TAXATION LAW

QUESTION NO. 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 jurisdiction, 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%)

B. Which of the following propositions may now be untenable:

1. The court should construe a law granting tax exemption strictly against the taxpayer.
2. The court should construe a law granting a municipal corporation the power to tax most strictly.
3. The Court of Tax Appeals has jurisdiction over decisions of the Customs Commissioner in cases
involving liability for customs duties.
4. The Court of Appeals has jurisdiction to review decisions of the Court of Tax Appeals.
5. The Supreme Court has jurisdiction to review decisions of the Court of Appeals.
Justify your answer or choice briefly. (5%)

QUESTION NO. II

A. RC is 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 tax payers and discriminates against prompt ones,
RC demands that he be refunded an amount equivalent to one-half of the real taxes he paid. The
municipal attorney rendered an opinion that RC cannot be reimbursed because the ordinance did not
provide for such reimbursement. RC files suit to declare the ordinance void on the ground that it is a class
legislation. Will his suit prosper? Explain your answer briefly. (5%)

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 But three years later, the law was repealed.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 of contract. Is the contention of the
companies tenable or not? Reason briefly. (5%)

QUESTION NO. III

A. XYZ Colleges 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 placements of the tuition fees.
(e) Donation of a lot and building by school alumni.
Which of these abovecited income and donation would not be exempt from taxation? Explain
briefly. (5%)

B. Suppose that XYZ Colleges if 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%)

QUESTION NO. 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%)

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 P20,000.00. 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%)

QUESTION NO. 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 Printers for back taxes corresponding to the
years before the new ruling? Reason briefly. (5%)

B. PQR Corp. claimed as a deduction in its tax returns the amount of P1,000,000 as bad debts. The
corporation was assessed by 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 help in determining whether or not the debts are bad debts?
Answer and explain briefly. (5%)

QUESTION NO. VI

As an incentive for investors, a law was passed giving newly established companies in certain
economic zones 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%)

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%)

QUESTION NO. 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%)

B. After the tax assessment had become final and unappealable, the Commissioner of Internal
Revenue initiated the filing 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%)

QUESTION NO. VIII

A. RAM got married to LISA last January 2003. On November 30, 2003, Lisa gave birth to twins.
Unfortunately, however, Lisa died in the course of her delivery. Due to complications, one of the twins also
died on December 15, 2003.
In preparing his Income Tax Return (ITR) for the year 2003, what should RAM indicate in the ITR
as his civil status: (a) single; (b) married; (c) Head of the family (d) widower; (e) none of the above? Why?
Reason. (5%)

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 & 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%)

QUESTION NO. 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 P1,000,000. But he ignored the notice. Last
month, the BIR effected a levy on the real properties of the estate to pay the delinquent tax. VCC filed a
motion with the probate court to stop the enforcement and collection of the tax on the ground that the BIR
should have secured first the approval of the probate court, which had jurisdiction over the estate, before
levying on its real properties. Is VCCs contention correct? (5%)

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%)
QUESTION NO. 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%)

B. A law was passed exempting doctors and lawyers from the operation of the value added tax.
Other professionals complained and filed 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%)