)

Employees who do no meet either the age or length of service A Co.

plans to give the following:


For category (A) employees - the benefits under the BIR approved plan plus an
ex gratia payment of one month of every year of service.
For category (B) employees - one month for every year of service. For both
categories, the cash equivalent of unused vacation and sick leave credits.
A Co. seeks your advice as to whether or not it will subject any of these
payments to WT. Explain your advice. (5%)
SUGGESTED ANSWER:
For category A employees, all the benefits received on account of their
separation are not subject to income tax, hence no withholding tax shall be
imposed. The benefits received under the BIR-approved plan upon meeting the
service requirement and age requirement are explicitly excluded 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
179

unused vacation and sick leave credits qualifies as part of separation benefits
excluded from gross income (CIR v. Court of Appeals, GR No. 96016, 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 WT. 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).
XI
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 the Philippines. The salary of P will be shouldered 50% by A Co. while
the other 50% plus housing, cost of living and educational allowances of P's
dependents will be shouldered by HK Co. A Co.- will credit the 50% of Ps salary to Ps
Philippine bank account. P will sign the contract of employment in the Philippines. P
will also be receiving rental income for the lease of his Philippine residence.
Are these salaries, allowances and rentals subject to the Philippine income tax?
(5%)
SUGGESTED ANSWER:
The salaries and allowances received by P are not subject to Philippine
income tax. P qualifies as a non-resident citizen because he leaves the
Philippines for employment requiring him to be physically present abroad most
180

of the time during the taxable year. (Section 22(E), NIRC). A non-resident citizen
is taxable only on income derived from Philippine sources. (Section 23, NIRC).
The salaries and allowances received from being employed abroad are incomes
from without because these are compensation for services rendered outside of
the Philippines. (Section 42, NIRC).
However, P is taxable on rental income for the lease of his Philippine
residence because this is an income derived from within, the leased property
being located in the Philippines. (Section 42, NIRC).
XII
Explain if the following items are deductible from gross income for income tax
purposes. Disregard who is the person claiming the expense. (5%)
1.

Interest on loans used to acquire capital equipment or machinery.

2.

Depreciation of goodwill.

SUGGESTED ANSWER:
1)

This is 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
181

gross income, thereby paving the way for a proper matching of costs against
revenues which is an essential feature of the income tax system.
XIII
Explain if the following items are deductible from gross income for income tax
purposes. Disregard who Is the person claiming the deduction. (5%)
1.

Reserves for bad debts.

2.

Worthless securities

SUGGESTED ANSWER:
1)

Reserve forbad debts are not allowed as deduction from gross

income. Bad debts must be charged off during the taxable year to be allowed as
deduction from gross income. The mere setting up of reserves will not give rise
to any deduction. (Section 34(B), NIRC).
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(B)(2), NIRC).
XIV
A Co.. a Philippine corporation. Issued preferred shares of stock with the
following features:
1.

Non-voting;

2.

Preferred and cumulative dividends at the rate of 10% per annum,

whether or not in any period the amount is covered by earnings or projects;


3.

In the event of dissolution of the issuer, holders of preferred stock shall

be paid in full or ratably as the assets of the issuer may permit before any distribution
shall be made to common stockholders; and
4.

The issuer has the option to redeem the preferred stock.


182

A Co. declared dividends on the preferred stock and claimed the dividends as interests
deductible from its gross income for income tax purposes. The BIR disallowed the
deduction. A Co. maintains that the preferred shares with their features are really
debt and therefore the dividends are really 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).
General Observation and Comments:
1.

Thirty percent (30%) of the 1999 Bar questions were centered on

income tax remedies, specifically question nos. 1, IV, V and VIII.


The Committee should welcome this development and should even suggest
that about forty-five percent (45%) of future Bar questions should be on tax
remedies, internal revenue, tariff and customs, local and real property taxation.
2.
This year's Bar questions in Taxation were not well distributed
among the subjects included in the coverage of the examination. The following
shows the distribution of the subjects:
General Principles of Taxation .................. 0%
National Internal Revenue Code ............... 65%
[nos. III, VI, VQ, IX, X, XI,
xn, xm, xiv]
Tariff and Customs Code..

0%

Republic Act No. 1125, Creating the Court


Of Tax Appeals (presumably including
Tax remedies) ......................................

30%

[nos. I, IV, v, VIII


The Local Government Code on Taxation... 5% [II]

183

It is suggested that the subject coverage of future Bar examinations in


Taxation should include a percentage distribution for each subject. For
example:
General Principles of Taxation.................. 10%
National Internal Revenue Code................ 30%
Tax on Income.......................................... 25%
Estate and donoris taxes..........................

5%

Exclude: Tax returns, withholding VAT, Other percentage


Taxes,

Excise

taxes.

Documentary

Stamp

taxes,

administrative Provisions, statutory offenses and Penalties,


allotment of internal Revenue and Oversight Committee.
Tariff and Customs Code.......................... 5%
Exclude: Arrastre and Classification of Commodities Republic Act No.
1125, Creating the Court Of Tax Appeals, Tax Remedies under NIRC,
Tariff and Customs. Code, the Local Government Code on Local and
Real Property Taxation................. 45%
The Local Government Code on
Taxation (basics)........................... 10%
Local Government Taxation.......... 5%
Real Property Taxation................. 5%
3.

There was a lop-sided emphasis on situs of taxation, .specially on

the taxation of income derived from sources within/without the Philippines.


4.

There were six questions which had weights of 10% each or a total

of 60%. It is suggested that the examiner be charitable" in rating these


questions.
5.

Except for the above observations and comments, the 1999 Bar

Examination questions in Taxation were generally fair and reasonable. There was
a proper balance between problem type of questions and objective type of
questions.

184

1998 BAR EXAMINATION


I
Explain the requirement of uniformity as 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 & Tait 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 same force and effect in every place where the subject maybe found.
(Phil. Trust 8L Co. v. Yatco. 69 Phil. 420).
II
From what sources of income are the following persons/ corporations taxable
by the Philippine government?

185

1.

Citizen of the Philippines residing therein; [1%]

2.

Non-resident citizen; [1%]

3.

An individual citizen of the Philippines who is working and deriving

income from abroad as an overseas contract worker; [1%]


4.

An alien individual, whether a resident or not of the Philippines; [1%]

5.

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.


III
State whether the following transactions are a) VAT Exempt, b) subject to VAT at
10%; or c) subject to VAT at 0%:
1.

Sale of fresh vegetables by Aling Ining at the Pamilihang Bayan ng Trece

Martirez. [1%]
2.

Services rendered by Jake's Construction Company, a contractor to the

World Health Organization in the renovation of its offices In Manila. [1%]

186

3.

Sale of tractors and other agricultural implements by Bungkal

Incorporated to local farmers. [1%]


4.

Sale of RIW by Cely's Boutique, a Filipino dress designer, in her dress

shop and other outlets. (1%1


5.

Fees for lodging paid by students to Bahay-Bahayan Dormitory, a private

entity operating a student dormitory (monthly fee. P1,500). 11%]


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. 108IB](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[A](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[A](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 residential units with a monthly rental per unit not exceeding Php8,000,
which is exempt from VAT regardless of the amount of aggregate rentals received
by the lessor during the year. (Sec. 109 (x), NIRC). The term unit shall mean per
person in the case of dormitories, boarding houses and bed spaces (Sec. 4.103-1,
RR No. 7-95).
Comment:
187

The problems do not call for a yes or no answer. Accordingly, a bar candidate
who answered only VAT exempt. VAT at 10% or VAT at 0%. as called for in the problem
without further reasons, should be given full credit.
IV
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.
1.

For income tax purposes, may Arnold be considered as head of a

family?" [3%]
2.

Is Arnold entitled to deduct from his gross income, an additional

exemption for each of his illegitimate child? [2%]


SUGGESTED ANSWER:
1.

Yes. An unmarried man who has illegitimate minor children who

live with him and depend upon him for their chief support is considered as head
of the family" (RR No. 2-98 implementing Section 35, NIRC).
2.

No. Arnold is only entitled to deduct additional personal exemption

for four (4) out of the six (6) illegitimate children. The maximum number of
dependents for purposes of the additional personal exemption is four. (Sec. 35,
NIRC).
V
Give the requisites for deductibility of a loss. [5%]
SUGGESTED ANSWER:
The requisites for deductibility of a loss are a) loss belongs to the taxpayer;
b) actually sustained and charged off during the taxable year; c) evidenced by a
closed and completed transaction; d) not compensated by insurance or other
forms of indemnity; e) not claimed as a deduction for estate tax purposes in case

188

of individual taxpayers; and f) if it is a casualty loss it is evidenced by a


declaration of loss filed within 45 days with the BIR.
Comment:
The question is vague. There are different kinds of losses recognized as
deductible under the Tax Code. These are losses, in general (Sec. 34[D](I); net
operating loss carryover (Sec. 34[D](3); capital losses (Sec. 34[D](4); Losses from wash
sales of stocks or securities (Sec. 34[D](5) in relation to Sec. 38); wagering losses (Sec.
34(D)(6); and abandonment losses (Sec. 34(D)(7). Losses are also deductible from the
gross estate (Sec. 86(A)(1)(e). NIRC).
Considering the time allotted for a five (5) point question is only nine (9)
minutes, the candidates would not be able to write down a complete answer. It is
suggested that any answer which states the requisites for the deductibility of any of
the above losses be given full credit.
VI
1.

What is the proper allowance for depreciation of any property used in

trade or business? (3%]


2.

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 P10,000 after
its useful life? [2%]
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; b) declining- balance
method; c) sum-of-years-dlgit method; and d) any other method which may be
prescribed

by

the

Secretary

of

Finance

upon

recommendation

of

the

Commissioner of Internal Revenue (Sec. 34(F), NIRC).


2.

The annual depreciation of the depreciable fixed asset may be

computed on the straight-line method which will allow the taxpayer to deduct an
189

annual depreciation of Php4,500, arrived at by dividing the depreciable value


(Php 100,000-Php10,000) of Php90,000 by the estimated useful life (20 years).
Note:
The bar candidate may give a different figure de-pending on the method he used in
computing the annual depreciation. The facts given in the problem are sufficient to
compute the annual depreciation either under the declining-balance method or sumof-years-digit method. Any answer arrived at by using any of the recognized methods
should be given full credit. It is suggested that no question requiring computation
should be given in future bar examinations.
VII
Can the Commissioner of Internal Revenue inquire into the bank deposits of a
taxpayer? If so, does this power of the Commissioner conflict with FLA. 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).
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 financial position
demonstrates a clear inability to pay the tax assessed, his application shall not
be considered unless and until he waives in writing his privilege under R.A. No.
1405, and such waiver shall constitute the authority of the Commissioner to
inquire into the bank deposits of the taxpayer.
VIII
190

Is the BIR authorized to collect estate tax deficiencies by the summary remedy
of levy upon and sale of real properties of the decedent without first securing the
authority of the court sitting in probate over the supposed will of the decedent? [5%]
SUGGESTED ANSWER:
Yes. The BIR is authorized to collect estate tax deficiency through the
summary remedy of levying upon and sale of real properties of a decedent,
without the cognition and authority of the court sitting in probate over the
supposed will of the deceased, because the collection of estate tax is executive
in character. As such the estate tax is exempted from the application of the
statute of non-claims, and this is justified by the necessity of government
funding, immortalized in the maxim that taxes are the lifeblood of the
government (Marcos v. UR, G.R. No. 120880, June 5, 1997).
ALTERNATIVE ANSWER:
Yes, if the tax assessment has already become final executory and
enforceable. The approval of the court sitting in probate over the supposed will
of the deceased is not a mandatory requirement for the collection of the estate
tax.
The probate court is determining issues which are not against the property
of the decedent, or a claim against the estate as such, but is against the interest
or property right which the heir, legatee, devisee, etc. has in the property
formerly held by the decedent. (Marcos v. CIR, G.R. No. 120880, June 5, 1997).
IX
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

Government

of

Pateros

issued

to

the

occupants/beneficiaries Certificates of Award giving to them the respective areas


where their houses are erected. Through Ordinance No.2. Series of 1998, the said
municipal government ordained that the lots awarded to the awardees/donees be
finally transferred and donated to them. Determine the tax consequence of the
191

foregoing dispositions with respect to Ace Tobacco Corporation, the Municipal


Government of Pateros, and the occupants/beneficiaries. [5%]
SUGGESTED ANSWER:
The donation by Ace Tobacco Corporation is exempt from the donor's tax
because it qualifies as a gift to or for the use of any political subdivision of the
National Government (Section 101(2), NIRC). The conveyance is likewise exempt
from documentary stamp tax because it is a transfer without consideration.
Since the donation is to be used as a relocation site for the less fortunate
constituents of the municipality, it may be considered as an undertaking for
human settlements, hence the value of the land may be deductible in full from
the gross income of Ace Tobacco Corporation if in accordance to a National
Priority Plan determined by the National Economic Development Authority. (Sec.
34[H](2)(a), NIRC). If the utilization is not in accordance to a National Priority
Plan determined by the National Economic Development Authority, then Ace
Tobacco Corporation may deduct the value of the land donated only to the
extent of five (5%) percent of its taxable income derived from trade or business
as computed without the benefit of the donation. (Sec. 34[Hl(2)(a) in relation to
Sec. 34[H](1), NIRC).
The Municipality of Pateros is not subject to any donors 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.
Alterative Answer on Taxability of Municipality and Awardees:
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
192

occupants/beneficiaries, this is intended to perpetuate the purpose of the


previous donor, the Municipality 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.
X
1.
2.

What is the difference between capital gains and ordinary gains? [3%1
What does the term ordinary income include? [2%]

SUGGESTED ANSWER:
1.

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.
2.

The term ordinary income includes any gain from the sale or

exchange of property which is not a capital asset. These are the gains derived
from the sale or exchange of property such as stock in trade of the taxpayer or
other property of a kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the course of his trade or business, or
property used in trade or business of a character which is subject to the
allowance for depreciation, or real property used in trade or business of the
taxpayer. (Sec. 22[Z] in relation to Sec. 39(A)(1), both of the NIRC).
ALTERNATIVE ANSWER:
The term ordinary income includes income from performance of services,
whether professional or personal, gains accruing from business, and profit
arising from the sale or exchange of ordinary assets.
XI

193

An individual taxpayer who owns a ten (10) door apartment with a monthly
rental of PI0.000 each residential unit, sold this property to another individual
taxpayer. Is the seller liable to pay the capital gains tax? (5%)
SUGGESTED ANSWER:
No. The seller is not liable to pay the capital gains tax because the
property sold is an ordinary asset, i.e. real property used in trade or business. It
is apparent that the taxpayer is engaged in the real estate business, regularly
renting out the ten (10) door apartment.
XII
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:
a)

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). & derived from sources without the Philip-pines,
it is not subject to withholding of final tax because the Philippine tax law and
regulations could not reach out to foreign jurisdictions.
b)

The tax shall be withheld by the Reader's Digest or local agent who

has control over the payment of the prize.


c)

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
conviction to a penalty equal to the total amount of tax not withheld (Sec. 251,
NIRC). In case of failure to withhold the tax or in the case of under withholding,
the deficiency tax shall be collected from the payor/withholding agent (1st par..
Sec. 2.57(A), R.R. No. 2-98).
Any person required under the Tax Code or by rules and regulations to
withhold taxes at the time or times required by law or rules and regulations
shall, in addition to other penalties provided by law, upon conviction be
punished by a fine of not less than Ten thousand pesos (Phpl0,000) and suffer
194

imprisonment of not less than one (1) year but not more than ten (10) years (1st
par., Sec. 255, NIRC).
Comment:
It is suggested that any of the following answers to the question, What are the
liabilities for failure to withhold such a tax? be given full credit:
1.

The payor shall be liable for the payment of the tax which was not

withheld.
2.

The payor/withholding agent shall be liable to both civil and criminal

penalties imposed by the Tax Code.


XIII
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)
(1)(c). NIRC).
XIV
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%]
SUGGESTED ANSWER:
a)

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.

195

b)

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[Al(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[A](I)(c),
NIRC).
Comment:
It is suggested that full credit should be given for any answer to the first
question because the answer requires an interpretation of the Election Code. Pursuant
to the provisions of Section 99(C) of the NIRC, the taxability of this type of
contributions/donations is governed by the Election Code.
XV
An information was filed in court for willful non-payment of income tax the
assessment of which has become final. The accused, through counsel, presented a
motion that he be allowed to compromise his tax liability subject of the information.
The prosecutor indicated his conformity to the motion. Is this procedure correct? (5%]
SUGGESTED ANSWER:
No. Criminal violations, if already filed in court, may not be compromised
(Sec. 204[B], NIRC). Furthermore, the payment of the tax due after apprehension
shall not constitute a valid defense in any prosecution for violation of any
provisions of the Tax Code (Sec. 247(a), NIRC). Finally, there is no showing that
the prosecutor in the problem is a legal officer of the Bureau of Internal Revenue
to whom the conduct of criminal actions is lodged by the Tax Code.
ALTERNATIVE ANSWER:
No. If the compromise referred to is the civil aspect, the procedure
followed is not correct. Compromise for the payment of any internal revenue tax
shall be made only by the Commissioner of Internal Revenue or in a proper case
the Evaluation Board of the BIR (Sec. 204, NIRC). Applying the law to the case at
bar, compromise settlement can only be effected by leave of Court.
XVI
196

May the Commissioner of the Internal Revenue compromise 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%]
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.
XVI
1.
2.

When is a revenue tax considered delinquent? [3%I


What constitutes prima facie evidence of a false or fraudulent return?

[2%]
SUGGESTED ANSWER:
1.

A revenue tax is considered delinquent when it is unpaid after the

lapse of the last day prescribed by law for its payment. Likewise, it could also be
considered as delinquent where an assessment for deficiency tax has become
final and the taxpayer has not paid it within the period given in the notice of
assessment.
2.

There is prima facie evidence of a false or fraudulent return when

the taxpayer has wilfully 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).
XVIII
197

Is the BIR authorized to issue a warrant of garnishment against the bank


account of a taxpayer despite the pendency of his protest against the assessment with
the BIR or appeal with the Court of Tax Appeals? [5%]
SUGGESTED ANSWER:
The BIR is authorized to issue a warrant of garnishment against the bank
account of a taxpayer despite the pendency of protest (Yabes v. Flojo, 15 SCRA
278). Nowhere in the tax Code is the Commissioner required to rule first on the
protest before he can institute collection proceedings on the tax assessed. The
legislative policy is to give the Commissioner much latitude in the speedy and
prompt collection of taxes because it is in taxation that the Government
depends to obtain the means to carry on its operations (Republic v. Tim Tian
Teng Sons, Inc., 16 SCRA 584).
The Commissioner is not authorized to issue the warrant of garnishment
during the pendency of appeal with the Court of Tax Appeals because the
assessment is not yet final and unappealable.
ALTERNATIVE ANSWER:
No. because the assessment has not yet become final, executory and
demandable. The basic consideration in the collection of taxes is whether the
assessment is final and unappealable or the decision of the Commissioner is
final, executory and demandable, the BIR has legal basis to collect the tax
liability by either administrative or judicial action.
XIX
CFB Corporation, a domestic corporation engaged in food processing and other
allied activities, received a letter from the BIR assessing it for deliquency 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%)

198

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 considered as a denial by the BIR of the
protest filed by CFB Corporation (CIR v. Union Shipping Corp. 185 SCRA 547).
Within thirty (30) days from receipt of such denial ln clear and
unequivocal language," I shall then file a petition for review with the Court of
Tax Appeals.
ALTERNATIVE ANSWER:
Within thirty (30) days from receipt of the warrant of distraint and levy, I
shall file a petition for review with the Court of Tax Appeals with an application
for issuance of a writ of preliminary injunction to enjoin the Bureau of Internal
Revenue from enforcing the warrant.
This is the action I shall take because I shall consider the issuance of the
warrant as a final decision of the Commissioner of Internal Revenue which could
be the subject of appeal to the Court of Tax Appeals (Yabes v. Flojo, 15 SCRA
278). The CTA may, however, remand the case to the BIR and require the
Commissioner

to specifically rule

on

the

protest.

The

decision

of

the

Commissioner, if adverse to my client, would then constitute an appeal- able


decision.
XX
Is assessment necessary before a taxpayer may be prosecuted for wilfully
attempting in any manner to evade or defeat any tax imposed by the Internal Revenue
Code? [5%]
SUGGESTED ANSWER:
No. Assessment is not necessary before a taxpayer maybe prosecuted if
there is a prima facie showing of a willful attempt to evade taxes as in the
taxpayer's failure to declare a specific item of taxable income in his income tax
199

returns (Ungab v. Cusi 97 SCRA 877). On the contrary, if the taxes alleged to
have been evaded is computed based on reports approved by the BIR there is a
presumption of regularity of the previous payment of taxes, so that unless and
until the BIR has made a final determination of what is supposed to be the
correct taxes, the taxpayer should not be placed in the crucible of criminal
prosecution (CIR v. Fortune Tobacco Corp., GK No. 119322, June 4, 1996).
1997 BAR EXAMINATION

Question No. 1:
(a)

Is double taxation a valid defense against the legality of a tax measure?

(b)

When an item of Income is taxed In the Philippines and the same

Income Is taxed in another country, is there a case of double taxation?


(c)

What are the usual methods of avoiding the occurrence of double

taxation?
ANSWER:
(a)

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, in that the same subject Is taxed twice when it should
be taxed but once, in a fashion that both taxes are imposed for the same purpose
by the same taxing authority, within the same jurisdiction or taxing district, for
the same taxable period and for the same kind or character of a tax. then it
becomes legally objectionable for being oppressive and inequitable.
(b)

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.
(c)

The usual methods of avoiding the occurrence of double taxation

1.

Allowing reciprocal exemption either by law or by treaty;

are:

200

2.

Allowance of tax credit for foreign taxes paid;

3.

Allowance of deduction for foreign taxes paid; and

4.

Reduction of the Philippine tax rate.

Note:
Any three of the methods shall be given full credit.
Question No. 2:
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.
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 latters power to propose or concur with amendments. This
follows from the co-equality of the two chambers of Congress [Tolentino v.
Secretary of Finance, GR No. 115455, Oct. 30, 1995).
Question No. 3:
"X" Corporation was the recipient in 1990 of two tax exemptions both from
Congress, one law exempting the company's bond issues from taxes and the other
201

exempting the company from taxes in the operation of its public utilities. The two laws
extending the tax exemptions were revoked by Congress before their expiry dates.
Were the revocations constitutional?
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, 1996).
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.
Question No. 4:
Taxes were generally imprescriptible; statutes, however, may provide otherwise.
State the rules that have been adopted on this score by
(a)

The National Internal Revenue Code;

(b)

The Tariff and Customs Code; and

(c)

The Local Government Code Answer;

The rules that have been adopted on prescription are as follows:


(a)

National Internal Revenue Code - The statute of limitation for assessment

of tax if a return is filed is within three (3) years from the last day prescribed by law for
the filing of the return or if filed after the last day, within three years from date of
actual filing. If no return is filed or the return filed is false or fraudulent, the period to
assess is within ten years from discovery of the omission, fraud or falsity.

202

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)

Tariff 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).
Question No. 5:
(a)

Discuss the meaning of the Global and Schedular systems of taxation.

(b)

To which system would you say that the method of taxation under the

National Internal Revenue Code belongs?


ANSWER:
(a)

A global system of taxation is one where the taxpayer is required to

lump up all items of income earned during a taxable period and pay under a
single set of income tax rules on these different items of Income.
A schedular system of taxation provides for a different tax treatment of
different types of income so that a separate tax return is required to be filed for
each type of income and the tax is computed on a per return or per schedule
basis.
(b)

The method of taxation under the NIRC belongs to a system which is

partly schedular and partly global.


203

Question No. 6:
Juan, a Filipino citizen, has emigrated to the United States where he is now a
permanent resident. He owns certain income-earning property in the Philippines from
which he continues to derive substantial income. He also receives income from his
employment in the United States on which the US income tax is paid.
On which of the above income is the taxable, if at all, in the Philippines, and
how, in general terms, would such income or incomes be taxed?
ANSWER:
Juan, shall be taxed on both his Income from the Philippines and on his
income from the United States be-cause his being a citizen makes him taxable on
all income wherever derived. For the income he derives from his property in the
Philippines, Juan shall be taxed on his net Income under the Simplified Net
Income Taxation Scheme (SN1TS) whereby he shall be considered as a selfemployed individual. His income as employee in the United States, on the other
hand, shall be taxed in accordance with the schedular graduated rates of 1%, 2%
and 3%. based on the adjusted gross income derived by non-resident citizens
from all sources without the Philippines during each taxable year.
Question No. 7:
A bachelor was employed by Corporation A on the first working day of January
1996 on a part-time basis with a salary of P3.500.00 a month. He then received the
13th month pay. In September 1996, he accepted another part-time job from
Corporation B from which he received a total compensation of P14,500.00 for the year
1996. The correct total taxes were withheld from both earnings.
With the withholding taxes already paid, would he still be required to file an
income tax return for his 1996 income?
ANSWER:
Yes, because what Is exempt from filing are those individuals who have
total compensation income not exceeding P60.000 with the taxes correctly
withheld only by one employer. In this case, even if his aggregate compensation
204

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).
Question No. 8:
A corporation, engaged in real estate development, executed deeds of sale on
various subdivided lots. One buyer, after going around the subdivision, bought a
comer lot with a good view of the surrounding terrain. He paid PI .2 million, and the
title to the property was issued. A year later, the value of the lot appreciated to a
market value of PI.6 million, and the buyer decided to build his house thereon. Upon
inspection, however, he discovered that a huge tower antennae had been erected on
the lot frontage totally blocking his view. When he complained, the realty company
exchanged his lot with another comer lot with an equal area but affording a better
view.
Is the buyer liable for capital gains tax on the exchange of the lots?
ANSWER:
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).

205

Question No. 9:
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?
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. The interest from money market placements is
subject to a final withholding tax of 20%; dividends from domestic corporation
are exempt from income tax; and gains from stock transactions with the
Philippine Stock Exchange are subject to transaction tax which is in lieu of the
income tax. The proceeds under an insurance policy on the loss of goods is not
an item of income but merely a return of capital hence not taxable.
ALTERNATIVE ANSWER:
The gross receipts from trading business are includible as an item of
income in the corporate income tax return. Likewise, the gain or loss realized as
a consequence of the receipt of proceeds under an insurance policy on the loss
of goods will be included in the corporate income tax return either as a taxable
gain or a deductible loss. The gain or loss is arrived at by deducting from the
proceeds of insurance (amount realized) the basis of the good lost (Sec. 34(a).
NIRC). The net income of the corporation shall be subject to corporate income
tax rate of 35%.
The other items of revenue will not be included in the corporate income
tax return. The interest from money market placements is subject to a final
withholding tax of 20%; dividends from domestic corporation are exempt from
206

income tax; and gains from stock transactions with the Philippine Stock
Exchange are subject to transaction tax which is in lieu of the income tax.
Question No. 10:
Three brothers inherited in 1992 a parcel of land valued for real estate tax
purposes at P3.0 million which they held in co-ownership. In 1995, they transferred
the property to a newly organized corporation as their equity which was placed at the
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)?
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 PI00,000 and 20% for the excess thereof (Section
21(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 subjected to income tax. then, the sale will also
be taxable if a gain results therefrom. In the instant case, the sale will not be
207

subject to any internal revenue tax other than the documentary stamp tax,
because the seller did not realize any gain from the safe. The gain is measured by
the difference between the amount realized (selling price) and the basis of the
property. Incidentally, the basis to him is his share in the value of the property
received at the time of exchange, which is P2 Million, an amount. Just equal to
the amount realized from the sale.
Question No. 11:
An insolvent company had an outstanding obligation of P100.000.00 from a
creditor. Since it could not pay the debt, the creditor agreed to accept payment
through dacion enpago a property which had a market value of P30,000.00. In the
dacion en pago document, the balance of the debt was condoned.
(a)

What is the tax effect on the discharge of the unpaid balance of the

obligation on the debtor corporation?


(b)

Insofar as the creditor is concerned, how is he effected taxwise as a

consequence of the transaction?


ANSWER:
(a)

The condonation of the unpaid balance of the obligation has the

effect of a donation made on the part of the creditor. It is obvious that the
creditor merely desires to benefit the debtor and without any consideration
therefore cancels the debt, the amount of the debt cancelled is a gift from the
creditor to the debtor and need not be included in the latter's gross income
(Sec.50, RR No. 2);
(b)

For the difference of P70.000, the creditor shall be subject to

donors 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.
208

(b)

The write-off of the bad debt will entitle the creditor to claim the

same as a deduction from its gross income. Question No. 12:


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.
Question No. 12:
In 1994, the income tax returns of the heirs were examined and deficiency
income tax assessments were is-sued against each of them for the years 1989 to 1993,
inclusive, as having entered into an unregistered partnership. Were the assessments
justified?
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
respective definite shares of the estate and the income thereof, for each of them
to manage and dispose of as exclusively his own without the intervention of the
other heirs, and, accordingly, he becomes liable individually for all taxes in
connection therewith. If after such partition, he allows his shares to be held in
common with his co-heir under a single management to be used with the intent
of making profit thereby in proportion to his share, there can be no doubt that,
even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed (Lorenzo Ona, et at v.
CIR, 45 SCRA 74).

209

ALTERNATIVE ANSWER:
No. the assessments are not justified. The mere sharing of income does
not of itself establish a partnership absent any dear intention of the co-owners
who are only awaiting liquidation of the estate.
Question No. 13:
Mar and Joy got married in 1990. A week before their marriage, Joy received, by
way of donation, a condominium unit worth P750.000.00 from her parents. After
marriage, some renovations were made at a cost of PI50,000.00. The spouses were
both employed in 1991 by the same company. On 30 December 1992, their first child
was bom, and a second child was bom on 07 November 1993. In 1994, they sold the
condominium unit and bought a new unit.
Under the foregoing facts, what were the events in the life of the spouses that
had income tax incidences?
ANSWER:
The events in the life of spouses. Mar and Joy. which have income tax
incidences are the following:
(a)

Their marriage in 1990 qualifies them to claim personal exemption

for married individuals;


(b)

Their employment in 1991 by the same company will make them

liable to the income tax imposed on gross compensation income;


(c)

Birth of their first child in December 1992 would give rise to an

additional exemption of P5.000 for taxable year 1992;


(d)

Birth of their second child in November 1993 would likewise entitle

them to claim additional exemption of P5,000 raising their additional personal


exemptions to P10,000 for taxable year 1993; and 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.
Question No. 14:
210

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'?
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 in the course of business:
b)

Distribution or transfer to:


(1)

Shareholders or investors as share in the profits of VAT-

registered persons: or
(2)
c)

Creditors in payment of debt:

Consignment of goods if actual sale is not made within 60 days

following the date such goods were consigned: and


d)

Retirement from or cessation of business, with respect to

inventories of taxable goods existing as of such retirement or cessation.


Question No. 15:
A corporation files its income tax return on a calendar year basis. For the first
quarter of 1993, it paid on 30 May 1993 its quarterly income tax in the amount of
P3.0 million. On 20 August 1993, it paid the second quarterly income tax of P0.5
million. The third quarter resulted in a net loss, and no tax was paid. For the fourth
and final return for 1993, the company reported a net loss for the year, and the
taxpayer Indicated in the income tax return that it opted to claim a refund of the
quarterly income tax payments.
On 10 January 1994, the corporation filed with the Bureau of Internal Revenue
a written claim for the refund of P3.5 million.
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

211

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?
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. PhilAm 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.
Question No. 16:
(a)

A taxpayer received, on 15 January 1996, an assessment 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 n 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?
ANSWER:
(a)

No. Before taxpayer can avail of judicial remedy he must first

exhaust administrative remedies by filing a protest within 30 days from receipt


of the assessment. It is the Commissioner's decision on the protest that give the
Tax Court jurisdiction over the case provided that the appeal is filed within 30
212

days from receipt of the Commissioners decision. An assessment by the BIR is


not the Commissioner's decision from which a petition for review may be filed
with the Court of Tax Appeals. Rather, it is the action taken by the
Commissioner in response to the taxpayer's protest on the assessment that
would constitute the appeallable decision (Section 7, RA 1125).
(b)

No, the petition for review cannot be entertained by the Court of

Appeals, since decisions of the Commissioner on cases involving claim for tax
refunds are within the exclusive and primary jurisdiction of the Court of Tax
Appeals (Section 7, RA 1125).
Question No. 17:
Explain briefly each of the special customs duties authorized under the Tariff
and Customs Code.
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:
(c)

Marking Duty - This is a duty on an ad valorem basis imposed for

improperly marked articles. The law requires that foreign Importations


must be marked in any official language of the Philippines the name of the
country of origin of the article:

213

(d)

Discriminatory or Retaliatory Duty - This is a duty imposed on

imported goods whenever it is found as a fact that the country of origin


discriminates against the commerce of the Philippines in such a manner
as to place the commerce of the Philippines at a disadvantage compared
with the commerce of any foreign country.
Question No. 18:
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?

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 forfeiture may still be exercised by the Bureau of Customs
even if the goods are no longer in its custody.
(b)

On the other hand, when the goods are properly released and thus

beyond the reach of tax lien, the government can seek payment of the tax
liability through judicial action since the tax liability of the importer constitutes
a personal debt to the government, therefore, enforceable by action. In this case
judicial remedy is normally availed of instead of the administrative remedy.
Question No. 19:
State the fundamental principles underlying real property taxation in the
Philippines.

214

ANSWER:
The following are the fundamental principles governing real property
taxation:
(a)

Real property shall be appraised at its current and fair market

(b)

Real property shall be classified for assessment purposes on the

value;

basis of its actual use:


(c)

Real property shall be assessed on the basis of a uniform

classification within each local government unit;


(d)

The appraisal, assessment, levy, and collection of real property tax

shall not be let to any private person; and


(e)

The appraisal and assessment of real property shall be equitable.

Question No. 20:


Give the remedies available to local government units to enforce the collection of
taxes, fees, and charges?
ANSWER:
The remedies available to the local government units to enforce collection
of taxes, fees, and charges are:
(a)

Administrative remedies of distraint of personal property of

whatever kind whether tangible or intangible, and levy of real property and
interest therein; and
(b)
Judicial remedy by institution of an ordinary civil action for
collection with the regular courts of proper jurisdiction.
1996 BAR EXAMINATION
Question No. l:

215

1)

What are the basic features of the present income tax system"?

ANSWER:
OUT present income tax system can be said to have the following basic features:
a.

It has adopted a comprehensive tax situs by using the nationality,

residence, and source rules. This makes citizens and resident aliens taxable on
their income derived from all sources while non-resident aliens are taxed only on
their income derived from within the Philippines. Domestic corporations are also
taxed on universal income while foreign corporations are taxed only on income
from within.
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.
individual

It has retained more schedular than global features with respect to


taxpayers

but

has

maintained

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-eam concept or the so called
withholding tax.

216

c.

The corporate income tax is a one-layer tax in that distribution of profits

to stockholders (except to non-residents are not subject to Income tax.


2) What is the nature of the power of taxation?
ANSWER:
The power to tax is an attribute of sovereignty and is inherent in the
State. It is a power emanating from necessity because it imposes a necessary
burden

to

preserve

the

States

sovereignty

(PhiL

Guarantee

Co.

vs.

Commissioner, L-22074, April 30, 1965). It is inherently legislative in nature and


character in that the power of taxation can only be exercised through the
enactment of law.
ALTERNATIVE ANSWER:
The nature of the power of taxation refers to its own limitations such as
the requirement 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.
Question No. 2:
1)

X, a lessor of a property, pays real estate tax on the premises, a real

estate dealers tax based on rental receipts and income tax on the rentals. X claims
that this is double taxation.
Decide.
ANSWER:
There is no double taxation. Double taxation means taxing for the same
tax period the same thing or activity twice, when it should be taxed but once, by
the same taxing authority for the same purpose and with the same kind or
character of tax. The real estate tax is a tax on property; the real estate dealers
tax is a tax on the privilege to engage in business; while the income tax is a tax
on the privilege to earn an income. These taxes are imposed by different taxing
authorities and are essentially of different kind and character [Villanueva vs.
City of Iloilo, 26 SCRA 578).
217

2) Is protest at the time of payment of taxes/duties a requirement to preserve


the taxpayers right to claim a refund? Explain.
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 fifteen days thereafter, a written
protest setting forth his objections to the ruling or decision in question (Sec.
2308, TCC).
Question No. 3:
1)

Distinguish tax evasion from tax avoidance.

ANSWER:
a)

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.
b)

X is the owner of a residential lot situated at Quirino Avenue, Pasay

City. The lot has an area of300square 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
218

not been paying his income taxes. X is now being assessed for the unpaid income
taxes in the total amount of PI50,000.00. X claims his income tax liability has
already been compensated by the amount of P300.000.00 which the government
owes him for the expropriation of his property.
Decide.
ANSWER:
The income tax liability of X can not be compensated with the amount
owed by the Government as compensation for his property expropriated. Taxes
are of distinct kind, essence and nature than ordinary obligations. Taxes and
debts cannot be the subject of compensation because the Government and X are
not mutually creditors and debtors of each other and a claim for taxes is not a
debt, demand, contract, or judgment as is allowable to be set off. (Francia vs.
LAC, G.R 76749. June 28, 1988)
Question No. 4:
1)

Why are tax exemptions strictly construed against the taxpayer?

ANSWER:
Tax exemptions are strictly construed against the taxpayer because such
provisions are highly disfavored and may almost be said to be odious to the law
(Manila Electric Company vs. Vera, 67 SCRA351). The exception contained in the
tax statutes must be strictly construed against the one claiming the exemption
because the law does not look with favor on tax exemptions they being contrary
to the life-blood theory which is the underlying basis for taxes.
2)

When may a taxpayers suit be allowed?

ANSWER:
A taxpayer's suit may only be allowed when an act complained of, which
may include a legislative enactment, directly involves the illegal disbursement of
public funds derived from taxation (Pascual vs. Secretary of Public Works, 110
Phil. 331).
219

Question No. 5:
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.


ANSWER:
1)

Foreign corporations effecting a donation is subject to donors 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
employees, is not subject to donors tax (BIR Ruling No. 018-87, January 26,
1987). However, if 85% of the business of the foreign corporation is located in
the Philippines or the shares donated have acquired business situs in the
Philippines, the donation may be taxed in the Philippines subject to the rule of
reciprocity.
2)

If the shares of stocks were given to Mr. Y in consideration of his

services to the corporation, the same shall constitute taxable compensation


income to the recipient because it is a compensation for services rendered under
an employer-employee relationship, hence, subject to income tax.
The par value or stated value of the shares issued also constitutes
deductible expense to the corporation provided it is subjected to withholding tax
on wages.
Question No. 6:
X is employed as a driver of a corporate lawyer and receives a monthly salary of
P5,000.00 with free board and lodging with an equivalent value of P1,500.00.
1) What will be the basis of Xs income tax.
2) Will your answer in question (a) be the same if X's employer is an
obstetrician? Why?

220

ANSWER:
1)

The basis of Xs income tax would depend on whether his employer

is an employee or a practising corporate lawyer. If his employer is an employee,


the basis of Xs 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

Xs 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.
Question No. 7:
1)

Distinguish a false return from a fraudulent return.

ANSWER:
The distinction between a false return and a fraudulent return is that the
first merely implies a deviation from the truth or fact whether intentional or
not, whereas the second is intentional and deceitful with the sole aim of evading
the correct tax due [Aznar vs. Commissioner, L-20569. 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 under declaration of
income, intentional over declaration of deductions or the recurrence of both. A
221

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, L20569, August 23, 1974)
2)

Explain the extent of the authority of the Commissioner of Internal

Revenue to compromise and abate taxes?


ANSWER:
The authority of the Commissioner to compromise encompasses both civil
and criminal liabilities of the taxpayer. The civil compromise is allowed only in
cases (a) where the tax assessment is of doubtful validity, or (b) when the
financial position of the taxpayer demonstrates a clear inability to pay the tax.
The compromise of the tax liability is possible at any stage of litigation and the
amount of compromise is left to the discretion of the Commissioner except with
respect to final assessments issued against laige taxpayers wherein the
Commissioner cannot compromise for less than fifty percent (50%). Any
compromise involving large taxpayers lower than fifty percent (50%) shall be
subject to the approval of the Secretary of Finance.
All criminal violations except those involving fraud, can be compromised
by the Commissioner but only prior to the filing of the information with the
Court.
The Commissioner may also abate or cancel a tax liability when (a) the tax
or any portion thereof appears to have been unjustly or excessively assessed; or
(b) the administrative and collection costs involved do not justify collection of
the amount due. (Sec. 204. NIRC)
Question No. 8:
The Constitution exempts from taxation charitable institutions, churches,
parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and
lands, buildings and improvements actually, directly and exclusively used for religious,
charitable and educational purposes.

222

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.
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.
Question No. 9:
1)

X, an employee of ABC Corporation died. ABC Corporation gave Xs

widow an amount equivalent to Xs salary for one year.


Is the amount considered taxable income to the widow? Why?
ANSWER:
No. The amount received by the widow from the decedents 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 the widow is not an income are as follows:
a.
b.

the gift was made to the widow rather than the estate:
there was no obligation for the corporation to make further

payments to the deceased;


223

c.

the widow had never worked for the corporation;

d.

the corporation received no economic benefit; and

e.

the deceased had been fully compensated for his services (Estate of

Sydney Carter us. Commissioner, 453 F. 2d 61 (2d Cir. 1971).


2)

A, an employee of the Court of Appeals, retired upon reaching the

compulsory age of 65 years. Upon compulsory retirement, A received the money value
of his accumulated leave credits in the amount of P500,000.00.
Is said amount subject to tax? Explain.
ANSWER:
No. The commutation of leave credits, more commonly known as terminal
leave pay, Le., the cash equivalent of accumulated vacation and sick leave
credits given to an officer or employee who retires, or separated from the service
through no fault of his own, is exempt from income tax. (BIR Ruling 238-91
dated November 8, 1991; Commissioner vs. CAandEfrenCastaneda, GRNo. 96016,
October 17, 1991).
Question No. 10:
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 donors tax from Ayala Land Corporation, which taxes, Onyoc and Ayala
Land Corporation refuse to pay.
Decide.
ANSWER:
The prize will not constitute a taxable income to Onyoc, hence the BIR is
not correct in imposing the income tax. RA. No. 7549 explicitly provides that
All prizes and awards granted to athletes in local and International sports
224

tourna-ments 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 donors tax from Ayala Land
Corporation. The law is clear when it categorically stated That the donors of
said prizes and awards shall be exempt from the payment of the donors tax."
Question No. 11:
1)

Who are liable for the payment of Value-Added Tax?

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

2)

What are the characteristics of the Value-Added Tax?

not

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 ANSWER:
The value-added tax has the following characteristics:
a.

It is an indirect tax where tax shifting is always presumed:

b.

It is consumption-based;
225

c.

It is imposed on the value-added in each stage of distribution;

d.

It is a credit-invoice method value-added tax; and

e.

It is not a cascading tax.

3)

Give at least three (3) real estate transactions which are not subject to

the Value-Added Tax.


ANSWER:
Real estate transactions which are exempt from the value-added tax are:
a.

Sale of real property not primarily held for sale or lease In the

ordinary course of trade or business;


b.

Sale of real property utilized for socialized housing under RA. No.

c.

Sale of real property utilized under the low-cost housing under BP

7279;

Big. 220.
Note:
The other real estate transactions which are exempt from the value-added tax which
may be cited by the bar candidates are as follows:
a.

Transfer of real property to a trustee if the property is to be held merely

in trust for the trustor.


b.

Transfer of real property to a corporation in exchange for its shares of

stock under Section 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.

226

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.
4)

What Is the basis of the Value-Added Tax on taxable sales of real

property?
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.
Question No. 12:
1)

May the Court of Tax Appeals issue an injunction to enjoin the collection

of taxes by the Bureau of Internal Revenue? Explain.


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 taxpayers 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.
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
227

compromise, Le. 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).
Question No. 13:
On January 1, 1996, armed with warrants of seizure and detention issued by
the Bureau of Customs, members of the customs enforcement and security services
coordinated with the Quezon City police to search the premises owned by a certain Mr.
Ho along Kalayaan Avenue, Quezon City, which allegedly contained untaxed vehicles
and parts. While inside the premises, the member of 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.
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).
Question No. 14:

228

1)

Compare the taxpayers remedies under the National Internal Revenue

Code and the Tariff and Customs Code.


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 administrative remedy which is the filing of
protest within 30 days from receipt of assessment, and judicial remedy which is
the appeal of the adverse decision of the Commissioner on the protest with the
Court of Tax Appeals, thereafter to the Court of Appeals and finally with the
Supreme Court.
The remedy after payment is availed of by paying the assessed tax within
30 days from receipt of assessment and the filing of a claim for refund or tax
credit of these taxes on grounds that they are erroneously paid within two years
from date of payment. If there is a denial of the claim, appeal to the CTA shall be
made within thirty days from denial but within two years from date of payment.
If the Commissioner fails to act on the claim for refund or tax credit and the
two- year period is about to expire, the taxpayer should consider the continuous
inaction of the Commissioner as a denial and elevate the case to the CTA before
the expiration of the two- year period.
Under the Tariff and Customs Code, taxpayers remedies arise only after
payment of duties. The administrative remedies consist of filing a claim for
refund which may take the form of abatement or drawback. The taxpayer can
also file a protest within 15 days from payment if he disagrees with the ruling or
decision of the Collector of Customs regarding the legality or correctness of the
assessment of customs duties. If the decision of the Collector is adverse to the
taxpayer, he can notify the Collector within 15 days from receipt of said decision
of his desire to have his case reviewed by the Commissioner. The decision of the
Collector

on

the

taxpayers

protest,

if

adverse

to

the

Government,

is

automatically elevated to the Commissioner for review; and if such decision is


affirmed by the Commissioner, the same shall be automatically elevated to and
finally reviewed by the Secretary of Finance.

229

Resort to judicial relief can be had by the taxpayer by appealing the


decision of the Commissioner or of the Secretary of Finance (for cases subject to
automatic review) within 30 days from the promulgation of the adverse decision
to the CTA.
2)

Discuss briefly the remedies of an importer during the pendency of

seizure proceedings.
ANSWER:
During the pendency of seizure proceedings the importer may secure the
release of the imported property for legitimate use by posting a bond in an
amount to be fixed by the Collector, conditioned for the payment of the
appraised value of the article and/or any fine, expenses and costs which may be
adjudged in the case; provided, that articles the importation of which is
prohibited by law shall not be released under bond.
The importer may also offer to pay to the collector a fine imposed by him
upon the property to secure its release or in case of forfeiture, the importer shall
offer to pay for the domestic market value of the seized article, which offer
subject to the approval of the Commissioner maybe accepted by the Collector in
settlement of the seizure case, except when there is fraud. Upon payment of the
fine or domestic market value, the property shall be forthwith 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.
1995 BAR EXAMINATION
Question No. 1:
1)
2)

What is "gross income" for purposes of the Income tax?


How does income" differ from capital"? Explain.

ANSWER:

230

1)

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: royalties; dividends; annuities; prizes and
winnings; pensions; and partners distributive share of the gross income of
general professional partnership (Sec. 28, NIRC).
ALTERNATIVE ANSWER:
a)

Gross income means all wealth which flows into the taxpayer other

than as a mere return of capital. It includes the forms of income specifically


described as gains and profits including gains derived from the sale or other
disposition of capital.
b)

Gross income means Income (in the broad sense) less income which

is, by statutory provision or otherwise, exempt from the tax imposed by law (Sec.
36, Rev. Reg. No. 2) Gross income from business means total sales, less cost of
goods sold, plus any Income from investments and from incidental or outside
operations or sources (Sec. 43, Rev. Reg. No. 2).
2)

Income differs from capital in that income is any wealth which

flows into the taxpayer other than a return of capital while capital constitutes
the Investment which is the source of income. Therefore, capital is fund while
income is the flow. Capital is wealth, while income is the service of wealth.
Capital is the tree while income is the fruit (Vicente Madrigal, et al v. James
Rafferty, 38 Phil. 414).
Question No. 2:
1)

Mr. Adrian is an executive of a big business corporation. Aside from his

salary, his employer provides him with the following benefits: free use of a residential
house in an exclusive subdivision, free use of a limousine and membership in a
country club where he can entertain customers of the corporation.
Which of these benefits, if any, must Mr. Adrian report as income? Explain.

231

2)

Capt. Canuto is a member of the Armed Forces of the Philippines. Aside

from his pay as captain, the government gives him free uniforms, free living quarters
in whatever military camp he is assigned, and free meals inside the camp.
Are these benefits income to Capt. Canuto? Explain.
3)

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 saiaiy of P10,000.00 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 P100,000.00 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.
ANSWER:
1)

Mr. Adrian must report the imputed rental value of the house and

limousine as income. If the rental value exceeds the 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 sendees 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).
232

The free use of a limousine and the membership in a country dub 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 employer. This is to enable Mr. Adrian to
entertain company guests (Collector vs. Henderson).
2)

No, the free uniforms, free living quarters and the free meals inside

the camp are not income to Capt. Canuto because these are facilities or
privileges furnished by the employer for the employer's convenience which are
necessary incidents to proper performance of the military personnel's duties.
3)

None.

The

compensation

for

injuries

P200.000
sustained

moral
by

and
Mr.

exemplary
Infante.

The

damages

are

P400.000.00

reimbursement for hospitalization expenses and the P60.000.00 for salaries he


failed to receive are amounts of any damages received whether by suit or
agreement on account of such injuries. Section 28(b)(5) of the Tax Code
specifically exclude these amounts from the gross income of the individual
injured. (Section 28(b). NIRC and Sec. 63 Rev. Reg. No. 2)
ALTERNATIVE ANSWER:
The income realized from the judgment is only the recovery for lost
salaries. This constitutes taxable income because were it not for the injury, he
could have received it from his employer as compensation income. All the other
amounts received are either compensation for injuries or damages received on
account of such injuries which are exclusions from gross income pursuant to
Section 28(b)(5) of the Tax Code.
Question No. 3:
Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriquez
for ten years at a rental of P12,000.00 per year. The condition is that Mr. Enriquez will
233

erect a building on the land which will become the property of Mr. Domingo at the end
of the lease without compensation or reimbursement whatsoever for the value of the
building.
Mr. Enriquez erects the building. Upon completion the building had a fair
market value of PI Million. At the end of the lease the building is worth only
P900.000.00 due to depreciation.
Will Mr. Domingo have income when the lease expires and becomes the owner of
the building with a fair market value of P900.000.00? How much income must he
report on the building? Explain.
ANSWER:
When a building is erected by a lessee in 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:
a)

The lessor may report as income the market value of the

building at the time when such building is completed; or


b)

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 PI,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:
234

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 rental
income that has accrued as of said date.
Question No. 4:
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.
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 latters gross income.
Question No. 5:
For failure of Oceanic Company, Inc. (OCEANIC), to pay deficiency taxes of P20
Million, the Commissioner of Internal Revenue issued warrants of distraint on
OCEANICs personal properties and levied on its real properties. Meanwhile, the
Department of Labor through the Labor 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.
The Commissioner of Internal Revenue filed a motion with the Labor Arbiter to
annul the sale and enjoin the sheriff from disposing the proceeds thereof. The

235

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.
ANSWER:
The motionfiled 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 employers 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
at G.R No. 74965, November 9, 1994).
Question No. 6:
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 months 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)
Explain.
2)

Did Mr. Jacobo derive income when he received his separation pay?

Did Mr. Kintanar derive income when he received his separation pay?

Explain.
ANSWER:
1)

Yes, Mr. Jacobo derived a taxable income when he received his

separation pay because his separation from employment was voluntary on his

236

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 official or employee (Sec 28, NIRC).
ALTERNATIVE ANSWER:
No, Mr. Jacobo did not derive any taxable income because the separation
pay was due to a retrenchment policy adopted by the company so that any
employee terminated by virtue thereof is considered to have been separated due
to causes beyond the employees control. The voluntary redundancy program
requiring employees to make an offer to resign is only considered as a tool to
expedite the lay-off of excess manpower whose services are no longer needed by
the employer, but is not the main reason or cause for the termination.
2)

No. Mr. Kintanar did not derive any income when he received his

separation pay because his separation from employment is due to causes beyond
his control. The separation was involuntary as it was a consequence of the
closure of various unprofitable departments pursuant to the redundancy
program.
Question No. 7:
Five years ago Marquez, Peneyra, Jayme, Posadas and Manguiat, all lawyers,
formed a partnership which they named Marquez and Peneyra Law Offices. The
Commissioner of Internal Revenue thereafter issued Revenue Regulation 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 RA. 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 taxpayers suit alleging that

Revenue Regulation No. 2-93 violates the principle of uniformity in taxation because
237

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 professions and partners in general professional partnerships.
Is this contention correct? Explain.
2)

Is Revenue Regulation No. 2-93 now considered as having adopted a

gross income method instead of retaining the net income taxation scheme? Explain.
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 obligated to report as income their share in the income of
the general professional partnership during the taxable year whether distributed
or not. The SNITS treat professionals as one class of taxpayer so that they shall
be treated alike irrespective of whether they practice their profession alone or in
association with other professionals under a general professional partnership.
What are taxed differently are individuals and corporations. All individuals
similarly situated are taxed alike under the regulations, therefore, the principle
of uniformity in taxation is not violated. On the contrary, all the requirements of
a valid classification have been complied with [Tan vs. del Rosario et al G.R No.
109289, October 3. 1994).
2)

No. Revenue Regulation No. 2-93 implementing RA No. 7496 have

indeed significantly reduced the items of deduction by limiting it to direct costs


and expenses or the 40% of gross receipts maximum deduction in cases where
the direct costs are difficult to determine. The allowance of limited deductions
however, is still in consonance with the net income taxation scheme rather than
the gross income method. While it is true that not all the expenses of earning
the income might be allowed, this can well be justified by the fact that
deductions are not matters of right but are matters of legislative grace.
Question No. 8:
Mr. Lajojo is a big-time swindler. In one year he was able to earn PI Million from
his swindling activities. When the Commissioner of Internal Revenue discovered his

238

income from swindling, the Commissioner assessed him a deficiency income tax for
such income.
The lawyer of Mr. Lajojo protested the assessment on the following grounds:
1)
2)

The income tax applies only to legal income, not to illegal income:
Mr. Lajojos receipts from his swindling did not constitute income

because he was under obligation to return the amount he had swindled, hence, his
receipt from swind1 ling 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 assessment, 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.
ANSWER:
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 us.
U.S.,366 U.S. 213, 1961). To treat the embezzled funds not as taxable Income
would perpetuate injustice by relieving embezzlers of the duty of paying income
taxes on the money they enrich themselves with through embezzlement, while
honest people pay their taxes on every conceivable type of income. (Janies us.
U.S.)

3)

The deficiency income tax assessment is a direct tax imposed on

the owner which is an excise on the privilege to earn an income. It will not
239

necessarily be paid out of the same income that were subjected to the tax. Mr.
Lajojos liability to pay the tax is based on his having realized a taxable income
from his swindling activities and will not affect his obligation to make
restitution. Payment of the tax is a civil obligation imposed by law while
restitution is a civil liability arising from a crime.
Question No. 9:
In 1990, Mr. Naval bought a lot for PI,000,000.00 in a subdivision with the
intention of building his residence on it. In 1994, he abandoned his plan to build his
residence on it because the surrounding area became a depressed area and land
values in the subdivision went down; instead, he sold it 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.

ANSWER:
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.
Question No. 10:
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.
In gratitude Perez, in behalf of his manufacturing firm, sent Osorio an
expensive car as a gift. Osorio called Perez and told him that there was really no
240

obligation on the part of Perez or his company, to give such an expensive gift. But
Perez insisted that Osorio keep the car. The company of Perez deducted the cost of the
car as a business expense.
The Commissioner of Internal Revenue included the fair market value of the car
as income of Osorio who protested that the car was a gift and therefore excluded from
income.
Who is correct, the Commissioner or Osorio? Explain.
ANSWER:
The Commissioner is correct. The car having been given to Mr. Osorio in
consideration of having introduced Mr. Perez to a foreign Importer which
resulted to a profitable business deal is considered to be a compensation for
services rendered. The transfer is not a gift because it is not made out of a
detached or disinterested generosity but for a benefit accruing to Mr. Perez. The
fact that the company of Mr. Perez takes a business deduction for the payment
indicates that it was considered as a pay rather than a gift. Hence, the fair
market value of the car is includable in the gross Income pursuant to Section
28(a)(1) of the Tax Code (See 1974 Federal Tax Handbook, p. 145). A payment
though voluntary, if it is in return for services rendered, or proceeds from the
constraining force of any moral or legal duty or a benefit to the payor is
anticipated, is a taxable income to the payee even if characterized as a gift by
the payor (Commissioner vs. Duberstein, 363 U.S. 278).
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 donors 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 donors tax on Mr Perez company. (Sec.
28(b)(3), NIRC; Pirovano vs. Commissioned
241

Question No. 11:


Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he
retired at 65 he received retirement pay equivalent to two months salary for every year
of service as provided in the hospital BIR approved retirement plan.
The Board of Directors of the hospital felt that the hospital should give Quiroz
more than what was provided for in the hospital's retirement plan in view of his loyalty
and invaluable services for forty-five years; hence, it resolved to pay him a gratuity of
P1 Million over and above his retirement pay.
The Commissioner of Internal Revenue taxed the P1 Million 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 PI Million was

retirement pay and therefore excluded from income? Explain.


2)

Is Mr. Quiroz correct in claiming that the additional PI Million was gift

and therefore excluded from income? Explain.


ANSWER:
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 employers motivation test,
emphasis should be placed on the value of Mr. Quiroz services to the company as
the compelling reason for giving him the gratuity, hence it should constitute a
taxable income. The payment would only qualify as a gift if there is nothing but
good will, esteem and kindness' which motivated the employer to give the
242

gratuity. (Stanton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein
problem.
ALTERNATIVE ANSWER:
Yes. The 1 million is not compensation income subject to income tax but a
gift from his employer. There was no evidence presented to show that he was not
fully compensated for his 45 years of service. If his services contributed in a
large measure to the success of the hospital, it did not give rise to a recoverable
debt. The PI million is purely a gratuity from the company. It is a taxable gift to
the transferor. Under the Tax Code, gifts are excluded from gross income
therefore

exempt

from

income

tax.

(Sec.

28(b)(3).

NIRC;

Pirovano

vs.

Commissioner)
Question No. 12:
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.
The Commissioner of Internal Revenue 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.
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
243

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. Sonoras companionship. The transfer
being gratuitous is subject to donors tax. Mr. Rodrigo should be assessed
deficiency donors tax and a 50% surcharge imposed for fraudulently simulating
a contract of sale to evade donors tax, (Sec. 91(b), NIRC).
Question No. 13:
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 correct? Explain.

2)

If you were the lawyer of Stephen Yang, what would you have advised

your client before he included in his 1994 return the amount of P50.000.00 as 1993
income to avoid the fraud surcharge? Explain.
3)

Considering that Stephen Yang had already been assessed a deficiency

income tax for 1993 for his failure to report the P50,000.00 income, what would you
advise him to do to avoid the penalties for tax delinquency? Explain.
4)

What would you advise Stephen Yang to do with regard to the income

tax he paid for the P50,000.00 in his 1994 return? In case your remedy fails, what is
your other recourse? Explain.
ANSWER:
1)

The examiner is correct in assessing a deficiency income tax for

taxable year 1993but not in imposing the 50% fraud surcharge. The amount of
all items of gross income must be included in gross income during the year in
which received or realized (Sec. 38, NIRC). The 50% fraud surcharge attaches
244

only if a false or fraudulent return is willfully made by Mr. Yang (Sec.248.NIRC).


The fact that Mr. Yang included the income in his 1994 return belies any claim
of willfulness but is rather indicative of an honest mistake which was sought to
be rectified by a subsequent act, that is the filing of the 1994 return.
Mr. Yang should have amended his 1993 Income tax return to allow for the
inclusion of the P50.000 income during the taxable period it was realized.
3)

Mr. Yang should file a protest questioning the 50% surcharge and

ask for the abatement thereof.


ALTERNATIVE ANSWER:
Mr. Yang should pay the deficiency income tax on or before the day
prescribed for its payment per notice of demand. After payment and within two
years thereafter, 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.
Question No. 14:
1)
2)

What is a deficiency interest" for purposes of the income tax? Illustrate.


What is a delinquency interest" for purposes of the income tax?

Illustrate.
ANSWER:
1)

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 XYZCorp. for taxable year 1993 there was found to be due a
245

deficiency income tax of PI25,000.00 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.
2)
Delinquency interest is the interest of 20% or the Manila Reference
Rate, whichever is higher, required to be paid in case of failure to pay:
a)

the amount of the tax due on any return required to be filed; or

b)

the amount of the tax due for which return is required; or

c)

the deficiency tax or any surcharge or interest thereon, on the due

date appearing in the notice and demand of the Commissioner of Internal


Revenue.
If in the above illustration the assessment notice was released on
December31,1994 and the amount of deficiency tax, inclusive of surcharge and
deficiency interest were computed up to January 30, 1995 which is the due date
for payment per assessment notice, failure to pay on this latter date will render
the tax delinquent and will require the payment of delinquency interest.
Question No. 15:
Kenneth Yusoph owns a commercial lot which he bought many years ago for PI
Million. It is now worth P20 Million although the zonal value is only P15 Million. He
donates one- half pro-indiviso interest in the land to his son Dino on 31 December
1994, and the other one-half pro-indiviso interest to the same son on 2 January 1995.
1)

How much is the value of the gifts in 1994 and 1995 for purposes of

computing the gift tax? Explain.


2)

The Revenue District Officer questions the splitting of the donations into

1994 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.
3)

Dino subsequently sold the land to a buyer for P 20 Million. How much

did Dino gain on the sale? Explain.

246

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.
ANSWER:
1)

The value of the gifts for purposes of computing the gift tax shall be

P 7.5 million in 1994 and P7.5millionin 1995. In valuing a real property for gift
tax purposes the property should be appraised at the higher of two values as of
the time of donation which are (a) the fair market value as determined by the
Commissioner {which is the zonal value fixed pursuant to Section 16(e) of the
Tax Code), or (b) the fair market value as shown in the schedule of values fixed
by the Provincial and City Assessors. The fact that the property is worth P20
million as of the time of donation is immaterial unless it can be shown that this
value is one of the two values mentioned as provided under Section 81 of the
Tax Code.
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 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
PI 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 PI million from the
amount realized which is P20 million.
4)

If the commercial lot was received by inheritance the gain from the

sale for P20 million is P5 million because the basis is the fair market value as of
the date of acquisition. The stepped-up basis of P15 million which is the value
for estate tax purposes is the basis for determining the gain (Sec. 34(b)(2), NIRC).
ALTERNATIVE ANSWER:
247

If Dino held on to the property as a capital asset in that it is neither for


sale in the ordinary course of business nor used in Dinos business, then upon
sale thereof there is presumed to be realized an income of P20 million which is
the gross selling price of the property. (Sec. 21(e), NIRC). The same would be
subject to the 5% capital gains tax.
Question No. 16:
1)

When does importation begin and when does it end?

2)

Under the Tariff and Customs Code, what are


a)
b)
c)
d)

dumping duties
countervailing duties
marking duties
discriminatory duties?

ANSWER:
1) Importation begins from the time the carrying vessel or aircraft enters
Philippine territorial jurisdiction with the intention to unload therein and ends
at the time the goods are released or withdrawn from the customhouse upon
payment of the customs duties or with legal permit to withdraw (Viduya vs.
Berdiago, 73 SCRA 553).
2.

a) Dumping duties are special duties imposed by the Secretary of Finance

upon recommendation of the Tariff Commission when it is found that the price
of the imported articles is deliberately or continually fixed at less than the fair
market value or cost of production, and the importation would cause or likely
cause an injury to local industries engaged in the manufacture or production of
the same or similar articles or prevent their establishment.
b)

Countervailing duties are special duties imposed by the Secretary of

Finance upon prior investigation and report of the Tariff Commission to offset
an excise or inland revenue tax upon articles of the same class manufactured at
home or subsidies to foreign producers or manufacturers by their respective
governments.
248

c)
imposed

Marking duties are special duties equivalent to 5% ad valorem


on

articles

not

properly

marked.

These

are

collected

by

the

Commissioner of Customs except when the improperly marked articles are


exported or destroyed under customs supervision and prior to final liquidation of
the corresponding entry. These duties are designed to prevent possible deception
of the customers.
d)

Discriminatory duties are special duties collected in an amount not

exceeding 1Q0% 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.

1994 BAR EXAMINATION


Question No. 1:
What are:
1) Disguised dividends in income taxation? Give an example.
2) Vanishing deductions in estate taxation?
ANSWER:
1)

Disguised dividends are those income payments made by a domestic


corporation, which is a subsidiary of a non-resident foreign corporation, to
the latter ostensibly for services rendered by the latter to the former, but
which payments are disproportionately larger than the actual value of the
services rendered. In such case, the amount over and above the true value
of the service rendered shall be treated as a dividend, and shall be
subjected to the corresponding tax of 35% on Philippine sourced gross
income, or such other preferential rate as may be provided under a
corresponding Tax Treaty.

Example:Royaltypayments under a corresponding licensing agreement.

249

2)

Vanishing deductions or property previously taxed in estate taxation


refers to the diminishing deductibility/ exemption, at the rate of 20% over
a period of five (5) years until it is lost after the fifth year, of any property
(situated in the Philippines) forming part of the gross estate, acquired by
the decedent from a prior decedent who died within a period of five (5)
years from the decedents death.

Question No. 2:
1) What is the principle of mobilia sequuntur personamin income taxation?
2) Are donations inter vivos and donations mortis causa subject to estate taxes?
ANSWER:
1)

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.

2) Donations inter vivos are subject to donors gift tax (Sec. 91 (a). Tax Code)
while donations mortis causa are subject to estate tax (Sec. 77, Tax Code).
However, donations inter vivos, actually constituting taxable lifetime like
transfers in contemplation of death or revocable transfers (Sec. 78 (b) and
(c). Tax Code) may be taxed for estate tax purposes, the theory being that
the transferors control thereon ertends up to the time of his death.
ALTERNATIVE ANSWER:
2. Donations inier vivos are not subject to estate taxes because the transfer
of the property take effect during the lifetime of the donor. The transfer is
therefore subject to the donors 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.
Question No. 3:
1) Distinguish a direct from an indirect tax.
250

2)

Distinguish schedular treatment" from global treatment" as used in income


taxation.

ANSWER:
1) 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)
2) Distinction between schedular treatment" and global treatment as used in
income taxation:
Under

a schedular

system, the

various types/items of income

(Le.

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.
Question No. 4:
1)

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
received by the stockholders in exchange of the assets?

2)

In a qualified merger 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 surviving corporation from the absorbed corporation; and (b) the sale of the
shares of stock received by the stockholders from the surviving corporation?

ANSWER:
1) In a qualified tax free exchange of property for shares under Section 34 (c)
251

(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 (Le. 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 received by the stockholders In exchange of the assets
shall be the original/historical cost of the property given in exchange of the
shares of stock.
ALTERNATIVE ANSWER:
1) The basis in computing capital gains tax in a qualified tax-free exchange
under Sec. 34 (c) (2) is:
(a)

With respect to the asset received by the corporation the same as it


would be in the hands of the transferor increased by the amount of the
gain recognized to the transferor on the transfer.

(b) With respect to the shares received by the stockholders in exchange of


the assets - the same as the basis of the property, stock or securities
exchanged, decreased by the money received and the fair market value of
the other property received, and increased by the amount treated as
dividend of the shareholder and the amount of any gain that was
recognized on the exchange.
2) In a qualified merger under Section 34 (c) (2) of the Tax Code, the tax
basis for computing the capital gains on:
(a) the sale of the assets received by the surviving corporation from the
absorbed corporation shall be the original/historical cost of the assets
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.
Question No. 5:
In smuggling a shipment of garlic, the smugglers used an eight-wheeler truck
252

which they hired for the purpose of taking out the shipment from the customs zone.
Danny, the truck owner, did not have a certificate of public convenience to operate his
trucking business. Danny did not know that the shipment of garlic was illegally
imported.
Can the Collector of Customs of the port seize and forfeit the truck as an
instrument in the smuggling?
ANSWER:
Yes, the Collector of Customs of the port can seize and forfeit the truck as
an instrument in the smuggling activity, since the same was used unlawfully in
the importation of smuggled articles. The mere carrying of such articles on
board the truck (in commercial quantities) shall subject the truck to forfeiture,
since it was not being used as a duly authorized common carrier, which was
chartered or leased as such. (Sec. 2530 (a], TCC)
Moreover, although forfeiture of the vehicle will not be effected if it is
established that the owner thereof had no knowledge of or participation in the
unlawful act, there arises a prima facie presumption or knowledge or
participation if the owner is not in the business for which the conveyance is
generally used. Thus, not having a certificate of public convenience to operate a
trucking business, he is legally deemed not to have been engaged in the trucking
business. (Sec. 2531, Tariff and Customs Code)
Question No. 6:
Pedro Reyes, an official of Corporation X, asked for an earlier retirement because
he was emigrating to Australia. He was paid P2,000.000.00 as separation pay in
recognition of his valuable sendees to the corporation.
Juan Cruz, another official of the same company, was separated for occupying a
redundant position. He was given PI.000,000.00 as separation pay.
Jose Bautista was separated due to his failing eyesight. He was given P500,000.00
as separation pay.
All the three (3) were not qualified to retire under the BIR-approved pension plan
of the corporation.
253

1)

Is the separation pay given to Reyes subject to income tax?

2)

How about the separation pay received by Cruz?

3)

How about the separation pay received by Bautista?

ANSWER:
1)

The separation pay given to Reyes is subject to income tax as


compensation income because it arises from a service rendered pursuant
to an employer-employee relationship. It is not considered an exclusion
from gross income because the rule in taxation is tax construed in
strictissimijuris or the rule on strict interpretation of tax exemptions.

2)

The separation pay received by Cruz is not subject to income tax because
his separation from the company was involuntary (Sec. 28 b (7), Tax Code).

3)

The separation pay received by Bautista is likewise not subject to tax. His
separation is due to disability, hence involuntary.

Under the law, separation pay received through involuntary causes are
exempt from taxation.
Question No. 7:
In December 1993, the Sangguniang Bayan authorized a Christmas bonus of
P3,000.00, a cash gift of P5,000.00, and transportation and representation allowance
ofP6,000.00 for 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 allowances?
ANSWER:
1)

The Christmas bonus 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


254

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 its clientele like the people of the municipality.
Question No. 8:
In 1991. Imelda gave her parents a Christmas gift of P 100.000.00 and a
donation of P80.000.00 to her parish church. She also donated a parcel of land for the
construction of a building to the PUP Alumni Association, a non-stock, non-profit
organization. Portions of the building shall be leased to generate income for the
association.
1)

Is the Christmas gift of P100.000.00 to Imelda's parents subject to tax?

2) How about the donation to the parish church?


3)

How about the donation to the P.U.P, Alumni Association?

ANSWER:
1)

The Christmas gift of PI00,000.00 given by Imelda to her parents is


taxable up to P50.000.00because under the law (Sec. 92 (a) of the Tax
Code), net gifts not exceeding P50.000.00 are exempt.

2)

The donation of P80.000.00 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 [Uadoc v. Commissioner, 14 SCRA 292).

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
255

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 and promotion 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.
Question No. 9:
The University of Bigaa, a non-stock, non-profit entity, operates a canteen for its
students and a bookstore Inside the campus. It also operates two dormitories for its
students, one of which is in the campus.
Is the University liable to pay income taxes for the operation of the:
1)

canteen?

2)

bookstore?

3)

two dormitories?

ANSWER:
1)

For the operation of the canteen Inside the campus, the income thereon
being incidental to the operations of the University as a school, is exempt
(Art. XIV (4) (3). Constitution; DECS Regulations No. 137-87, Dec. 16.
1987).

2)

For the same reasons, the University of Bigaa is not liable to pay income
taxes for the operation of the bookstore, since this is an ancillary activity
the conduct of which is carried out within the school premises.

3)

The University of Bigaa shall not be liable to pay income taxes for the
operation of the dormitory located in the campus, for same reasons as the
foregoing.

However, the latter shall be liable for Income taxes on income from
256

operations of the dormitory located outside the school premises.


Question No. 10:
Noel Langit and his brother, Jovy, bought a parcel of land which they registered in
their names as pro Indivlsoowners (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 PI,000,000.00 for parcel A and P500.000.00 for parcel B.
1) The BIR claims that the sale of parcel A should be taxed as a sale by an
unregistered partnership. Is the BIR correct?
2)

The BIR also claims that the sale of parcel B should be taxed as a sale by a
corporation. Is the BIR correct?

ANSWER:
The BIR is not correct, since there is no showing that the acquisition of
the property by Noel and JovyLangit as pro indivlso owners, and prior to the
formation of the partnership, was used, intended for use, or bears any relation
whatsoever to the pursuit or conduct of the partnershipbusiness. The sale of
parcel A shall therefore not be treated as a sale by an unregistered partnership,
but an ordinary sale of a capital asset, and hence will be subject to the 5%
capital gains tax and documentary stamp tax on transfers of real property, said
taxes to be borne equally by the co-owners.
ALTERNATIVE ANSWER:
The BIR is correct in treating the gain from the sale of parcel A by Noel and
JovyLangit at a profit of PI,000,000.00. in the case of Pascual and Dragon u.
Commissioner, G.R. No. 78133, October 18, 1988, the Supreme Court ruled that
the sharing of returns does not in itself establish a partnership, whether or not
the persons sharing therein have a joint or common right or interest in the
property. The decision in said case cannot be applied here because clearly the
parties organized a partnership duly registered with the Securities and Exchange
Commission. They pooled their resources together with the purpose of dividing
the profit between them.
1) The BIR is correct, since a corporation as defined under Section 20 (a)
257

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.
Question No. 11:
Jose Ortiz owns 100 hectares of agricultural land planted to coconuttrees. He
died on May30,1994. Priorto 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?
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) ofihe Tax Code still forms part of decedent's
interest".
Question No. 12:
X-land Condominium Corporation was organized by the owners of units in Xland Building in accordance with the Master Deed with Declaration of Restrictions.
The X- land Building Corporation, the developer of the building, conveyed the common
areas in favor of the X-land Condominium Corporation.
Is the conveyance subject to any tax?
ANSWER:
The

conveyance

is

not

subject

to

any

tax.

The

same

is

without

consideration, and not in connection with a sale made to X-land Condominium


Corporation, and the purpose of the conveyance to the latter is for the
258

management of the common areas for the common benefit of the unit owners.
The same is not subject to income tax since no income was realized as a
result of the conveyance, which was made pursuant to the Condominium Act
(R.A. No. 4626, and the purpose of which was merely to vest title to the common
areas in favor of the Land Condominium Corporation.
There being no monetary consideration, neither is the conveyance subject
to the creditable withholding tax imposed under Revenue Regulations 1-90, as
amended.
The second conveyance was actually no conveyance at all because when the
units were sold to the various buyers, the common areas were already part and
parcel of the sale of said units pursuant to the Condominium Act. However, the
Deed of Conveyance is subject to documentary stamp tax.
N.B. Documentary stamps tax and Condominium Law are excluded from the
coverage of the Bar Examinations.
Question No. 13:
Maribel Santos, a retired public school teacher, relies on her pension from the
GSIS and the interest income from a time deposit of P500.000.00 with ABC Bank.
Is Miss Santos liable to pay any tax on her income?
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).
Question No. 14:
The Collector of Customs instituted seizure proceedings against a shipment of motor
vehicles for having been mis- declared 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.
ANSWER:
259

The procedure in seizure cases may be summarized as follows:


-

The collector issues a warrant for the detention or forfeiture of the


imported articles; (Sec. 2301. Tariff and Customs Code)

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)

A formal hearing is conducted; (Sec. 2312. TCC)

The Collector renders a declaration of forfeiture; (Sec. 2312, TCC)

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 Collectors decision; (Sec. 2313, TCC)

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)

The importer adversely affected by the decision of the Court of Tax


Appeals may appeal to the Court of Appeals within fifteen (15) days which
may be extended for another fifteen (15) days or such period as the Court
of Tax Appeals may decide.

Question No. 15:


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 ticketing
services.
Are the revenues of Caledonia Aircargo from tickets reserved by its Philippine
offlce subject to tax?
ANSWER:
The revenues in the Philippines of Caledonia Aircargo as an off-line' airline
from ticket reservation services are taxable income from whatever source"
under Sec. 28(a) of theTax Code. This case is analogous to Commissioner v.
260

BOAC. G.R No. No. 65773-74, April 30, 1987 where the Supreme Court ruled that
the income received in the Philippines from the sale of tickets by an off-line"
airline is taxable as Income from whatever source.
Question No. 16:
The Secretary of Finance, upon recommendation of the Commissioner of Internal
Revenue, issued a Revenue Regulation using gross Income as the tax base for
corporations doing business in the Philippines
Is the Revenue Regulation valid?
ANSWER:
The regulation establishing gross income as the tax base for corporations
doing business in the Philippines (domestic as well as resident foreign) is not
valid. This is no longer implementation of the law but actually it constitutes
legislation because among the powers that are exclusively within the legislative
authority to tax is the power to determine the amount of the tax. (See 1 Cooley
176-184). Certainly, if the tax is limited to gross income without deductions of
these corporations, this is changing the amount of the tax as said amount
ultimately depends on the taxable base.
Question No. 17:
XCEL Corporation filed its quarterly income tax return for the first quarter of
1985 and paid an Income tax of P500.000.00 on May 15, 1985. In the subsequent
quarters, XCEL suffered losses so that on April 15, 1986 it declared a net loss of
PI,000,000.00 in its annual income tax return. After failing to get a refund, XCEL filed
on March 1, 1988 a case with the Court of Tax Appeals to recover the P500.000.00 in
taxes paid on May 15, 1985.
Is the action to recover the taxes filed timely?
ANSWER:
The action for refund was filed in the Court of Tax Appeals on time. In the
case of Commissioner v. TMX Sales.fnc., 205 SCRA 184, which is similar to this
case, the Supreme Court ruled that in the case of overpaid quarterly corporate
261

income tax, the two-year period for filing claims for refund In the BIR as well as
in the institution of an action for refund in the CTA, the two-year prescriptive
period for tax refunds (Sec. 230, Tax Code) is counted from the filing of the final,
adjustment return under Sec. 67 of the Tax Code, and not from the filing of the
quarterly return and payment of the quarterly tax. The CTA action on March
1,1988 was clearly within the reglementaiy two-year period from the filing of the
final adjustment return of the corporation on April 15,1986.
Question No. 18:
Bates Advertising Company is a non-resident corporation duly organized and
existing under the laws of Singapore. It is not doing business and has no office in the
Philippines. 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 withholdingtax?
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)(1), Tax Code).
Question No. 19:
Four Catholic parishes hired the services of Frank Binatra. a foreign non-resident
entertainer, to perform for four (4) nights at the Folk Arts Theater. Binatra was paid
P200.000.00 a night. The parishes earned PI,000,000.00. which they used for the
support of the orphans in the city.
Who are liable to pay taxes?
ANSWER:
The following are liable to pay Income taxes:
a) The four catholic parishes because the income received by them, not
262

being income earned as such in the performance of their religious


functions and duties, is taxable income under the last paragraph of Sec.
26, in relation to Sec. 26(e) of the Tax Code. In promoting and operating
the Binatra Show, they engaged in an activity conducted for profit. (Ibid.)
b) The income of Frank Binatra, a non-resident alien under our law is taxable
at the rate of 30%, final withholding tax based on the gross income from
the show. Mr. Binatra is not engaged in any trade or business in the
Philippines.
Question No. 20:
Cliff Robertson, an American citizen, was a permanent resident of the
Philippines. He died in Miami, Florida. He left 10.000 shares of Meralco, a
condominium unit at the Twin Towers Building at Pasig. Metro Manila and a house
and lot in Los Angeles, California.
What assets shall be included in the Estate Tax Return to be filed with the BIR?
ANSWER:
All of Mr. Robertsons assets consisting of10,000shares in the Meralco, a
condominium unit in Pasig, and his house and lot in Los Angeles, California are
taxable. The properties of a resident alien decedent like Mr. Robertson are
taxable wherever situated (Secs. 77, 78 and 98, Tax Code).

1993 BAR EXAMINATIONS

Question No. 1:
X is the Advertising Manager of Mang Douglas Hamburger, Inc. X had dinner with
Y, owner of a chain of restaurants, to convince the latter to carry Mang Douglas
hamburger. After Y agreed, both X and Y went their separate ways. X celebrated by
going to a singles bar. He picked up a partner and consumed a bottle of beer. He drove
home at 3:00 a.m. On his way, he sideswiped a pedestrian who died as a result of the
accident. X settled the case extrajudicially by paying the heirs of the pedestrian
P50.000.00. The money, however, came from Mang Douglas Hamburger, Inc. Discuss
whether the P50.000.00 can be claimed by Mang Douglas Hamburger, Inc. as an
263

ordinary and necessary expense.


ANSWER:
No. As the expenditure had not been incurred in cariy- ing on his trade or
business, the same cannot be considered an ordinary and necessary expense for
which deduction may be claimed. Such expense is a personal expense which is
not deductible from the gross income.
ALTERNATIVE ANSWERS:
a) In the case of Helvering vs. Humpton (1935; CCA 9th 79F [2dl 358, it was
held that:
Restitution is ordinarily expected to be made by a person in the course of
whose business a wrong is committed, so that he may deduct the amount
thereof as an ordinary and necessary business expense."
In the case at bar, the money advanced by Mang Douglas Hamburger, Inc. to
pay off the civil liability of X, which arose from the accident after a business
deal has been struck for Mang Douglas Hamburger, Inc. was in fact reparation/restitution to the aggrieved heirs. However, the same cannot be
considered as an ordinary and deductible expense, since the law poses as a
condition for its deductibility that the wrong or tort should have been
committed in the course of the business.
b) If Mang Douglas Hamburger, Inc. treats the advances as salary or
compensation ofY who is an employee of Mang Douglas and withholds the
corresponding tax thereon then there is a possibility of deducting.
Question No. 2:
The Filipinas Hospital for Crippled Children is a charitable organization. X visited the
hospital, on his birthday, as was his custom. He gave P100,000.00 to the hospital and
P5.000.00 to a crippled girl whom he particularly pitied. A crippled son of X is in the hospital
as one of its patients. X wants to exclude both the P100,000.00 and the P5.000.00 from his
gross income. Discuss.
ANSWER:

264

Under Sec. 29 (h) 11) of the National Internal Revenue Code charitable
contributions to be deductible must be:
a. actually paid or made to domestic corporations or associations organized
and operated exclusively for religious. charitable, scientific, youth and
sports development, cultural or educational purposes or for rehabilitation
of veterans or to social welfare institutions no part of which inures to the
benefit of any private individual;
b. made within the taxable year;
c. not more than 6% (for individuals) of 3% (for corporations) of the
taxpayers

taxable

income

to

be

computed

without

including

the

contribution.
Applying the above-provisions of law to the case at bar, it is clear therefore
that only the PI00,000.00 contribution of X to Filipinas Hospital for Crippled
Children qualified as a deductible contribution.
Sec. 29 (h) (1) of the NIRC expressly provides that the same must be actually
paid to a charitable organization to be deductible. Note that the law accorded no
privilege to similar contributions extended to private individuals. Hence, the
P5,000.00 contribution to the crippled girl cannot be claimed as a deduction.
ALTERNATIVE ANSWER:
a)

The P100,000.00 donation may properly be deducted fromXs gross


income, but not the P5.000.00 donated to the crippled girl, as charitable
and other contributions that may be deducted from taxable income do not
contemplate those given to individuals. While it may be that Xs son is a
patient in the hospital, it cannot be said that part of its net income inures
to the benefit of X as to be disallowed as a deduction from taxable income.

b)

Assuming X is a self-employed Individual, he may not deduct the


donations made because under Section 29 of the NIRC as amended by RA
7496 better known as SNITS, only contribution to the government or to an
accredited relief organization for the rehabilitation of calamity stricken
areas declared by the President may be deducted for income tax purposes.
Clearly, the donees do not qualify as relief organizations.
265

Assuming X is receiving purely compensation income, he can only deduct


from gross compensation income personal exemption, additional personal
exemption and special additional personal exemption (Section 29. NIRC as
amended).
Note:
The problem does not refer to any particular taxable period, so if the
contributions were effected prior to the effectivityofR.A. 7496, then the contribution of
P100,000.00 can be allowed, subject to the limitations prescribed under Sec. 29 (h) (i)
of the NIRC.
Question No. 3:
X just hurdled the bar examinations and immediately engaged in the practice of
law. In preparing his income tax return, he listed the following as deductible items: (a)
fees paid to the Supreme Court to be able to take the bar examinations; (b) fees paid to
a law school to enroll in its pre- bar review classes; (c) malpractice insurance and (d)
amount spent to entertain a judge who decided ish first case. Which deductions are
allowable? Reasons.
ANSWER:
Sec. 29 of the National Internal Revenue Code on deductions, among other
things provides:
"(a) Expenses
(1) Business Expenses (a) In general - All the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other compensation for
personal services actually rendered; travelling expenses while away from home
in the pursuit of a trade, profession or business; rentals or other payments
required to be made as a condition to the continued use or possession, for the
purpose of the trade, profession or business of property to which the taxpayer
hasnot taken nor is not taking title or in which he has no equity."
Further, Sec. 69 of Revenue Regulations No. 2.as amended, otherwise known
as Income Tax Regulations" reads:
Sec. 69. Professional Expenses - Aprofessional may claim as
266

deductions the cost of supplies used by him or in the practice of his


profession, expenses paid in the operation and repair of transportation
equipment used in making professional calls, dues to professional
societies and subscriptions to professional journals, the rent paid for
office rooms, the expenses of the fuel, light, water, telephone, etc. used
on such offices, and the hire of office assistants. Amounts currently
expended for books, furnitures and professional instruments and
equipment, the useful life of which is short, may be deducted. But
amounts expended for books, furniture and professional instruments
and equipment of a permanent character are not allowable deductions."
From the foregoing provisions of law that ordinary and necessary expenses
incurred during a taxable year pertaining directly to the practice of a profession
may be allowed as deductions, it may be inferred from a keen reading of Sec. 69
of Revenue Regulations No. 2 that aside from personal exemptions, only direct
costs or overhead expenses incurred in the actual practice of a profession may
be claimed, i.e. supplies, fuel, light, electricity, salaries, etc.
Applying the above considerations in the case at bar, it appears that among
the expenses incurred by X. only the premiums he paid for malpractice
insurance qualifies as a deductible expense, the same being an ordinary and
necessary expense in the pursuit of a profession as defined by Sec. 29 of the
NIRC and further qualified by Revenue Regulations No. 2. The tuition fees for
pre-bar classes and the bar examination fees paid to the Supreme Court by X do
not qualify as deductible expenses under Revenue Regulations No. 2. As for the
amount spent by X to entertain the judge who decided his first case, the same
may not be claimed as an expense. A business expense to be deductible must be
sustained by adequate proof and that the same must not be against the law or
public policy [Consolidated Mines, Inc. us. Court of Tax Appeals, L-18863 29
August 1974).
Moreover, it may be worthwhile to note that under Sec. 3 (B) of Revenue
Regulations No. 2-93, implementing Republic Act No. 7496, otherwise known as
An Act Adopting The Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged In the Practice Of Their Profession, amending
Section 21 and 29 of the National Internal Revenue Code, as amended", only the
267

following direct costs are deductible:


a. Raw materials
b.

Salaries of employees directly performing services for the taxpayer in the


course of or pursuant to his business or practice of his profession. This
includes salaries and wages paid for janitorial, security, bookkeeping,
administrative and sales personnel, by a self-employed taxpayer or a
professional in the exercise of his profession:

c.

telecommunication, electricity, fuel, light and water;

d. business rental;
e. depreciation;
f. contribution made to the Government and accredited relief oiganizatlons
for the rehabilitation of calamity- stricken areas declared by the President.
The deductibility of the contributions is based on two criterias, to wit:
1. The donee or recipient must be the government or accredited relief
organization: and
ii. The contribution must be utilized for the rehabilitation of calamitystricken areas declared by the President.
The term Government" as used in the law refers to the Philippines or any of
its agencies or political subdivisions and includes:
i.

Departments, agencies, bureaus, commissions and authorities,


including state colleges and universities:

ii. Autonomous regions, provincial, city or municipal governments;


g. Interest paid or accrued within a taxable year on loans contracted from
accredited financial institutions which must be proven to have been paid
or incurred in connection with the conduct of a taxpayer's profession,
trade or business.
ALTERNATIVE ANSWER:

268

None of the expenses are allowable. With respect to individuals engaged in


the practice of a profession, the NIRC limits deductions only to direct costs
incurred in the exercise of the profession, which costs do not include the items
being claimed by X.
Note:
Again, the problem did not refer to any particular taxable period.
Question No. 4:
The employees of Travellers, Inc. staged a strike. X, a non-union, member joined
the strike and volunteered to picket the company premises from 8:00 A.M. to 12:00
P.M., Monday to Friday. Six months into the strike. X ran out of money and asked
financial aid from the union since he has no other source of income and needed
financial assistance in order to live. The union gave him PI ,000.00 a month to take
care of his food requirements plus P500.00 to take care of his monthly rent. When X
filed his return, he excluded these benefits from his gross income. The exclusion was
denied by the BIR Decide.
ANSWER:
The PI,500.00 is not compensation income because compensation income
arises out of employer-employee relationship as payment for services without
compensation. The P1.500.00 is a gift from the labor union. According to
Section 28 (b) (3) of the NIRC, gifts are to be excluded from gross income. Thus,
the BIR's denial is not valid.
ALTERNATIVE ANSWER:
Under the law, gross Income consists of all gains, profits, and income of the
taxpayer during a taxable year of whatever kind and in whatever form derived
from any source, whether legal or illegal, except items of gross income subject to
final income tax and income exempt from taxation under Sec. 28 (b) of the NIRC.
Moreover, in the case of Guitierrez vs. Collector of Internal Revenue. CTA
Case No. 65. 31 August 1965, it was held that the phrase income from whatever
source derived covers all other forms of income. It discloses a legislative policy
to include all income not expressly exempted, as within the class of taxable
income under our laws, irrespective of the voluntary or involuntary action of the
269

taxpayer in producing the gain.


Therefore based on the foregoing considerations, the benefits subject in the
case at bar, not expressly exempted by law, are considered as income.
Question No. 5:
X owns a half-hectare property In Bacoor, Cavite which In 1980was expropriated
by the national government, through the Department of Public Works and Highways.
After ten years, X was paid P2.000.000.00 as just compensation plus 6% annual
interest by the DPWH but minus the withholding tax. Is the action of DPWH proper?
Reasons.
ANSWER:
No, the action of DPWH is not proper.
In the case of Province ofTayabas vs. Perez,66 Phil. 467 Just compensation
was defined as the just and complete equivalent of the loss which the owner of
a thing expropriated has to suffer by reason of the expropriation".
Further, in BIR Ruling 61-91 just compensation was defined as that which is
paid by the Government equivalent to the value of the property at the time of
its taking. It is the fair and full equivalent for the indemnity.
Based in the foregoing it is clear therefore that the amount received after
10 years as just compensation is not in any way a profit, gain or income on the
part of X In the same vein, the 6% annual interest paid by DPWH is not income.
The same partakes of the nature of a penalty or indemnity due and accruing to
X for having been deprived of the use and benefit by not being paid of the fair
market value of the property since its taking 10 years ago. Hence, the DPWH
should not have withheld taxes.
ALTERNATIVE ANSWERS:
a)

No. the withholding tax (presumably on capital gains) should have been
based on the fair market value of the property at the time of the
expropriation. Thus, in this case, for purposes of computing the
withholding tax on capital gains, the amount representing the 6% annual
interest should have been excluded from the withholding tax base.
270

b)

No. With respect to capital gains on sales of realty to the government, X


may elect to include the same in his gross compensation income or to pay
the corresponding capital gains tax. By withholding the taxes on the just
compensation (for which the basis should only be P2,000,000.00)
excluding the interest) DPWH denied such option to X.

c) Assuming the property is an ordinary asset, the expropriation proceedings


in 1980 is not subject to the creditable withholding tax under Revenue
Memorandum Circular 7-90 clarifying Revenue Regulations Nos. 12-89 and
1 -90 implementing Section 50 (b) of the NIRC, the transfer of the
property was effected in 1980. The above mentioned revenue rules and
regulations are applicable only to sales, exchange or transfers of real
properties consummated on or after 1 January 1990 (BIR Ruling 040-91).
The 6% interest on the just compensation" is not in the nature of an
interest on Philippine currency bank deposit and yield or any other
monetary benefit from deposit substitutes from trust fund and similar
arrangements, the same is not subject to the 20% final withholding tax
under Sec. 21 of the NIRC (BIR Ruling 040-91).
Question No. 6:
X is a travelling salesman in Jolo, Sulu. In the course of his travel, a band of
MNLF seized his car by force and used it to kidnap a foreign missionary. The next day,
X learned that the military and the MNLF band had a chance encounter. Using heavy
weapons, the military fired at the MNLF band that tried to escape with the use of Xs
car. All the members of the band died and Xs car was a total wreck. Can X deduct the
value of his car from his income as casualty loss? Reasons.
ANSWER:
Sec. 29 (i) (c) of the National Internal Revenue Code provides that in cases of
individual taxpayers, losses to be deductible must be:
a)

actually sustained and charged off within the taxable year;

b)

have been incurred in trade, profession or business or in any transaction


entered into for profit, though not connected with trade, profession, or
business;

271

c)

Moreover, Sec. 1 of Revenue Regulations No. 12-77, defined casualty as


complete or partial destruction of property resulting from an Identifiable
event of sudden, unexpected, or unusual nature. It denotes accidents,
some sudden Invasion by hostile agency, and excludes progressive
deterioration.

Based on the above-mentioned laws and the circumstances of the case at


bar, the value of the wrecked car is deductible as casualty loss, provided the
regulations governing substantiation requirements for losses are complied with.
ALTERNATIVE ANSWERS:
a)

No. With respect to individuals engaged in business, the NIRC limits


deductions only to certain direct costs incurred In connection with the
business, which costs, however, do not include casualty losses.

b)

No. Section 29 of the NIRC, as amended by RA7496, better known as the


SNTTS, does not include among the allowable items of deductions for selfemployed individuals like X, casualty losses even if the property destroyed
is used in business. A taxpayer claiming deduction must point to some
specific provision of the statute in which that deduction is authorized and
must be able to prove that he is entitled to the deduction which the law
allows (Adas Consolidated Mining, 102 SCRA 246).

Note:
It depends. If he is an employee of a company, that is not deductible. On the other
hand, if he is a businessman it will be deductible to his gross income provided he can
recover only up to the amount of the casualty loss that does not exceed its book value,
provided further, that it is not compensated by insurance or otherwise.
Under the SNITS Law (R-A 7496) losses of any kind are no longer deductible from
gross income of individuals.
Question No. 7:
Maria Clara, a Filipino citizen, married Ha Wa. aHongkong national in 1988 in
Hongkong. In 1989, the two separated and Maria returned to the Philippines. The two
lost contact with each other. In 1990, Maria filed her income tax return and claimed a
272

personal exemption of P12.000.00 under Sec. 21(a) of the Tax Code. Decide.
ANSWER:
Maria may file a separate return as a married individual because it is
impossible to file a consolidated return. However.according to Section 29 of the
NIRC prior to the eflectivity of R.A. 7167. husband and wife electing to compute
their income tax separately shall be entitled to a personal exemption of
P6.000.00 each.
ALTERNATIVE ANSWERS:
a)

Revenue Regulations No. 1-92. prescribing the implementing guidelines


for R.A. No. 7167. provides that the new basic personal exemptions of
individuals taxpayers are as follows:

1. For single individual or married individuals but Judicially decreed as


legally separated with no qualified dependents - P9.000.00.
2. For married couples with both spouses employed- P9.000.00
3. For married couples with only one spouse employed - P 18,000.00.
4. For head of the family - P 12,000.00.
Based on the foregoing provisions of law, Maria's claim of P 12,000.00 as
personal exemption cannot be allowed. While she is married and not judicially
separated, it does not appear that she has dependents to qualify her as head of
the family and to entitle her to the claim of P12,000.00 personal exemption.
b)

Not being legally separated. Maria may claim a higher personal exemption
of PI8.000.00 for married individuals, and not merely PI2,000.00 which
applies to the Head of a Family. The exemption for the Head of a Family
requires that one be unmarried or legally separated, which Maria Clara is
not.
c) Maria may not claim the PI2,000.00 personal exemption as head of the

family in accordance with Section 29 of the NIRC as amended by RA 7167 and


RA 7496. The Supreme Court ruled in the case of Umali v. Estanislao (209
SCRA446) that the increased personal exemptions shall take effect on January
273

29, 1992 and shall be applied on income earned for taxable year 1991.
Question No. 8:
In 1990, X started constructing a commercial building with spaces for lease to the
public. X required Y, a prospective lessee to sign a pre-lease agreement, which
principally provided: (a) that the lessee shall extend to the lessor a noninterest bearing
loan of P100,000.00 payable within twelve (12) months: and (b) that in consideration
of the loan, the lessee shall be given preference in the lease and his rentals shall not
be increased while the loan remains unpaid. Upon completion of the building. Y
extended the loan ofP100.000.00 to X and he was given a space in its ground floor.
May the BIR consider the P100,000.00 as taxable income of X. Reasons.
ANSWER:
Sec. 28 of the NIRC defines gross income as all income from whatever
source derived including but not limited to the following items.
a) Compensation for services, including fees, commissions, and similar items;
b) Gross income derived from business;
c) Gains derived from dealings in property:
d) Interest;
e) Rents;
f)

Royalties;

g) Dividends;
h) Annuities
i)

Prizes and winnings;

j)

Pensions; and

k) Partners distributive share of the gross income of general professional


partnership.
Further, under Sec. 36 of Revenue Regulations No. 2, taxable income in a
broad sense, means all wealth which flows into the taxpayer other than as a
274

mere return of capital. It includes the forms of the income specifically described
as gains and profits, including gains derived from the sale or other disposition of
assets. Gross income, means income (in the broad sense) less income which is by
statutory provision or otherwise exempt from the tax imposed by law.
Applying the above provision of law to the case at bar, the amount of P
100,000.00 being a loan or an indebtedness is an outlay, not a taxable income or
gain.
ALTERNATIVE ANSWER:
The PI 00,000.00 may not be considered taxable income of X. as the same is
only a loan that would eventually have to be paid. To the extent that X saved in
interest payments, the reasonable value thereof may perhaps be considered as
income to X. but the loan, however, may not strictly be considered interest-free
as value therefor was given by X in return.
Question No. 9:
M/V Floria, a vessel of Philippine registry, was hired to transport beans from
Singapore to India. The vessel was allegedly hijacked at sea and found its way to
Bataan. It is also alleged that said beans are now with the List Co. and fake
documents were used to show that the beans were imported from Japan. The Collector
of Customs seized the M/V Floria and its cargo. The owner of M/V Floria filed a
complaint in the Regional Trial Court to obtain possession of the vessel and the beans.
Does the RTC have jurisdiction over the case?
ANSWER:
The RTC has no jurisdiction. The Collector of Customs sitting in seizure and
forfeiture proceedings has exclusive jurisdiction to hear and determine all
questions touching on the seizure and forfeiture of dutiable goods. The RTC has
no jurisdiction to pass upon the validity or regularity of the seizure and
forfeiture proceedings conducted by the Bureau of Customs. [Commissioner of
Customs vs. Makasiar. 177 SCRA 27, 33-34 (1989) citing Pacis vs. Averin, 18
SCRA 9071966)]
Neither has RTC review powers over actions concerning seizure and
forfeiture proceedings conducted by the Collector of Customs which is
275

reviewable by the Commissioner of Customs whose decision, in turn, is


reviewable by the Court of Tax Appeals, (ibid)
ALTERNATIVE ANSWERS:
a)

No. The owner must have first appealed the decision of the Collector to
the Commissioner of Customs, and if the decision was adverse, then to
the Court of Tax Appeals, consistent with the principle of exhaustion of
administrative remedies.

b) No. The question of seizure and forfeiture is for the Collector of Customs
to determine in the first instance and then the Commissioner of Customs.
This is a field where the doctrine of primary jurisdiction controls. The
Collector of Customs when sitting in forfeiture proceedings, constitutes a
tribunal upon which the law confers jurisdiction to hear and determine all
questions touching the forfeiture and further disposition of the subject
matter. The exclusive jurisdiction in seizure and forfeiture cases vested in
the Collector of Customs precludes the RTC from assuming cognizance
over such matter. The RTC is thus devoid of competence to act on the
matter (Republic v. CF1 of Manila, 213 SCRA 222).
Question No. 10:
Xs favorite charity organization is the Philippine National Red Cross. To raise
money, PNRC sponsored a concert featuring the Austria Boys Choir. X advanced
P100,000.(X) to the PNRC for which he was issued a promissory note. Before its
maturity, X cancelled and returned the note to PNRC. An advertising man, X also
undertook the promotions of the Austria Boys Choir. Part of the promotions campaign
was to ask prominent personalities to publicly donate blood to the PNRC a day before
the concert. X himself donated 100 cc of blood. X intends, to claim as deductions the
value of the note, the cash value of the promotions campaign and the cash value of
the blood he donated. Give your legal advice.
ANSWER:
The value of the note can be claimed as deduction as charitable
contribution. While the amount was originally a loan, it can be considered to
have become a gift or contribution when X cancelled and returned the note to

276

PNRC. a charitable organization.


On the other hand, the cash value of the promotions campaign cannot be
claimed as a deduction. Advertising expenses can only be deducted from the
revenues where the expenses was incurred. In the case at hand, PNRC is the
revenue-producing entity not X. X did not derive any revenue. Thus, the cash
value of his promotions campaign cannot be claimed as deduction.
Finally, the cash value of the blood donated by X cannot be claimed as
deduction. Blood has no monetary value in this case as it is not disbursed in the
form of expense.
ALTERNATIVE ANSWERS:
a)

The value of the note qualifies as a contribution to a charitable


institution which may be deducted from gross income but only to the
extent that it does not exceed 6% of his taxable income derived from
business.

X cannot claim deductions for the other items. Charitable and other
contributions, to be deductible, must actually have been paid, which is not true
of the value of the advertising promotions, and must represent some economic
benefit to the recipient, which is not true of the blood donation.
b)

Section 29 as amended by RA 7496 allows the deduction of donation to


an accredited relief organization for the rehabilitation of calamity
stricken areas declared by the President. Clearly, the PNRC will qualify as
donee relief organization. The P100,000.00 - note maybe allowed to the
extent of its cash value considering that the maker of the note is the
donee itself. The rule is, donation made in kind shall be determined at its
fair market value as of the date such donations or gifts are made. (Section
10 BIR-NEDA Regulation 1-81) The services rendered by the taxpayer to
promotethe show and the 100 cc. blood may not be allowed because of the
difficulty in getting the fair-market value of these noncash donations.

Note:
If the donation is made before the efiectivity of RA. 7496. It is deductible but
subject to limitations under Sec. 29 h (i) of the NIRC.
277

Question No. 11:


X is employed as security guard of Excel Supermarket, Inc. X lives in a room
within the compound of Excel but he is not charged any rent. The rental value of the
room is P300.00 a month. X wants your opinion on whether BIR can tax the value of
the free use of his room.
ANSWER:
The rental value of the room is not taxable. Section 2.2 of the Revenue
Audit Memo Order No. 1-87 provides that if the lodging is furnished in the
business premises of the employer and the employee is required to accept such
lodging as a condition of his employment, then the value of said lodging will be
not taxable. It is merely for the convenience, comfort and pleasure of the
employer.
ALTERNATIVE ANSWER:
a)

The BIR may not tax the value of the free use of the room, as the same
may not strictly be considered compensation income. Considering the
nature of Xs employment and the fact that free lodging was furnished
within the business premises, it may reasonably be said that the benefit
therefrom inured to the employer more than toX and thus may not
actually

be

considered

remuneration

for

services included

in

the

computation of taxable income.


b)

It depends. If the lodging furnished to employee-X is within the business


premises of the employer and the employee is required to accept the
lodging as condition for employment the imputed rental value of the room
used by X shall be excluded from X's compensation income (BIR Audit
Memo 1-87).

Question No. 12:


X is the proprietor of Vanguard, which is a security and detective agency. X was
able to get the contract to provide the security services of a government agency. He
signed the Security Agreement with the director of the government agency calling for
the deployment of 100 security guards on a 24 hour basis. The contract was revocable
278

at the will of the director. To please the director, X gives him at the end of the month
P100,000.00 per guard hired. May X deduct from his income the money he paid to the
director? Reasons.
ANSWER:
The money paid to please the director is not deductible. This is a form of
bribery. Deductions shall not be allowed if the expense is contrary to law, public
policy or for immoral purposes (Zamora vs. Collector, SCRA 163; Roxas vs. CTA,
23 SCRA 276).
ALTERNATIVE ANSWERS:
a)

No. The money given to the director was paid merely to please" him and
was not paid for services actually rendered and therefore does not qualify
as compensation for services deductible as ordinary and necessary
expense. Moreover, deductions are allowable only if incurred for legal
purposes.

b)

No. A taxpayer may not deduct a business expense which is against the
law or public policy. The payment made to the director is a bribe given to
a government employee. Bribery is a crime punishable under the Revised
Penal Code.

Question No. 13:


X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land
is to be devoted strictly for religious purposes by the Church. When the Church tried
to register the title of the land, the Register of Deeds refused claiming that the capital
gains tax was not paid. Is the transaction exempt from the capital gains tax? Reasons.
ANSWER:
No. Under Section 21 (e) in relation to Section 49 (a) (4) of the National
Internal Revenue Code, the seller is the one liable for the payment of the capital
gains tax from the sale of real property by an individual taxpayer. Meanwhile,
the Church in this instant case is the buyer. Hence, Section 28 (4) of the 1987
Constitution, which exempts church lands, buildings, and improvements, does
not apply because the obligation to pay the capital gains tax herein is imposed
on X, the seller, and not on the Church. Since payment of the capital gains tax
279

is a condition precedent for the registration of the transfer certificate of title to


real property, the nonpayment herein by the seller is a valid reason for the
Registry of Deeds to deny the transfer of title to the subject land.
ALTERNATIVE ANSWERS:
a)

Assuming that in the hands of X, the piece of land is a capital asset, then
the sale to the Church is subject to capital gains tax for which X is liable.
It is immaterial that the land will be used exclusively for religious
purposes; if there is any exemption, then it applies to Church, and not to
X, the vendor.

b)

No. The tax exemption granted to churches in the Constitution refers to


property tax and not to capital gains tax which is an income tax. Besides,
the capital gains tax is the liability of the seller X and not the purchaser.

Question No. 14:


Oriental, Inc. holds a proprietary share of Capital Gold Club, Inc. It assigned
without any consideration this share to X, one of its foreign consultants, to enable
him to use its facilities for the duration of his stay in the Philippines. X signed a
Declaration of Trust where he acknowledged that the share is owned by Oriental, Inc.
and where he promised to transfer the same to whoever will succeed him as consultant. WhenXs contract with Oriental, Inc. expired, he left the Philippines and assigned
forfree the share to Y, his successor in office. What tax, if any, can be imposed by the
BIR on the transaction?
ANSWER:
The BIR cannot Impose any tax because there was no real transfer of the
ownership of the subject Capitol Golf Club, Inc. (Capitol) proprietary share from X to
Y. Oriental. Inc. is the true owner of the Capitol proprietary share. It remained the
true owner from the time of the Capitol shares use by X, to the transfer of the Capitol
shares use to Y. Oriental remained the legal owner thereof all throughout, while X
and Y are only the beneficial owners.
ALTERNATIVE ANSWERS:
a)

The value of the use of the share may be considered compensation


income to both X and Y subject to income tax. The revocable trust may
280

not be considered a disposition of a share of stock subject to capital gains


tax.
b)

Since the transfer does not involve any consideration, X is not subject to
income tax. While the transfer is gratuitous, there is no donative intent.
Thus, the transaction is not subject to donors tax. However, since the
certificate is evidence of interest in the Property of a corporation, the
transfer of the said certificate is subject to the documentary stamp tax of
P0.20 on each P200 or fractional part thereof, of the face value of such
certificate, in accordance with Section 178 of the NIRC (BIR Ruling 23589).

c)

If the BIR puts value to the playing rights, then the transfer to the
expatriate, that value could be treated as compensation to the expatriate,
hence, taxable.

Question No. 15:


Pacific, Inc. is engaged in overseas shipping. It time chartered one of its ships
to a Japanese company on a five- year term. The charter was consummated through
the efforts of Kamino Moto, a Tokyo based broker. The negotiation took place in Tokyo.
The agreement calls for Pacific, Inc. to pay Kamino Moto $50,000.00. Your opinion is
sought whether Pacific, Inc. should withhold the tax before sending the compensation
of Kamino Moto.
ANSWER:
The compensation of Kamino Moto is not subject to withholding tax.
Compensation for labor orpersonal services performed outside the Philippines
are considered as income from sources without the Philippines (Sec. 36 (c) (3)
and (a) (3). Kamino Motos efforts in consummating the Charter is a form of
labor or services.
Considering further than Kamino Moto is a Tokyo based broker, presumably
a non-resident foreign corporation, it is taxable only on income within the
Philippines. Since the contract was consummated in Japan. Kamino Motos
compensation, therefore, is not subject to withholding tax.

281

ALTERNATIVE ANSWERS:
a) Taxes should not be withheld as the income was derived from an activity
outside the country and. therefore, from sources outside the Philippines.
It has been held in Commissioner v. Japan Air Lines, 202 SCRA 450 that
for the source of income to be considered as coming from the Philippines,
it is sufficient that the income is derived from activities within the
country. The time chartering of the ship occurred outside the Philippine
territory. Therefore, income derived therefrom is not subject to income
taxes that may be withheld at source.
b) Kamino Moto is a non-resident alien not engaged in trade or business in
the Philippines. According to Section 25 of the NIRC, he is liable to pay
income tax if the compensation paid by Pacific is compensation income
derived from sources within, the Philippines. However, the brokerage
service of Kamino Moto was rendered in Tokyo. Applying the source- rule
in Section 36 of the NIRC, the income derived by the taxpayer is income
derived from sources outside the Philippines. Thus, the compensation of
Kamino Moto is not subject to Philippine income tax. Pacific Inc. should
not withhold income tax on the payment.
Question No. 16:
Juan Panalo won a damage suit for P500,000.00against Juana Talo. Panalo got a
writ of execution and made a levyon the lot of Talo. The lot was sold at public auction
where Panalo was the highest bidder for P500.000.00. Panalo refused to pay any
capital gains tax on his purchase of said lot. Your opinion.
ANSWER:
The capital gains tax from sales of real property is payable by the seller
(Section 21 (e) in relation to Section 49 (a) (4) of the NIRC).
Hence, Panalo cannot refuse to pay the capital gains tax on his purchase of
said lot.
ALTERNATIVE ANSWER:
Panalo is not liable for capital gains tax as only the vendor, in this case,
282

Talo, is liable therefor, if at all.


Question No. 17:
Fitness, Inc. is a domestic corporation engaged in the manufacture and sale of
nutritional products. It pays royalties to its foreign licensor. After investigation, the
BIR on December 17, 1974, sent a notice of assessment to Fitness, Inc. for allegedly
failing to remit withholding tax at source for the fourth quarter of 1973 on its
royalties. It demanded payment of P3,000,000.00. The notice was received by Fitness,
Inc. on December 19, 1974.
On February 8,1975, Fitness, Inc., through its counsel, protested the assessment
and requested its cancellation or withdrawal on the ground that it lacked factual and
legal bases. On December 10, 1979, the Commissioner of the BIR rendered a decision
reducing the assessment to PI.500.000.00.
Fitness. Inc. was not satisfied and on January 18.1980, it filed a petition for
review of the decision in the CTA to enjoin the enforcement of the assessment. On
February 7, 1980, the BIR issued a warrant of distraint against Fitness. Inc. The CTA
enjoined the collection of the deficiency taxes by virtue of the warrant of distraint. It
was argued by Fitness, Inc. that the right of the BIR to collect its alleged deficiency
taxes had already prescribed. Rule on the argument.
ANSWER:
The warrant of distraint was served on the taxpayer within the prescriptive
period (then 5 years, now three (3) years). In Commissioner v. WyethSuaco (202
SCRA125), the court ruled that the prescriptive period provided by law to make
collection by distraint and/or levy or by a proceeding in court is interrupted
once a taxpayer protests the assessment and requests for its cancellation. Thus,
when the taxpayer protested the assessment on 8 February 1975, the
prescriptive period to collect was interrupted and resumed on 10 December
1979. When the Commissioner issued the warrant of distraint on 7 February
1980 it was well within the five-year (now 3 years) prescriptive period to collect.
ALTERNATIVE ANSWERS:
a) The Burea u of Internal Revenue (BIR") shall assess internal revenue
taxes within three (3) years after the last day prescribed by law for the
filing of return, and no proceeding in court without assessment for the
283

collection of such taxes shall be begun after the expiration of such period
(Section 203 of the National Internal Revenue Code [NIRC"). However.
this three (3)-year prescriptive period shall be suspended when the
taxpayer requests for a reinvestigation and which is granted by the
Commission (Section 224 of NIRC). In case an assessment was made, the
tax may be collected within three (3) years from the date of assessment
(Collector of Internal Revenue v. Pineda,2 SCRA 401; Umali, Roman A,
Reviewer in Taxation,1985, pp. 486-487; Vitug, Jose C., Compendium of
Tax Law and Jurisprudence, 2nd Rev., Ed., 1989, p. 255). If the taxpayer
asks for a reinvestigation of the assessment and such reinvestigation is
made, and on the basis of which the BIR makes another assessment, the
three (3)-year period for collection is to be counted from the last
assessment (Rep. v. Lopez,7 SCRA 566; Rep. v. Acebedo, 22 SCRA 1356;
Umali, Roman A., Reviewer in Taxation,1985, pp. 486-487; Vitug, Jose C.,
Compendium of Tax Law and Jurisprudence, 2nd Rev., Ed., 1989, p. 255).
In the case at bar, the running of the three (3)-year prescriptive period for
the BIR to collect taxes started to run only on 10 December 1979, when a final
assessment was made by the BIR reducing the tax due to One Million Five
Hundred Thousand Pesos (PI,500,000.00). The distraint against Fitness, Inc.
Hence, the action of the BIR to collect the deficiency taxes was clearly within
the three (3)- year prescriptive period.
b) The right of the BIR to collect the deficiency taxes has not prescribed, as
the prescriptive period is reckoned from the date of the reduced
assessment, which is December 10, 1979. The BIR has three (3) years from
said date to collect.
The reduced assessment is In the nature of a compromise assessment, the
first assessment received by Fitness on December 19,1974, and protested only
on February 8,1975, having already become final and binding on Fitness.
Applying the present provisions of the NIRC. Fitness should have protested the
assessment within thirty (30) days from receipt of the same. Failing to do so, the
assessment became final and was presumably merely compromised. The date of
such compromise assessment should then be the basis for computing the
prescriptive period of three (3) years.
284

Note:
Beginning 1984, the prescriptive period of the right of the government to assess
and collect internal revenue taxes was reduced from five (5) to three (3) years.
Question No. 18:
On September 19, 1973, the BIR sent a notice of assessment to X to pay
P300.000.00 as forest charges for the year 1970-73. Xmade a partial payment of
P100.000.00 on September 28,1973. X died in November, 1977. On July 29, 1979, the
BIR filed in the Testate Estate Proceedings of X a claim for P200.000.00the unpaid
forest charges left by X. the administrator of the estate opposed the claim on the
ground of prescription. Decide.
ANSWER:
Where assessment was made, the tax may be collected within five (5) years
(now 3 years) from the date of assessment [Coflection of Internal Revenue v.
Pineda, 2 SCRA 401; Umali, Roman A., Reviewer in Taxation, 1985. pp. 486-487;
Vitug, JoseC., Compendium of Tax Law and Jurisprudence, 2nd Rev., Ed.. 1986,
p. 255).
In the case at bar, X on the basis of the notice of assessment, voluntarily
made a partial payment to the Bureau of Internal Revenue in the amount of One
Hundred Thousand Pesos (P100,000.00). However, it took the BIR almost more
than five (5) years to take the necessary legal action to collect the remaining
amount of taxes due.
This is clearly beyond the five (5) now three (3) year period for the collection
of taxes. Hence, the claim filed by the BIR against the Estate of X for the
payment of Two Hundred Thousand Pesos (P200.000.00) has prescribed.
ALTERNATIVE ANSWERS:
a)

The claim has prescribed as the BIR has only three (3) years from the date
of the assessment to collect.

b)

Taxes are money claims that must be filed with the probate court within
the period provided for in the Rules of Court (Sections 1 and 2. Rule 86).
In the case of Domingo v. Garlttos (8 SCRA 443), the court ruled that the
claims shall be barred if filed beyond the prescribed period Just like any
285

other money claims. But the ruling in Garlitos was superseded by Vera v.
Fernandez which ruled that estate taxes are payable even if presented
beyond the period in the statute of non-claims in the Rules of Court.
Question No. 19:
On February 13,1969.X, obtained a loan of P800.000.00 from the GSIS secured
by the mortgage of a parcel of land including its improvements. X failed to pay the
loan. The lot was foreclosed and sold at public auction to the GSIS as the highest
bidder. X failed to redeem the lot and the GSIS consolidated its title to the lot in 1977.
In 1979, however, the GSIS allowed X to repurchase the lot.
After assessment by the City Assessor, the City Treasurer of Manila required X to
pay the real estate taxes due on the lot for the years 1977 and 1978. X paid under
protest. On September 5, 1979, X sent a demand letter to the City Treasurer for
refund. The demand was refused.
X then filed with the Regional Trial Court a complaint against the City of Manila
for a sum of money and/or recovery of real estate taxes paid under protest." The City
questioned the jurisdiction of the Court. Decide.
ANSWER:
Section 62 of the Real Property Tax Code provides that:
"Sec. 62.Payment under protest.
a)

When a taxpayer desires for any reason to pay his tax under protest, he
shall indicate the amount or portion thereof he is contesting and such
protest shall be annotated on the tax receipts by writing thereon the
words paid under protest.' Verbal protests shall be confirmed in writing,
with a statement of the ground, therefor, within thirty days. The tax may
be paid under protest, and in such case it shall be the duty of the
Provincial, City or Municipal Treasurers to annotate the ground or
grounds therefor on the receipt.

b)

In case of payments under protest, the amount or portion of the tax


contested shall be held in trust by the treasurer and the difference shall

286

be treated as revenue.
c)

In the event that the protest is finally decided in favor of the


government the amount or portion of the tax held in trust by the
treasurer shall accrue to the revenue account, but if the protest shall be
decided finally in favor of the protestant. the amount or portion of the tax
protested or applied as tax credit to any other existing or future tax
liability of the said protestant." (Emphasis Supplied)

If the owner is not satisfied with the action of the provincial orcity
assessors in the assessment of his property, he may file an appeal to the Board
of Assessment Appeals of the province on city, within sixty (60) days from the
receipt of the decision (Section 30 of the Real Property Tax Code).
If the owner is not satisfied with the decision of the Board of Assessment
Appeals, he may appeal the said decision to the Central Board of Assessment
Appeals within thirty (30) days after the receipt of the decision (Sections 34 and
36 of the Real Property Tax Code).
As enunciated in the case of Victorias Milling Co., Inc., vs. Court of Tax
Appeals 22 SCRA 1008, 1001 (1968):
"It Is settled in our Jurisdiction that where an assessment is illegal and
void, the remedy of a taxpayer, who has already paid the realty tax under
protest, is to sue for refund in the competent court of first instance. On the
other hand, where the assessment is merely erroneous, his recourse is to file an
appeal in the Provincial Board of Assessment Appeals within 60 days from
receipt of the assessment." [Underscoring Supplied)
In view of the foregoing, the legal recourse of X is to appeal the decision of
the City Treasurer to the Board of Assessment appeal, and not to file an action
for sum of money and/or recovery of real estate taxes. Hence, the Regional Trial
Court has jurisdiction over the complaint filed by X.
ALTERNATIVE ANSWERS:
a)

The Regional Trial Court has Jurisdiction. It has been held that the
regular courts have jurisdiction over actions for refund of real estate taxes
paid under protest on the ground of solutioindebitt
287

b)

The RTC does not have jurisdiction over the matter. Section 30 of PD. No.
464 (The Real Property Tax Code) prescribes the proper remedy of the
taxpayer. It requires X, who is not satisfied with the action of the city
assessor, to appeal his case to the Local Board of Assessment Appeal
within sixty days from date or receipt by X of the written notice denying
his request for refund of real property taxes paid.

Note:
The examinees were made to understand that no questions will be asked under
the Local and Real Property Tax Code.
Question No. 20:
Evelyn is a graduate student of U.P. In January, 1991, she won the Palanca
Award for an outstanding short story she wrote. The award was P25.000.00 in cash.
In February, 1991, she was also named most Valuable Player of the Varsity volleyball
team and she was given a trophy plus P10.000.00. Finally, in March, 1991, she
received a Fellowship Award from the University of California to pursue a master's
degree in American literature. The fellowship is for $10,000.00 plus freeboard and
lodging for two (2) semesters. Should Evelyn include these awards and fellowship in
her gross income? Reasons.
ANSWER:
Gross income includes prizes and winnings (Section 27 of the National
Internal Revenue Code [NIRC"), except those stated in Section 28 B, (8), (E) of
the NIRC, to wit:
(E) Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civil achievement but only if:
(i)

The recipient was selected without any action on his part to enter
the contest or proceeding: and

(ii) The recipient is not required to render substantial future services


as a condition to receiving the prize or award.
1 The first award granted to Evelyn was a Palanca award. This kind of
award requires submission of literary works. Hence, this is included in
the gross income because it fails to meet the legal requisites provided
288

for in the aforequoted provisions of law specifically item (i).


2 The second award granted to Evelyn was the Most Valuable Player
Award. In this kind of award, Evelyn did not file any application to
enter into any contest. The award was given to her in recognition for
her outstanding performance in the field of sports. However, the
recognition in the field of sports is not among those stated in the
aforequoted provision of law. Thus, the award granted to her does not
fall under the aforequoted provision of law.
3 The last award granted to her was the Fellowship Award. This requires
also submission of application to qualify for such award. Hence, it fails
to meet the necessary requisites of the aforequoted provision of law
specifically item (i).
ALTERNATIVE ANSWERS:

a)

The award of P25.000.00 should be Included in Evelyn's gross Income for


while it was earned as a prize for literaiy achievement, it cannot be said
that she won without any action on her part to enter the contest. Her
P100.000.00 prize as Most Valuable Player cannot be excluded for the
same reason. Both awards, however, may be considered income subject to
income tax.

The fellowship award of $10,000.00 is, however, excluded from her income
as she was selected therefor without any action on her part and the same was
given to her in recognition of literaiy and educational achievement, presumably
without her being required to render future services for the grantor.
b)

It depends. Section 28 (b) (8,E) of the NIRC enumerates the requirements


in order to exclude the item from taxation. The Tax Code requires that the
prizes and awards are given primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civil achievements.
The awards mentioned were given to the taxpayer in recognition of her
literary achievement in the case of the Palanca Award, the most valuable
player award for civic/educational achievement and the fellowship
award'for educational achievement.

289

Section 28(b) further requires that the recipient must be selected without
any action on his part to enter the contest or proceeding and the taxpayerrecipient is not required to render substantial future services as a condition to
receiving the prize or award. If these two requirements are met, then the items
should not be included in the gross income.
Note:
Under BIR 131-91 addressed to the University of Sto. Tomas, stipends to scholars
are not deductible.
1992 BAR EXAMINATION
Question No. 1:
Mr. Dante Raymundo retired from the government service as Director of Land
Transportation on January 6, 1985. Upon retirement, Mr. Raymundo received, among
other benefits, his terminal leave pay for which the BIR withheld the sum of
P56.000.00 a week following the date of his retirement.
On October 17, 1991, following the decision of the Supreme Court that the money
value of the accumulated leave credits/terminal pay is not subject to witholding tax, Mr.
Raymundo filed a claim for refund of P56.000.00 with the Commissioner of Internal
Revenue.
1)

Is Mr. Raymundo within his rights in claiming a refund of taxes withheld on


his terminal leave following the Supreme Court decision?

ANSWER:

No. Under Section 230 of the NIRC, a suit for the recovery of tax erroneously
or illegally collected cannot be filed after the expiration of two years from the
date of payment of tax regardless of any supervening cause that may
ariseafterpayment. Thus, the right of Mr. Raymundo to claim for refund has
already prescribed.
2)

If the retiree is within his legal rights in claiming refund of the taxes withheld,
will the BIR automatically grant his claim? Explain your answer.

ANSWER:
No. Because he must file a written claim.
290

Comment:
The question expresses that the retiree is within his legal rights" in
claiming the refund of the taxes withheld. Accordingly, an examinee can assume
that all the requirements have been met with respect to the refund. In this sense, an
examinee may be led to say it can be automatic.
3) Assuming that the BIR denies the claim for refund, what could be the possible
reason or statutory basis for such a denial?
ANSWER:
The possible reason for a denial would be that the written claim has already
prescibed or that the terminal pay leave is not excluded from income tax. Sec.
230, NIRC (supra).
4)

Discuss the theory of supervening event as it applies to claims for refund of


erroneously/illegally collected taxes. Can the retiree claim a refund under this
theory? Explain.

SUGGESTED ANSWER:
The theory of supervening event expresses that an event which is beyond
the control of the parties would allow the recovery of erroneously or illegally
collected taxes provided the proceeding for such recovery is made within the
prescriptive period from the occurrence of such event.
The theory of the supervening event has been abrogated by Section 230 of
the NIRC.
Question No. 2:
1) What are the legal remedies of an aggrieved taxpayer both at the
administrative and judicial levels? Describe separately the procedures.
ANSWER:
a)

The administrative and judicial remedies are such as may be provided for
in law imposing the tax. An expression of such remedies in the law should
then be deemed exclusive by the taxpayer. When the law imposing the tax
is silent on remedies, the laws and rules of procedure of general applica291

tion shall then govern.


1

b) Under the NIRC, an aggrieved taxpayer


may either (1) dispute an assessment within
thirty (30) days from receiptthereof by filing with
the Commissioner of Internal Revenue a request
for reconsideration of reinvestigation, or (2) pay
the assessment within the thirty days then file a
written claim with the Commissioner of Internal
Revenue for refund within two years from full and
final payment.

Upon an adverse decision of the Commissioner and within thirty days from
receipt of notice of denial, an appeal may be filed with the Court of Tax Appeals.
However, with respect to claims for refunds, an appeal must also be filed within
two years from the date of full and final payment.
From the decision of the Court of Tax Appeals, an appeal or petition for
review by certiorari may be taken to the Court of Appeals and then to the
Supreme Court in appropriate cases.
Comment:
An examinee should also be given credit if the remedies under the Tariff and
Customs Code were instead discussed.
2) Distinguish between a taxpayers remedies in connection with his tax
assessment and/or demand and his claim for refund of taxes alleged to have
been erroneously or illegally collected.
ANSWER:
A tax assessment becomes final unless it is disputed or contested within 30
days from receipt thereof by the taxpayer. If the action taken by the
Commissioner on the resquest for reconsideration is unacceptable to the
taxpayer, the latter must then appeal, by way of Petition for Review to the Court
ofTax Appeals within thirty days from receipt of the decision of the
Commissioner of Internal Revenue. The taxpayer may also opt to pay the tax
before the finality of the assessment (e.g., within 30 days from receipt of the
assessment) and then file within two years a written claim for the refund of the

292

tax. A denial by the Commissioner of a claim for refund must be appealed to the
CTA within thirty days from receipt of notice of denial and within two years
from the day of full and final payment. Continued inaction by the Commissioner
on claims for refund may thus be taken as a denial appealable to the Court of
Tax Appeals, in order topermit the appeal to be considered or having been made
within the two-year mandatory period.
3) What are the requisites before a taxpayer's request for reinvestigation may be
granted by the BIR? Discuss briefly.
ANSWER:
A request for re-investigation refers to a plea for re- evaluation of an
assessment on the basis of newly-discovered evidence or additional evidence the
taxpayer intends to present in the re-investigation.
ALTERNATIVE ANSWER:
He must file a written protest stating his grounds therefor so that his
protest could be granted.
Comment:
This question involves knowledge of BIRCirculars which are not included in the
Bar Examination coverage.
4)

If the request for re-investigation is denied, is it possible or advisable to file a


petition for review with any court or agency as a last resort?

ANSWER:
A denial of a request for re-investigation on an assessment partakes the
nature of a decision if made by the Commissioner. In this a case, an appeal may
be filed with the CTA within thirty days from receipt of the notice of denial.
ALTERNATIVE ANSWER:
On the assumption that the denial by the BIR was not made by the
Commissioner himself but by the regional officer, for instance, or that the

293

request for re-investigation is not on an assessment as yet, then it may not


necessarily cqnstitute a decision on a disputed assessment from which an appeal
may be made to the Court ofTax Appeals.
Comment:
The problem did not indicate the subject matter of the request for reinvestigation nor the officials acting for and in behalf of the BIR in the denial of the
request for re-investiga- tion. Assuming that the subject matter of the request for reinvestigation were not an assessment or that the denial was made by a lower official,
then there would still be a need for pursuing administrative remedies.
Question No. 3:
ABC, a domestic corporation sold in 1989 two (2) condominiun units of Legaspi
Towers in Roxas Blvd. for P8,158,142.00. Taxpayer corporation declared in its income
tax return for taxable year 1989, its gains derived from the sale of the two (2)
condominium units as follows:
UNIT A

UNIT B

(316.5 sq.ft.)

(322 sq.ft.)

Proceeds from sale

P3,933,679 +

P4,224,463= P8.158,142

PI,501,295

PI,529,755 = P3,031,050

P49.248

P55.413 =

LESS:
a)

AcquisitionCosts
(Deed of Sale 9/9/83)

b)

Payments ofRealty Tax

P104.661

Total (a) (b)

PI.550,543

PI,585,168 = P3,135,711

Gains

P2.383.136

P2,639,295 =P5.022.431

Without going into computations, answer the following question:

294

Since ABC derived gains from the sale of the condominium units, should it pay
the 5% capital gains tax, 35% corporate income tax or none of the above because the
corporation is not a real estate dealer? Discuss.
ANSWER:
ABC corporation must pay the 35% corporate incometax.
The National Internal Revenue Code does not provide for the payment by
corporations of 5% capital gains tax on the sale of real property, whether
considered capital assets or not. Such income is included in the computation of
net income (Gross taxable income less deductions) and is subject to the tax rate
of 35%.
ALTERNATIVE ANSWER:
The capital gains derived will only form part of the taxable income of the
taxpayer susceptible to deductions. Accordingly, the net capital gain on the sale
may not necessarily be subject to the 35% tax. The taxpayers total income and
deductions for the year must be considered.
It is immaterial whether the corporation is a real estate dealer or not.
Question No. 4:
Pursuant to the National Internal Revenue Code and under existing rules and
regulations,

the

Commissioner

of

Internal

Revenue

is

clothed

with

the

authority/power to evaluate facts of tax cases and issue assessments/demands


against a taxpayer for deficiency taxes.
1) If an KTC Judge, on motion of an informer, renders a decision ordering the
Commissioner to assess and collect from the taxpayer certain deficiency taxes
when, in fact, the BIR has already ascertained that no deficiency taxes are due
the taxpayer, what proper course of action would you advise your informerclient to undertake?
ANSWER:
The issue being disputed assessment, jurisdiction, if at all, lies with the
Court ofTax Appeals and not with the RTC. The court decision, in my view, can
295

be

voided.

would

simply

advice

my

client

to

pursue

the

matter

administratively. If the evidence warrants, I could have the matter investigated


by the Ombudsman.
ALTERNATIVE ANSWER:
I will advice the client to go to the BIR to file an information under oath so
that it may consider any evidence my client may have in his possession.
2)

Do you think an action for mandamus with the RTC can prosper to compel the
Commissioner to issue a deficiency assessment?

ANSWER:
No. It has been held that the assessment of taxes is not a ministerial duty
compellable by mandamus. It is a discretionary power vested by law on the
Commissioner of Internal Revenue in the exercise of which the regular courts
may not interfere with.
3) Which court acts on:
a)

disputed assessments:

b)

tax collection cases filed by the BIR?

ANSWER:
a)

The CTA exercises exclusive appellate Jurisdiction over disputed


assessments.

b)

Tax collection cases are filed by the BIR with regular courts.

Question No. 5:
Your client. United Market Cooperative, is requesting the Commissioner of Internal
Revenue to exempt it from the payment of VAT on its purchase of prime commodities
from food suppliers/manufacturers on the ground that it is exempt from all taxes,
including VAT, under R_A. No. 6938, the Cooperative Code of the Philippines.
Do you think your client can obtain the necessary exemption from the BIR? If
your answer is in the affirmative, explain the basis for the grant. If in the negative,
state the basis for the rejection of the request.
296

ANSWER:
1) An exemption is not necessary. The value added tax is not on the purchase
but on the sellers, except In importation.
2)

No. The exemption to which the taxpayers are entitled to refers to those
taxes that are levied on the exempt taxpayer or directly imposed on the
exempted goods. The value added tax is imposed on the sellers of goods
and services, not the purchaser.

ALTERNATIVE ANSWER:
Yes. Under the NIRC, transactions which are exempted by special laws from
the payment of value-added taxes shall be so exempt. RA 6938.the Cooperative
Code of the Philippines is a special law entitling the United Market Cooperative
in the case at bar to exemption from VAT.
Question No. 6:
On September 10, 1991, a Bank Manager of Peoples Bank, Inc. (PBI), upon
reading an obituary announcing the death of Mr. Roberto Diaz refused to allow one of
his heirs to withdraw Mr. Diaz deposit amounting to P2 Million.
A week later, immediately following said denial, the administrator of the estate
sued the Bank/Bank Manager to compel them to release the money since such act
was arbitrary and constituted a denial of property/constitutional rights.
1) If you are retained as counsel by the Bank/Bank Manager to defend their stand
in refusing to release the P2 Million to the heirs, what would you raise as a legal
defense? Discuss.
ANSWER:
I would raise the defense that under Sec. 90 of the NIRC a bank with
knowledge of the death of a person who maintains a deposit account with such
bank shall allow withdrawals therefrom only if the mandatory requirement of a
certification from the Commissioner that the taxes due thereonhave been paid
could be presented by an heir. Absent such certification, a bank is authorized to
withhold the release of deposits of a decedent.
2) Under the same set of facts, would you, as administrator of the estate, rather
file an administrative appeal with the Commissioner of Internal Revenue or a
297

petition for review with the Court of Tax Appeals? Explain.


ANSWER:
An administrative appeal to the Commissioner of Internal Revenue would
not be a proper remedy without an original proceeding having first been filed
with the BIR
A petition for review with the Court of Tax Appeals, on the other hand,
requires a final decision of the Commissioner, the CTA being a court of exclusive
appellate jurisdiction.
As administrator, I would cause the payment of the proper taxes on the
deposits

and

thereafter,

secure

the

required

certification

from

the

Commissioner.
3)

If the Commissioner of Internal Revenue allows the administrator of the estate


or the heirs of the decedent to withdraw from the deposit account, what are the
conditions under the Tax Code which have to be met first?

ANSWER:
Before withdrawals on deposits of a decedent could be permitted, the
proper taxes should first be paid and a certification of such payment secured
from the Commissioner. However, the Commissioner may authorize the
withdrawal without a certification provided the amount to be withdrawn shall
not exceed P 10,000.00.
ALTERNATIVE ANSWER:
Payment of the tax or the filing of a bond would, in substance, be enough
for the Commissioner to allow the withdrawal.
Question No. 7:
Mr. Bill Morgan, a Canadian citizen and a resident of Scarborough, Ontario,
sends a gift check of $20,000.00to his future Filipino daughter-in-law who Is to be
married to his only son in the Philippines.
1)

Is the donation by Mr. Morgan subject to tax? Explain.


298

ANSWER:
Yes. While the gift has been made on account of marriage, to qualify for
exemption to the extent of the first PIO.OOO.OO (now P50.000.00) of the value
thereof, such gift should have been given to a legitimate, recognized natural or
adopted child of the donor.
ALTERNATIVE ANSWER:

It is not subject to tax because the gift was made outside the Philippines.
Comment:
The phrase In the Philippines" is dangling and may be interpreted by students to
modify where the son is, where the marriage Is, or where the daughter-in-law is.
Furthermore, the question does not say where the daughter-in-law received the gift.
We recommend that any answer that discusses the problem of situs should be given
full credit.
2) What is the tax consequences, if any, to the donee (Filipino daughter-in-law of
Mr. Morgan)?
ANSWER:
The gift, with respect to the donee, is excluded from gross income and is
exempt from Income taxation. There Is no donees gift tax.
3)

Can you name one kind of gift that is exempt from donors tax which is
extendible to both residents and nonresidents or non-citizens of the
Philippines? Include qualifications, If any.

ANSWER:
Gifts made to or for the use of the National Government or any entity
created by any of its agencies which is not conducted for profit, or to any
political subdivision of the said Government are exempt from gift tax with
respect to both residents and non-residents.
Question No. 8:

299

A disgruntled employee of Apache Corporation reported to the Commissioner of


Customs that the company is illegally importing electronic equipment by way of
unlawful "shipside" activities thereby evading payment of customs duties and taxes on
the goods.
Accordingly, the Commissioner of Customs, upon the request of the Economic
Intelligence and Investigation Bureau (EIIB), issued warrants of seizure and detention
and directed EIIB to seize the goods listed in the warrants.
After the seizure of the goods and considering the magnitude of the value of the
goods, counsel for Apache Corporation filed a petition with the Supreme Court for
certiorari, prohibition and mandamus to enjoin the Commissioner of Customs and
his agents from continuing further with the forfeiture proceedings and praying that
the Commissioner return the confiscated articles on the ground that the warrants
were in violation of the Rules of Court and the Bill of Rights.
If you are a newly-appointed Solicitor in the office of the Solicitor General
representing the Commissioner of Customs, how would you defend the latter? Give the
specific defenses.
ANSWER:
Appurtenant to its power under the Tariff and Customs Code to enforce the
provisions of such law, the Bureau of Customs may conduct searches and
seizures even without the benefit of a warrant issued by a judge upon probable
cause. This is historically considered an exemption from the constitutional
guarantee against unreasonable searches and seizures.
2)

Assuming that the enforcement of the warrant had been extended to the
residence of the President of Apache Corporation, is such enforcement valid?
Explain.

ANSWER:
No. The Tariff and Customs Code authorizes custom officials and agents to
search any building, except dwelling houses.
3)

Do you think the petition for certiorari, prohibition and mandamus filed by
Apache Corporation will prosper in the Supreme Court? Discuss.

ANSWER:
300

No. The choice of remedy assumes want of authority and Jurisdiction.


Warrantless searches and seizures are, however, authorized under TCC. Such
searches and seizures are not considered unreasonable within the meaning of
the constitutional guarantee.
Question No. 9:
Ms. Edna Dinoso is the registered owner of a residential lot with a two-storey
house situated in Naga City. The lot with an area of328 sq. meters is described and
covered by TCT No. 4739 of the Registry of Deeds of Naga City.
On September 12. 1977, a 115 sq. meter portion of Ednas property was
expropriated by the Republic of the Philippines for the sum of P6.700.00
representing the assessed value of the aforesaid portion: This amount was deposited
by the Government in Ednas account.
For almost ten (10) years, Edna failed to pay her real estate taxes on the same
property. Thus, on November 5, 1977, her property was sold at public auction by the
City Treasurer of Naga City to satisfy her real estate tax delta- quencies amounting
to P5,800.00. The highest bidder for the property was Angel Chua.
Edna was not present at the public auction although she later admitted having
received the notice of hearing for the petition for entiy of a new certificate of title by
AngelChua. (Both the auction sale and the final bill of sale were annotated at the
back of TCT No. 4739 by the Register of Deeds.)
On March 15, 1979, Edna filed a complaint to annul the auction sale which
was denied by the CFI Judge of Naga City. In fact, the CFI Judge ordered the TCT #
4739 of Edna be cancelled and that a new title be issued to Angel Chua.
On appeal, the Court of Appeals affirmed the CFI decision in toto. Edna then
elevated the case to the Supreme Court citing several grave errors of law, among
which are:
1) That her tax delinquencies (involving P5,800.00) for non-payment of real estate
taxes were offset by the sum of P6,700.00which the government of the
Philippines owed her. She claims that her tax delinquencies have been extinguished by legal compensation:
2)

That the price of P5,800.00 paid by Angel Chua was grossly inadequate and
301

that because of its inadequacy, the same is tantamount to deprivation of


property without due process of law;
3) That the public auction made on her property is void.
Discuss the merits of the appeal.
Comment:
Real Property Taxation has been excluded in the Bar Examination Coverage;
hence, an examinee should not be penalized by any failure to answer this number.
ANSWER:
1) The decision of the Court of Appeals affirming the CFI decision must be
affirmed.
On the procedural aspect, it has not been shown, as required under the
Real Property Tax Code that plaintiff has paid the amount for which the real
property has been sold plus interest.
On the claim of extinction of tax liability by legal compensation, there is
jurisprudence to the effect that the doctrine of equitable recoupment does not
apply in this Jurisdiction. Assuming it does, the facts of the case bear out that
the Government does not owe the plaintiff any amount.
2) On the claim that the price for the property was grossly inadequate, the
Real Property Tax Code specifically mentions that the sale of real
property at public auction is to satisfy all the taxes and penalties due
and costs of sale" (Sec. 73). Thus, the selling price is based not on the fair
market value of the property sold at public auction but the amount of real
property taxes due thereon. In any case, the delinquent taxpayer is given
one year from the date of registration of the sale within which to redeem
the property by paying the taxes due plus costs and interest.
3)

On the claim that the public auction made on the property is void, the
Real Property Tax Code provides (Sec. 83,2nd par.) that a court shall not
declare a sale invalid due to irregularities in the proceedings unless such
irregularities have impaired the substantial rights of the taxpayer. In the
302

case at bar, the plaintiff received a notice of hearing for the petition for
entry of a new certificate of title during which she could have questioned
any irregularity in the conduct of the sale.
Question No. 10:
Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock
of San Miguel Corporation. For failure to file a donors return on the donation within
the statutory period, the taxpayer was assessed the sum of PI02,000.00, as donors
tax plus 25% surcharge or P25.500.00 and 20% interest or P20.400.00which he paid
on June 24. 1985.
On April 10, 1986, he filed his income tax return for 1985 claiming among
others, a deduction for interest amounting to P9.500.00 and reported a taxable
income of P96.000.00.
On November 10. 1986, the taxpayer filed an amended income tax return for the
same calendar year 1985, claiming therein an additional deduction in the amount of
P20.400.00 representing interest paid on the donors gift tax.
A claim for refund of alleged overpaid income tax for 1985 was filed with the
Commissioner which was subsequently denied.
Upon appeal with the Court of Tax Appeals, the Commissioner took Issue with
the Court ofTax Appeals determination that the amount paid by the taxpayer for
interest on his delinquent taxes is deductible from the gross income for the same year
pursuant to Sec. 29 (b) (1) of the National Internal Revenue Code.
The Commissioner of Internal Revenue pointed out that a tax is not an
indebtedness. He argued that there is a fundamental distinction between a tax" and a
"debt". According to the Commissioner, the deductibility of interest on indebtedness
from a persons income tax cannot extend to interest on taxes."
1) What is your opinion on the argument of the Commissioner that a tax is not an
indebtedness so that deductibility on the interst on taxes should not be allowed?
ANSWER:
The Commissioners argument is misplaced because the interest on the
donors tax is not one that can be considered as having been incurred in
303

connection with the taxpayers trade, business or exercise of profession.


ALTERNATIVE ANSWER:
a)

While a tax may be considered a debt for purposes of deducting from


gross income, the interest on taxes cannot be so considered, as such
interest is in the nature of a penalty, the imposition of which is designed
to discourage delinquent payment of taxes. To allow the deductibility of
such interest would be to diminish the punitive and deterrent effects of
the imposition, and thus to diminish the importance of the prompt
payment of taxes.

b)

The argument of the Commissioner is wrong. Because while a tax as a


general rule is not a debt, interest on a non-payment of a tax has been
considered like interest on indebtedness by the Supreme Court. (Note:
Whether or not the interest is deductible under the present aw no
apparently in question).

2) Distinguish between the legal concept of "taxes" and "debts".


ANSWER:
A tax may be considered a debt in the Civil Code sense for the following
purposes:
a)

Collection being enforced by court action:

b)

Statute of limitations: and

c)

Deduction from gross income.

Strictly speaking, however, a tax is not a debt in that there can be no set-off
between the taxpayer and the Government.
3)

Pursuant to the National Internal Revenue Code, for interest to be deductible, what
are the requirements to be met? Explain.
ANSWER:
For interest to be deductible, the following requirements must be met:

a) That there must be an indebtedness:


b) That there is an interest on such indebtedness:
c) Such interest was paid or accrued within the taxable year
304

d) Interest was paid on a debt related to ones profession, trade or business.


Question No. 11:
1) The President of the Philippines and the Prime Minister of Japan entered into an
executive agreement in respect of a loan facility to the Philippines from Japan whereby
it was stipulated that interest on loans granted by private Japanese financial
institutions to private financial Institutions in the Philippines shall not be subject to
Philippine income taxes.
Is this tax exemption valid? Explain.
ANSWER:
Yes. The tax exemption is valid because an executive agreement has the
force and effect of a treaty under the provision of the Revenue Code. Taxation is
subject to International Comity.
ALTERNATIVE ANSWERS:
a)

The act of tax exemption is an act of taxation which is inherently legislative.


Therefore, a mere executive agreement cannot provide for a tax exemption.

b)

No. Under the NIRC, for interest on investment in the Philippines in loans to be
exempt from taxation, such investment must have been made by foreign
government-owned

or

controlled

financing

institutions

or

international

financing institutions established by governments. In the case at bar, the loans


would be granted by private Japanese financial institutions and therefore, the
interest thereon would not be exempt from taxation.
2) In a loan agreement between the Central Bank of the Philippines (as borrower)

and private international bank (as lender), it is stipulated that all payments of Interest
by the Central Bank to the lenders shall be made free and clear from all Philippine
taxes which may be imposed thereon.
Is the stipulation valid? Explain.
ANSWER:
305

No. The act of tax exemption is an act of taxation which is inherently


legislative and, therefore, a mere executive agreement without concurrence by
Congress, cannot provide for a tax exemption.
ALTERNATIVE ANSWER:
It is valid. The stipulation in the agreement that the lender shall be made
free and clear" from all Philippine taxes, simply meant that the Central Bank
will assume the tax liability which is not contrary to law, morals, good customs,
public order or public policy.
Question No. 12:
Corporation X declared cash dividends in favor of its non-resident stockholders in
the United States from which amount, the tax on dividend income was withheld.
Under the RP-US Tax Treaty, deductions allowed as tax on dividends earned at
source were fixed at lower rates giving rise to overpayment of the tax on dividends
paid to the nonresident US stockholders (representing the difference between the
amount of withholding tax paid and the amount supposed to have been withheld
under the mentioned tax covenant).
Corporation X filed a claim for refund of said overpayment with the
Commissioner of Internal Revenue within the prescribed period which however,
remained unacted upon, and before the expiration of the two (2) year reglementary
period, it filed a judicial claim for refund with the Court of Tax Appeals.
Respondent Commissioner of Internal Revenue argues that Corporation X is not
the real party in interest to prosecute a claim for refund of the overpaid taxes of the
nonresident US stockholders, who are the real parties in interest. But neither could it
maintain an action for refund in a representative capacity having failed to show proof
of authorization.
Will Corporation X*s case prosper? Explain.
ANSWER:
Yes. A subsidiary, while not the real party in interest, could prosecute a
claim of refund in behalf of its non-resident stockholders by virtue of its being
the withholding agent for the government in respect of the cash dividends it
declared [Comm. vs. Wander Phils.).
306

ALTERNATIVE ANSWERS:
No. The tax is due on the non-resident stockholders. The rule is that the
refund may be claimed by the taxpayer on whom the tax is imposed and who
effectively paid the tax.
Question No. 13:
Under Section 2523 of the Tariff and Customs Code, the duty of verifying the
correct weight of a cargo shipment is imposed upon the vessels master, owner or
employee. If a discrepancy between the actual gross weight and declared gross weight
of manifested cargo exceeds 20% and the Collector shall be of the opinion that such
discrepancy was due to the carelessness or incompetency of the master or pilot in
command, owner or employee of the vessel, a fine of not more than 15% of the value of
the article may be imposed upon the importing vessel.
ABC Corporations vessel was found, after appropriate administrative proceedings,
to have violated the said provision far exceeding the 20% statutory limitation. The
Collector of Customs imposed a dine of P22.600.00 (representing 15% of the value of
the discrepancy) which was affirmed by the Commissioner of Customs.
On appeal by ABC Corporation, the Court of Tax Appeals found the fine of
P22.600.00 harsh and unreasonable for a first offense and reduced the same to
P5.000.00.
The Commissioner of Customs questions the scope of authority of the Court of
Tax Appeals in the determination of the fine imposable under Section 2523 of the
Tariff and Customs Code.
Whose judgment should prevail under the circumstances of the case? Explain
fully.
ANSWER:
The judgment of the Court of Tax Appeals should prevail.
The CTA has exclusive appellate jurisdiction over decisions of the
Commissioner of Customs in cases involving the imposition of fines, forfeitures
307

or other penalties.
1991 BAR EXAMINATION
Question No. 1:
1) The police power, the power to tax and the power of eminent domain are inherent
powers of government. May a tax be validly imposed in the exercise of the police power
and not of the power to tax? If your answer is in the affirmative, give an example.
ANSWER:
The police power may be exercised for the purpose of requiring licenses for
which license fees may have to be paid. The amount of the license fees for the
regulation of useful occupations should only be sufficient to pay for the cost of
the license and the necessary expense of police surveilance and regulation. For
non-useful occupations, the license fee may be sufficiently high to discourage
the particular activity sought to be regulated. It is clear from the foregoing that
police power may not be exercised by itself alone for the purpose of raising
taxes. However, police power may be exercised jointly with the power of taxation
for the purpose of raising revenues. (Lutz us. Araneta, 98 Phil. 148)
ALTERNATIVE ANSWER:
Taxation involves the power to raise revenue not only in order to support
the existence of government but likewise to cany out legitimate objects of
government. Among such legitimate objects are those that police power itself
can cover. As early as the case of Lutz vs. Araneta (98 Phil. 148), the Supreme
Court has ruled that taxation may be used to implement an object of police
power. An illustration of such exercise would be an imposition of taxes on
gambling, the rates of which are made somewhat onerous in order to discourage
gambling instead of an outright prohibition thereof by an exercise of a police
power measure such as by present provisions of the Revised Penal Code.
2) Discuss the meaning and the implications of the following statement:
Taxes are the lifeblood of government and their prompt and certain
availability is an imperious need."

308

ANSWER:
The phrase, taxes are the lifeblood of government, etc." expresses the
underlying basis of taxation which is governmental necessity, for indeed,
without taxation, a government can neither exists nor endure. Taxation is the
indispensable and inevitable price for civilized society: without taxes, the
government would be paralyzed. This phrase has been used, for instance, to
justify the validity of the laws providing for summary remedies in the collection
of taxes. As a consequence of the above rule, an injunction against the assessment and collection of taxes is generally withheld be the laws imposing such
taxes. Even when it is not so, under procedural laws such an injunction may not
be obtained as held in the case of Valley Trading Co. vs. CFI (G.R. No. 49529, 31
March 1989), where the Supreme Court ruled that the damages that may be
caused to the taxpayer by being made to pay the taxes cannot be said to be as
irreparable as it would be against the governments inability to collect taxes.
Question No. 2:
To provide means for rehabilitation and stabilization of the sugar industry so as to
prepare it for the eventuality of the loss of the quota allocated to the Philippines
resulting from the lifting of U.S. sanctions against an African country. Congress
passes a law increasing the existing tax on the manufacture of sugar on a graduated
basis. All collections made under the law are to accrue to a special fund to be spent
only for the purposes enumerated therein, among which are to place the sugar
industry in a position to maintain itself and ultimately to insure its continued
existence despite the loss of that quota, and to afford laborers employed in the
industry a living wage and to improve their working conditions. X, a sugar planter,
files a suit questioning the constitutionality of the law alleging that the tax is not for a
public purpose as the same is being levied exclusively for the aid and support of the
sugar industry.
Decide the case.
ANSWER:
The suit filed by the sugar planter questioning the constitutionality of the
sugar industry stabilization measure is untenable. Taxation is no longer merely
309

for raising revenue to support the existence of government but the power may
also be exercised to carry out legitimate objects of the government It is a
legitimate object of government to protect its local industries on which the
national economy largely depends. Where the aim of the tax measure is to
achieve such a governmental obj ecttve, the tax Imposition can be said to be for
a public purpose (Gaston vs. Republic Bank, 158 SCRA 626).
Question No. 3:
Apple Computer Corp. (ACC) is a foreign corporation doing business in the
Philippines through a local branch located at Makati, Metro Manila. In 1985, the local
branch applied with the Central Bank for authority to remit to ACC branch profits
amounting to P8,000,000.00. After paying the 15% branch remittance tax of
PI,200,000.00, the branch office remitted to ACC the balance of P6.800.000.00. In
January 1986, the branch office was advised by its. legal counsel that it overpaid the
branch remittance tax since the basis of the computation thereof should be the
amount actually remitted and not the amount applied for. Accordingly, the branch
office applied for a refund in the amount of P180.000.00.
If you were the Commissioner of Internal Revenue, would you grant the claim for
refund?
ANSWER:
If I were the Commissioner of Internal Revenue, I would allow the claim for
refund. The remittance tax should be computed on the amount actually
remitted (Marubeni Corporation vs. Commissioner, G.R No. 76573, 14 September
1989). In the refund of taxes, the claim therefor can be filed within two (2) years
from the time of payment so long as the tax payment was made before an
assessment by the Commissioner has become final (Sec. 230, N1RC).
Question No. 4:
Bom of a poor family on 14 February 1944. Mario worked his way through college.
After working for more than 2 years in X Manufacturing Corporation, Mario decided to
retire and avail of the benefits under the veiy reasonable retirement plan maintained
by his employer. He planned to invest whatever retirement benefits he would receive in
a business that will provide his employer with the needed raw materials. On the day of
his retirement on 30 April 1985. he received P400.000.00 as retirement benefit. In
addition, his endowment insurance policy, for which he was paying an annual
310

premium of PI.520.00 since 1965. also matured. He was then paid the face value of
his insurance policy in the amount of P50.000.00.
1) Is Marios P400.000.00 retirement benefit subject to income tax?
ANSWER:
Marios P400.000.00 retirement benefit is subject to income tax. To be
exempt, the retirement pay must have been extended to an employee who is at
least 50 years of age and who would have worked for at least ten (10) years with
the employer. The amount cannot be considered as a separation pay that would
have exempted benefits from income tax since it was Mario who had decided to
retire instead of being required to do so (Sec. 28. NIRC)
2) Is his P50.000.00 insurance proceeds exempt from income taxation?
ANSWER:
The P50.000.00 insurance proceeds is not totally exempt from income tax.
The excluded amount is only that portion which corresponds to the premiums that
he had paid since 1965. At the rate of PI,520.00 per year multiplied by twenty (20)
years which was the period of the policy, he must have paid a total of P30.400.00.
Accordingly, he will be subject to report as taxable income the amount of P
19,600.00 (Sec. 28. NIRC)

Question No. 5:
Delstar Emmanuel Perez, a government employee, retires from the service upon
reaching the compulsory retirement age of 65. Would the amount he is entitled to
receive by way of commutation of his accumulated leave credits, of his terminal leave
pay, be subject to income tax?
ANSWER:
The amount that Emmanuel Perez is to receive should not be subjected to
income tax, and such was the ruling by the Supreme Court in the In Re Zialcita
Administrative Case (Adm. Matter No. 90-6015-SC, 18 Oct. 1990). The ruling
apparently repudiated, or at least is inconsistent with, its earlier decision in
Commissioner vs. Victoriano (G.R. No. 83176, 10 August 1989).

311

Question No. 6:
Robert Patterson is an American who first arrived in the Philippines in 1944 as a
member of the U.S. Armed Forces that liberated the Philippines. After the war, he
returned to the United States but came back to the Philippines in 1958 and stayed
here up to the present He is presently employed in the United States Naval Base.
Olongapo City. For the year 1985, he earned US$10,856.00. Sometime in 1986, the
District Revenue Office of the Bureau of Internal Revenue served him a notice
informing him that he did not file his income tax return for the year 1985 and
directing him to file said return in 10 days. He refused to file any return claiming that
he is not a resident alien and is therefore not required to file any income tax return.
Is Pattersons claim correct?
ANSWER:
Pattersons claim is not correct. While Paterson is exempt from income tax,
an exemption from income tax does not, however, necessarily mean an
exemption likewise from the filing of an income tax return {Garrison vs. Court
of Appeals, 187 SCRA 525).
Question No. 7:
Roberto Ruiz and Conrado Cruz bought three (3) parcels of land from Rodrigo
Sabado on 4 May 1976. Then on 8 July 1977, they bought two (2) parcels of land from
Miguel Sanchez. In 1988, they sold the first three parcels of land to Central Realty,
Inc. In 1989, they sold the two parcels to Jose Guerrero. Ruiz and Cruz realized a net
profit of P100,000.00 forthesalein 1988 and PI50,000.00for the sale in 1989. The
corresponding capital gains taxes were individually paid by Ruiz and Cruz.
On 20 September 1990, however, Ruiz and Cruz received a letter from the
Commissioner of Internal Revenue assessing them deficiency corporate income taxes
for the years 1988 and 1989 because, according to the Commissioner, during said
years they, as co-owners in the real estate transactions, formed an unregistered
partnership or joint venture taxable as a corporation and that the unregistered
partnership was subject to corporate income tax, as distinguished from profits derived
from the partnership by them, which is subject to individual income tax.
Are Robert Ruiz and Conrado Cruz liable for deficiency corporate income tax?

312

ANSWER:
Roberto Ruiz and Conrado Cruz are not liable for corporate income tax.
Abandoning evidently the Gatchalian rule, the Supreme Court in a recent ruling
(Pascual vs. Court of Tax Appeals, G.R No. 78133, 18 Oct. 1988), held that
isolated transactions by two or more persons do not warrant their being
considered as an unregistered partnership. They will instead be considered as
mere co-owners; no corporate income tax is due on mere co-ownerships. It was,
therefore correct for Ruiz and Cruz to merely pay their individual income tax
liabilities on the real estate transactions.
Question No. 8:
ABC Computer Corp. purchased some years ago Membership,Certificate No. 7
from the Calabar Golf Club, Inc. for P300.000.00. In 4 September 1985, it transferred
the same to Mr. John Johnson, its American computer consultant, to enable him to
avail of the facilities of the Club during his stay here. The consultancy agreement
expired two (2) years later. In the meantime, the value of the Club share appreciated
and what was purchased by the corporation at P300,000.00, commanded a market
value of P800.000.00 in 1987. Before he returned home a few days after his tenure
ended, Mr. Johnson transferred the subject share to Mr. Robert James, the new
consultant of the firm and the newly designated playing representative, under a Deed
of Declaration of Trust and Assignment of Shares wherein the former acknowledged
the absolute ownership of ABC Computer Corp. over the share, that the assignment
was without any consideration, and that the share was placed in his name because
the Club required it to be done.
1)

Is the assignment/transfer of the shares from Johnson to James subject to Income


tax?
ANSWER:
The assignment or transfer of shares from Johnson to James is not subject
to income tax. There had been no real change of ownership that took place.
There having been no actual sale or exchange, no income tax incidence can be
said to have occurred, fn addition, there was really no income realized or
received considering that in the Deed of Declaration of Trust and Assignment of
Shares, the absolute ownership of ABC Computer Corporation was explicitly
recognized.
313

2) Is the said assignment a gift and, therefore, subject to gift tax?


ANSWER:
The assignment can neither be held to be a gift. To be considered a gift
within the context of the NIRC, there must be a transfer of ownership or a
quantifiable interest. More importantly, the transfer of the membership
certificate was merely a designation of the consultant to be the playing
representative" of ABC Computer Corporation in the Calabar Golf Club.
Question No. 9:
Newtex International (Phils.) Inc. is an American firm duly authorized to engage
in business in the Philippines as a branch office. In its activity of acting as a buying
agent for foreign buyers of shirts and dresses abroad and performing liason work
between its home office and the Filipino garment manufacturers and exporters. Newt
ex does not generate any income. To finance its office expenses here, its head office
abroad regularly remits to it the needed amount. To oversee its operations and
manage its office here, which had been in operation for two (2) years, the head office
assigned three (3) foreign personnel.
1) Is Newtex International (Phils.) Inc. subject to VAT?
ANSWER:
Newtex International (Phils.) Inc.. is not subject to VAT. The VAT is imposed
on sellers and not on buyers. The branch office did not derive any income or
compensation so as to possibly permit the imposition of a VAT on compensation
for services rendered. In addition, since the transactions are direct export sales,
the VAT does not apply. Export sales are among those that are either zero rated
or exempt from VAT (Secs. 99-100, NIRC).
2) Are the three foreign personnel subject to Philippine income tax?
ANSWER:
The three (3) foreign personnel are subject to tax on the income that they
receive for services rendered in the Philippines. Non-resident aliens are subject
to tax on income from sources within the Philippines., Income is deemed
derived from sources within the country when it is earned for services rendered
in the Philippines (Sec. 22. in relation to Sec. 36, NIRC).
314

Question No. 10:


Colawin Marketing Corp. (CMC) sells goods and renders services to Pinatubo
Inc., a contractor for the U.S. Base. CMC applies for zero rate. Is it qualified for zero
rating under the pertinent Tax Code provisions on VAT?
ANSWER:
CMC is not qualified for zero rating. The goods and services rendered to
Pinatubo, Inc.. evidently a domestic corporation, cannot be considered as an export
sale. Pinatubo Inc. is but a contractor for the U.S. Base.
The sales which are subject to zero percent are export sales and sales to
persons or entities whose exemption under special laws or by an International
Agreement where the Philippines is a signatory effectively subjects such sales to
zero rate (Sec. 100, NIRC).
Question No. IX:
Cebu Development Inc. (CDI) has an authorized capital stock of P5,000,000,00
divided into 50,000 shares with a par value of One Hundred Pesos (P100.00) per
share. Of the authorized capital stock, twenty-five thousand (25,000) shares have
been subscribed. Mr. Juan Legaspi is a stockholder of CDI where he has subscription
amounting to 13,000 shares. To fully pay his unpaid subscription in the amount of
P950.000.00, Mr. Legaspi transferred to the corporation a parcel of land that he owns
by virtue of a Deed of Assignment. Upon investigation, the BIR discovered that Mr.
Legaspi acquired said property for only P500,000.00.
1) Is Mr. Legaspi liable for any taxable gain?
ANSWER:
The transfer by Mr. Legaspi to the corporation of the parcel of land in
payment of his unpaid subscription did not increase his stockholdings in the
corporation. It cannot be said that he acquired control of the corporation by
virtue of the transfer of the land. His percentage of stockholdings in the capital
stock of the corporation remains the same after the transfer as before.
Therefore, Mr. Legaspi derived taxable gain for his economic gain which was
realized by virtue of the exchange of the land for the liability for the
subscription.
315

ALTERNATIVE ANSWER:
Mr. Legaspi is not liable for any taxable gain. The transaction amounted to
an exchange of shares of property for shares of stock as a result of which the
property transferor acquired control of the corporation. The 13,000 shares of
stock acquired in exchange of property was more than fifty percent (50%) of the
total subscribed capital stock of Cebu Development, Inc. (CDI) that qualified the
transaction as a tax-exempt under the provisions of Sec. 34 (c) (2) of the
National Internal Revenue Code.
1) Is the CDI liable for any taxable gain?
ANSWER:
CDI Itself Is not liable for any taxable gain since subscription payments
are not considered as taxable income being merely investments in the
corporation. However, a taxable incidence may occur as and when the
corporation sells the parcel of land for a price over and above the value of the
shares of stock or in this case over and above P950,000.00. Until such time,
however, there is no realizable income on the part of the corporation.
Question No. 12:
Antonio Cruz was appointed by the Regional Trial Court as Administrator in
the testate proceedings for the settlement of the estate of his deceased father. On 12
February 1987, the Commissioner of Internal Revenue issued a deficiency estate
tax assessment for the estate in question in the amount of P2.816,514.60. The
notice of deficiency assessment was received by the Administrator on 19 February
1987. In his letter to the Commissioner, dated 21 February 1987, which was
received by the latters office two (2) days later, the Administrator requested for a
reconsideration of the assessment on the ground that the same is contrary to law
and is not supported by sufficient evidence. He also requested for a period of fifteen
(15) days within which to submit the estates position paper.
On 4 August 1988, not having received the promise position paper, the
Commissioner filed with the Court a motion for allowance of claim and for an order
of payment of estate taxes, praying therein that the administrator be directed to pay
the BIR the aforementioned deficiency tax. The Administrator opposed the motion
alleging that by reasons of the pendency of his request for reconsideration, the
deficiency assessment has not become final and executory and, therefore, the
316

absence of a decision on the disputed' assessment is a bar against collection of


taxes. He further argued that it is the Court of Tax Appeals, and not the Regional
Trial Court, which has exclusive jurisdiction over the claim.
Resolve the motion and issues raised.
ANSWER:
Evidently, the request for reconsideration did not express or specify the
grounds therefor. A request for reconsideration in the tenor stated in the
problem is insufficient, not being substantiatied, to stop the running of the
30-day period within which the assessment may be disputed (Dayrit vs. Cruz,
G.R No. 39919, 26 September 1988). The failure of the taxpayer to submit the
promised position paper within the said 30-day period had the effect of
rendering the assessment final and executory. In addition, the pendency of a
decision on a disputed assessment does not bar the collection of the NIRC
taxes, and no injunction maybe issued by any court (except by the Court of
Tax Appeals as an incident to a timely petition for review). In the absence of a
petition for review with the Court of Tax Appeals which may be brought by a
taxpayer within thirty (30) days from the receipt of the final decision of the
Commissioner, the Court of Tax Appeals has no jurisdiction to take
cognizance thereof (See Sec. 11, RA. 1125). Premises considered, the action
taken by the Commissioner with the Regional Trial Court was appropriate
and in accordance with law.
ALTERNATIVE ANSWER:
Once a request for reconsideration is made by the taxpayer on an
assessment of the BIR within 30 days from receipt thereof, the Commissioner
is bound to make a decision thereon. That decision is the one appealable to
the Court of Tax Appeals. But if the taxpayer does not appeal within the 30day period, the assessment becomes final and executory and demandable.
The implication of this new provision in the NIRC is that the Commissioner
cannot collect the tax as long as the taxpayer has still the right to appeal
from the Commissioners action.
Question No. 13:

317

Sometime in 15 September 1990, a shipment of 150 packages of imported


goods and personal effects arrived and . was unloaded at the Port of Manila. After
the amount of P15,887.00 was paid by the consignee as customs duties.
internal revenue taxes, fees and other charges, the packages were released from the
Customs house. As the packages were being transported from the Customs area to
their destination, the truck carrying them was intercepted at T.M, Kalaw St., Ermita,
Manila by agents of the Economic Intelligence & Investigation Bureau (EIIB). In a
formal communication. EIIB informed the Collector of Customs that the packages
were released from the customs zone without proper appraisal to the damage of the
Government and requested for the issuance of the necessary warrant of seizure.
Seizure proceedings (S.I. No. 796) was then instituted and the Collector of Customs
issued a warrant of seizure and detention.
During the progress of the search and seizure, and while the goods were being
removed by the Customs agents from the bodegas where they were stored, the
consignee filed a Petition (Civil Case No. 234) with the Regional Trial Court of Manila
asking that the Collector of Customs and all his agents be restrained from further
enforcing the aforesaid warrant and from proceeding with the trial of S.I. 796, and
that said warrant be declared null and void since the Collector no longer had
jurisdiction to issue the same considering that the customs duties and taxes had
already been paid and the goods had left the control and jurisdiction of the Bureau of
Customs
1)

Did the Collector of Customs have Jurisdiction to issue the warrant of seizure and
detention?
ANSWER:
On the assumption that the goods* were released from Customs custody
without proper appraisal as contended by EIIB, the Collector of Customs had
Jurisdiction to issue the warrant of seizure and detention. This remedy is
generally available in importations tainted with irregularity (Sec. 2531, TCC:
Viduya vs. Berdiago. 73 SCRA 553).

2)

Did the payment of the customs duties, taxes, etc. render illegal and improper the
issuance of said warrant?
ANSWER:
In seizure and forfeiture, the payment of customs duties, taxes, etc., does
not necessarily render as irregular and improper the issuance of a warrant of
318

seizure and detention. What is legally consequential is whether there was,


infact, an irregularity committed in the importation of the articles and their
release from customs.
3) Has the Regional Trial Court jurisdiction to hear and decide Civil
Case No. 234?
ANSWER:
No. the RTC has no jurisdiction. In the case of seizures and forfeitures, an
ordinary court may not take cognizance of the case and. therefore, said courts
would be bereft of jurisdiction to hear and decide the same. The jurisdiction of
the Collector of Customs in seizure and forfeiture proceedings is exclusive of all
other courts. The proper remedy would be to go through with the hearing of the
case with the Collector of Customs from whose decision an appeal may be made
to the Commissioner of Customs and. thereafter, if the taxpayer still feels
aggrieved, to the Court of Tax Appeals.
Observations:
The problem does not indicate that the claim of EIIB was in fact the case. Since
the factual settings did not state categorically that the importation was irregular, it is
possible that an examinee would have considered the importation as falling under the
administrative remedy of enforcement of tax lien. In this remedy, the collectors
jurisdiction lies only while the goods are in customs custody; hence, upon the release
of the goods from customs custody a warrant of seizure and forfeiture would not be
justified. The problem did not indicate that there was any intention to smuggle or even
an attempt to smuggle the imported goods.
Question No. 14:
In view of the unfavorable balance of payment condition and the increasing
budget deficit, the President of the Philippines. upon recommendation of the National
Economic and Development Authority, issues during a recess of Congress an
Executive Order imposing an additional duty on all imports at the rate of ten (10%)
percent ad valorem. The Executive Order also provides that the same shall take
effect immediately. Ricardo San Miguel, an importer, questions the legality of the
Executive Order on the grounds that only Congress has the authority to fix the rates
of import duties and, in any event, such an Executive Order can take effect only thirty
(30) days after promulgation and the President has no authority to shorten said
319

period.
Are the objections of Mr. San Miguel tenable?

ANSWER:
No. the objections are not tenable as the Executive Order cannot take effect
immediately". Being an external law and having the effect of law, the
Executive Order cannot become effective without publication, a requirement of
due process (Tanada vs. Tuvera, 136 SCRA27; Executive Order No. 202).
ALTERNATIVE ANSWER:
Under the Flexible Tariff Clause (Sec. 401, Tariff and Customs Code), any
order issued by the President thereunder can generally take effect only thirty
(30) days after its issuance. In cases however of an order imposing additional
import duties, the law provides that the same can take effect immediately.
Question No. 15:
The Municipality of Malolos passed an ordinance imposing a tax on any sale or
transfer of real property located within the municipality at a rate of one-fourth (1/4) of
one percentum (1%) of the total consideration of such transaction. X sold a parcel of
land in Malolos which he inherited from his deceased parents and refused to pay the
aforesaid tax. He instead filed appropriate case asking that the ordinance be declared
null and void since such a tax can only be collected by the national government, as in
fact he has paid BIR the required capital gains tax. The Municipality countered that
under the Constitution, each local government is vested with the power to create its
own sources of revenue and to levy taxes, and it imposed the subject tax in the
exercise of said constitutional authority.
Resolve the controversy.

ANSWER:
The ordinance passed by the Municipality of Malolos imposing a tax on the
sale or transfer of real property is void. The Local Tax Code only allows
provinces and cities to impose a tax on the transfer of ownership of real
property (Sec. 7 and Sec. 23, Local Tax Code). Municipalities are prohibited
320

from imposing said tax that provinces are specifically authorized to levy. (Sec.
22, Local Tax Code).
While it is true that the Constitution has given broad powers of taxation to
local government units, this delegation, however, is subject to such limitations
as may be provided by law (Sec. 5, Art X, 1987 Constitution).
.

Question No. 16:


The Municipality ofArgao, Province of Cebu passed a tax ordinance requiring all
professionals practicing in the municipality to pay a tax equivalent to two (2%)
percent of their gross income. A certified true copy of the ordinance was sent to the
Secretary of Finance for review on 1 March 1989 and was received by him on the
same day. On 15 August 1989, even as the tax ordinance remained unacted upon by
the Secretary of Finance, the municipality started collecting the tax in question. The
members of the Philippine Bar in the municipality questioned the legality of the
ordinance and sought the suspension of the collection of the tax. but the
municipality argued that since the Secretary has not taken any action on the
ordinance for more than one hundred twenty days after his receipt thereof, the
legality of the ordinance can no longer be questioned and insisted on the collection of
the tax.
1) Is the tax ordinance in question legal?

ANSWER:
No. the tax ordinance is not legal as the Local Tax Code allows provinces
and cities, to the exclusion of municipalities, to impose an annual occupation
tax on all persons engaged in the exercise or practice of their profession or
calling in specified amounts which in the case of lawyers is P75.00 per annum
(Secs. 11 and 12 in relation to Sec. 23, Local Tax Code). A person authorized to
practice his profession or calling shall pay the tax to the province where he
practices his profession or calling or maintains his office.

No local government unit can impose a tax on income (Sec. 5, Local Tax
Code).
2) Is the Municipality correct in insisting on collecting the tax?
321

ANSWER:
No, the Municipality was incorrect in insisting on the collection of the tax.
Once the tax on occupation is paid as stated in paragraph (a), above, the lawyer
is entitled to practice his profession or calling In all parts of the Philippines
without being subject to any other national or local tax, license or fee for the
practice of such profession or calling.
3) Will the inaction of the Secretary of Finance bar the professionals in the Municipality
from questioning the legality of that ordinance?
ANSWER:
The inaction of the Secretary of Finance does not bar the professionals in
the Municipality from questioning the legality of the ordinance. While it is true
that the Secretary of Finance may himself suspend the tax ordinance within a
120-day period from receipt thereof, his failure to do so, however, has no
preclusive effect on taxpayers who may be adversely affected by the ordinance.
4)

What remedies are available to the taxpayer to enable him to question the legality of
that ordinance?
ANSWER:
The taxpayer may pursue his remedies either administratively or Judicially.
He may, as the case warrants, file a formal protest with the Secretary of Finance
or query with the Provincial Fiscal whose opinion is appealable to the Secretary
of Justice whose decision may be contested in the proper court. The other
remedy would be to file a special civil action for declaratory relief (if
circumstances still warrant) or to pay the tax and thereafter to file an action for
refund within six (6) years after such payment.
ALTERNATIVE ANSWER:
On the basis of the facts of the problem. It would appear that the
administrative remedy is no longer available since there is already an attempt
to enforce collection. The only remedy of the taxpayer is to pay the tax and sue
for its recovery in the ordinary court.
Question No. 17:
322

In view of the street widening and cementing of roads and the improvement of
drainage and sewers in the district of Ermita, the City Council of the City of Manila
passed an ordinance imposing and collecting a special levy on lands in the district.
Jose Reyes, a landowner and resident of Ermita, submitted a protest against the
special levy fifteen (15) days after the last publication of the ordinance alleging that
the special levy was exorbitant since the rate thereof was more than the maximum
rate of two (2%) percent of the assessed value of the real properties allowed by Section
39 of P.D. 464, as amended.
Assuming that Jose Reyes is able to prove that the rate of the special levy is more
than the aforesaid percentage limitation of 2%, will his protest prosper?
ANSWER:
The special levy under the Real Property Tax Code on lands, specially
benefited by the proposed infrastructure, may not exceed sixty per cent (60%) of
the cost of said improvement. All lands comprised within the district benefited
are subject to the special levy except lands exempt from the real property tax
(Sec. 47. RPT). The protest shall be filed not later than 30 days after the
publication of the ordinance and may be submitted to the City Sanggunian
signed by a majority of the landowners affected by the proposed work. If no such
protest is filed in the manner above specified, the city ordinance shall become
final and effective. The levy imposed under the ordinance should be within the
limit of sixty percent (60%) of the total cost of the proposed improvement. The
rate of two percent (2%) of the assessed value under Sec. 39 of P.D. 464refers to
the real property tax and not to special levies.
Question No. 18:
Dagat-dagatan Shipping Corp. (DSC) brought into the country two (2) nonpropelled foreign barges which DSC chartered for use in the Philippine coastwise trade
under a Temporary Certificate of Philippine Registration, to be returned to the foreign
owner upon termination of the charter period but not beyond 1999, pursuant to P.D.
No. 760, as amended. Upon their arrival, the barges were subjected to duty by the
Bureau of Customs. DSC refused to pay any customs duty contending that the
charter or lease of the barges, which will be returned to the foreign owner when the
charter expires, is not an importation and, therefore cannot be subjected to any
customs duty.
1) Is DSC's refusal with or without legal basis?
323

ANSWER:

DSCs refusal is without legal basis. The term imposition includes the entry
into the country of any article from a foreign country. The fact that imported
goods are to be re-exported does not mean that the customs duties may not be
imposed, although, in certain cases and subject to limitations prescribed by the
Tariff and Customs Code a drawback may be available to the taxpayer so as to be
able to obtain their refund. An example of which are articles which are used in
the manufacture of products for export within three (3) years after the
importation.
2)

On what is the dutiable value of any imported article based?


ANSWER:
The dutiable value of imported articles is the home consumption cost value,
i.e., the cost or fair market value or price of the imported articles In wholesale
quantities in the principal market of the exporting country or country of origin,
including expenses collected from importation such as insurance, freight,
packaging, loading and unloading charges but excluding internal excise taxes. In
case such value is unascertainable, the Commissioner may also determine the
home consumption value from any reliable and available data (Sec. 20l.TCC, as
amended: Commissioner vs. Court of Tax Appeals, G.R No. 72069,21 May 1988).

324

325