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

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.

The doctrine of equitable recoupment allows a taxpayer whose claim for

refund has prescribed to offset tax liabilities with his claim of

A law imposing a tax on income of religious institutions derived from

the sale of religious articles is valid.

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

a. FALSE. Generally, a characteristic of a valid tax is payable in
cash and not in kind.

b. TRUE. It is one of the grounds where a commissioner may

validly compromise the payment of any internal revenue tax in
accordance with the NIRC.

c. TRUE. However, such doctrine is not applicable in our

jurisdiction because it puts a premium on the taxpayer's neglect
to enforce or assert his rights under the law.

d.FALSE. The profit was derived from religious related activity and
it is provided in the constitution that such transaction must be
exempted from taxes and duties.

e.FALSE. A false returns is due to mistakes, carelessness or

ignorance while a fraudulent return is an intent to evade taxes.

a. False. Payment of taxes are to be made cash. That is why there

is power to garnish bank accounts and distraint personal property
or levy real property to be converted to cash thru sale.

b. True. Sec. 204(A)(2) of the NIRC subject to minimum
compromise settlement of 10% of the basic tax assessed.
c.True. Take for example the corporate income tax the taxpayer
should select whether to claim for refund, apply for tax credit or
carry-over to next taxable period if there are overpayment of
taxes. Once a choice is made it is irrevocable. If no choice is made
it is presumed carry-over to be applied to future income tax
liabilities. Another example is the application of input tax to
output tax for VAT purposes.

d. False. These are non-stock, non-profit institutions and the items

sold are religious articles. Unless otherwise, they are selling
e. False: A false return is one where there is an honest mistake
while a fraudulent return is ill-motivated with intent to evade
taxes subject to examination for a period of 10 years from date of
discovery of falsity or fraud.

II Enumerate the four (4) inherent limitations on taxation. Explain each

item briefly. (4%)

a. Taxation is for public purpose-the legislature is without any
power to appropriate public revenue for anything but for public
b. Taxation is inherently legislative
c. The government is exempt from tax
d. Territoriality

III Melissa inherited from her father a 300-square-meter lot. At the time
of her father's 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.

Is Melissa liable to pay capital gains tax on the transaction? If so, how
much and why? If not, why not? (4%)

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%)

a.there is no income tax due. Income tax is only due if there is
capital gain or capital income. Here there is capital loss. The FMV
is 900,000. Melissa acquired it while its value is 720,000. She sold
is at the price of 600,000.

There is no income tax because there is no income gained.

instead, she encountered a loss. Its not capital gain but capital
loss, hence, not taxable.

b. No. She is not liable to pay VAT since the sale of real property
was not made in the ordinary course of trade or business where
VAT is imposed.

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

Can the CTA grant ITI's claim for refund based only on the CPA's
summary? Explain. (4%)

No, since a certification by the independent CPA is also required.

The party who desires to introduce as evidence such voluminous

documents must, after motion and approval by the Court,
present: (a) a Summary containing, among others, a chronological
listing of the numbers, dates and amounts covered by the
invoices or receipts and the amount/s of tax paid; and (b) a
Certification of an independent Certified Public Accountant
attesting to the correctness of the contents of the summary after
making an examination, evaluation and audit of the voluminous
receipts and invoices. (PLDT vs. CIR, G.R. No. 157264, January 31,

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, then parked inside a pay parking

garage, was seized and brought by government agents to a
government impounding facility. The Collector of Customs denied
Jessie's 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.

Resolve with reasons Jessie's criminal complaint. (4%)

Would your answer be the same if the luxury car was seized while
parked inside the garage of Jessie's residence? Why or why not? (4%)

a. the complaint may not prosper since the issuance of warrant of
search and seizures is the prerogative of the collector of customs
which the regular courts cannot interfere with pursuant to the
doctrine of primary jurisdiction. there is no usurpation of judicial
functions since the law categorically vests such authority upon
the collector of customs. although the facts are clear that the
seizure was illegal because it was seized outside the BOC'
custody, the luxury car not being a prohibited article, such
defense cannot also be maintained because the illegality of
seizures under the TCC is still within the BOC's domain and not
within the regular court's.

b. yes my answer remains the same. regardless of the illegality of

the seizure, regular courts are still w/o jurisdiction.

VI The Sangguniang Bayan of the Municipality of Sampaloc, Quezon,

passed an ordinance imposing a storage fee of ten centavos (P0.10) for
every 100 kilos of copra deposited in any bodega within the
Municipality's 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 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%)


The ordinance is valid since the exercise by local governments of
the power to tax is ordained by the present Constitution. Each
local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject
to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy.

The storage fee imposed under the questioned ordinance is

actually a municipal license tax or fee on persons, firms and
corporations, like the plaintiff, exercising the privilege of storing
copra in a bodega within the Municipality's territorial jurisdiction.
For the term "license tax" has not acquired a fixed meaning. It is
often used indiscriminately to designate impositions exacted for
the exercise of various privileges. In many instances, it refers to
revenue-raising exactions on privileges or activities. (Proctor and
Gamble vs. Bohol, G.R. No. L-24265 December 28, 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

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

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%)

No. The position of KIA is not tenable. The Supreme Court has
held in one case that the absence of the flight operations within
the Philippine territory cannot alter the fact that revenues were
derived from ticket sales within the jurisdiction. As aptly stated in

another actual case, the flow of wealth proceeded from and
occurred within the Philippine territory enjoying the protection
accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of
supporting the government. Consequently, since the tickets
exchanged hands here and payments for fares were also made
here in the Philippine currency, such income is considered derived
from sources within the Philippines. Hence the position of KIA is
not tenable.

VIII 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.

- the case should be dismissed because regular courts have no
jurisdiction over questions raising the validity of tax ordinance; it
is with the sec of justice. however, the lawyer's contention is
tenable since a city under the LGC has no authority to impose
occupational taxes on persons practicing professions which
require government examinations; only a province can validly
enact such ordinance.

- I think the problem is referring to the case of Punsalan vs. City of

Manila, G.R. No. L-4817 May 26, 1954 where the validity of a
similar ordinance was upheld :

Plaintiffs brand the ordinance unjust and oppressive because they

say that it creates discrimination within a class in that while
professionals with offices in Manila have to pay the tax, outsiders
who have no offices in the city but practice their profession
therein are not subject to the tax. Plaintiffs make a distinction that
is not found in the ordinance. The ordinance imposes the tax upon
every person "exercising" or "pursuing" in the City of Manila
naturally any one of the occupations named, but does not say
that such person must have his office in Manila. What constitutes
exercise or pursuit of a profession in the city is a matter of judicial
determination. The argument against double taxation may not be
invoked where one tax is imposed by the state and the other is

imposed by the city (1 Cooley on Taxation, 4th ed., p. 492), it
being widely recognized that there is nothing inherently
obnoxious in the requirement that license fees or taxes be
exacted with respect to the same occupation, calling or activity
by both the state and the political subdivisions thereof. (51 Am.
Jur., 341.)

Also, under sec. 187 of the LGC: "That any question on the
constitutionality or legality of tax ordinances or revenue measures
may be raised on appeal within thirty (30) days from the
effectivity thereof to the Secretary of Justice who shall render a
decision within sixty (60) days from the date of receipt of the

So if the question was raised after 30 days from the effectivity of

the ordinance, or within thirty (30) days after receipt of the
decision or the lapse of the sixty-day period without the Secretary
of Justice acting upon the appeal, the aggrieved party may file
appropriate proceedings with a court of competent jurisdiction.

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 JEC's 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
therefor, in accordance with the terms of the lease agreement. Is the
contention of JEC correct? Explain your answer. (4%)

- No, JEC's contentions are wrong.

a. the LGC effectively wthdrew all the tax exemptions previously

enjoyed by GOCCs. whether or not the properties are used
actually, directly and exclusively, the properties here are taxable.

b. it is a rule in real property taxation that the assessment and

payment of real property tax shall be on the basis of actual use
and not by ownership. here the agreement is clear that JEC is the
owner of these properties and that the operation, management
and maintenance is with JEC. therefore, it is alone liable.

- The contention of JEC is not correct since it is JEC that is being

taxed by the Local government and not RPC. It follows then that
JEC cannot escape liability from the payment of realty taxes by
invoking its exemption in Section 234 (c) of R.A. No. 7160. The
mere undertaking of petitioner RPC, that it shall be responsible for
the payment of all real estate taxes and assessments, does not
justify the exemption. The privilege granted to petitioner RPC
cannot be extended to JEC. The covenant is between JEC and RPC
and does not bind a third person not privy thereto, in this case,
the Province of Batangas. (FELS Energy Inc. vs. Batangas, G.R. No.
168557 February 16, 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.

Does ABCD Corporation have the legal personality to file the refund on
behalf of its non-resident stockholders? Why or why not? (3%)

Is the contention of ABCD Corporation correct? Why or why not? (3%)

a. ABCD as a withholding agent has the legal personality to claim
for a refund or credit of excess withholding taxes erroneously
paid. A withholding agent is both the agent of the government
and the taxpayer. The withholding agent has such direct and
independent liability under the withholding tax system, that in the
event of non-payment of the tax, the tax shall be collected from
the withholding agent. With such burden to pay tax not withheld,
the withholding agent has the same personality to claim for
refund in the event of overpayment. (CIR vs. Procter and Gamble,
G.R. No. L-66838 December 2, 1991 / PNB vs. CIR, CTA Case No.
7355 July 12, 2010)

b. The contention of ABCD is incorrect since the availment of a tax

treaty provision must be preceded by an application for a tax
treaty relief with the BIR International Tax Affairs Division (ITAD).
This is to prevent any erroneous interpretation and/or application
of the treaty provisions with which the Philippines is a signatory
to. The application must be filed using an Application for Relief
from Double Taxation at least 15 days before the transaction
accompanied by supporting documents justifying the relief.
(Revenue Memorandum Order 1-2000)

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%)

Raffy will declare as his income the salaries of both spouses, while
Wena will declare the income from the coffee shop.

Wena will declare the combined compensation income of the spouses,

and Raffy will declare the income from the coffee shop.

All the income will be declared by Raffy alone, because only one
consolidated return is required to be filed by the spouses.

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

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.


XII YYY Corporation engaged the services of the Manananggol Law Firm
in 2006 to defend the corporation's 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 YYY's claim of deduction proper? Reasons.

The income tax deduction for legal fees incurred for services
rendered in 2007 should have been accrued and claimed as an
allowable deduction from income tax in the Y2007 though it was
paid in the succeeding taxable year. Provided, withholding taxes
were remitted in the BIR in the Y2007.

However, the deduction claimed in the Y2008 when the actual

payment was made may also be considered an allowable
deduction for income tax purposes provided it was not yet
claimed as a deduction in the previous year and that appropriate
withholding taxes were deducted and was remitted in the BIR in
the Y2008.


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 P1-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 P1.5-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 Zandro's death.
Zandro died in 2007, and Wilma succeeded to the property.
Should the painting be included in the gross estate of Xavier in 2001
and thus, be subject to estate tax? Explain. (3%)

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

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

May a vanishing deduction be allowed in either or both of the estates?

Explain. (3%)

a. The painting should be included as part of Xaviers gross estate
since all property of the decedent at the time of his death, real or
personal tangible or intangible must be included. The painting is
owned by Xavier by way of donation, since it was transferred to
him for less than the adequate and full consideration of its fair
market value, with Yuri paying the corresponding donors tax.
Since the painting was acquired by donation within 2 years from
the death of Xavier, a vanishing deduction of 80% shall apply. As
such, only 20% of the paintings fair market value at the time of
death of the decedent shall form part of the gross estate and will
be subject to estate tax. (Sec. 100 - NIRC)

b. The painting should not be included in the taxable gross estate

of Zandro. The transmission from the first heir in favor of another
beneficiary, in accordance with the desire of the predecessor shall
not be subject to estate tax (Sec. 87, B NIRC). Upon the death of
the Zandro, the inheritance received by him during his lifetime is
transferred to Wilma, thus no property is considered as
transferred to his estate.

c. A vanishing deduction may be allowed only in the estate of

Xavier since the painting was acquired by donation within 2 years
from his death. As such, a vanishing deduction of 80% on the fair
market value of the painting at the time of the decedents death
shall apply. (Sec. 86 A,2 NIRC)

No vanishing deduction may be allowed in Zandros estate since
the painting does not form part of his gross estate and it is
already beyond 5 years from the death his predecessor, Xavier.

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 P10,000.00. His gross rental income for one
year is P1,650,000.00. 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%)

Yes. He should register as a VAT taxpayer since his annual gross
income exceeds the 1M threshold even though his gross monthly
income from residential lease per unit is within the 10K threshold.

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.

Is Miguel entitled to claim a dowry exclusion? Why or why not? (3%)

Is Miguel entitled to the rule of reciprocity in order to be exempt from

the Philippine donor's tax? Why or why not? (3%)

a. Miguel is not entitled to claim dowry exclusion. For the dowry to
be exempt from donors tax, the gift must have been made by a
resident of the Philippines. (Sec. 101 A NIRC)

b. The rule of reciprocity cannot be invoked in order to be exempt

from donors taxes. Any tax exemption must be expressly granted
by law or treaty, it cannot be merely implied nor assumed by the
application of reciprocity since it interferes with the collection of
taxes, which are lifeblood of the government.

A.) No, because dowry exclusion is not available to a nonresident

not a citizen of the Philippines.

B.) No, the rule of reciprocity cannot be applied in the instant

case. In order for the rule of reciprocity to apply, to be exempt

from Philippine donor's tax, the intangible personal property
donated must obtain business situs in the Philippines. Here, there
is no showing that the stocks in Barack Motors Corporation
donated to Miguelito have acquired business situs in the
Philippines. Such being the case, the rule of reciprocity cannot be

XVI 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%)

No. Sec. 34(L) of the NIRC states that once a choice is made the
same is irrevocable for the taxable year. Further, he is not
required to submit his financial statements since he elected
optional standard deduction that is why no audit was made by the

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.

Is the CTA correct in dismissing the petition for review? Explain your
answer. (4%)

Assume that the CTA's decision dismissing the petition for review has
become final. May the Commissioner legally enforce collection of the
delinquent tax? Explain. (4%)

a. The CTA is correct in dismissing the petition since it was filed
beyond the reglamentary period. If a protest is denied, in whole or
in part, or the 180 day period has already lapsed without the BIR
acting upon the protest, the taxpayer may appeal to the CTA

within 30 days from the receipt of the denial or the lapse of the

Here, the taxpayer did not appeal within 30 days after the 180
day period counted from July 31, 2000. As such, the right to
appeal to the CTA had already lapsed.

b. The Commissioner may no longer legally enforce the collection

of the delinquent tax since the prescriptive period of 5 years from
the date of final assessment had already lapsed.


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%)

Since the problem was not clear on the date when all the relevant
documents were filed, I think there can be 2 ways to answer:

(1) The taxpayer has no more remedy since the assessment has
already become final, executory and demandable.

The taxpayer filed the request for reinvestigation and submitted

all relevant documents on February 4, 2009, which gives the BIR
until August 3, 2009 (180 days from Feb. 4, 2009) to render its
decision. The period to file an appeal to the CTA therefore lapsed
on September 2, 2009 which is 30 days from the time the BIR
failed to render its decision on August 3, 2009.

(2) The taxpayer may file an appeal to the Court of Tax Appeals
within 30 days from October 5, 2009 60 days from February 4,
2009 for filing all relevant documents + 180 days from April 5,
2009, or after receipt of the decision of the BIR denying the
protest, whichever comes first.

If the protest is denied by the CTA Division he may file for a
motion for reconsideration within 15 days from receipt of the
decision. If the MR is denied he may appeal to the CTA en banc
within 15 days from receipt of the order denying the motion.

If the CTA en banc still denies the protest, a petition for certiorari
may be filed with the Supreme Court for final determination within
15 days of receipt of the en banc decision.

XIX Johnny transferred a valuable 10-door commercial apartment to a

designated trustee, Miriam, naming in the trust instrument Santino,
Johnny's 10-year old son, as the sole beneficiary. The trustee is
instructed to distribute the yearly rentals 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.

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

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%)

a. The trustee must pay the annual income tax on the rental
income of the property held in trust. Income distributed currently
by the fiduciary to the beneficiary is taxable at the same rate
imposed upon individuals. (Sec. 60 A, 2 NIRC)

b. My advice would be the same since income accumulated or

held for future distribution under the terms of the trust is also
taxable at the same rate imposed upon individuals (Sec. 60 A, 1

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%)

- Yes. Since the expenses were incurred in protecting the brand
franchise of one of its products in the ordinary course or trade of
the business. Further, the advertising expense is not a capital

expense since the brand franchise being protected is already in
the operational phase hence the outright deduction from gross
income in the year it was incurred.

- MFC is not correct since the protection of its brand franchise is

analogous to the maintenance of goodwill or title to ones
property. This is a capital expenditure which should be spread out
over a reasonable period of time. As such, it may not be deducted
from gross income as an ordinary business expense. (CIR vs.
General Foods, G.R. No. 143672. April 24, 2003)