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Question No. 1: (1991)

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.


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 vs. 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 carry 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.”

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 government’s inability to collect taxes.

Question No. 2: (1991)

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.


The suit filed by the sugar planter questioning the constitutionality of the sugar
industry stabilization measure is untenable. Taxation is no longer merely 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 eceonomy largely depends. Where the aim o f the tax measure
is to achieve such a governmental objective, the tax imposition can be said to be for a public
purpose (Gaston vs. Republic Bank, 158 SCRA 626).

QUESTION NO. 10: (1992)

Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock of San Miguel
Corporation. For failure to file a donor’s return on the donation within the statutory period, the
taxpayer was assessed the sum of P102,000.00, as donor’s tax plus 25% surcharge or P25,500.00 and
20% interest or P20,400.00 which 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 additional deduction in the amount of P20,400.00 representing interest paid on
the donor’s 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 of Tax Appeals
determination that the amount paid by the taxpayer for interest on his delinquent taxes is deductible
form the gross income for the same year pursuant to Sec. 29 (b) (1) of the National Internal Revenue

The Commissioner of Internal Revenue pointed out that a tax is not 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 form a person’s income tax cannot extend to interest on

1) What is your opinion on the argument of the Commissioner that a tax is not indebtedness so
that deductibility on the interest on taxes should not be allowed?


The Commissioner’s argument is misplaced because the interest on the donor’s tax is not one that can
be considered as having been incurred in connection with the taxpayer’s trade business or exercise


a) While a tax be considered a debt for purposes of deduction from gross income, the interest on
taxes cannot be 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 general rule is not a debt,,
interest of 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 law is not
apparently in question).
2) Distinguish between the legal concept of “taxes” and “depts.”


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 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.


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;
d) Interest was paid on a debt related to one’s profession, trade or business.

Question No. 3: (1994)

1. Distinguish a direct from an indirect tax.

2. Distinguish “scheduler treatment” from “global treatment” as used in income



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 person paying the tax.
QUESTION NO.16: (1994)

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 a doing business in the

Is the revenue regulation valid?


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. (Sec. 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.

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 “scheduler treatment’ and “global treatment” as used in income


Under a scheduler system, the various types/items of income (i.e, 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. 1: (1996)

1. What are the basic features of the present income tax system?


Our 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
graduated rates of income tax. Corporations in general are taxed at a flat rate of thirty five
percent (35%) of net income.

c. It has retained more scheduler than global features with respect to individual taxpayers
but has maintained a more global treatment on corporations.

Note: The following might also be cited by the bar candidates as features of the income tax

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 corporation which are taxed on gross income.

b. the income tax is generally imposed via 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-earn concept of the so called withholding tax.

c. The corporate income tax is a one-layer tax in that distribution of profits to stockholders
(except to non-residents) is not subject to income tax.

2. What is the nature of the power of taxation?


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 State’s
sovereignty (Phil. Guarantee Co. vs. Commissioner, L22074, 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 an dthat it should
be subject to international comity.

Question No. 2 (1996)

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.



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 dealer’s 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).

2. Is protest at the time of payment of taxes/duties a requirement to preserve the taxpayers

right to claim a refund? Explain.


For taxes imposed under the NIRC, protes 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 collated, 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 decisions in question (Sec. 2308,
Question No. 3: (1996)

1. Distinguish tax evasion from tax avoidance.


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 of 300 square 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 not been paying his income taxes, X is now being assessed for the unpaid
income taxes in the total amount of P150,000.00. X claims his income tax liability has already
been compensated by the amount of P300,000.00 which the government owes him for the
expropriated of his property.



The income tax liability of X cannot be compensated with the amount owned 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.
IAC, G.R 76749, June 28, 1988)

Question No. 4: (1996)

1. Why are tax exemptions strictly construed against the taxpayer?


Tax exemptions are strictly construed against the tax-payer because such provisions are
highly disfavoured and may almost be said to be odious to the law (Manila Electric Company vs.
Vera 67 SCRA 351). The exception contained in the tax statues must be strictly construed
against the one claiming the exemption because the law does not look with favour on tax
exemptions them being contrary to the life-blood theory which is the underlying basis for taxes.
2. When may a taxpayer’s suit be allowed?


A taxpayer’s suit may only 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).

Question No. 7: (1996)

1. Distinguished a false return from a fraudulent return.


The distinction between a false return and a fraudulent return is that the first merely
implies a deviation from the truth or fact whether international or not, whether 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 false return is not necessarily tainted with fraud because the 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. (Asnar vs. Commissioner L-20569,
August 23, 1974)

2. Explain the extent of the authority of the Commissioner of Internal Revenue to

compromise and abate taxes?


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 for the tax liability is possible at
any stage of litigation and the amount of compromise is left to the discretion for the
Commissioner except with respect to final assessments issued against large taxpayers wherein
the Commissioners cannot compromise for less than fifty percent (5-%_. 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 by not 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 s costs involved do not justify collection of the amount due. (Sec. 204, NIRC)

Question No. 8 (1996)

The Constitution exempts from taxation charitable institutions, churches, parsonages or

convents apartment thereto, mosques and non-profit cemeteries and lands buildings and
improvements actually, directly and exclusively used for religious, charitable and educational

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.


Yes, Mercy Hospital can claim exemption from taxaton under the provision of the
Constitution, but only with respect to real property taxes provided that such rela properties are
used actually, directly and exclusively for charitable purposes.

Question No. 1: (1997)

(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 taxaAnswer:


(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 occurence of double taxation are:

1. Allowing reciprocal exemption either by law or by treaty;

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 (1997)

The House of Representative 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 of the House
Bill, the Senate introduced SB 8000 which was its own version of the same tax. The Senate
deliberated on this 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.


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 latter’s 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: (1997)

“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 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?


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: (1997)

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


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.

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
withinh 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 may be 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: (1997)

(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?

(a) A global system of taxation is one where the taxpayer is required to lump up all items
of income earned during 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.