BAR EXAMINATION : TAXATION : September 11, 2005

INSTRUCTIONS This questionnaire consists of fourteen (14) Roman numbers contained in eight (8) pages. Read each question very carefully. Answer legibly, clearly and concisely. Start each number on a separate page; an answer to a sub-question under the same number may be written continuously on the same and immediately succeeding pages until completed. Do not repeat the question. AND IN YOUR NOTEBOOK WITH THIS QUESTIONNAIRE GOOD LUCK!!! -Ia) 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 to tax? Explain. b) May taxes be the subject of set-off or compensation? Explain. c) 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 estate tax? Explain. (10%)

Suggested Answers a) The power of taxation is one of the inherent powers of the state. The power of taxation 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 vs. Marcos, etc. G.R. No. 120082, Sept. 11, 1996). In one case, the Supreme Court described the power of taxation as an awesome power. However, according to the Court, no matter how awesome it may be, it must not be exercised arbitrarily. The legislative body may enact tax laws to raise revenue even in the absence of constitutional provision granting the legislative body the power to tax since the power of the state, through its lawmaking body, to repeat, is inherent. In fact according to the Court, the provisions relative to taxation in the constitution are a limitation of the power of the state to tax rather than a grant of power.

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b) The Supreme Court in several cases ruled that, taxes may not be subject to setoff or compensation since the government and the taxpayer are not debtor and creditor to its other. The source of the taxpayers obligation to pay taxes is law, while the source of the governments obligation to pay to the taxpayer, in almost all cases is contract or judgment. Another reason given by the Court is that, taxes is the lifeblood of the government. The power of the state to tax spring from necessity and its survival necessarily depends primarily on the revenue collected from the taxpayer. c) In one case, the Supreme Court again ruled that, set-off or compensation under the civil code as mode of extinguishing an obligations is not legally possible as a rule since even if there is a judgment against the local government, the local government shall first passed an appropriation ordinance to appropriate an amount to pay its judgment creditor based on the final judgment and/or order of the court, except if the cause of action of the taxpayer against the national government or local government unit is contract, express or implied, since an appropriated amount has been earmarked through an appropriation act or law intended for the said purpose. d) Yes, deficiency tax assessment may be a bar to a claim for tax refund or tax credit, if the government could prove that based on the examination and investigation conducted by a duly authorized BIR examiner relative to such claim, the taxpayer has deficiency tax instead of overpayment. It must be remembered that a claim for tax refund or tax credit partakes of the nature of exemption, which cannot be allowed, unless supported by substantial and convincing evidence. Being in the nature of an exemption from taxation, a claim for tax refund or tax credit, must be dealt with - very strictly against the claimant and failure to discharge said burden is fatal to the taxpayers claim. e) No, the approval of the court, sitting as probate or estate settlement court is not necessary in the enforcement and collection of estate tax. There is nothing in the tax code and in pertinent remedial law that expressly or even impliedly suggest the necessity of the probate or estate settlement courts approval of states claim for estate taxes, before the same can be enforced and collected. On the contrary, Sec. 94 of the Tax Code provides that no judge shall authorize the executor or administrator to deliver a distributive share to any party interested in the estate unless a certification from the Commissioner that the estate tax has been paid is shown (Marcos vs. CA, G.R. 1208880). - 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 sale of a car used for personal purposes.

(5%)
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Suggested Answers: (a) Income from jueteng is TAXABLE. Firstly, income from jueteng is taxable because it is not one of those items of income excluded under Section 32 (B) of the1997 NIRC. Secondly, under Section 32 (A), the term gross income is defined as all income derived from whatever source. Therefore, income is taxable or subject to income tax, regardless of whether the source is legal or illegal, as long as it is not specifically excluded by law, particularly in Section 32 (B) of the 1997 NIRC, as amended. (b) Gain arising from expropriation of property is likewise TAXABLE. Its taxability is also based on Sections 32 (A) & (B). In addition, an expropriated property whether classified as ordinary or capital asset is subject to tax, although a different kinds of tax may be imposable. If the property is classified as ordinary asset or capital asset but the same is not shares of stocks or real property, and even if it is a share of stock but sold inside the stock exchange it will be subject to income tax and the rates of income tax imposable depends upon the owner of the property expropriated. If the properties expropriated were capital assets such as, shares of stock sold outside the stock exchange or real property, they are subject to capital gain tax. Real property classified, as capital asset and was expropriated by the government or any of its political subdivision may not be subject to capital gain tax since the owner/seller is given the option to treat the transaction as one involving a disposition of an ordinary asset, and the gain if any, may be treated as ordinary gain. (c) Taxes paid and then subsequently refunded is TAXABLE. The reason is, at the time the tax was paid, the taxpayer may have had claimed the same as deduction from their gross income in their income tax return that resulted to a reduction of his income tax due. Therefore, only those taxes allowed as deduction against gross income or gross estate are taxable if subsequently refunded and that said taxes paid and subsequently recovered were actually claimed as deductions either in the income tax returns or estate tax returns filed by the taxpayer. (d) Recovery of bad debts previously charged off is TAXABLE. For the same reason that bad debts charged off is allowed as deduction and had the effects of reducing taxpayers taxable income. (e) Gain on sale of a car used for personal purposes is TAXABLE. The car used for personal purpose(s) is classified under the Tax Code as capital asset. However, the same is not subject to capital gain tax since car is neither a shares of stocks nor is real property, but nevertheless, the gain thereof is subject to income tax and at the same time subject to the so called holding period wherein, if the holding period is one year or below, one hundred (100%) percent of the gain is taxable while if the holding period is more than one year, only fifty (50%) percent is required to be declared in the income tax return as part of the gross income or as other income subject to graduated rates imposed on individual taxpayers.

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(2) State and discuss briefly whether the following cases may be compromised or may not be compromised: a) b) c) d) e) Delinquent accounts; Cases under administrative protest, after issuance of the final assessment notice to the taxpayer, which are still pending; Criminal tax fraud cases; Criminal violations already filed in court; 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 Answers:
(a) Yes, delinquent accounts may be compromised. A delinquent accounts presupposes a situation that a certain individual taxpayer, estate, trust or corporation failed to pay his or its tax obligations properly, fully and on time as prescribed by law. As a consequence, the said taxpayer is required to pay not only the unpaid basic tax but also including the surcharge of 25% for late payment, 20% interest per annum and compromise penalties, if the case is one of those subject to a compromise. Under this circumstances, the Tax Code in Section 204 (A) authorized the Commissioner of Internal Revenue to compromise under either of the following grounds, when: (1) a reasonable doubt as to the validity of the claim against the taxpayer exist; or (2) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. The law provides the minimum rates based on basic tax of which the commissioner is allowed to compromise, that is 40% and 10% for the first and second ground above stated, respectively. In other words, below the aforestated rates of compromise, the commissioner alone has no authority. Payment of internal revenue tax may still be compromised even below the minimum rates, but it is required that the compromise must be approved by the Evaluation Board, which is composed of the Commissioner and four (4) Deputy Commissioners. (b) Yes, protested assessment pending resolution or decision may be compromised since the general rule is, cases may be compromised at any stage of the proceedings, especially if the case is pending before the office of the BIR. Cases under administrative protest or pending before the office of the BIR may be compromised by the Commissioner or the Evaluation Board as long as one of the two grounds under Section 204 (A) (1) & (2) NIRC is present, that is when: (1) a reasonable doubt as to the validity of the claim exist; or (2) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. (c) No, the CIR is not authorized to compromise criminal case involving fraud. Criminal tax fraud cases may not be compromise since the law is clear that all criminal violations may be compromised except those involving fraud (Sec. 204 (B) last sentence of the 1997 NIRC). (d) No, criminal cases pending in court may not be the subject of compromise by the commissioner. Criminal violation already filed in court is another exception to the general rule that all criminal violations may be compromised (Sec. 204 (B) last sentence of the 1997 NIRC). However, a criminal case filed in court may be compromised but it must be with the consent of court and not by the agreement of the taxpayer and the commissioner or the Evaluation Board.

(e) Cases under this circumstance may still be compromised if the legal basis is that the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax (Sec. 204 (A) (2) of the 1997 NIRC).

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- III (1) State with reasons the tax treatment of the following in the preparation of annual income tax returns: a) Proceeds of life insurance received by a child as irrevocable beneficiary; b) 13th month pay and de minimis benefits; c) Dividends received by a domestic corporation from (i) another domestic corporation; and (ii) a foreign corporation; d) Interest on deposits with (i) Allied 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 Answers: a) The proceeds of life insurance policies paid to the beneficiary or heir upon the death of the insured shall be excluded from gross income. The main reason of the law is, the proceeds from life insurance is not considered as income, but rather a return of capital since the life of a person is incapable of pecuniary estimation. So, if a person was insured say for example for P1M, it means that the life of that person is worth P I M, and therefore, no profit or income to talk about because the P1M is considered as the capital or the value of the life of a person insured. In short, the rule is, no profit or income shall be considered received or realized as a result of the death of the insured. b) 13th month pay and de minimis benefits is excluded from gross income unless the total amount exceeds P30,000.00. Therefore, any amount of benefits in excess of P30,000 shall be subject to income tax. c) (i) Dividends received by a domestic corporation from another domestic corporation are not taxable since this are considered under the NIRC as inter-corporate dividends which are exempt from dividend tax; and (ii) while dividends received by domestic corporation from a foreign corporation are subject to withholding tax and taxes withhold are considered as the final tax. d) (i) Interest rate on deposits at Allied Bank or of a local offshore banking unit of a foreign bank are both subject to 20% withholding tax if it is a Philippine peso deposit. However, the interest rate is 7 % if it is a foreign currency deposit and the depositor is a resident of the Philippines, unless the said deposits is a long-term deposit as define by law. If the depositor of a foreign currency is non-resident it is not subject to withholding tax. Therefore, some adjustments in the reported interest income on bank deposit in the income statement has to be made for income tax purposes, since interest income on bank deposit which is subject to withholding tax is a final tax and shall not be included as part of the gross income in the annual income tax return.

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e) Income realized from sale of capital assets is subject to capital gain tax if (1) the capital assets are share of stocks and it was sold outside the stocks exchange; or (2) if the capital asset is a real property. Thus, the income or gain realized from sale of capital assets which were subjected to capital gain tax shall be excluded from gross taxable income to be reported in the annual income tax return since the capital gain tax is a final tax. If the capital assets is not subject to capital gain tax under the Tax Code, the gain realized shall be included as part of the gross income, 100% of the gain, if the holding period does not exceed one year and only 50% of the gain, if the holding period is more than one year. Holding period is the period counted or reckoned from the date of the acquisition up to the date of sale. However, if the income realized is from the sale of ordinary assets, the entire gain shall be reported in the income tax return as part of other taxable gross income. Be it noted that holding period principle is not applicable to gain realized from the sale of ordinary assets. (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 Answers: a) Broadly speaking, tax refunds or tax credits are based on the legal principle of quasicontract or solutio indebiti (Art. 2154, CC). The following conditions must be present before the Commissioner could authorize the refund or credit of taxes erroneously or illegally received, viz: a. There must the a written claim for refund or credit duly filed with the Office of the Commissioner; and b. The written claim for refund or credit must be filed within the two - year period from the date of payment of the tax or penalty regardless of the supervening cause that may arise after payment (Sec. 229, 1997 NIRC), as amended. a) Yes, a withholding agent has the right to file an application for tax refund. In one case, the Supreme Court held: Withholding agent should be allowed to claim this particular 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. et al., G.R. No. 68375, April 15, 1988).

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- IV A taxpayer received a tax deficiency assessment of P1.2 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 therefore. 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: We assume that the tax deficiency assessment received by the taxpayer is already a Preliminary Assessment Notice, and not just a Notice of Informal Conference, considering that the BIR sent a Final Notice Before Seizure after the taxpayer filed a request for reconsideration. The period of 10 days within which to pay the assessed tax is quite short, since normally, the period given under the Tax Code within which the taxpayer is required to pay or to file a protest is 15 days from receipt of the formal notice of assessment. Assuming that it is the Commissioner, (not the Regional Director), who instead of resolving the issues raised on the taxpayers request for reconsideration, issued the Final Notice Before Seizure, then, under this circumstance one can safely presumed that the issuance of said notice is a denial of the taxpayers request for reinvestigation which entitles the said concerned taxpayer to elevate the case to the Court of Tax Appeals. However, if the Final Notice Before Seizure was issued by the Regional Director and not by the CIR, I believe that the taxpayer shall appeal the case first to the Office of the Commissioner before elevating the same to the Court of Tax Appeals. This in consonance with the principle of exhaustion of administrative remedies. Otherwise, if a case is appealed directly to the CTA, without passing through the Office of the Commissioner, the CTA may dismiss the appeal on the ground of lack of cause of action or that the CTA has no jurisdiction over the appealed case. -VDanilo, 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%)

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Suggested Answer: Yes. Pursuant to Sec. 255 of the 1997 NICR, Danilo is liable to pay deficiency tax and in addition thereto, upon conviction, he is liable to pay a fine of not less than P10,000.00 and to suffer imprisonment of not less that one (1) year but not more than ten (10) years. The accountant is likewise liable under Sections 232, 253 (c) and 257 of the 1997 NIRC. Under Section 232 of the aforestated law, the accountant upon conviction for each act or omission, be punished by an increase penalty of fine not less than Thirty Thousand (P30,000.00) Pesos but not more Fifty Thousand (P50,000.00) Pesos and imprisonment of not less than two (2) years but not more than six (6) years, while under Sections 253 and 257 of 1997 NIRC, his certificate as CPA shall be automatically revoked or cancelled upon conviction. - VI 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. The tickets sold by an international airline in the Philippines with no landing rights in the Philippines is NOT TAXABLE since the said sales of international tickets is not within the meaning of Gross Philippine Billings as defined under the Tax Code [Section 28 (A) (3) (a) 1997 NIRC]. The reason is, to be considered as part of the so-called Gross Philippine Billing and therefore taxable, the carriage of persons, excess baggage, cargo and mail must originate in the Philippines regardless of the place where the tickets were actually sold. What matters in this kind of business (international air carrier), which is engaged in a sale of services, is the place where the service was actually rendered, i.e., the service of transporting passengers, excess baggage, cargo and mail. - VII MARIO TAN, 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 terns of which MARIO TAN, JR was paid the following amounts: P500,000.00 for his hospitalization; P250,000.00 as moral damages; and P300,000.00 for loss of income during the period of his treatment and recuperation. In addition, MARIO TAN, 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%)

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Suggested Answers: a) The P500,000.00 and P250,000.00 received by Mario Tan, Jr from the airline and insurer for his hospitalization and moral damages, respectively, are not subject to income tax. The NIRC provides in Section 32 (B) (4), as amended:
Section 32 Gross Income xxx (B) Exclusion from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx (4) Compensation for Injuries and Sickness - Amount received, through Accident or Health Insurance or under Workmens Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.

b) With regards to the P300,000.00 and P200,000 received by Mario Tan, Jr. from his employer due to loss of income during the period of treatment and recuperation and cash equivalent earned and vacation sick leave are subject to income tax. The reason is said items are income not specifically excluded by law from gross income thus, subject to income tax under Section 32 (A). It should always be remembered that as a general rule, an income shall be included as part of the gross income, and is therefore, taxable regardless of its source, unless specifically excluded under Section 32 (B) of the 1997 NIRC, as amended. - VIII 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 minim 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. (10%) Suggested Answer: The entire amount received by the terminated employees in the instant case is not subject to income tax because their separation and/or termination from employment was the result of the continued losses suffered by their employer, Company A , which is clearly a cause beyond their (terminated employees) control. The Tax Code in Section 32 (B) (6) (b), as amended, provides in part:
Section 32 Gross Income xxx (B) Exclusion from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx (6) Retirement Benefits, Pensions, Gratuities, etc. (b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee.

(Underscoring supplied for emphasis)

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- IX (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 territorial jurisdiction located in the said city seek your legal advice on the matter, what would your advice be? Discuss. (5%) Suggested Answer: During the public hearing, I would advise my client to opposed the city government, particularly the city council, not to pursue the proposed ordinance that will impose levy on idle lands within its jurisdiction since the same is without legal basis and therefore null and void. Section 236, Chapter 5, R.A. 7160, otherwise known as Local Government Code of 1991, provides:
Sec. 236. Additional Ad Valorem Tax on Idle Lands. A province or a city, or a municipality within the Metropolitan Manila Area, 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. (Underscoring supplied for emphasis)

Sec. 236 of the Local Government Code is clear. Only a province or a city, or a municipality within Metro Manila Area is authorized to levy an annual tax of idle lands. Therefore, by exclusion, local government units located outside Metro Manila Area are not authorized to levy an annual tax of idle lands.

(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. (5%)

Suggested Answer: The basis of dutiable value of an imported article subject to an ad valorem tax is the schedules and classifications provided under the Tariff and Customs Code.

(b) Distinguish countervailing duty from dumping duty. (5%)

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Suggested Answer: Countervailing duty is special duty imposed on imported articles which are granted any kind or form of subsidy by the government in the country of origin or exportation, the importation of which has caused or threatens to cause material injury to a domestic industry or has materially retarded the growth or prevents the establishment of a domestic industry (R.A. 8751), while Dumping duty or anti-dumping duty is special duty imposed on the importation of articles into the Philippines at less than its normal value when destined for domestic consumption in the exporting country, which is the difference between the export price and the normal value of such articles (R.A. 8752). Philippine Government imposes both duties in order to protect the local industries or products affected by such kind of imported articles.

(3.)

Jacob, after serving a 5-year tour of duty as military attach in Jakarta, returned to the Philippines bring with him his personal effects including a personal computer and a car. Would Jacob be liable for taxes on these items? Discuss fully. (5%)

Suggested Answer: The personal effects of Jacob who is a returning resident citizen is exempt from the payment of value added tax provided such goods are exempt from custom duties under the Tariff and Custom Code of the Philippines (Sec. 109 (h), 1997 NIRC). In the case of car brought by Jacob the same is subject to value-added tax, excise tax and custom duties (Sec. 109 (1) and Sec. 129, 1997 NIRC).

-XThe 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 northwester side, is idle or unoccupied. May the Church claim tax exemption on the entire land? Decide with reasons. (5%)

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Suggested Answers: No. The Church can claim tax exemption only on the southern side and middle part occupied by the Church and convent, the eastern side by a school run by the Church itself, and northwestern side, which is idle or unoccupied. While the southeastern side of the property occupied by commercial establishments are subject to real property tax. As a consequence, the income of the property occupied by commercial establishments is subject to the taxes imposed under the National Internal Revenue Code. The reason why that portion of the said property use as commercial establishment is taxable is because it is not used actually, directly and exclusively used for religious and educational purposes. Properties or religious or educational institution use for commercial purpose and their corresponding income are taxable (Sec. 28 (3) 1987 Philippine Constitution). The real property will be subjected to real property tax while the income will be subjected to income tax and finally the sales or gross receipts thereof may be subject to value added tax or percentage taxes. - 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 Yes, the sale is taxable. It is subject to value added tax, excise tax and custom duties because you are under the law considered as the direct importer since you are not entitled to the privilege given to an alien employee of the ADB because said privilege is personal to him (the alien employee of the ADB). The privilege enjoyed by the said alien employee of the ADB is personal and as rule, not transferable.

- 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 Citybank Orlando, Florida; (b) rest house 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. (10%)
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Suggested Answer: Since Ralph Donald was granted a permanent resident status by the Philippine government, thus, he is considered for estate tax purposes under the Tax Code a resident alien decedent at the time of his death, notwithstanding, that he actually died in the Orlando, Florida, USA. As such all his properties, real or personal, tangible or intangible, wherever, situated the value thereof shall form part of his gross estate. Therefore, all his properties enumerated in the problem, from (a) to (g) shall be valued at the time of death an shall be included as part of his gross estate in his estate tax return to filed by his executor or administrator or any of his heirs [Sec. 85 of the 1997, NIRC]. The proceeds from a life insurance policy issued by a U.S. corporation is subject to estate tax, except when it is expressly stipulated in the policy that the designation of his beneficiary (who is not the estate of the deceased, executor or administrator) is irrevocable [Sec. 85 (E)of the 1997, 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 P.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. (10%)

Suggested Answer: This is a case of tax evasion since the parties, particularly, on the part of the seller, Josel who is normally the person obliged to pay the capital gain tax and documentary stamps tax, unless there is an agreement to the contrary. The BIR may file a criminal case against Josel and Jess including the tax consultant. This is a case conspiracy to violate the provisions of our Tax Code. Since the basis of the capital gain tax and documentary tax is the zonal value or the actually selling price, whichever is higher, naturally there would be a deficiency taxes payable by the parties involved in the act or omission after conviction. This case may not be compromised because this is a criminal case involving fraud.

- 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.
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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. (10%)

Suggested Answer: a) Yes. Mr. Fermin who is a CPA-LAWYER, whose main office is located in Quezon City, may be required to pay a professional tax not only as a lawyer but also as a CPA considering that he practices both professions in said city. b) No. Based on the facts of the case, Quezon City has no right to collect any professional tax from Mr. Fermin even if he practices his two professions in said city. The law provides that, Every person legally authorized to practice his profession shall pay the professional tax to the province where he practice his profession or where he maintains his principal office in case he will practice his profession in several places: Provided, however, That such person who has paid the corresponding professional tax shall be entitled 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 (b) of the Local government Code]. While, Sec. 151 of the Local Government Code provides: Except as otherwise provided in this Code, the city, may levy taxes, fees, and charges which the province or municipality may imposed. (Underscoring supplied for emphasis) Therefore, if a person is engaged in the exercise of his profession, and he practices his profession in several places, as normally what most of the lawyers and CPAs are doing, in which case, he is mandated to pay his professional tax in the province or city where his main office is located. And since Mr. Permins main office is located at Makati City, he is under the law mandated to pay his professional taxes as a CPA and as a lawyer in Makati City. Mr. Fermin is no longer required to pay professional taxes in other provinces and cities where he may be practicing his two professions, and that includes Quezon City. In short, Mr. Fermin, under the law thus cited, is not required to pay professional tax in Quizon City even if he resides and practices his two profession in said city,

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(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. (10%)

Suggested Answer: Yes, the ruling of the DOJ is correct. As a rule, an assessment of tax deficiency of a corporation is not a precondition to the filing of a criminal complaint as when the violation is so patent and therefore the evidence of guilt of the accused is strong. In the case of CIR vs. Pascor Realty and Development Corporation, the Supreme Court reiterated the general rule that an assessment is not necessary before a criminal charge can be filed. A criminal charge need only be proved by a prima facie evidence showing the taxpayer the failure to file the required return and such fact need not be proved by assessment. Sec. 222 (a) of the 1997 NIRC specifically states that, In case of a false or fraudulent return with intent to evade tax or failure to file a return, the tax may be assessed, or proceedings in court for the collection of such tax may be file without an assessment. Furthermore, the Tax Code provides that the civil and criminal aspect of the case may be pursued simultaneously. So, if I were the counsel of the corporation, I would rather submit counter-affidavit and attached therein the necessary documents to rebut, point by point, all the allegations in the complaint.