Tax Bar Questions

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.
com
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ANSWERS TO BAR
EXAMINATION QUESTIONS
IN
TAXATION LAW
* ARRANGED BY TOPIC *
(1994 2006)
Ed!"d #$d A%%#$&"d '()
ROMUALDO L. SEERIS II
Silliman University - College of
Law
From the ANSWERS TO BAR EXAMINATION QUESTIONS
by the UP LAW COMPLEX & PILIPPINE ASSOCIATION
OF LAW SCOOLS
June 3, 2007
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
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FOREWARD
This work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may be
freely o!ied and distrib"ted# ne$ertheless# %ERMISSION TO CO%& from the editors is
A'(ISA)LE to !rotet the interest of the ORI*INAL SO+RCES,REFERENCES of this
material-. It is !rimarily intended for all those who desire to ha$e a dee!er "nderstandin. of
the iss"es ommonly to"hed by the %hili!!ine )ar E/aminations and its trend on s!eifially
on Ta/ation Laws. It is s!eifially intended for law st"dents from the !ro$ines who# $ery
often# are rei!ients of deliberately distorted notes from other "nsr"!"lo"s law shools and
st"dents.
I wo"ld like to seek the ind"l.ene of the reader for some )ar 0"estions whih are im!ro!erly
lassified "nder a to!i and for some to!is whih are im!ro!erly or i.norantly !hrased# for
the arran.er is 1"st a )ar Re$iewee who has !re!ared this work while re$iewin. for the 2
nd
time for the )ar E/ams 2334 "nder time onstraints and within his limited knowled.e of the
law. I wo"ld like to seek the reader5s ind"l.ene also for a n"mber of ty!o.ra!hial errors in
this work.
The Arranger
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Detailed Table of Contents
GENERA+ PRINCIP+ES........................................................................................................................... 8
Basic Features: Present Income Tax System
(1996).................................................................................................... 8 Basic Stages or Aspects of Taxation
(!!"#................................................................................................................ 8 Collection of Taxes$ A%t&orit'(
Ordinar' Co%rts (!!)#............................................................................................... 8 Collection of Taxes$
*rescription (!!)# ..................................................................................................................... 8 Direct Tax +s.
,ndirect Tax ()--.#................................................................................................................................ 8 Direct Tax
+s. ,ndirect Tax (!!!#................................................................................................................................ 8 Direct
Tax +s. ,ndirect Tax (!!)#................................................................................................................................ 8
Direct Tax +s. ,ndirect Tax (!!"#................................................................................................................................
9 Do%ble Taxation ()--/#...............................................................................................................................................
9 Do%ble Taxation$ W&at Constit%tes DT0
()--"#........................................................................................................... 9 Do%ble Taxation( ,ndirect D%plicate
Taxation ()--/# ................................................................................................... 9 Do%ble Taxation( 1icense Fee +s.
1ocal Tax (!!.#..................................................................................................... 9 Do%ble Taxation( 2et&ods of
A+oiding DT ()--/# ....................................................................................................... 9 ,3prescriptibilit' of Tax
1a4s ()--/# .......................................................................................................................... 9 *o4er of Taxation$
E5%al *rotection of t&e 1a4 (!!!# ............................................................................................ 10 *o4er of
Taxation$ ,n&erent in a So+ereign State (!!6# ........................................................................................... 10
*o4er of Taxation$ 1egalit'( 1ocal 7o+8t Taxation
(!!6#.......................................................................................... 10 *o4er of Taxation$ 1egislati+e in 9at%re
()--.# ........................................................................................................ 10 *o4er of Taxation$ 1i3itations of t&e
Congress (!!)# ............................................................................................. 10 *o4er of Taxation$ 1i3itations$
*assing of Re+en%e Bills ()--/# .............................................................................. 11 *o4er of Taxation$
1i3itations( *o4er to Destro' (!!!# .......................................................................................... 11 *o4er of
Taxation$ Re+ocation of Exe3pting Stat%tes ()--/# ................................................................................... 11
*o4er of Taxation( ,n&erent in a So+ereign State (!!:# ...........................................................................................
11 *o4er of Taxation( 1egislati+e in 9at%re ()--"#
........................................................................................................ 12 *%rpose of Taxation( ,nterpretation
(!!.#................................................................................................................ 12 *%rpose of Taxation( 1egislati+e
in 9at%re (!!.# ..................................................................................................... 12 R%le on Set;Off or
Co3pensation of Taxes ()--"#..................................................................................................... 12 R%le on Set;Off
or Co3pensation of Taxes (!!)#..................................................................................................... 12 R%le on Set;
Off or Co3pensation of Taxes (!!:#..................................................................................................... 13 R%le on
Set;Off or Co3pensation on Taxes (!!:#.................................................................................................... 13 Tax
A+oidance +s. Tax E+asion ()--"#...................................................................................................................... 13
Tax A+oidance +s. Tax E+asion (!!!#......................................................................................................................
13 Tax Exe3ptions$ 9at%re < Co+erage( *roper *art' (!!.#
........................................................................................ 13 Tax 1a4s( B,R R%ling( 9on;Retroacti+it' of R%lings
(!!.# ....................................................................................... 14 Tax *'ra3iding( Definition < 1egalit' (!!"#
............................................................................................................ 14 Taxpa'er S%it( W&en Allo4ed
()--"#......................................................................................................................... 14 =nifor3it' in t&e Collection
of Taxes ()--8# ............................................................................................................. 14
INCOME TAXATION................................................................................................................................ ).
Basic: Allowable Deuctions !s" Personal #xem$tions (%&&1)
.................................................................................. 14 Basic$ 2eaning of Taxable ,nco3e (!!!#
................................................................................................................. 15 Basic$ *rinciple of Mobilia
Sequuntur Personam (199')............................................................................................ 15 Basic$ *roper
Allo4ance of Depreciation ()--8# ....................................................................................................... 15 Basic$
So%rces of ,nco3e$ Taxable ,nco3e ()--8# .................................................................................................... 15
Basic$ Tax Benefit R%le (!!6# ..................................................................................................................................
15 Basic( Basis of ,nco3e Tax ()--"# ............................................................................................................................
16 Basic( 7ross ,nco3e$ Define ()--:#..........................................................................................................................
16 Basic( ,nco3e +s. Capital ()--:#...............................................................................................................................
16 Basic( Sc&ed%lar Treat3ent +s. 7lobal Treat3ent ()--.#
......................................................................................... 16 Co3pensation( ,nco3e Tax$ D%e to *rofitable
B%siness Deal ()--:# ........................................................................ 16 Corporate$ ,nco3e$ Donor8s tax( Tax
1iabilit' ()--"# ................................................................................................ 17 Corporate( ,nco3e Tax(
Reasonableness of t&e Bon%s (!!"# .................................................................................. 17 Corporate( ,nco3e$
Co+erage( >Off;1ine> Airline ()--.#............................................................................................ 17 Corporate(
,nco3e$ Co+erage( >Off;1ine> Airline (!!:#............................................................................................ 17
Di+idends$ Disg%ised di+idends ()--.#..................................................................................................................... 18
Di+idends( ,nco3e Tax( Ded%ctible 7ross ,nco3e ()---# .........................................................................................
18
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#((ect) *ononation o( +oan in Taxation (199,)
........................................................................................................ 18 Fringe Benefit Tax$ Co+ered E3plo'ees
(!!)#......................................................................................................... 18 Fringe Benefit Tax$ E3plo'er
re5%ired to *a' (!!6# ................................................................................................ 19 ,nterest$ Deficienc'
,nterest$ define ()--: Bar#.......................................................................................................... 19 ,nterest$
Delin5%enc' ,nterest$ define ()--:#............................................................................................................. 19
,TR$ *ersonal ,nco3e( Exe3pted to File ,TR
()--/#................................................................................................... 19 ,TR( Do3estic Corporate Taxation
()--/#.................................................................................................................. 19 ,TR( Do3estic Corporate
Taxation (!!)#.................................................................................................................. 20 ,TR( *ersonal
,nco3e$ T4o E3plo'3ent (!!)# ........................................................................................................ 20 ,TR(
*ersonal ,nco3e( 7S,S *ension (!!!# ............................................................................................................. 20
,TR( *ersonal ,nco3e( 2arried ,ndi+id%al (!!.#
....................................................................................................... 20 ,TR( Taxpa'er( 1iabilities( Falsified Tax
Ret%rn (!!:# .............................................................................................. 20 *artners&ip$ ,nco3e Tax ()--:#
................................................................................................................................ 21 *ersonal( ,nco3e Tax$ 9on;
Resident Alien (!!!# .................................................................................................... 21 *ersonal( ,nco3e Tax$
9on;Resident Citi?en ()---#.................................................................................................. 21 *ersonal( ,nco3e
Tax$ Tax;Free Exc&ange ()--/#..................................................................................................... 22 *ersonal(
,nco3e Tax( Contract of 1ease ()--:# ....................................................................................................... 22
*ersonal( ,nco3e Tax( 2arried ,ndi+id%al
()--/#....................................................................................................... 22 *ersonal( ,nco3e Tax( Retiring
Alien E3plo'ee (!!:# ............................................................................................. 23 *ersonal( ,nco3e
Taxation$ 9on;Resident Citi?en ()--/# .......................................................................................... 23 Taxable
,nco3e$ ,llegal ,nco3e ()--: Bar#................................................................................................................ 23
Taxable or 9on;Taxable( ,nco3e and 7ains (!!:#
................................................................................................... 23 Wit&&olding Tax$ 9on;Resident Alien
(!!)#............................................................................................................. 24 Wit&&olding Tax$ Retire3ent
Benefit (!!!#.............................................................................................................. 24 Wit&&olding Tax$
Retire3ent Benefit (!!!#.............................................................................................................. 24 Wit&&olding
Tax$ Ro'alt' (!!# ............................................................................................................................... 24
Wit&&olding Tax( Co+erage (!!.#
............................................................................................................................ 25 Wit&&olding Tax( Do3estic
Corporation( Cas& Di+idends (!!)# .............................................................................. 25 Wit&&olding Tax(
,nco3e s%b@ect t&ereto (!!)# ....................................................................................................... 25 Wit&&olding
Tax( 9on;Resident Alien ()--.#............................................................................................................. 25
Wit&&olding Tax( 9on;Resident Corporation ()--.#
.................................................................................................. 26 Wit&&olding Tax( ReaderAs Digest A4ard
()--8#........................................................................................................ 26 Wit&&olding Tax( Ti3e Deposit
,nterest( 7S,S *ension ()--.# .................................................................................. 26
DEDUCTIONS, EXEMPTIONS, EXC+USIONS - INC+USIONS.....................................................
"
Deuction: Facilitation Fees or -.ic.bac.-
(199/)..................................................................................................... 26 Ded%ctions$ Ordinar' B%siness
Expenses (!!.# .................................................................................................... 26 Ded%ctions$ A3o%nt for
Bribe (!!)#........................................................................................................................ 27 Ded%ctions$ Capital
1osses( *ro&ibitions (!!6# ...................................................................................................... 27 Ded%ctions$
Ded%ctible ,te3s fro3 7ross ,nco3e ()---#.......................................................................................... 27
Ded%ctions$ ,nco3e Tax$ Donation$ Real *ropert' (!!#
........................................................................................ 27 Ded%ctions$ 9on;Ded%ctible ,te3s( 7ross ,nco3e
()---# ......................................................................................... 28 Ded%ctions$ Re5%isites( Ded%cibilit' of a
1oss ()--8# .............................................................................................. 28 Ded%ctions( ,nco3e Tax$ Allo4able
Ded%ctions (!!)#............................................................................................. 28 Ded%ctions( Banis&ing
Ded%ction( *%rpose (!!"# ................................................................................................... 28 Excl%sion <
,ncl%sion( 7ross Receipts (!!"# .......................................................................................................... 28
Excl%sion +s. Ded%ction fro3 7ross ,nco3e
(!!)#.................................................................................................. 28 Excl%sions < ,ncl%sions$ Benefits on
Acco%nt of ,n@%r' ()--:# ................................................................................. 29 Excl%sions < ,ncl%sions$
Exec%ti+e Benefits ()--:#.................................................................................................. 29 Excl%sions <
,ncl%sions( Assets( Resident Alien (!!:# ........................................................................................... 29
Excl%sions < ,ncl%sions( Benefits on Acco%nt of Deat& ()--"#
................................................................................. 30 Excl%sions < ,ncl%sions( Benefits on Acco%nt of ,n@%r'
(!!:# ................................................................................. 30 Excl%sions < ,ncl%sions( Co3pensation for
personal in@%ries or sicCness (!!6# ..................................................... 30 Excl%sions < ,ncl%sions( Facilities
or *ri+ileges( 2ilitar' Ca3p ()--:# ..................................................................... 30 Excl%sions < ,ncl%sions(
7ifts o+er and abo+e t&e Retire3ent *a' ()--:# ................................................................ 31 Excl%sions <
,ncl%sions( ,TR( )6t& 3ont& pa' and de 3ini3is benefits (!!:# ......................................................... 31
Excl%sions < ,ncl%sions( ,TR( Di+idends recei+ed b' a do3estic corporation (!!:#
................................................ 31 Excl%sions < ,ncl%sions( ,TR( ,nco3e reali?ed fro3 sale
(!!:#................................................................................ 31 Excl%sions < ,ncl%sions( ,TR( ,nterest on deposits
(!!:#......................................................................................... 31 Excl%sions < ,ncl%sions( ,TR( *roceeds of
life ins%rance (!!:# ............................................................................... 32 Excl%sions < ,ncl%sions( 1ife
,ns%rance *olic' (!!6# .............................................................................................. 32
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#xem$tions: *0aritable Institutions (%&&&)
............................................................................................................... 32 Exe3ptions$ C&aritable ,nstit%tions(
C&%rc&es ()--"# .............................................................................................. 32 Exe3ptions$ Ed%cational
instit%tion (!!.#............................................................................................................... 32 Exe3ptions$ 7ifts <
Donations ()--.# ...................................................................................................................... 32 Exe3ptions$
Dead of t&e Fa3il'$ ()--8#................................................................................................................... 33
Exe3ptions$ 9on;*rofit Ed%cational ,nstit%tions (!!!#
............................................................................................ 33 Exe3ptions$ 9on;*rofit Entit'( Ancillar'
Acti+it' < ,ncidental Operations ()--.# ...................................................... 33 Exe3ptions$ 9on;StocCE 9on;
*rofit Association (!!# ............................................................................................ 34 Exe3ptions$ *ri?e of
*eace *oster Contest (!!!#.................................................................................................... 34 Exe3ptions$
*ri?es < A4ards( At&letes ()--"# ......................................................................................................... 34
Exe3ptions$ Retire3ent Benefits$ WorC Separation ()---#
....................................................................................... 34 Exe3ptions$ Separation *a' ()--.#
.......................................................................................................................... 35 Exe3ptions$ Separation *a'
()--:# .......................................................................................................................... 35 Exe3ptions$ Separation
*a' (!!:# .......................................................................................................................... 36 Exe3ptions$ StocC
Di+idends (!!6# ........................................................................................................................ 36 Exe3ptions$
Strictl' Constr%ed ()--"# ..................................................................................................................... 36
Exe3ptions$ Ter3inal 1ea+e *a' ()--"#
................................................................................................................... 36 Exe3ptions( C&aritable ,nstit%tions
(!!"# ............................................................................................................... 36 Exe3ptions( Ed%cational
instit%tion (!!.#............................................................................................................... 36 Exe3ptions(
Exe3ptions are =nilateral in 9at%re (!!.#........................................................................................... 37
Exe3ptions( 7o+8t Bon%sF 7iftsF < Allo4ances ()--.#
.............................................................................................. 37 Exe3ptions( *ersonal < Additional Exe3ption
(!!"# .............................................................................................. 37 Exe3ptions( Ro3an Cat&olic C&%rc&(
1i3itations (!!:# ......................................................................................... 38
CAPITA+ GAIN TAX................................................................................................................................ 68
*a$ital Asset !s" 1rinary Asset
(%&&2).................................................................................................................... 38 Capital 7ain Tax( 9at%re
(!!)# ................................................................................................................................ 38 Ordinar' Sale of a
Capital Asset ()--.#..................................................................................................................... 38 Sales of S&are
of StocCs$ Capital 7ains Tax Ret%rn ()---# ....................................................................................... 39 Tax
Basis$ Capital 7ains$ 2erger of Corporations ()--.# ..........................................................................................
39 Tax Basis$ Capital 7ains$ Tax;Free Exc&ange of *ropert' ()--.#
.............................................................................. 39
CORPORATION - PARTNERS/IP...................................................................................................... 6-
Ba Debts) Factors) #lements t0ereo(
(%&&')............................................................................................................ 39 Condo3ini%3 Corp.( Sale of
Co33on Areas ()--.# ................................................................................................. 40 Corporation( Sale(
Creditable Wit&&olding Tax ()--.#............................................................................................... 40 Di+idends$
Wit&&olding Tax ()---# ........................................................................................................................... 40 Effect$
Dissol%tion( Corporate Existence (!!.#........................................................................................................ 41
2ini3%3 Corporate ,nco3e Tax
(!!)#..................................................................................................................... 41 2ini3%3 Corporate
,nco3e Tax( Exe3ption (!!)# .................................................................................................. 41
ESTATE - DONOR0S TAXES ...............................................................................................................
.)
Donor3s Tax: #lection *ontributions (199/)
.............................................................................................................. 41 Donor8s Tax( Basis for Deter3ining
7ain ()--:# ....................................................................................................... 41 Donor8s Tax( Dacion en *ago(
Effect$ Taxation ()--/# .............................................................................................. 42 Donor8s Tax( Donation
to a Sibling (!!)#................................................................................................................. 42 Donor8s Tax(
Donation to 9on;StocCF 9on;*rofit *ri+ate Ed%cational ,nstit%tions (!!!#........................................... 42
Donor8s Tax( Donation to *olitical Candidate (!!6#
................................................................................................. 43 Donor8s Tax( Donee or Beneficiar'( Stranger
(!!!# ................................................................................................. 43 Donor8s Tax( Sale of s&ares of StocC <
Sale of Real *ropert' ()---#......................................................................... 43 Estate Tax$ Co3pre&ensi+e
Agrarian Refor3 1a4 ()--.#.......................................................................................... 43 Estate Tax$ Donation
2ortis Ca%sa (!!)# ................................................................................................................ 43 Estate Tax$
Donation 2ortis Ca%sa +s. ,nter Bi+os ()--.# ......................................................................................... 44
Estate Tax$ 7ross Estate$ Allo4able Ded%ction
(!!)#.............................................................................................. 44 Estate Tax$ 7ross Estate$ Ded%ctions
(!!!# ............................................................................................................ 44 Estate Tax$ ,ncl%sion$ Resident
Alien ()--.# ............................................................................................................. 44 Estate Tax$ *a'3ent +s.
*robate *roceedings (!!.# ............................................................................................... 45 Estate Tax$ Sit%s of
Taxation$ 9on;Resident Decedent (!!!#................................................................................... 45 Estate Tax$
Banis&ing Ded%ctions ()--.#.................................................................................................................. 45 Estate
Tax( *a'3ent +s. *robate *roceedings (!!:# ............................................................................................... 45
BUSINESS TAXES ..................................................................................................................................
.:
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4AT: Basis o( 4AT
(1996).......................................................................................................................................... 45 BAT$
C&aracteristics of BAT ()--"#........................................................................................................................... 45
BAT$ Exe3pted Transactions
()--"#......................................................................................................................... 45 BAT$ 1iable for *a'3ent
()--"# ................................................................................................................................ 46 BAT$ Transactions
>Dee3ed SalesG ()--/# ............................................................................................................... 46 BAT( Co+ered
Transactions ()--8# ........................................................................................................................... 46 BAT(
Exe3ption$ Constit%tionalit' (!!.# ................................................................................................................. 46
BAT( 9on;BAT taxpa'er( Clai3 for Ref%nd (!!"#
..................................................................................................... 47
REMEDIES IN INTERNA+ RE1ENUE TAXES ...................................................................................
./
BI5: Assessment: 6nre7istere Partners0i$ (1998)
.................................................................................................. 47 B,R$ Collection of Tax Deficienc' ()---#
................................................................................................................... 47 B,R$ Co3pro3ise( Conditions
(!!!#........................................................................................................................ 48 B,R$ Co3pro3ise( Extent
of A%t&orit' ()--"# ........................................................................................................... 48 B,R$ Co3pro3ise(
Wit&&olding Agent ()--8#............................................................................................................ 48 B,R$
Corporation$ Distraint < 1e+' (!!# .................................................................................................................
48 B,R$ Co%rt of Tax Appeals$ Collection of Taxes( 7ro%nds for Co3pro3ise ()--"#
.................................................... 49 B,R$ Cri3inal *rosec%tion$ Tax E+asion
()--8#......................................................................................................... 49 B,R$ Extinction( Cri3inal 1iabilit'
of t&e Taxpa'er (!!#.......................................................................................... 49 B,R$ Fra%d%lent Ret%rn(
*ri3a Facie E+idence ()--8#............................................................................................... 50 B,R$ Fra%d%lent
Ret%rn( *ri3a Facie E+idence (!!#............................................................................................... 50 B,R$
7arnis&3ent$ BanC Acco%nt of a Taxpa'er ()--8#.............................................................................................
50 B,R$ *re;Assess3ent 9otice not 9ecessar' (!!#
................................................................................................... 51 B,R$ *rescripti+e *eriod$ Ci+il Action (!!#
............................................................................................................. 51 B,R$ *rescripti+e *eriod( Assess3ent
< Collection ()---#........................................................................................ 51 B,R$ *rescripti+e *eriod(
Cri3inal Action (!!#....................................................................................................... 51 B,R$ Secrec' of
BanC Deposits 1a4 ()--8# ............................................................................................................... 52 B,R$
S%33ar' Re3ed'$ Estate Tax Deficiencies ()--8# ............................................................................................
52 B,R$ =npaid Taxes +s. Clai3s for =npaid Wages
()--:#............................................................................................ 53 B,R( Assess3ent( Cri3inal Co3plaint
(!!:#............................................................................................................ 53 B,R( A%t&orit'( Ref%nd or Credit
of Taxes (!!:# ...................................................................................................... 53 B,R( Co3pro3ise
(!!.#........................................................................................................................................... 53 B,R(
Co3pro3ise (!!:#........................................................................................................................................... 54
B,R( Deficienc' Tax Assess3ent +s. Tax Ref%nd E Tax Credit (!!:#
......................................................................... 54 B,R( Distraint( *rescription of t&e Action
(!!#........................................................................................................ 54 B,R( False +s. Fra%d%lent Ret%rn
()--"#.................................................................................................................... 55 B,R( H%risdiction( Re+ie4
R%lings of t&e Co33issioner (!!"#................................................................................. 55 B,R( *rescripti+e
*eriod( Assess3ent( Fra%d%lent Ret%rn (!!#.............................................................................. 55 B,R(
*rescripti+e *eriod( Cri3inal Action (!!"#....................................................................................................... 55
B,R( Taxpa'er$ Ci+il Action < Cri3inal Action (!!#
................................................................................................ 55 C%sto3$ Biolation of Tax < C%sto3 D%ties
(!!#..................................................................................................... 56 C%sto3s( Basis( A%to3atic Re+ie4
(!!#................................................................................................................ 56 Delin5%ent Tax Ret%rn ()--8#
................................................................................................................................... 57 H%risdiction$ C%sto3s +s.
CTA (!!!#...................................................................................................................... 57 17=$ Collection of
TaxesF Fees < C&arges ()--/# ..................................................................................................... 57 Tax A3nest'
+s. Tax Exe3ption (!!)# .................................................................................................................... 57
Taxpa'er$ Ad3inistrati+e < H%dicial Re3edies
(!!!#............................................................................................... 57 Taxpa'er$ Assess3ent$ *rotest$ Clai3s
for ref%nd (!!!#......................................................................................... 58 Taxpa'er$ Assess3ent( ,n@%nction
(!!.# ................................................................................................................. 58 Taxpa'er$ B,R A%dit or
,n+estigation ()---#.............................................................................................................. 58 Taxpa'er$ Cit'
Board of Assess3ent Decision( W&ere to appeal ()---#.................................................................... 59
Taxpa'er$ Clai3 for Ref%nd( *roced%re
(!!#.......................................................................................................... 59 Taxpa'er$ Deficienc' ,nco3e Tax
()--:#................................................................................................................... 59 Taxpa'er$ Ex&a%stion of
Ad3inistrati+e Re3edies ()--/#......................................................................................... 60 Taxpa'er$ Fail%re
to Wit&&eld < Re3it Tax (!!!#..................................................................................................... 60 Taxpa'er$
9,RC +s. TCC Re3edies ()--"#................................................................................................................. 60
Taxpa'er$ O+er4it&olding Clai3 for Ref%nd ()---#
................................................................................................... 61 Taxpa'er$ *rescripti+e *eriod$ S%spended
(!!!#..................................................................................................... 61 Taxpa'er$ *rescripti+e *eriod( Clai3
for Ref%nd ()--/# ............................................................................................ 61 Taxpa'er$ *rescripti+e *eriod(
Clai3s for Ref%nd ()--.# .......................................................................................... 61 Taxpa'er$ *rescripti+e
*eriod( Clai3s for Ref%nd (!!.# .......................................................................................... 62
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Tax$ayer: Protest a7ainst Assessment (199/)
.......................................................................................................... 62 Taxpa'er$ *rotest against Assess3ent
()---# .......................................................................................................... 62 Taxpa'er$ *rotest against
Assess3ent ()---# .......................................................................................................... 62 Taxpa'er$ *rotest(
Clai3 of Ref%nd ()--"#................................................................................................................ 63 Taxpa'er(
Appeal to t&e Co%rt of Tax Appeals (!!:#................................................................................................ 63
Taxpa'er( Clai3 for Tax Credits (!!"#
..................................................................................................................... 63 Taxpa'er( Co3pro3ise after
Cri3inal Action ()--8# ................................................................................................. 63 Taxpa'er( *rotest
against Assess3ent( Donor8s Tax ()--:# ..................................................................................... 64 Taxpa'er(
Wit&&olding Agent( Clai3 of Tax Ref%nd (!!:# ....................................................................................... 64
+OCA+ - REA+ PROPERTY TAXES.................................................................................................. ".
+ocal Taxation: Actual 6se o( Pro$erty (%&&%)
.......................................................................................................... 64 1ocal Taxation$ Co+erage
(!!#............................................................................................................................... 64 1ocal Taxation$
Exe3ption( Real *ropert' Taxes (!!# ........................................................................................... 65 1ocal
Taxation$ ,3position of Ad Balore3 Tax (!!!# ............................................................................................... 65
1ocal Taxation$ 1egalit'E Constit%tionalit'( Tax Ordinance (!!6#
............................................................................. 65 1ocal Taxation$ 1egalit'( ,3position of Real *ropert' Tax
Rate (!!# ...................................................................... 65 1ocal Taxation$ *o4er to ,3pose (!!6#
................................................................................................................... 65 1ocal Taxation$
Re3issionECondonation of Taxes (!!.#.......................................................................................... 66 1ocal
Taxation$ R%le of =nifor3it' and E5%alit' (!!6#............................................................................................. 66
1ocal Taxation( Sit%s of *rofessional Taxes
(!!:#................................................................................................... 66 1ocal Taxation( Special 1e+' on ,dle
1ands (!!:#.................................................................................................... 66 Real *ropert' Tax$
=ndergro%nd 7asoline TanCs (!!6#........................................................................................... 67 Real
*ropert' Tax( Re5%ire3ents( A%ction Sales of *ropert' for Tax Delin5%enc' (!!"#
......................................... 67 Real *ropert' Taxation$ Capital Asset +s. Ordinar' Asset ()--:#
.............................................................................. 67 Real *ropert' Taxation$ Capital 7ains +s. Ordinar'
7ains ()--8# .............................................................................. 67 Real *ropert' Taxation$ Co+erage of
Ordinar' ,nco3e ()--8# ................................................................................... 67 Real *ropert' Taxation$
Exc&ange of 1ot( Capital 7ain Tax ()--/#............................................................................ 68 Real *ropert'
Taxation$ Exe3ptionEDed%ctions( Donor8s Tax ()--8#......................................................................... 68 Real
*ropert' Taxation$ Exe3ption$ Ac5%iring 9e4 *rincipal Residence (!!!#
....................................................... 68 Real *ropert' Taxation$ F%nda3ental *rinciples ()--/#
............................................................................................ 69 Real *ropert' Taxation$ *rinciples <
1i3itations$ 17= (!!!#................................................................................... 69 Real *ropert' Taxation$
*ropert' Sold is an Ordinar' Asset ()--8#........................................................................... 69 Real *ropert'
Taxation$ =ndergro%nd 7asoline TanCs (!!)# ................................................................................... 69 Real
*ropert' Taxation( Exe3pted *roperties (!!"# ................................................................................................
69
TARI33 AND CUSTOMS DUTIES ........................................................................................................
/!
*ustoms: 9Flexible Tari(( *lause: (%&&1)
.................................................................................................................. 70 C%sto3s$ Ad3inistrati+e +s. H%dicial
Re3edies ()--/# ............................................................................................ 70 C%sto3s$ ,3portation ()--:#
.................................................................................................................................... 70 C%sto3s$ H%risdiction(
Sei?%re < Forfeit%re *roceedings ()--"# ............................................................................. 70 C%sto3s$ Iinds
of C%sto3 D%ties ()--:# ................................................................................................................. 70 C%sto3s$
Iinds of C%sto3 D%ties ()--/# ................................................................................................................. 71
C%sto3s$ Re3edies of an ,3porter ()--"#
................................................................................................................ 71 C%sto3s$ Ret%rning Residents$
To%ristETra+elers (!!6# .......................................................................................... 71 C%sto3s$ Sei?%re <
Forfeit%re$ Effects ()--.# .......................................................................................................... 71 C%sto3s$ Steps
in+ol+ing *rotest Cases ()--.#........................................................................................................ 72 C%sto3s(
Basis of D%tiable Bal%e( ,3ported Article (!!:# ....................................................................................... 72
C%sto3s( Co%nter+ailing D%t' +s. D%3ping D%t'
(!!:#........................................................................................... 72 C%sto3s( Taxabilit'( *ersonal Effects
(!!:#............................................................................................................ 72
OT/ER RE+ATED MATTERS............................................................................................................... /6
BI5: Ban. De$osits Secrecy 4iolation
(%&&&)............................................................................................................ 73 B,R$ Secrec' of BanC Deposit
1a4 (!!6# ................................................................................................................. 73
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics
GENERA+ PRINCIP+ES
Basic Features: Present Income
Tax System (1996) What are the basic features of the present
income tax system"?
SUGGESTED ANSWER)
Our present income tax system can be sai
to have the following basic features!
"a# $t has aopte a *1;P5#<#=SI4#
TA> SIT6S by using the nationality%
resience% an source rules& 'his ma(es
citi)ens an resient aliens taxable on their
income erive from all sources while non-
resient aliens are taxe only on their income
erive from within the *hilippines& +omestic
corporations are also taxe on universal
income while foreign corporations are taxe
only on income from within&
"b# 'he iniviual income tax system is
mainly P51?5#SSI4# I= =AT65# in that it
provies a grauate rates of income tax&
Corporations in general are taxe at a flat rate
of thirty five percent ",-.# of net income&
"c# $t has retaine ;15# S*<#D6+A5
T<A= ?+1BA+ F#AT65#S with respect to
iniviual taxpayers but has maintaine a
more global treatment on corporations&
=ote: The following might also be cited by
the bar candidates as features of the income
tax system: $niviual compensation income earners are taxe
on moifie /ross $ncome "/ross compensation
income less personal exemptions#& Self-employe
an professionals are taxe on net income with
euctions limite to seven items or in lieu thereof
the forty percent "01.# maximum euction plus
the personal exemptions& Corporations are
generally taxe on net income except for non-
resient foreign corporations which are taxe on
gross income&
'he income tax is generally impose via the self-
assessment system or pay-as-you-file concept of
imposing the tax although certain incomes&
$ncluing income of non-resients% are taxe on
the pay-asyou-earn concept or the so calle
withholing tax&
'he corporate income tax is a one-layer tax in that
istribution of profits to stoc(holers (except to
nonresidents) are not sub2ect to income tax&
Basic Sta7es or As$ects o(
Taxation (%&&6) 3numerate the , stages or aspects of
taxation& 3xplain each& "-.#
SUGGESTED ANSWER)
'he aspects of taxation are!
"4# L356$7/ 8 the act of the legislature in
choosing the persons% properties% rights or
privileges to be sub2ecte to taxation&
"9# :SS3SS;37' an COLL3C'$O7 8 'his
is the act of executing the law through the
aministrative agencies of government&
",# *:6;37' 8 the act of the taxpayer in
settling his tax obligations&
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*ollection o( Taxes: Aut0ority)
1rinary *ourts (%&&1) ;ay the courts en2oin the collection of
revenue taxes? 3xplain your answer& "9.#
SUGGESTED ANSWER)
:s a general rule% the courts have no authority
to en2oin the collection of revenue taxes& "Sec&
94<% 7$=C#& >owever% the Court of 'ax
:ppeals is empowere to en2oin the collection
of taxes through aministrative remeies
when collection coul 2eopari)e the interest
of the government or taxpayer& "Section 44%
=: 449-#&
*ollection o( Taxes:
Prescri$tion (%&&1) ;ay the collection of taxes be barre by
prescription? 3xplain your answer& ",.#
SUGGESTED ANSWER)
6es& 'he collection of taxes may be barre by
prescription& 'he prescriptive perios for
collection of taxes are governe by the tax
law imposing the tax& >owever% if the tax law
oes not provie for prescription% the right of
the government to collect taxes becomes
imprescriptible&
Direct Tax !s" Inirect
Tax (199') +istinguish a irect from an inirect
tax&
SUGGESTED ANSWER)
: +$=3C' ':? is one in which the taxpayer
who pays the tax is irectly liable therefor%
that is% the buren of paying the tax falls
irectly on the person paying the tax&
:n $7+$=3C' ':? is one pai by a person who
is not irectly liable therefor% an who may
therefore shift or pass on the tax to another
person or entity% which ultimately assumes
the tax buren& (;acea !" ;acarai7@ 198
S*5A 881)
Tax (%&&&) :mong the taxes impose by the @ureau of
$nternal =evenue are income tax% estate an
onorAs tax% value-ae tax% excise tax% other
percentage taxes% an ocumentary stamp
tax& Classify these taxes into irect an
inirect taxes% an ifferentiate irect from
$nirect taxes& "-.#
SUGGESTED ANSWER)
$ncome tax% estate an onorAs tax are
consiere as irect taxes& On the other
han% value-ae tax% excise tax% other
percentage taxes% an ocumentary stamp
tax are inirect taxes&
+$=3C' ':?3S are emane from the very
person who% as intene% shoul pay the tax
which he cannot shift to anotherB while an
$7+$=3C' ':? is emane in the first
instance from one person with the
expectation that he can shift the buren to
someone else% not as a tax but as a part of
the purchase price&
Tax (%&&1) +istinguish irect taxes from inirect taxes%
an give an example for each one& "9.#
SUGGESTED ANSWER)
+$=3C' ':?3S are taxes wherein both the
incience "or liability for the payment of the
tax# as well as the impact or buren of the
tax falls on the same person& :n
example of this tax is income tax where the
person sub2ect to tax cannot shift the buren
of the tax to another person&
$7+$=3C' ':?3S% on the other han% are taxes
wherein the incience of or the liability for the
payment of the tax falls on one person but the
buren thereof can be shifte or passe on to
another person& 3xample of this tax is the
value-ae tax&
A+TERNATI1E ANSWER)
: irect tax is a tax which is emane from
the person who also shoulers the buren of
the tax& 3xample! corporate an iniviual
income tax&
:n inirect tax is a tax which is emane
from one person in the expectation an
intention that he shall inemnify himself at
the expense of another% an the buren finally
resting on the ultimate purchaser or
consumer& 3xample! value ae tax&
Tax (%&&6) +istinguish "irect taxes" from "inirect
taxes&" /ive examples& "-.#
SUGGESTED ANSWER)
+$=3C' ':?3S are emane from the very
person who shoul pay the tax an which he
can not shift to another& :n $7+$=3C' ':? is
emane from one person with the
expectation that he can shift the buren to
someone else% not as a tax but as part of the
purchase price& 3xamples of irect taxes are
the income tax% the estate tax an the
onorAs tax& 3xamples of inirect taxes are
the value-ae tax% the percentage tax an
the excise tax on exciseable articles&
Double
Taxation (1998) $s ouble taxation a vali efense against the
legality of a tax measure?
SUGGESTED ANSWER)
7o% ouble taxation staning alone an not
being forbien by our funamental law is not
a vali efense against the legality of a tax
measure (Pe$si *ola !" Tanawan@ 69 S*5A
'6&)" >owever% if ouble taxation amounts to
a irect uplicate taxation%
4in that the same sub2ect is taxe twice when it
shoul be taxe but once%
9in a fashion that both taxes are impose for the
same purpose
,by the same taxing authority% within the same
2urisiction or taxing istrict%
0for the same taxable perio an
-for the same (in or character of a tax
then it becomes legally ob2ectionable for
being oppressive an ineCuitable&
Double Taxation: A0at
*onstitutes DTB (1996) ?% a lessor of a property% pays real estate tax
on the premises% a real estate ealerAs tax
base on rental receipts an income tax on
the rentals& ? claims that this is ouble
taxation? +ecie&
SUGGESTED ANSWER)
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9 of 73
'here is no ouble taxation& +OU@L3
':?:'$O7 means taxing for the same tax
perio the same thing or activity twice% when
it shoul be taxe but once% by the same
taxing authority for the same purpose an
with the same (in or character of tax& 'he
=3:L 3S':'3 ':? is a tax on propertyB the
=3:L 3S':'3 +3:L3=AS ':? is a tax on the
privilege to engage in businessB while the
$7CO;3 ':? is a tax on the privilege to earn
an income& 'hese taxes are impose by
ifferent taxing authorities an are essentially
of ifferent (in an character (4illanue!a !s"
*ity o( Iloilo@ %6 S*5A ,8/)"
Double Taxation) Inirect Du$licate
Taxation (1998) When an item of income is taxe in the
*hilippines an the same income is taxe in
another country% is there a case of ouble
taxation?
SUGGESTED ANSWER)
6es% but it is only a case of inirect uplicate
taxation which is not legally prohibite
because the taxes are impose by ifferent
taxing authorities&
Double Taxation) +icense Fee !s"
+ocal Tax (%&&') : municipality% @@% has an orinance which
reCuires that all stores% restaurants% an other
establishments selling liCuor shoul pay a
fixe annual fee of *91&111& SubseCuently%
the municipal boar propose an orinance
imposing a sales tax eCuivalent to -. of the
amount pai for the purchase or consumption
of liCuor in stores% restaurants an other
establishments& 'he municipal mayor% CC%
refuse to sign the orinance on the groun
that it woul constitute ouble taxation& $s the
refusal of the mayor 2ustifie? =eason briefly&
"-.#
SUGGESTED ANSWER)
7o& 'he refusal of the mayor is not 2ustifie&
'he impositions are of ifferent nature an
character& 'he fixe annual fee is in the
nature of a license fee impose through the
exercise of police power while the -. tax on
purchase or consumption is a local tax
impose through the exercise of taxing
powers& @oth a license fee an a tax may be
impose on the same business or occupation%
or for selling the same article an this is not in
violation of the rule against ouble taxation
D*am$ania ?eneral e Tabacos e
Fili$inos !" *ity o( ;anila@ / S*5A 268
C1962D#&
Double Taxation) ;et0os o(
A!oiin7 DT (1998) What are the usual methos of avoiing the
occurrence of ouble taxation?
SUGGESTED ANSWER)
'he usual methos of avoiing the
occurrence of ouble taxation are!
4:llowing reciprocal exemption either by law
or by treatyB
9:llowance of tax creit for foreign taxes
paiB
,:llowance of euction for foreign taxes
paiB an
0=euction of the *hilippine tax rate&
Note: Any three of the methods shall be
given full credit.
Im$rescri$tibility o( Tax
+aws (1998) 'axes were generally imprescriptibleB
statutes% however% may provie otherwise&
State the rules that have been aopte on
this score by -
"a# 'he 7ational $nternal
=evenue CoeB "b# 'he 'ariff an Customs
CoeB an "c# 'he Local /overnment Coe
:nswer!
SUGGESTED ANSWERS)
'he rules that have been aopte on
prescription are as follows!
"a# =ational Internal 5e!enue *oe -
'he statute of limitation for assessment of tax
if a return is file is within three ",# years
from the last ay prescribe by law for the
filing of the return or if file after the last ay%
within three years from ate of actual filing& $f
no return is file or the return file is false or
frauulent% the perio to assess is within '37
63:=S from iscovery of the omission% frau
or falsity&
'he perio to collect the tax is within
'>=33 63:=S from ate of assessment& $n
the case% however% of omission to file or if
the return file is false or frauulent% the
perio to collect is within '37 63:=S from
iscovery without nee of an assessment&
"b# Tari(( an *ustoms *oe - $t oes
not express any general statute of limitationB
it provie% however% that "when articles have
entere an passe free of uty or final
a2ustment of uties mae% with subseCuent
elivery% such entry an passage free of uty
or settlement of uties will% after the
expiration of O73 "4# 63:=% from the ate of
the final payment of uties% in the absence of
frau or protest% be final an conclusive upon
all parties% unless the liCuiation of $mport
entry was merely tentative" "Sec 4E1,% 'CC#&
"c# +ocal ?o!ernment *oe - Local
taxes% fees% or charges shall be assesse
within F$53 "-# 63:=S from the ate they
became ue& $n case of frau or intent to
evae the payment of taxes% fees or charges
the same maybe assesse within '37 63:=S
from iscovery of the frau or intent to evae
payment& 'hey shall also be collecte either
by aministrative or 2uicial action within F$53
"-# 63:=S from ate of assessment "Sec& 4G0%
L/C#&
Power o( Taxation: #Eual Protection
o( t0e +aw (%&&&) :n 3xecutive Orer was issue pursuant to
law% granting tax an uty incentives only to
businesses an resients within the "secure
area" of the Subic 3conomic Special Hone%
an enying sai incentives to those who live
within the Hone but outsie such "secure
area"& $s the constitutional right to eCual
protection of the law violate by the
3xecutive Orer? 3xplain& ",.#
SUGGESTED ANSWER)
7o& 3Cual protection of the law clause is
sub2ect to reasonable classification&
Classification% to be vali% must "4# rest on substantial istinctions% "9# be
germane to the purpose of the law% ",# not be
limite to existing conitions only% "0# apply
eCually to all members of the same class&
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'here are substantial ifferences between big
investors being entice to the "secure area"
an the business operators outsie that are in
accor with the eCual protection clause that
oes not reCuire territorial uniformity of laws&
'he classification applies eCually to all the
resient iniviuals an businesses within the
"secure area"& 'he resients% being in li(e
circumstances to contributing irectly to the
achievement of the en purpose of the law%
are not categori)e further& $nstea% they are
similarly treate% both in privileges grante
an obligations reCuire& (Tiu, et al, v. ourt
of !npeals, et al, ".#. No. $%&!$', (anuary %',
$))))
Power o( Taxation: In0erent in a
So!erei7n State (%&&2) Why is the power to tax consiere inherent
in a sovereign State? "0.#
SUGGESTED ANSWER)
$t is consiere inherent in a sovereign State
because it is a necessary attribute of
sovereignty& *ithout this power no sovereign
+tate can exist or endure& The power to tax
proceeds upon the theory that the existence
of a government is a necessity and this
power is an essential and inherent attribute
of sovereignty, belonging as a matter of right
to every independent state or government.
7o sovereign state can continue to exist
without the means to pay its expensesB an
that for those means% it has the right to
compel all citi)ens an property within its
limits to contribute% hence% the emergence of
the power to tax& (,$ Am. (ur.,Taxation !').
Power o( Taxation: +e7ality) +ocal
?o!3t Taxation (%&&2) ;ay Congress% uner the 4G<I Constitution%
abolish the power to tax of local
governments? "0.#
SUGGESTED ANSWER)
7o& Congress cannot abolish what is
expressly grante by the funamental law&
'he only authority conferre to Congress is to
provie the guielines an limitations on the
local governmentAs exercise of the power to
tax "Sec& -% :rt& ?% 4G<I Constitution#&
Power o( Taxation: +e7islati!e
in =ature (199') 'he Secretary of Finance% upon
recommenation of the Commissioner of
$nternal =evenue% issue a =evenue
=egulation using gross income as the tax
base for corporations oing business in the
*hilippines& $s the =evenue =egulation vali?
SUGGESTED ANSWER)
'he regulation establishing gross income as
the tax base for corporations oing business
in the *hilippines "omestic as well as
resient foreign# is not vali& 'his 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
etermine -the amount of the tax& (+ee $
ooley $&-.$/!). Certainly% if the tax is limite
to gross income without euctions of these
corporations% this is changing the amount of
the tax as sai amount ultimately epens on
the taxable base&
Power o( Taxation: +imitations o( t0e
*on7ress (%&&1) Congress% after much public hearing an
consultations with various sectors of society%
came to the conclusion that it will be goo for
the country to have only one
system of taxation by centrali)ing the
imposition an collection of all taxes in the
national government& :ccoringly% it is
thin(ing of passing a law that woul abolish
the taxing power of all local government
units& $n your opinion% woul such a law be
vali uner the present Constitution? 3xplain
your answer& "-.#
SUGGESTED ANSWER)
7o& 'he law centrali)ing the imposition an
collection of all taxes in the national
government woul contravene the
Constitution which manates that! & & & "3ach
local government unit shall have the power to
create their own sources of revenue an to
levy taxes% fees% an charges sub2ect to such
guielines an limitations as Congress may
provie consistent with the basic policy of
local autonomy&" $t is clear that Congress can
only give the guielines an limitations on the
exercise by the local governments of the
power to tax but what was grante by the
funamental law cannot be withrawn by
Congress&
Power o( Taxation: +imitations: Passin7
o( 5e!enue Bills (1998)
'he >ouse of =epresentatives introuce >@
I111 which envisione to levy a tax on
various transactions& :fter the bill was
approve by the >ouse% the bill was sent to
the Senate as so reCuire by the Constitution&
$n the upper house% instea of a eliberation
on the >ouse @ill% the Senate introuce S@
<111 which was its own version of the same
tax& 'he Senate eliberate on this Senate
@ill an approve the same& 'he >ouse @ill
an the Senate @ill were then consoliate in
the @icameral Committee& 3ventually% the
consoliate bill was approve an sent to
the *resient who signe the same& 'he
private sectors affecte by the new law
Cuestione the valiity of the enactment on
the groun that the constitutional provision
reCuiring that all revenue bills shoul
originate from the >ouse of =epresentatives
ha been violate& =esolve the issue&
SUGGESTED ANSWER)
'here is no violation of the constitutional
reCuirement that all revenue bills shoul
originate from the >ouse of =epresentatives&
What is prohibite is for the Senate to enact
revenue measures on its own without a bill
originating from the >ouse& @ut once the
revenue bill was passe by the >ouse an
sent to the Senate% the latter can pass its own
version on the same sub2ect matter consonant
with the latterAs power to propose or concur
with amenments& 'his follows from the co-
eCuality of the two chambers of Congress
"Tolentino !" Secretary o( Finance@ ?5
=o" 11,',,@ 1ct" 2&@ 199,#&
Power o( Taxation: +imitations) Power
to Destroy (%&&&) Justice >olmes once sai! The power to tax is
not the power to destroy while this ourt
(the +upreme ourt) sits.0 +escribe the
power to tax an its limitations& "-.#
SUGGESTED ANSWER)
'he power to tax is an inherent power of the
sovereign which is exercise through the
legislature% to impose burens upon sub2ects
an ob2ects within its Jurisiction for the
purpose of raising revenues to carry out the
legitimate ob2ects of government& 'he
unerlying basis for its exercise is
governmental necessity for without it no
government can exist nor enure&
:ccoringly% it has the
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11 of 73
broaest scope of all the powers of
government because in the absence of
limitations% it is consiere as unlimite%
plenary% comprehensive an supreme& 'he
two limitations on the power of taxation are
the inherent an constitutional limitations
which are intene to prevent abuse on the
exercise of the otherwise plenary an
unlimite power& $t is the CourtAs role to see to
it that the exercise of the power oes not
transgress these limitations&
Power o( Taxation: 5e!ocation o(
#xem$tin7 Statutes (1998)
"?" Corporation was the recipient in 4GG1 of
two tax exemptions both from Congress% one
law exempting the companyAs bon issues
from taxes an the other exempting the
company from taxes in the operation of its
public utilities& 'he two laws extening the tax
exemptions were revo(e by Congress before
their expiry ates& Were the revocations
constitutional?
SUGGESTED ANSWER)
6es& 'he exempting statutes are both grante
unilaterally by Congress in the exercise of
taxing powers& Since taxation is the rule an
tax exemption% the exception% any tax
exemption unilaterally grante can be
withrawn at the pleasure of the taxing
authority without violating the Constitution
";actan *ebu International Air$ort
Aut0ority !@ ;arcos@ ?"5 =o" 1%&&/%@
Se$tember 11@ 1996#&
7either of these were issue by the taxing
authority in a contract lawfully entere by it
so that their revocation woul not constitute
an impairment of the obligations of contracts&
A+TERNATI1E ANSWER)
7o& 'he withrawal of the tax exemption
amounts to a eprivation of property without
ue process of law% hence unconstitutional&
Power o( Taxation) In0erent in a
So!erei7n State (%&&,) +escribe the power of taxation& ;ay a
legislative boy enact laws to raise revenues
in the absence of a constitutional provision
granting sai boy the power to tax? 3xplain&
SUGGESTED ANSWER)
6es% the legislative boy may enact laws even
in the absence of a constitutional provision
because the power to tax is inherent in the
government an not merely a constitutional
grant& 'he power of taxation is an essential
an inherent attribute of sovereignty
belonging as a matter of right to every
inepenent government without being
expressly grante by the people& (Pe$siF*ola
Bottlin7 *om$any o( t0e P0ili$$ines@ Inc" !"
;unici$ality o(
Tanauan@ +eyte@ ?"5" =o" +F211,6@ February
%8@1986)
'axation is the inherent power of a State to
collect enforce proportional contribution to
support the expenses of government& 'axation
is the power veste in the legislature to
impose burens or charges upon persons an
property in orer to raise revenue for public
purposes&
'he power to tax is so unlimite in force an
so searching in extent that courts scarcely
venture to eclare it is
sub2ect to any restrictions whatever% except
such as rest in the iscretion of the authority
which exercises it& (Tio !" 4ieo7ram 5e7ulatory
Boar@ ?"5" =o" +F8,698@ Gune 1/@ 19/8) So
potent is the power to tax that it was once
opine that "the power to tax involves the
power to estroy&"
(*"G" ;ars0all in ;c*ulloc0 !" ;arylan@ '
A0eat@ 216 ' +" #" ,89@ 6&8)
Power o( Taxation) +e7islati!e
in =ature (1996) What is the nature of the power of
taxation?
SUGGESTED ANSWER)
'he *OW3= 'O ':? is an attribute of
sovereignty an is inherent in the State& $t is a
power emanating from necessity because it
imposes a necessary buren to preserve the
StateAs sovereignty (P0il ?uarantee *o" !s"
*ommissioner@ +F%%&8'@ A$ril 2&@ 196,)& $t is
inherently legislative in nature an character
in that the power of taxation can only be
exercise through the enactment of law&
A+TERNATI1E ANSWER)
'he nature of the power of taxation refers to
its own limitations such as the reCuirement
that it shoul be for a public purpose% that it
be legislative% that it is territorial an that it
shoul be sub2ect to international comity&
Pur$ose o( Taxation)
Inter$retation (%&&') Which of the following propositions may now
be untenable! 4# 'he court shoul construe a
law granting tax
exemption strictly against the taxpayer& 9#
'he court shoul construe a law granting a
municipal corporation the power to tax most
strictly&
,# 'he Court of 'ax :ppeals has
2urisiction over ecisions of the Customs
Commissioner in cases involving liability for
customs uties&
0# 'he Court of :ppeals has 2urisiction to
review ecisions of the Court of 'ax :ppeals&
-# 'he Supreme Court has 2urisiction to
review ecisions of the Court of :ppeals&
Justify your answer or choice briefly& "-.#
SUGGESTED ANSWER)
%& The court should construe a law granting a
municipal corporation the power to tax most
strictly. 'his proposition is now untenable& 'he basic
rationale for the grant of tax power to local
government units is to safeguar their
viability an self-sufficiency by irectly
granting them general an broa tax powers
(;anila #lectric *om$any !" Pro!ince o(
+a7una et" al"@ 2&6 S*5A 8,& C1999D)&
Consiering that inasmuch as the power to tax
may be exercise by local legislative boies%
no longer by vali congressional elegation
but by irect authority conferre by the
Constitution% in interpreting statutory
provisions on municipal fiscal powers% oubts
will% therefore% have to be resolve in favor of
municipal corporations (*ity ?o!ernment o(
San Pablo@ +a7una !" 5eyes@ 2&, S*5A 2,2
C1999D)" 'his means that the court must aopt
a liberal construction of a law granting a
municipal corporation the power to tax&
=ote: $f the examinee chose proposition
no" ' as his answer% it shoul be given full
creit consiering that the present C':
:ct "=&:& 7o& G9<9# has mae the C': a
coeCual 2uicial boy of the Court of
:ppeals& 'he Cuestion "Which of the
following propositions
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12 of 73
may now be untenable" may lea the
examinee to choose a proposition which is
untenable on the basis of the new law
espite the cut-off ate aopte by the
@ar 3xamination Committee& =&:& 7o&
G9<9 was passe on ;arch ,1% 9110&
Pur$ose o( Taxation) +e7islati!e
in =ature (%&&') 'axes are assesse for the purpose of
generating revenue to be use for public
nees& 'axation itself is the power by which
the State raises revenue to efray the
expenses of government& : 2urist sai that a
tax is what we pay for civili)ation&$n our
2urisiction% which of the following statements
may be erroneous! 4# 'axes are pecuniary in
nature& 9# 'axes are enforce charges an
contributions& ,# 'axes are impose on
persons an property within
the territorial 2urisiction of a State& 0# 'axes
are levie by the executive branch of the
government& -# 'axes are assesse accoring to
a reasonable rule of apportionment& Justify your
answer or choice briefly& "-.#
S6??#ST#D A=SA#5:
A" '" Taxes are levied by the executive
branch of government& 'his statement is
erroneous because levy refers to the act of
imposition by the legislature which is one
through the enactment of a tax law& Levy is
an exercise of the power to tax which is
exclusively legislative in nature an
character& Clearly% taxes are not levie by the
executive branch of government& (G4P* !"
Albay@ 1/6 S*5A 19/ C199&D)"
5ule on SetF1(( or *om$ensation
o( Taxes (1996) ? is the owner of a resiential lot situate at
Kuirino :venue% *asay City& 'he lot has an
area of ,11 sCuare meters& On June 4% 4GG0%
411 sCuare meters of sai lot owne by ? was
expropriate by the government to be use in
the wiening of Kuirino :venue% for
*,11&111&11 representing the estimate
assesse value of sai portion& From 4GG4 to
4GG-% ?% who is a businessman% has not been
paying his income taxes& ? is now being
assesse for the unpai income taxes in the
total amount of *4-1%111&11& ? claims his
income tax liability has alreay been
compensate by the amount of *,11&111&11
which the government owes him for the
expropriation of his property& +ecie&
SUGGESTED ANSWER)
'he income tax liability of ? can not be
compensate with the amount owe by the
/overnment as compensation for his property
expropriate% taxes are of istinct (in% essence
an nature than orinary obligations& 'axes an
ebts cannot be the sub2ect of compensation
because the /overnment an ? are not mutually
creitors an ebtors of each other an a claim
for taxes is not a ebt% eman% contract% or
Jugment as is allowable to be set off& (Francia
!s" IA*" ?"5 868'9@ Gune
%/" 19//)
o( Taxes (%&&1) ;ay a taxpayer who has pening claims for
5:' input creit or refun% set-off sai claims
against his other tax liabilities? 3xplain your
answer& "-.#
SUGGESTED ANSWER)
7o& Set-off is available only if both obligations
are liCuiate an emanable& LiCuiate
ebts are those where the exact amounts
have alreay been etermine& $n the instant
case% the claim of the taxpayer for 5:' refun
is still pening an the amount has still to be
etermine& : fortiori% the liCuiate
obligation of the taxpayer to the government
can not% therefore% be set-off against the
unliCuiate claim which the taxpayer
conceive to exist in his favor& "P0ilex ;inin7
*or$" !" *I5@ ?5 =o" 1%,8&'@ Au7ust %9@
199/#&
A+TERNATI1E ANSWER)
7o& 'axes an claims for refun cannot be the
sub2ect of set-off for the simple reason that
the government an the taxpayer are not
creitors an ebtors of each other& 'here is a
material istinction between a tax an a claim
for refun& Claims for refuns 2ust li(e ebts
are ue from the government in its corporate
capacity% while taxes are ue to the
government in its sovereign capacity& "P0ilex
;inin7 *or$" !" *I5@ ?5 =o" 1%,8&'@
Au7ust %9@ 199/#&
o( Taxes (%&&,) ;ay taxes be the sub2ect of set-off or
compensation? 3xplain&
SUGGESTED ANSWER5
7o% taxes cannot be the sub2ect of set-off or
compensation for the following reasons! 4#
'he lifebloo theory reCuires that there shoul
be no unnecessary impeiments to the
collection of taxes to ma(e available to the
government the wherewithal to meet its
legitimate ob2ectivesB an
9# 'he payment of taxes is not a contractual
obligation but arises out of a uty to pay% an
in respect of the positive acts of government%
regaring the ma(ing an enforcing of taxes%
the personal consent of the iniviual
taxpayer is not reCuire& (5e$ublic !"
;ambulao +umber *o"@ ?"5" =o" +F188%,@
February %/@ 196%) *altex !" *ommission on
Auit@ ?"5" =o" 9%,/,@ ;ay /@ 199%) an
P0ilex !" *ommissioner o( Internal 5e!enue@
?"5" =o" 1%,8&'@ Au7ust %/@ 199/)
>owever% there is a possibility that set-off may
arise% if the claims against the government have
been recogni)e an an amount has alreay
been appropriate for that purpose& Where both
claims have alreay become overue an
emanable as well as fully liCuiate&
Compensation ta(es place by operation of law
uner :rt& 4911 in relation to :rticles 49IG an
49G1 of the 7ew Civil Coe&
(Domin7o !" ?arlitos@ ?"5" =o" +F1/99'@ Gune %9@
1962)
on Taxes (%&&,) Can an assessment for a local tax be the
sub2ect of set-off or compensation against a
final 2ugment for a sum of money obtaine
by the taxpayer against the local government
that mae the assessment? 3xplain&
SUGGESTED ANSWER)
7o% taxes cannot be the sub2ect of set-off even
when there is a final 2ugment for a sum of
money against the local government ma(ing
the assessment& 'he government an the
taxpayer are not the "mutual creitors an
ebtors" of each other who can avail of the
remey of compensation which :rt& 49I< "Civil
Coe# is
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1* of 73
referring to 5e$ublic o( t0e P0ili$$ines !"
;ambulao +umber *o"@ ?"5" =o" +F188%,@
February %/@ 196%) an Francia !"
Intermeiate A$$ellate *ourt@ ?"5" =o" +F
686'9@ Gune %/@199/"
'here is% however% legal basis to state that an
assessment for a local tax may be the sub2ect
of set-off or compensation against a final
2ugment for a sum of money obtaine by the
taxpayer against the local government by
operation of law where the local government
an the taxpayer are in their own right
reciprocally ebtors an creitors of each
other% an that the ebts are both ue an
emanable& 'his is consistent with the ruling
in Domin7o !" ?arlitos@ ?"5" =o" +F1/99'@ Gune
%9@1962@ relying upon :rts& 49I< an 49IG of
the Civil Coe% where these provisions were
applie in relation to the national tax% an
shoul therefore be applicable to a local tax&
Tax A!oiance !s" Tax
#!asion (1996) +istinguish tax evasion from tax
avoiance&
SUGGESTED ANSWER)
'ax evasion is a scheme use outsie of
those lawful means to escape tax liability
an% when availe of% it usually sub2ects the
taxpayer to further or aitional civil or
criminal liabilities& 'ax avoiance% on the
other han% is a tax saving evice within the
means sanctione by law% hence legal&
Tax A!oiance !s" Tax
#!asion (%&&&) ;r& *ascualAs income from leasing his
property reaches the maximum rate of tax
uner the law& >e onate one-half of his sai
property to a non-stoc(% non-profit
eucational institution whose income an
assets are actually% irectly an exclusively
use for eucational purposes% an therefore
Cualifie for tax exemption uner :rticle ?$5%
Section 0 ",# of the Constitution an Section
,1 "h# of the 'ax Coe& >aving thus
transferre a portion of his sai asset% ;r&
*ascual succeee in paying a lesser tax on
the rental income erive from his property&
$s there tax avoiance or tax evasion?
3xplain& "9.#
SUGGESTED ANSWER)
'here is tax avoiance& ;r& *ascual has
exploite a fully permissive alternative
metho to reuce his income tax by
transferring part of his rental income to a tax
exempt entity through a onation of one-half
of the income proucing property& 'he
onation is li(ewise exempt from the onorAs
tax& 'he onation is the legal means
employe to transfer the incience of income
tax on the rental income&
Tax #xem$tions: =ature H *o!era7e)
Pro$er Party (%&&') :s an incentive for investors% a law was
passe giving newly establishe companies in
certain economic )one exemption from all
taxes% uties% fees% imposts an other charges
for a perio of three years& :@C Corp& was
organi)e an was grante such incentive& $n
the course of business% :@C Corp& purchase
mechanical eCuipment from ?6H $nc&
7ormally% the sale is sub2ect to a sales tax&
?6H $nc& claims% however% that since it sol the
eCuipment to :@C Corp& which is tax exempt%
?6H
shoul not be liable to pay the sales tax& $s
this claim tenable? "-.#
SUGGESTED ANSWER)
:& 7o& 3xemption from taxes is personal in
nature an covers only taxes for which the
taxpayer-grantee is irectly liable& 'he sales
tax is a tax on the seller who is not exempt
from taxes& Since ?6H $nc& is irectly liable for
the sales tax an no tax exemption privilege
is ever given to him% therefore% its claim that
the sale is tax exempt is not tenable& : tax
exemption is construe in strictissimi 1uris an
it can not be permitte to exist upon vague
implications (Asiatic Petroleum *o"@ +t" 4"
+lanes@ '9 P0il '66 C19%6D)"
:ssume argueno that ?6H ha to an i
pay the sales tax& :@C Corp& later foun out%
however% that ?6H merely shifte or passe
on to :@C the amount of the sales tax by
increasing the purchase price& :@C Corp& now
claims for a refun from the @ureau of
$nternal =evenue in an amount corresponing
to the tax passe on to it since it is tax
exempt& $s the claim of :@C Corp&
meritorious? "-.#
SUGGESTED ANSWER6
@& 7o& 'he claim of :@C Corp& is not
meritorious& :lthough the tax was shifte to
:@C Corp& by the seller% what is pai by it is
not a tax but part of the cost it has assume&
>ence% since :@C Corp& is not a taxpayer% it
has no capacity to file a claim for refun& 'he
taxpayer who can file a claim for refun is the
person statutorily liable for the payment of
the tax&
Tax +aws) BI5 5ulin7) =onF5etroacti!ity
o( 5ulin7s (%&&') +ue to an uncertainty whether or not a new
tax law is applicable to printing companies%
+3F *rinters submitte a legal Cuery to the
@ureau of $nternal =evenue on that issue& 'he
@$= issue a ruling that printing companies
are not covere by the new law& =elying on
this ruling% +3F *rinters i not pay sai tax&
SubseCuently% however% the @$= reverse the
ruling an issue a new one stating that the
tax covers printing companies& Coul the @$=
now assess +3F *rinters for bac( taxes
corresponing to the years before the new
ruling? =eason briefly& "-.#
SUGGESTED ANSWER)
7o& =eversal of a ruling shall not be given a
retroactive application if sai reversal will be
pre2uicial to the taxpayer& 'herefore% the @$=
can not assess +3F printers for bac( taxes
because it woul be violative of the principle
of non-retroactivity of rulings an oing so
woul result in grave in2ustice to the taxpayer
who relie on the first ruling in goo faith
(Section %'6@ =I5*) *I5 !" Burrou70s@ Inc"@
1'% S*5A 2%'C19/6D)"
Tax Pyramiin7) De(inition H
+e7ality (%&&6) What is tax pyramiing? What is its basis in law?
"-.#
SUGGESTED ANSWER)
'ax *yramiing is the imposition of a tax upon
another tax& $t has no basis in fact or in law
(Peo$le !" Sani7anbayan@ ?"5" =o" 1,%,2%@
Au7ust 16@ %&&,)" 'here is also tax pyramiing
when sales taxes are incorrectly applie to
goos several times from prouction to final
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14 of 73
sale% thus% shifting the tax buren to
the ultimate consumer&
(=1TAB#=#: This concept pertains to the 2AT law
which is excluded from the bar coverage,
"uidelines for %''- 3ar 4xaminations, (une $,,
%''-)
Tax$ayer Suit) A0en
Allowe (1996) When may a taxpayerAs suit be
allowe? S6??#ST#D A=SA#5:
: taxpayerAs suit may only be allowe when
an act complaine of% which may inclue a
legislative enactment% irectly involves the
illegal isbursement of public funs erive
from taxation "Pascual !s" Secretary o(
Public Aor.s@ 11& P0il" 221#&
6ni(ormity in t0e *ollection o(
Taxes (199/) 3xplain the reCuirement of uniformity as a
limitation in the imposition anLor collection
of taxes& "-.M
SUGGESTED ANSWER)
Uniformity in the imposition anLor collection of
taxes means that all taxable articles% or (ins of
property of the same class shall be taxe at the
same rate& 'he reCuirement of uniformity is
complie with when the tax operates with the same
force an effect in every place where the sub2ect of
it is foun (*0urc0ill H Tail !" *once$tion@ 2' P0il"
969)& $t oes not mean that lans% chattels%
securities% income% occupations% franchises%
privileges% necessities an luxuries shall be
assesse at the same rate& +ifferent articles maybe
taxe at ifferent amounts provie that the rate is
uniform on the same class everywhere with all
people at all times& :ccoringly% singling out one
particular class for taxation purposes oes not
infringe the reCuirement of uniformity&
FI5ST A+T#5=ATI4# A=SA#5:
'he criteria is met when the tax laws operate
eCually an uniformly on all persons uner
similar circumstances& :ll persons are treate in
the same manner% the conitions not being
ifferent% both in privileges conferre an
liabilities impose& Uniformity in taxation also
refers to geographical uniformity& Favoritism
an preference is not allowe&
S#*1=D A+T#5=ATI4# A=SA#5:
: tax is eeme to have satisfie the
uniformity rule when it operates with the
same force an effect in every place where
the sub2ect maybe foun& (P0il" Trust H *o" !"
Iatco@ 69 P0il" '%&)"
INCOME TAXATION
Basic: Allowable Deuctions !s" Personal
#xem$tions (%&&1)
+istinguish :llowable +euctions from
*ersonal 3xemptions& /ive an example of an
allowable euction an another example for
personal exemption& "-.#
SUGGESTED ANSWER)
'he istinction between allowable euctions
an personal exemptions are as follows!
a& As to amount 8 :llowable
euctions generally refer to actual
expenses incurre in the pursuit of trae%
business or practice of profession while
personal exemptions are arbitrary
amounts allowe by law&
As to nature 8 :llowable euctions constitute
business expenses while personal exemptions
pertain to personal expenses&
As to $ur$ose 8 +euctions are allowe to
enable the taxpayer to recoup his cost of oing
business while personal exemptions are allowe
to cover personal% family an living expenses&
As to claimants 8 :llowable euctions can be
claime by all taxpayers% corporate or otherwise%
while personal exemptions can be claime only
by iniviual taxpayers&
Basic: ;eanin7 o( Taxable
Income (%&&&) What is meant by taxable income?
"9.#
SUGGESTED ANSWER)
':?:@L3 $7CO;3 means the pertinent items
of gross income specifie in the 'ax Coe%
less the euctions anLor personal an
aitional exemptions% if any% authori)e for
such types of income by the 'ax Coe or
other special laws& (+ec. 5$, N6# of $))&)
Basic: Princi$le o( Mobilia Sequuntur
Personam (199') What is the principle of mobilia se7uuntur
personam in income taxation?
SUGGESTED ANSWER)
*rinciple of 8obilia +e7uuntur 9ersonam in
income taxation refers to the principle that
taxation follows the property or person who
shall be sub2ect to the tax&
Basic: Pro$er Allowance o(
De$reciation (199/) 4What is the proper allowance for epreciation of
any property use in trae or business? N,.#
9What is the annual epreciation of a epreciable
fixe asset with a cost of *411%111 an an
estimate useful life of 91 years an salvage
value of * 41%111 after its useful life?
SUGGESTED ANSWER)
4& 'he $ro$er allowance o( e$reciation
of any property use in trae or business
refers to the reasonable allowance for the
exhaustion% wear an tear (including
reasonable allowance for obsolescence) of
sai property& 'he reasonable allowance shall
inclue% but not limite to% an allowance
compute uner any of the following
methos!
"a# straight-line
methoB "b# eclining-balance
methoB "c# sum-of-years-igit
methoB an "# any other metho which may be
prescribe by the Secretary of Finance
upon recommenation of the
Commissioner of $nternal =evenue "Sec&
,0"F#& 7$=C#&
9& 'he annual epreciation of the epreciable
fixe asset may be compute on the straight-
line metho which will allow the taxpayer to
euct an annual epreciation of *hp0%-11%
arrive at by iviing the epreciable value
"*hp l11&111-*hpl1&111# of *hpG1%111 by the
estimate useful life "91 years#&
=1T#: 'he bar caniate may give a ifferent
figure epening on the metho he use in
computing the annual epreciation&
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1. of 73
'he facts given in the problem are sufficient to
compute the annual epreciation either uner the
eclining-balance metho or sum-of-years-igit
metho& :ny answer arrive at by using any of the
recogni)e methos shoul be given full creit& $t
is suggeste that no Cuestion reCuiring
computation shoul be given in future bar
examinations&
Basic: Sources o( Income: Taxable
Income (199/) From what sources of income are the following
personsLcorporations taxable by the *hilippine
government? 9# Citi)en of the *hilippines
resiing thereinB N4.O ,# 7on-resient citi)enB
N4.4 0# :n iniviual citi)en of the *hilippines
who is
wor(ing an eriving income from abroa as
an overseas contract wor(erB N4.O -# :n alien
iniviual% whether a resient or not of the
*hilippinesB N4.O E# : omestic corporationB
N4.O SUGGESTED ANSWER) "Section 9,% 7$=C of
4GGI# 4# : citi)en of the *hilippines resiing
therein is
taxable on all income erive from sources
within an without the *hilippines& 9# :
nonresient citi)en is taxable only on income
erive from sources within the *hilippines&
,# :n iniviual citi)en of the *hilippines
who is wor(ing an eriving income from
abroa as an overseas contract wor(er is
taxable only on income from sources within
the *hilippines&
0# :n alien iniviual% whether a resient
or not of the *hilippines% is taxable only on
income erive from sources within the
*hilippines&
-# : omestic corporation is taxable on all
income erive from sources within an
without the *hilippines&
Basic: Tax Bene(it
5ule (%&&2) "a# What is meant by the "tax benefit
rule"?
SUGGESTED ANSWER)
"a# ':? @373F$' =UL3 states that the
taxpayer is oblige to eclare as taxable
income subseCuent recovery of ba ebts in
the year they were collecte to the extent of
the tax benefit en2oye by the taxpayer when
the ba ebts were written-off an claime as
a euction from income& $t also applies to
taxes previously eucte from gross income
but which were subseCuently refune or
creite& 'he taxpayer is also reCuire to
report as taxable income the subseCuent tax
refun or tax creit grante to the extent of
the tax benefit the taxpayer en2oye when
such taxes were previously claime as
euction from income&
"b# /ive an illustration of the application
of the tax benefit rule&
SUGGESTED ANSWER)
"b# ? Company has a business connecte
receivable amounting to *411%111&11 from 6
who was eclare ban(rupt by a competent
court& +espite earnest efforts to collect the
same% 6 was not able to pay% prompting ?
Company to write-off the entire liability&
+uring the year of write-off% the entire
amount was claime as a euction for
income tax purposes reucing the taxable net
income of ? Company to only *4%111%111&11&
'hree years later% 6
voluntarily pai his obligation previously
written-off to ? Company& $n the year of
recovery% the entire amount constitutes part
of gross income of ? Company because it was
able to get full tax benefit three years earlier&
Basic) Basis o( Income
Tax (1996) ? is employe as a river of a corporate
lawyer an receives a monthly salary of
*-%111&11 with free boar an loging with
an eCuivalent value of *4%-11&11&
4What will be the basis of ?As income tax? Why
9Will your answer in Cuestion "a# be the same if
?As employer is an obstetrician? Why?
SUGGESTED ANSWERS)
4# 'he basis of ?Ps income tax woul epen
on whether his employer is an employee or a
practicing corporate lawyer&
$f his employer is an employee% the basis of ?As
income tax is *E%-11&11 eCuivalent to the total of
the basic salary an the value of the boar an
loging& 'his is so because the employerLcorporate
lawyer has no place of business where the free
boar an loging may be given&
On the other han% if the corporate lawyer is a
"practicing lawyer "self-employe#% ? shoul be
taxe only on *-%111&11 provie that the free
boar an loging is given in the business
premises of the lawyer an for his convenience an
that the free loging was given to ? as a conition
for employment&
9# $f the employer is an obstetrician who is
self-employe% the basis of ?As income will
only be *-%111&11 if it is proven that the free
boar an loging is given within the business
premises of sai employer for his convenience
an that the free loging is reCuire to be
accepte by ? as conition for employment&
Otherwise% ? woul be taxe on *E%-11&11&
Basic) ?ross Income:
De(ine (199,) What is "gross $ncome" for purposes of the $ncome
tax?
SUGGESTED ANSWER)
/=OSS $7CO;3 means all income from
whatever source erive% incluing "but not
limite to# compensation for services%
incluing fees% commissions% an similar itemsB
gross income from businessB gains erive
from ealings in propertyB interestB rentsB
royaltiesB iviensB annuitiesB pri)es an
winningsB pensionsB an partnerAs istributive
share of the gross income of general
professional partnership "Sec& 9<% 7$=C#&
A+TERNATI1E ANSWER)
a# /ross income means all wealth which flows
into the taxpayer other than as a mere return
of capital& $t inclues the forms of income
specifically escribe as gains an profits
incluing gains erive from the sale or other
isposition of capital&
b# /ross income means income "in the broa
sense# less income which is% by statutory
provision or otherwise% exempt from the tax
impose by law "Sec& ,E% =ev& =eg& 7o& 9#&
/ross income from business means total
sales% less cost of goos sol% plus any
income from investments
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16 of 73
an from inciental or outsie
operations or sources "Sec& 0,% =ev&
=eg& 7o& 9#&
Basic) Income !s"
*a$ital (199,) >ow oes "$ncome" iffer from "capital"?
3xplain&
SUGGESTED ANSWER)
$ncome iffers from capital in that $7CO;3 is
any wealth which flows into the taxpayer
other than a return of capital while capital
constitutes the investment which is the
source of income& 'herefore% capital is fun
while income is the flow& Capital is wealth%
while income is the service of wealth& Capital
is the tree while income is the fruit "4icente
;ari7al et al !" Games 5E((erty@ 2/ P0il"
'1'#&
Basic) Sc0eular Treatment !s" ?lobal
Treatment (199') +istinguish "schedular treatment" from
"global treatment" as use in income
taxation&
SUGGESTED ANSWER)
Uner a SC>3+UL3= S6S'3;% the various
typesLitems of income (compensation:
business;professional income) are classifie
accoringly an are accore ifferent tax
treatments% in accorance with scheules
characteri)e by grauate tax rates& Since
these types of income are treate separately%
the allowable euctions shall li(ewise vary for
each type of income&
Uner the /LO@:L S6S'3;% all income
receive by the taxpayer are groupe
together% without any istinction as to the
type or nature of the income% an after
eucting therefrom expenses an other
allowable euctions% are sub2ecte to tax at
a fixe rate&
*om$ensation) Income Tax: Due to
Pro(itable Business Deal (199,)
;r& Osorio% a ban( executive% while playing
golf with ;r& *ere)% a manufacturing firm
executive% mentione to the latter that his
"Osorio# ban( ha 2ust opene a business
relationship with a big foreign importer of
goos which *ere)A company manufactures&
*ere) reCueste Osorio to introuce him to
this foreign importer an put in a goo wor
for him "*ere)#% which Osorio i& :s a result%
*ere) was able to ma(e a profitable business
eal with the foreign $mporter&
$n gratitue% *ere)% in behalf of his
manufacturing firm% sent Osorio an expensive
car as a gift& Osorio calle *ere) an tol him
that there was really no obligation on the part
of *ere) or his company to give such an
expensive gift& @ut *ere) insiste that Osorio
(eep the car& 'he company of *ere) eucte
the cost of the car as a business expense&
'he Commissioner of $nternal =evenue
inclue the fair mar(et value of the car as
$ncome of Osorio who proteste that the car
was a gift an therefore exclue from
income& Who is correct% the Commissioner or
Osorio? 3xplain&
SUGGESTED ANSWER)
'he Commissioner is correct& 'he car having
been given to ;r& Osorio in consieration of
having introuce ;r& *ere) to a foreign
$mporter which resulte to a profitable
business eal is consiere to be a
compensation for
services renere& 'he transfer is not a gift
because it is not mae out of a etache or
isintereste generosity but for a benefit accruing
to ;r& *ere)& 'he fact that the company of ;r&
*ere) ta(es a business euction for the payment
inicates that it was consiere as a pay rather
than a gift& >ence% the fair mar(et value of the car
is incluable in the gross income pursuant to
Section 9<"a#"l# of the 'ax Coe (+ee $)&! <ederal
Tax =andboo>, p. $!,). : payment though
voluntary% if it is in return for services renere% or
procees from the constraining force of any moral
or legal uty or a benefit to the payer is
anticipate% is a taxable income to the payee even
if characteri)e as a AgiftA by the payor
(*ommissioner !s" Duberstein@ 262 6"S" %8/)"
A+TERNATI1E ANSWER)
;r& Osorio is correct& 'he car was not payment
for services renere& 'here was no prior
agreement or negotiations between ;r& Osorio
an ;r& *ere) that the former will be
compensate for his services& ;r& *ere)% in
behalf of his company% gave the car to ;r&
Osorio out of gratitue& 'he transfer having
been mae gratuitously shoul be treate as a
gift sub2ect to onorAs tax an shoul be
exclue from the gross income of the
recipient% ;r& Osorio& 'he Commissioner shoul
cancel the assessment of eficiency income tax
to ;r& Osorio an instea assess eficiency
onorAs tax on ;r *ere)A company& "Sec& 9<"b#
",#% 7$=CB Piro!ano !s" *ommissioner#
*or$orate: Income: Donor3s tax)
Tax +iability (1996) ?% a multinational corporation oing business
in the *hilippines onate 411 shares of stoc(
of sai corporation to ;r& 6% its resient
manager in the *hilippines& 4# What is the tax
liability% if any% of ? corporation? 9# :ssuming
the shares of stoc(s were given to ;r& 6
in consieration of his services to the
corporation% what are the tax implications?
3xplain&
SUGGESTED ANSWERS)
4# Foreign corporations effecting a onation
are sub2ect to onorAs tax only if the property
onate is locate in the *hilippines&
:ccoringly% onation of a foreign corporation
of its own shares of stoc(s in favor of resient
employee is not sub2ect to onorAs tax "@$=
=uling 7o& 14<-<I% January 9E% 4G<I#&
>owever% if <-. of the business of the foreign
corporation is locate in the *hilippines or the
shares onate have acCuire business situs
in the *hilippines% the onation may be taxe
in the *hilippines sub2ect to the rule of
reciprocity&
9# $f the shares of stoc(s were given to ;r& 6
in consieration of his services to the
corporation% the same shall constitute taxable
compensation income to the recipient because
it is a compensation for services renere
uner an employer-employee relationship%
hence% sub2ect to income tax&
'he par value or state value of the shares
issue also constitutes euctible expense to
the corporation provie it is sub2ecte to
withholing tax on wages&
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*or$orate) Income Tax)
5easonableness o( t0e Bonus
(%&&6) /ol an Silver Corporation gave extra 40th
month bonus to all its officials an employees
in the total amount of *I- ;illion& When it
file its corporate income tax return the
following year% the corporation eclare a net
operating loss& When the income tax return of
the corporation was reviewe by the @$= the
following year% it isallowe as item of
euction the *I- ;illion bonus the
corporation gave its officials an employees
on the groun of unreasonableness& 'he
corporation claime that the bonus is an
orinary an necessary expense that shoul
be allowe& $f you were the @$= Commissioner%
how will you resolve the issue? "-.#
SUGGESTED ANSWER)
$ will isallow the expense& : bonus is
orinary an necessary where sai
expeniture is "4# appropriate an helpful in
the evelopment of the taxpayers business
(8artens, ?aw of <ederal 6ncome Taxation, 2olume
62, p. 5$,) an "9# is normal in relation to the business of
the taxpayer an the surrouning
circumstances (p. 5$-, 6bid).
'o etermine the reasonableness of the bonus
it must be commensurate with services
performe by the officials an employees&
Other factors to consier are whether the
payment was mae in goo faithB the
character of the taxpayerAs businessB the
volume an amount of its net earningsB its
localityB the type an extent of the services
renereB the salary policy of the corporationB
the si)e of the particular businessB the
employeesA Cualification an contributions to
the business ventureB an general economic
conitions (Atlas ;inin7 !" *I5@ ?"5" =o" +F
%6911@ Ganuary %8@ 19/1)& >owever% since the
business suffers from a net operating loss% $
will rule that the bonus is an unreasonable
expense&
*or$orate) Income: *o!era7e) -1((F
+ine- Airline (199') Caleonia :ircargo is an off-line international
carrier without any flight operations in the
*hilippines& $t has% however% a liaison office in
the *hilippines which is uly license with the
Securities an 3xchange Commission%
establishe for the purpose of proviing
passenger an flight information% reservation
an tic(eting services& :re the revenues of
Caleonia :ircargo from tic(ets reserve by
its *hilippine office sub2ect to tax?
SUGGESTED ANSWER)
'he revenues in the *hilippines of Caleonia
:ircargo as an "off-line" airline from tic(et
reservation services are taxable income from
"whatever source" uner Sec& 9<"a# of the
'ax Coe& 'his case is analogous to
*ommissioner
!" B1A*@ ?"5 =o" =o" 6,882F8'@ A$ril 2&@
19/8 where the Supreme Court rule that the
income receive in the *hilippines from the
sale of tic(ets by an "off-line" airline is
taxable as income from whatever source&
*or$orate) Income: *o!era7e) -1((F
+ine- Airline (%&&,) :n international airline with no laning rights
in the *hilippines sol tic(ets in the *hilippines
for air transportation& $s income erive from
such sales of tic(ets consiere taxable
income of the sai international
air carrier from *hilippine sources uner the
'ax Coe? 3xplain& "-.#
A+TERNATI1E ANSWER)
6es& 'he income erive from the sales of
tic(ets in the *hilippines is consiere taxable
income of the international air carrier from
*hilippine sources&
'he source of income is the property% activity or
service that prouce the income& 'he sale of
tic(ets in the *hilippines is the activity that
prouces the income& 'he absence of laning
rights in the *hilippines cannot alter the fact
that revenues were erive from tic(et sales
within the *hilippines& (*ommissioner o( Internal
5e!enue
!" Ga$an Air +ines@ ?"5" =o" 6&81'@ 1ctober '@
1991 reiteratin7 Britis0 1!erseas Airways
*or$"@ Air Inia an American Airlines@ Inc")
A+TERNATI1E ANSWER)
7o% uner +ec. 5 of #.#. No. $,.%''%% an off-
line airline having a branch office or a sales
agent in the *hilippines which sells passage
ocuments for compensation or commission
to cover off-line flights of its principal or hea
office% or for other airlines covering flights
originating from *hilippine ports or off-line
flights% is not consiere engage in business
as an international air carrier in the *hilippines
an is% therefore% not sub2ect to /ross
*hilippine @illings 'ax nor to the ,. common
carrierAs tax&
@ase on the foregoing% the international
airline company is not consiere as engage
in business in the *hilippines an is therefore
a non-resient foreign corporation& : non-
resient foreign corporation is sub2ect to the
gross income tax on its income erive from
sources within the *hilippines& 'he income
from sale of tic(ets shall not form part of
taxable income because the term "taxable
income" as efine uner Sec& ,4 of the 7$=C
refers only to income of those taxpayers who
pay by way of the net income tax& 'axable
income means the pertinent items of gross
income specifie in the 7$=C% less the
euctions anLor personal an aitional
exemptions% if any% authori)e for such types
of income by the 7$=C or other special laws&
Di!iens: Dis7uise
i!iens (199') +isguise iviens in income taxation? /ive an
example&
SUGGESTED ANSWER)
+isguise iviens are those income
payments mae by a omestic corporation%
which is a subsiiary of a nonresient foreign
corporation% to the latter ostensibly for
services renere by the latter to the former%
but which payments are isproportionately
larger than the actual value of the services
renere& $n such case% the amount over an
above the true value of the service renere
shall be treate as a ivien% an shall be
sub2ecte to the corresponing tax of ,-. on
*hilippine source gross income% or such
other preferential rate as may be provie
uner a corresponing 'ax 'reaty& #xam$le:
=oyalty payments uner a corresponing
licensing agreement&
Di!iens) Income Tax) Deuctible
?ross Income (1999) : Co&% a *hilippine corporation% issue
preferre shares of stoc( with the following
features!
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14 of 73
4# 7on-votingB
9# *referre an cumulative iviens at the rate of
41. per annum% whether or not in any perio
the amount is covere by earnings or pro2ectsB ,#
$n the event of issolution of the issuer%
holers of preferre stoc( shall be pai in full or ratably as
the assets of the issuer may permit before any
istribution shall be mae to common
stoc(holersB an 0# 'he issuer has the option to reeem
the preferre
stoc(&
: Co& eclare iviens on the preferre
stoc( an claime the iviens as interests
euctible from its gross $ncome for income
tax purposes& 'he @$= isallowe the
euction& : Co& maintains that the preferre
shares with their features are really ebt an
therefore the iviens are realty interests&
+ecie& "41.#
SUGGESTED ANSWER)
'he iviens are not euctible from gross
income& *referre shares shall be consiere
capital regarless of the conitions uner
which such shares are issue an% therefore%
iviens pai thereon are not consiere
AinterestA which are allowe to be eucte
from the gross income of the corporation&
(#evenue 8emorandum ircular No. $&.&$,
(uly $%, $)&$).
#((ect) *ononation o( +oan in
Taxation (199,) ;r& Francisco borrowe *41%111&11 from his
frien ;r& /utierre) payable in one year
without interest& When the loan became ue
;r& Francisco tol ;r& /utierre) that he ";r&
Francisco# was unable to pay because of
business reverses& ;r& /utierre) too( pity on
;r& Francisco an conone the loan& ;r&
Francisco was solvent at the time he
borrowe the * 41%111&11 an at the time the
loan was conone& +i ;r& Francisco erive
any income from the cancellation or
cononation of his inebteness? 3xplain&
SUGGESTED ANSWER)
7o% ;r& Francisco i not erive any income
from the cancellation or cononation of his
inebteness& Since it is obvious that the
creitor merely esire to benefit the ebtor
in view of the absence of consieration for
the cancellation% the amount of the ebt is
consiere as a gift from the creitor to the
ebtor an nee not be inclue in the
latterAs gross income&
Frin7e Bene(it Tax: *o!ere
#m$loyees (%&&1) ? was hire by 6 to watch over 5Ps fishpons
with a salary of *hp 41%111&11& 'o enable him
to perform his uties well% he was also
provie a small hut% which he coul use as
his resience in the mile of the fishpons&
$s the fair mar(et value of the use of the small
hut by ? a "fringe benefit" that is sub2ect to
the ,9. tax impose by Section ,, of the
7ational $nternal =evenue Coe? 3xplain your
answer& "-.#
SUGGESTED ANSWER)
7o& ? is neither a managerial nor a
supervisory employee& Only managerial or
supervisory employees are entitle to a fringe
benefit sub2ect to the fringe benefits tax&
3ven assuming that he is a managerial or
supervisory employee% the small hut is
provie for the convenience of the
employer% hence oes not constitute a
taxable fringe benefit& (+ection 55, N4#).
Frin7e Bene(it Tax: #m$loyer
reEuire to Pay (%&&2) : "fringe benefit" is efine as being any
goo% service or other benefit furnishe or
grante in cash or in (in by an employer to
an iniviual employee& Woul it be the
employer or the employee who is legally
reCuire to pay an income tax on it? 3xplain&
"0.#
SUGGESTED ANSWER)
$t is the employer who is legally reCuire to
pay an income tax on the fringe benefit& 'he
fringe benefit tax is impose as a F$7:L
W$'>>OL+$7/ ':? placing the legal
obligation to remit the tax on the employer%
such that% if the tax is not pai the legal
recourse of the @$= is to go after the
employer& :ny amount or value receive by
the employee as a fringe benefit is consiere
tax pai hence% net of the income tax ue
thereon& 'he person who is legally reCuire to
pay (same as statutory incidence as
distinguished from economic incidence) is
that person who% in case of non-payment% can
be legally emane to pay the tax&
Interest: De(iciency Interest:
e(ine (199, Bar) What is a "eficiency interest" for purposes
of the income tax? $llustrate&
SUGGESTED ANSWER)
+3F$C$37C6 $7'3=3S' for purposes of the
income tax is the interest ue on any amount
of tax ue or installment thereof which is not
pai on or before the ate prescribe for its
payment compute at the rate of 91. per
annum or the ;anila =eference =ate%
whichever is higher% from the ate prescribe
for its payment until it is fully pai&
$f for example after the auit of the boo(s of
?6H Corp& for taxable year 4GG, there was
foun to be ue a eficiency income tax of
*49-%111&11 inclusive of the 9-. surcharge
impose uner Section 90< of the 'ax Coe%
the interest will be compute on the
*49-&111&11 from :pril 4-% 4GG0 up to its
ate of payment&
Interest: DelinEuency
Interest: e(ine (199,) What is a "elinCuency interest" for purposes
of the income tax? $llustrate&
SUGGESTED ANSWER)
+elinCuency interest is the interest of 91. or
the ;anila =eference =ate% whichever is
higher% reCuire to be pai in case of failure
to pay!
"a# the amount of the tax ue on any
return reCuire to be fileB or
"b# the amount of the tax ue for which
return is reCuireB or
"c# the eficiency tax or any surcharge or
interest thereon% on the ue ate appearing in
the notice an eman of the Commissioner
of $nternal =evenue&
$f in the above illustration the assessment
notice was release on +ecember ,4% 4GG0
an the amount of eficiency tax% inclusive of
surcharge an eficiency interest were
compute up to January ,1% 4GG- which is the
ue ate for payment per assessment notice%
failure to
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19 of 73
pay on this latter ate will rener the tax
elinCuent an will reCuire the payment of
elinCuency interest&
IT5: Personal Income) #xem$te to
File IT5 (1998) : bachelor was employe by Corporation : on
the first wor(ing ay of January 4GGE on a
part-time basis with a salary of *,%-11&11 a
month& >e then receive the 4,th month pay&
$n September 4GGE% he accepte another
part-time Job from Corporation @ from which
he receive a total compensation of
*40%-11&11 for the year 4GGE& 'he correct
total taxes were withhel from both earnings&
With the withholing taxes alreay pai%
woul he still be reCuire to file an income
tax return for his 4GGE income?
SUGGESTED ANSWER)
6es% because what is exempt from filing are
those iniviuals who have total
compensation income not exceeing *E1&111
with the taxes correctly withhel only by one
employer& $n this case% even if his aggregate
compensation income from both his
employers oes not excee *E1&111 an that
total withholing taxes were correctly
withhel by his employers% the fact that he
erives compensation income concurrently
from two employers at anytime uring the
taxable year% oes not exempt him from filing
his income tax return (#A &!)&, as
implemented by ## No. !.)5).
IT5) Domestic *or$orate
Taxation (1998) +uring the year% a omestic corporation
erive the following items of revenue! "a#
gross receipts from a traing businessB "b#
interests from money placements in the
ban(sB "c# iviens from its stoc(
investments in omestic corporationsB "#
gains from stoc( transactions through the
*hilippine Stoc( 3xchangeB "e# procees
uner an insurance policy on the loss of
goos& $n preparing the corporate income tax
return% what shoul be the tax treatment on
each of the above items?
SUGGESTED ANSWER)
'he 7ross recei$ts (rom train7 business
is incluible as an item of income in the
corporate income tax return an sub2ect to
corporate income tax rate base on net
income&
'he other items of revenue will not be
inclue in the corporate income tax return& &
'he interest from money mar(et placements
is sub2ect to a final withholing tax of 91.B &
'he iviens from omestic corporation are
exempt from income taxB an & gains from stoc(
transactions with the *hilippine
Stoc( 3xchange are sub2ect to transaction tax
which is in lieu of the income tax& & 'he procees
uner an insurance policy on the loss
of goos is not an item of income but merely a
return of capital hence not taxable&
A+TERNATI1E ANSWER)
'he gross receipts from traing business is
incluible as an item of income in the
corporate income tax return& Li(ewise% the
gain or loss reali)e as a conseCuence of the
receipt of procees uner an insurance policy
on the loss of goos will be inclue in the
corporate income tax
return either as a taxable gain or a euctible
loss& 'he gain or loss is arrive at by
eucting from the procees of insurance
"amount reali)e# the basis of the goo lost
"Sec& ,0"a#% 7$=C#& 'he net income of the
corporation shall be sub2ect to corporate
income tax rate of ,-.&
'he other items of revenue will not be
inclue in the corporate income tax return&
'he interest from money mar(et placements
is sub2ect to a final withholing tax of 91.B
iviens from omestic corporations are
exempt from income taxB an gains from
stoc( transactions with the *hilippine Stoc(
3xchange are sub2ect to transaction tax
which is in lieu of the income tax&
IT5) Domestic *or$orate
Taxation (%&&1) a# >ow often oes a omestic corporation file income
tax return for income earne uring a single
taxable year? 3xplain the process& ",.#
SUGGESTED ANSWER)
a# : omestic corporation is reCuire to file
income tax returns four "0# times for income
earne uring a single taxable year& Kuarterly
returns are reCuire to be file for the first
three Cuarters where the corporation shall
eclare its Cuarterly summary of gross
income an euctions on a cumulative basis&
(+ection &,, N6#)& 'hen% a final a2ustment
return is reCuire to be file covering the
total taxable income for the entire year%
calenar or fiscal& (+ection &-, N6#)&
b# What is the reason for such proceure?
"9.#
SUGGESTED ANSWER)
b# 'he reason for this proceure is to ensure
the timeliness of collection to meet the
bugetary nees of the government&
Li(ewise% it is esigne to ease the buren on
the taxpayer by proviing it with an
installment payment scheme% rather than
reCuiring the payment of the tax on a lump-
sum basis after the en of the year&
A+TERNATI1E ANSWER)
b# 'he reason for the Cuarterly filing of tax
returns is to allow partial collection of the tax
before the en of the taxable year an also to
improve the liCuiity of government
IT5) Personal Income: Two
#m$loyment (%&&1) $n the year 9111% ? wor(e part time as a
waitress in a restaurant in ;ega ;all from
<!11 a&m& to 0!11 p&m& an then as a cashier
in a 90-hour convenience store in her
neighborhoo& 'he total income of ? for the
year from the two employers oes not excee
her total personal an aitional exemptions
for the year 9111& Was she reCuire to file an
income tax return last :pril? 3xplain your
answer& "-.#
SUGGESTED ANSWER)
6es& :n iniviual eriving compensation
concurrently from two or more employers at
any time uring the taxable year shall file an
income tax return "Sec& -4":#"9#"b#% 7$=C&#
A+TERNATI1E ANSWER)
$t epens& :n iniviual with pure
compensation income is not reCuire to file an
income tax returns when she meets the
following conitionsB "4# the total gross
compensation income oes not excee
*hpE1%111&11 an
"9# the income tax has been correctly withhel%
meaning
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the tax withhel is eCual to the tax
ue& (+ection , l(A@(%)(b), N6#).
'here is no mention in the problem of the
amount of personal an aitional personal
exemption to Cuantify how much is that
compensation income that i not excee the
personal an aitional personal exemptions&
'here is no% mention% either% of whether or not
the employers withhel taxes an that the
amount withhel is eCual to the tax ue&
Whether or not she will be reCuire to file an
income tax return last :pril 4- on the 9111
income will epen on her compliance with
the reCuirements of the law&
IT5) Personal Income) ?SIS
Pension (%&&&) ;r& Javier is a non-resient senior citi)en& >e
receives a monthly pension from the /S$S
which he eposits with the *7@-;a(ati
@ranch& $s he exempt from income tax an
therefore not reCuire to file an income tax
return? "-.#
SUGGESTED ANSWER)
;r& Javier is exempt from income tax on his
monthly /S$S pension (+ec. 5%(3)(-)(f), N6#
of $))&) but not on the interest income that
might accrue on the pensions eposite with
*7@ which are sub2ect to final withholing tax&
ConseCuently% since ;r& JavierAs sole taxable
income woul have been sub2ecte to a final
withholing tax% he is not reCuire anymore to
file an income tax return& (+ec. ,$ (A) (%) (c).
6bid@.
IT5) Personal Income) ;arrie
Ini!iual (%&&') =:; got marrie to L$S: last January 911,& On
7ovember ,1% 911,% L$S: gave birth to twins&
Unfortunately% however% L$S: ie in the
course of her elivery& +ue to complications%
one of the twins also ie on +ecember 4-%
911,&
$n preparing his $ncome 'ax =eturn "$'=# for
the year 911,% what shoul =:; inicate in
the $'= as his civil status! "a# singleB "b#
marrieB "c# >ea of the familyB "# wiowerB
"e# none of the above? Why? =eason& "-.#
SUGGESTED ANSWER)
=:; shoul inicate ""b# marrie" as his civil
status in preparing his $ncome 'ax =eturn for
the year 911,& 'he eath of his wife uring
the year will not change his status because
shoul the spouse ie uring the taxable
year% the taxpayer may still claim the same
exemptions (that of being married) as if the
spouse ie at the close of such year
(+ection 5,;1, N6#).
IT5) Tax$ayer) +iabilities) Falsi(ie
Tax 5eturn (%&&,) +anilo% who is engage in the traing
business% entruste to his accountant the
preparation of his income tax return an the
payment of the tax ue& 'he accountant file
a falsifie tax return by unereclaring the
sales an overstating the expense euctions
by +anilo& $s +anilo liable for the eficiency
tax an the penalties thereon? What is the
liability% if any% of the accountant? +iscuss&
"-.#
SUGGESTED ANSWER)
+anilo is liable for the eficiency tax as well
as for the eficiency interest& >e shoul not
be hel liable for the
frau penalty because the accountant acte
beyon the limits of his authority& 'here is no
showing in the problem that +anilo signe the
falsifie return or that it was prepare uner
his irection& DOn the other han the
accountant may be hel criminally liable for
violation of the 'ax Coe when he falsifie the
tax return by unereclaring the sale an
overstating the expense euctions& $f
+annyAs accountant is a Certifie *ublic
:ccountant% his certificate as a C*: shall
automatically be revo(e or cancelle upon
conviction&
Partners0i$: Income
Tax (199,) Five years ago ;arCue)% *eneyra% Jayme%
*osaas an ;anguiat% all lawyers% forme a
partnership which they name ;arCue) an
*eneyra Law Offices& 'he Commissioner of
$nternal =evenue thereafter issue #evenue
#egulation No. %.)5 implementing #A. &!)-
(nown as the Simplifie 7et $ncome 'axation
Scheme "S7$'S#& =evenue =egulation 7o& 9-G,
provies in part!
Sec" 6" ?eneral Pro(essional
Partners0i$& 8 'he general
professional partnership an the
partners are covere by =&:& I0GE&
'hus% in etermining profit of the
partnership% only the irect costs
mentione in sai law are to be
eucte from partnership income&
:lso% the expenses pai or $ncurre by
partners in their iniviual capacities
in the practice of their profession
which are not reimburse or pai by
the partnership but are not consiere
as irect costs are not euctible from
his gross income&
4# ;arCue) an *eneyra Law Offices file
a taxpayerAs suit alleging that =evenue
=egulation 7o& 9-G, violates the principle of
uniformity in taxation because general
professional partnerships are now sub2ect to
payment of income tax an that there is a
ifference in the tax treatment between
iniviuals engage in the practice of their
respective professions an partners in general
professional partnerships& $s this contention
correct? 3xplain&
SUGGESTED ANSWER)
4# 'he contention is not correct& /eneral
professional partnerships remain to be a non-
taxable entity& What is taxable are the
partners comprising the same an they are
obligate to report as income their share in
the income of the general professional
partnership uring the taxable year whether
istribute or not& 'he S7$'S treat
professionals as one class of taxpayer so that
they shall be treate ali(e irrespective of
whether they practice their profession alone or
in association with other professionals uner a
general professional partnership& What are
taxe ifferently are iniviuals an
corporations& :ll iniviuals similarly situate
are taxe ali(e uner the regulations%
therefore% the principle of uniformity in
taxation is not violate& On the contrary% all
the reCuirements of a vali classification have
been complie with (Ton !s" Del 5osario et al
?"5 =o" 1&9%/9@ 1ctobers@ 199')"
9# $s =evenue =egulation 7o& 9-G, now
consiere as having aopte a gross income
metho instea of retaining the net income
taxation scheme? 3xplain&
SUGGESTED ANSWER)
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21 of 73
9# 7o& =evenue =egulation 7o& 9-G,
implementing =: 7o& I0GE have inee
significantly reuce the items of euction
by limiting it to irect costs an expenses or
the 01. of gross receipts maximum
euction in cases where the irect costs are
ifficult to etermine& 'he allowance of
limite euctions however% is still in
consonance with the net income taxation
scheme rather than the gross income metho&
While it is true that not all the expenses of
earning the income might be allowe% this can
well be 2ustifie by the fact that euctions
are not matters of right but are matters of
legislative grace&
Personal) Income Tax: =onF
5esient Alien (%&&&) ;r& Corte) is a non-resient alien base in
>ong Qong& +uring the calenar year 4GGG%
he came to the *hilippines several times an
staye in the country for an aggregate
perio of more than 4<1 ays& >ow will ;r&
Corte) be taxe on his income erive from
sources within the *hilippines an from
abroa? "-.#
SUGGESTED ANSWER)
;r& Corte) being a non-resient alien
iniviual who has staye for an aggregate
perio of more than 4<1 ays uring the
calenar year 4GGG% shall for that taxable
year be eeme to be a non-resient alien
oing business in the *hilippines&
Consiering the above% ;r& Corte) shall be
sub2ect to an income tax in the same manner
as an iniviual citi)en an a resient alien
iniviual% on taxable income receive from all
sources within the *hilippines& A+ec. %, (A) ($),
N6# of $))&@ 'hus% he is allowe to avail of
the itemi)e euctions incluing the personal
an aitional exemptions but sub2ect to the
rule on reciprocity on the personal
exemptions& (+ec. 5! (A) to (() and (8) in
relation to +ec. %, (A) ($), 6bid, +ec. 5, (B),
6bid.@
NCT4: 6t is suggested that full credit
should be given if the examineeDs answer
only cover the first two paragraphs.
Personal) Income Tax: =onF
5esient *itiJen (1999) : Co&% a *hilippine corporation% has an
executive "*# who is a Filipino citi)en& : Co&
has a subsiiary in >ong Qong ">Q Co&# an
will assign * for an inefinite perio to wor(
full time for >Q Co& * will bring his family to
resie in >Q an will lease out his resience in
the *hilippines& 'he salary of * will be
shoulere -1. by : Co& while the other -1.
plus housing% cost of living an eucational
allowances of *As epenents will be
shoulere by >Q Co& : Co& will creit the
-1. of *As salary to *As *hilippine ban(
account& * will sign the contract of
employment in the *hilippines& * will also be
receiving rental income for the lease of his
*hilippine resience& :re these salaries%
allowances an rentals sub2ect to the
*hilippine income tax? "-.#
SUGGESTED ANSWER)
'he salaries an allowances receive by * are
not sub2ect to *hilippine income tax& *
Cualifies as a nonresient citi)en because he
leaves the *hilippines for employment
reCuiring him to be physically present abroa
most of the time uring the taxable year&
(+ection %%(4), N6#). : nonresient citi)en is
taxable only on income erive from
*hilippine sources& (+ection %5, N6#). 'he
salaries an
allowances receive from being employe
abroa are incomes from without because
these are compensation for services renere
outsie of the *hilippines& (+ection !%, N6#).
>owever% * is taxable on rental income for
the lease of his *hilippine resience because
this is an income erive from within% the
lease property being locate in the
*hilippines& (+ection !%, N6#).
Personal) Income Tax: TaxFFree
#xc0an7e (1998) 'hree brothers inherite in 4GG9 a parcel of
lan value for real estate tax purposes at
*,&1 million which they hel in co-ownership&
$n 4GG-% they transferre the property to a
newly organi)e corporation as their eCuity
which was place at the )onal value of *E&1
million& $n exchange for the property% the
three brothers thus each receive shares of
stoc( of the corporation with a total par value
of *9&1 million or% altogether% a total of *E&1
million& 7o business was one by the
Corporation% an the property remaine ile&
$n the early part of 4GGI% one of the brothers%
who was in ire nee of funs% sol his shares
to the two brothers for *9&1 million& $s the
transaction sub2ect to any internal revenue
tax "other than the ocumentary stamp tax#?
SUGGESTED ANSWER)
6es& 'he exchange in 4GG- is a tax-free
exchange so that the subseCuent sale of one
of the brothers of his shares to the other two
"9# brothers in 4GGI will be sub2ect to income
tax& 'his is so because the tax-free exchange
merely eferre the recognition of income on
the exchange transaction& 'he gain sub2ect to
income tax in the sale is measure by the
ifference between the selling price of the
shares "*9 ;illion# an the basis of the real
property in the hans of the transferor at the
time of exchange which is the fair mar(et
value of his share in the real property at the
time of inheritance "Section ,0"b#"9#% 7$=C#&
'he net gain from the sale of shares of stoc(
is sub2ect to the scheular capital gains tax of
41. for the first *411&111 an 91. for the
excess thereof "Section 9l"#% 7$=C#&
A+TERNATI1E ANSWER)
'he exchange effecte in 4GG- i not Cualify
as a tax-free exchange because there is no
showing that the three brothers gaine
control of the corporation by acCuiring at
least -4. of the voting rights& Since the
entire gain on the exchange was previously
sub2ecte to income tax% then% the sale will
also be taxable if a gain results therefrom& $n
the instant case% the sale will not be sub2ect
to any internal revenue tax other than the
ocumentary stamp tax% because the seller
i not reali)e any gain from the sale& 'he
gain is measure by the ifference between
the amount reali)e "selling price# an the
basis of the property& $ncientally% the basis to
him is his share in the value of the property
receive at the time of exchange% which is *9
;illion% an amount% 2ust eCual to the amount
reali)e from the sale&
Personal) Income Tax) *ontract
o( +ease (199,) ;r& +omingo owns a vacant parcel of lan& >e
leases the lan to ;r& 3nriCue) for ten years
at a rental of *49%111&11 per year& 'he
conition is that ;r& 3nriCue)
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22 of 73
will erect a builing on the lan which will
become the property of ;r& +omingo at the
en of the lease without compensation or
reimbursement whatsoever for the value of
the builing&
;r& 3nriCue) erects the builing& Upon
completion the builing ha a fair mar(et
value of *4 ;illion& :t the en of the lease
the builing is worth only *G11&111&11 ue to
epreciation&
Will ;r& +omingo have income when the
lease expires an becomes the owner of the
builing with a fair mar(et value of
*G11&111&11? >ow much income must he
report on the builing? 3xplain&
SUGGESTED ANSWER)
When a builing is erecte by a lessee in the
lease premises in pursuance of an
agreement with the lessor that the builing
becomes the property of the lessor at the en
of the lease% the lessor has the option to
report income as follows! 4# 'he lessor may
report as income the mar(et value of
the builing at the time when such builing is
completeB or 9# 'he lessor may sprea over
the life of the lease the
estimate epreciate value of such builing at
the termination of the lease an report as income
for each year of the lease an aliCuot part thereof
"Sec& 0G% == 7o& 9#&
Uner the first option% the lessor will have no
income when the lease expires an becomes
the owner of the builing& 'he secon option
will give rise to an income uring the year of
lease expiration of *G1&111&11 or 4L41 of the
epreciate value of the builing&
'he availment of the first option will reCuire
;r& +omingo to report an income of
*4&111%111&11 uring the year when the
builing was complete& : total of
*G11&111&11 income will be reporte uner
the secon option but will be sprea over the
life of the lease or *G1&111&11 per year&
A+TERNATI1E ANSWER)
;r& +omingo will reali)e an income when the
lease expires an becomes the owner of the
builing with a fair mar(et value of
*G11&111&11 because the conition for the
lease is the transfer of the builing at the
expiration of the lease& 'he income to be
reali)e by ;r& +omingo at the time of the
expiration will consist of the value of the
builing which is *G11&111&11 an any rental
income that has accrue as of sai ate&
Personal) Income Tax) ;arrie
Ini!iual (1998) ;ar an Joy got marrie in 4GG1& : wee(
before their marriage& Joy receive% by way of
onation% a conominium unit worth
*I-1&111&11 from her parents& :fter marriage%
some renovations were mae at a cost of
*4-1&111&11& 'he spouses were both
employe in 4GG4 by the same company& On
,1 +ecember 4GG9% their first chil was born%
an a secon chil was born on 1I 7ovember
4GG,& $n 4GG0% they sol the conominium unit
an bought a new unit& Uner the foregoing
facts% what
were the events in the life of the spouses
that ha income tax inciences?
SUGGESTED ANSWER)
'he events in the life of spouses& ;ar an Joy%
which have income tax inciences are the
following! 4# 'heir marriage in 4GG1 Cualifies
them to claim
personal exemption for marrie iniviualsB
9# 'heir employment in 4GG4 by the same
company will ma(e them liable to the income tax impose
on gross compensation incomeB ,# @irth of their
first chil in +ecember 4GG9 woul
give rise to an aitional exemption of *-%111
for taxable year 4GG9B 0# @irth of their secon
chil in 7ovember 4GG, woul
li(ewise entitle them to claim aitional
exemption of *-%111 raising their aitional personal
exemptions to * 41%111 for taxable year
4GG,B an -# Sale of their conominium unit
in 4GG0 shall ma(e the spouses liable to the -. capital gains tax on
the gain presume to have been reali)e from the
sale&
Personal) Income Tax) 5etirin7 Alien
#m$loyee (%&&,) :n alien employee of the :sian +evelopment
@an( ":+@# who is retiring soon has offere to
sell his car to you which he importe tax-free
for his personal use& 'he privilege of
exemption from tax is grante to Cualifie
personal use uner the :+@ Charter which is
recogni)e by the tax authorities& $f you
ecie to purchase the car% is the sale sub2ect
to tax? 3xplain& "-.#
SUGGESTED ANSWER)
'he sales transaction is sub2ect to value
ae tax "5:'# uner Sec& 41I"@# of the
7$=C% although this provision is expressly
exclue from the coverage of the 911- bar
exam&
'he procees from the sale are sub2ect to
income tax& 'he car is consiere a capital
asset of the retiring alien employee because
he is not engage in the business of buying
an selling cars& >e therefore erive income%
which shoul be reporte in his income tax
return& "Sees& ,9 an ,G% 7$=C#
Personal) Income Taxation: =onF
5esient *itiJen (1998) Juan% a Filipino citi)en% has immigrate to the
Unite States where he is now a permanent
resient& >e owns certain income-earning
property in the *hilippines from which he
continues to erive substantial income& >e
also receives income from his employment in
the Unite States on which the US income tax
is pai& On which of the above income is the
taxable% if at all% in the *hilippines% an how%
in general terms% woul such income or
incomes be taxe?
SUGGESTED ANSWER)
Juan% shall be taxe on both his income from
the *hilippines an on his $ncome from the
Unite States because his being a citi)en
ma(es him taxable on all $ncome wherever
erive& For the income he erives from his
property in the *hilippines% Juan shall be taxe
on his net income uner the Sim$li(ie =et
Income Taxation Sc0eme "S7$'S# whereby
he shall be consiere as a self-employe
iniviual& >is $ncome as employee in the
Unite States% on the other han% shall be
taxe in
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2* of 73
accorance with the scheular grauate
rates of 4.% 9. an ,.& base on the
a2uste gross income erive by non-
resient citi)ens from all sources without the
*hilippines uring each taxable year&
Taxable Income: Ille7al
Income (199, Bar) ;r& La2o2o is a big-time swinler& $n one year
he was able to earn *4 ;illion from his
swinling activities& When the Commissioner
of $nternal =evenue iscovere his income
from swinling% the Commissioner assesse
him a eficiency income tax for such income&
'he lawyer of ;r& La2o2o proteste the
assessment on the following grouns! 4# 'he
income tax applies only to legal income% not
to
illegal incomeB 9# ;r& La2o2oAs receipts from
his swinling i not
constitute income because he was uner
obligation to return the amount he ha swinle% hence%
his receipt from swinling was similar to a loan%
which is not income% because for every peso borrowe
he has a corresponing liability to pay one
pesoB an ,# $f he has to pay the eficiency
income tax assess ment% there will be harly anything left to return
to the victims of the swinling& >ow will you rule
on each of the three grouns for the protest?
3xplain&
SUGGESTED ANSWERS)
4# 'he contention that the income tax
applies to legal income an not to illegal
income is not correct& Section 9<"a# of the
'ax Coe inclues within the purview of gross
income all $ncome from whatever source
erive& >ence% the illegality of the income
will not preclue the imposition of the income
tax thereon&
9# 'he contention that the receipts from his
swinling i not constitute income because
of his obligation to return the amount
swinle is li(ewise not correct& When a
taxpayer acCuires earnings% lawfully or
unlawfully% without the consensual
recognition% express or implie% of an
obligation to repay an without restriction as
to their isposition% he has receive taxable
income% even though it may still be claime
that he is not entitle to retain the money%
an even though he may still be a2uge to
restore its eCuivalent (Games !s" 6"S"@266 6"S"
%12@ 1961)" 'o treat the embe))le funs not
as taxable income woul perpetuate in2ustice
by relieving embe))lers of the uty of paying
income taxes on the money they enrich
themselves with through embe))lement%
while honest people pay their taxes on every
conceivable type of income& ((ames vs. E.+.)
,# 'he eficiency income tax assessment is a
irect tax impose on the owner which is an
excise on the privilege to earn an income& $t
will not necessarily be pai out of the same
income that were sub2ecte to the tax& ;r&
La2o2oAs liability to pay the tax is base on his
having reali)e a taxable income from his
swinling activities an will not affect his
obligation to ma(e restitution& *ayment of the
tax is a civil obligation impose by law while
restitution is a civil liability arising from a
crime&
Taxable or =onFTaxable) Income
an ?ains (%&&,)
3xplain briefly whether the following items
are taxable or non-taxable! "-.# a# $ncome
from G6#T#=?B
SUGGESTED ANSWER)
'axable& /ross income inclues "all income erive
from whatever source" (+ec. 5%AA@, N6#), which
was interprete as all income not expressly
exclue or exempte from the class of taxable
income% irrespective of the voluntary or involuntary
action of the taxpayer in proucing the income&
'hus% the income may procee from a legal or
illegal source such as from 2ueteng& Unlawful gains%
gambling winnings% etc& are sub2ect to income tax&
'he tax coe stans as an inifferent neutral party
on the matter of where the income comes from& (*ommissioner o( Internal 5e!enue !"
;annin7@ ?"5" =o" +F%/29/@ Au7ust 6@ 198,)
b# /ain arising from #>P51P5IATI1= 1F
P51P#5TIB
SUGGESTED ANSWER)
'axable& Sale exchange or other isposition of
property to the government of real property is
taxable& $t inclues ta(ing by the government
through conemnation proceeings& (?onJales
!" *ourt o( Tax A$$eals@ ?"5" =o" +F1',2%@
;ay %6@ 196,)
c# TA>#S pai an subseCuently
refuneB
SUGGESTED ANSWER)
'axable only if the taxes were pai an
claime as euction an which are
subseCuently refune or creite& $t shall be
inclue as part of gross income in the year of
the receipt to the extent of the income tax
benefit of sai euction& (+ec. 5!A@A$@,
N6#) 7ot taxable if the taxes refune were
not originally claime as euctions&
# =ecovery of BAD D#BTS previously
charge offB
SUGGESTED ANSWER)
'axable uner the TA> B#=#FIT 56+#&
=ecovery of ba ebts previously allowe as
euction in the preceing years shall be
inclue as part of the gross income in the
year of recovery to the extent of the income
tax benefit of sai euction& (+ec. 5!A4@A$@,
N6#) 'his is sometimes referre as the
5#*APT65# 56+#S&
e# /ain on the sale of a car use for personal
purposes&
SUGGESTED ANSWER)
'axable& Since the car is use for personal
purposes% it is consiere as a capital asset
hence the gain is consiere income& (+ec.
5%AA@A5@ and +ec. 5)AA@A$@, N6#)
Ait00olin7 Tax: =onF
5esient Alien (%&&1) $s a non-resient alien who is not engage in
trae or business or in the exercise of
profession in the *hilippines but who erive
rental income from the *hilippines reCuire to
file an income tax return on :pril of the year
following his receipt of sai income? $f not%
why not? 3xplain your answer& "-.#
SUGGESTED ANSWER)
7o& 'he income tax on all income erive
from *hilippine sources by a non-resient
alien who is not engage in trae or business
in the *hilippines is withhel by the lessee as
a Final Withholing 'ax& (+ection ,&(A), N6#).
'he government can not reCuire persons
outsie
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24 of 73
of its territorial 2urisiction to file a returnB for
this reason% the income tax on income
erive from within must be collecte
through the withholing tax system an thus
relieve the recipient of the income the uty to
file income tax returns& (+ection ,$, N6#).
Ait00olin7 Tax: 5etirement
Bene(it (%&&&) 'o start a business of his own% ;r& ;ario e
/u)man opte for an early retirement from a
private company after ten "41# years of
service& *ursuant to the companyAs Cualifie
an approve private retirement benefit plan%
he was pai his retirement benefit which was
sub2ecte to withholing tax& $s the employer
correct in withholing the tax? 3xplain& "9.#
SUGGESTED ANSWER)
"a# $t epens& :n employee retiring uner a
companyAs Cualifie an private retirement
plan can only be exempt from income tax on
his retirement benefits if the following
reCuisites are met!
"4# that the retiring employee must have
been in service of the same employer for at
least ten "41# yearsB "9# that he is not less than -1 years of
age at the time of retirementB an
",# the benefit is availe
of only once&
$n the instant case% there is no mention
whether the employee has li(ewise complie
with reCuisites number "9# an
",#&
Ait00olin7 Tax: 5etirement
Bene(it (%&&&) Uner what conitions are retirement
benefits receive by officials an employees
of private firms exclue from gross income
an exempt from taxation? ",.#
SUGGESTED ANSWER)
'he conitions to be met in orer that
retirement benefits receive by officials an
employees of private firms are exclue from
gross income an exempt from taxation are
as follows!
9& Uner =epublic :ct 7o& 0G4I "those
receive uner a reasonable private benefit
plan#!
a& the retiring official or employee
must have been in service of the same
employer for at least ten
"41#
yearsB b& that he is not less than fifty "-1#
years of age at the time of retirementB
an c& that the benefit is availe
of only once&
,& Uner =epublic :ct 7o& IE04 "those
receive from employers without any
retirement plan#! 'hose receive uner existing collective
bargaining agreement an other
agreements are exemptB an
$n the absence of retirement plan or
agreement proviing for retirement
benefits the benefits are exclue from
gross income an exempt from income tax
if!
i& retiring employee must
have serve at least five"-# yearsB
an ii& that he is not less than
sixty "E1# years of age but not
more than sixty five "E-#&
Ait00olin7 Tax:
5oyalty (%&&%)
'he ;Q@-*hils& is a @O$-registere omestic
corporation license by the ;Q@ of the Unite
Qingom to istribute% support an use in the
*hilippines its computer software systems%
incluing basic an relate materials for
ban(s& 'he ;Q@-*hils& provies consultancy
an technical services inciental thereto by
entering into licensing agreements with ban(s&
Uner such agreements% the ;Q@-*hils& will
not acCuire any proprietary rights in the
license systems& 'he ;Q@-*hils& pays royalty
to the ;Q@-UQ% net of 4-. withholing tax
prescribe by the =*-UQ 'ax 'reaty&
$s the income of the ;Q@-*hils& uner the
licensing agreement with ban(s consiere
royalty sub2ect to 91. final withholing tax?
Why? $f not% what (in of tax will its income
be sub2ect to? 3xplain& "-.#
SUGGESTED ANSWER)
6es& 'he income of ;Q@-*hils& uner the
licensing agreement with ban(s shall be
consiere as royalty sub2ect to the 91. final
withholing tax& 'he term royalty is broa
enough to inclue technical avice% assistance
or services renere in connection with
technical management or aministration of
any scientific% inustrial or commercial
unerta(ing% venture% pro2ect or scheme& "Sec&
09"0#"f#% 7$=C#& :ccoringly% the consultancy
an technical services renere by ;Q@-*hils%
which are inciental to the istribution% support
an use of the computer systems of ;Q@-UQ
are taxable as royalty&
Ait00olin7 Tax)
*o!era7e (%&&') Citing Section 41% :rticle 5$$$ of the 4G<I
Constitution which provies that salaries of
2uges shall be fixe by law an that uring
their continuance in office their salary shall
not be ecrease% a 2uge of ;; =egional
'rial Court Cuestione the euction of
withholing taxes from his salary since it
results into a net euction of his pay& $s the
contention of the 2uge correct? =eason
briefly& "-.#
SUGGESTED ANSWER)
7o& 'he contention is incorrect& 'he salaries
of 2uges are not tax-exempt an their
taxability is not contrary to the provisions of
Section 41% :rticle 5$$$ of the Constitution on
the non-iminution of the salaries of members
of the 2uiciary uring their continuance in
office& 'he clear intent of the Constitutional
Commission that frame the Constitution is to
sub2ect their salaries to tax as in the case of
all taxpayers& >ence% the euction of
withholing taxes% being a manner of
collecting the income tax on their salary% is
not a iminution contemplate by the
funamental law& (=ita(an et" al" !" *I5@
1,% S*5A %/' C19/8O#&
Ait00olin7 Tax) Domestic *or$oration)
*as0 Di!iens(%&&1)
What o you thin( is the reason why cash
iviens% when receive by a resient citi)en
or alien from a omestic corporation% are
taxe only at the final tax of 41. an not at
the progressive tax rate scheule uner
Section 90":# of the 'ax Coe? 3xplain your
answer& "-.#
SUGGESTED ANSWER)
'he reason for imposing final withholing tax
rather than the progressive tax scheule on
cash iviens receive by
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2. of 73
a resient citi)en or alien from a omestic
corporation% is to ensure the collection of
income tax on sai income& $f we sub2ect the
ivien to the progressive tax rate% which
can only be one through the filing of income
tax returns% there is no assurance that the
taxpayer will eclare the income% especially
when there are other items of gross income
earne uring the year& $t woul be extremely
ifficult for the @$= to monitor compliance
consiering the huge number of stoc(holers&
@y shifting the responsibility to remit the tax
to the corporation% it is very easy to chec(
compliance because there are fewer
withholing agents compare to the number
of income recipients&
Li(ewise% the imposition of a final withholing
tax will ma(e the tax available to the
government at an earlier time& Finally% the
final withholing tax will be a sure revenue to
the government unli(e when the ivien is
treate as a returnable income where the
recipient thereof who is in a tax loss position
is given the chance to offset such loss against
ivien income thereby epriving the
government of the tax on sai ivien
income& N=ote: 6t is recommended that any
of the foregoing answers can be given full
credit because the 7uestion involves a policy
issue which can only be found in the
deliberations of ongress&O
A+TERNATI1E ANSWER)
'he reason why cash iviens receive by a
resient citi)en or alien from a omestic
corporation are sub2ecte to the final
withholing tax of 41. an not at the
progressive rate tax scheule is to lessen the
impact of a secon layer of tax on the same
income&
Ait00olin7 Tax) Income subKect
t0ereto (%&&1) What is meant by income sub2ect to "final
tax"? /ive at least two examples of income
of resient iniviuals that is sub2ect to the
final tax& ",.#
SUGGESTED ANSWER)
$ncome sub2ect to final tax refers to an
income wherein the tax ue is fully collecte
through the withholing tax system& Uner
this proceure% the payor of the income
withhols the tax an remits it to the
government as a final settlement of the
income tax ue on sai income& 'he recipient
is no longer reCuire to inclue the item of
income sub2ecte to "final tax" as part of his
gross income in his income tax returns&
3xamples of income sub2ect to final tax are
ivien income% interest from ban( eposits%
royalties% etc&
Ait00olin7 Tax) =onF
5esient Alien (199') Four Catholic parishes hire the services of
Fran( @inatra% a foreign non-resient
entertainer% to perform for four "0# nights at
the Fol( :rts 'heater& @inatra was pai
*911&111&11 a night& 'he parishes earne
*4%111%111&11 which they use for the
support of the orphans in the city& Who are
liable to pay taxes?
SUGGESTED ANSWER)
'he following are liable to pay income
taxes! "a# 'he four catholic parishes because the
income receive by them% not being income
earne "as such" in the performance of their
religious functions an uties% is taxable
income uner the last paragraph of Sec& 9E% in
relation to Sec& 9E"e# of the 'ax Coe& $n
4#
$t epens& $f the pri)e is consiere as winnings
erive from sources within the *hilippines% it is
sub2ect to withholing of final tax "Sec& 90N@O in
relation to Sec& -IN:O% 7$=C#& $f erive from
sources without the *hilippines% it is not sub2ect to
withholing of final tax because the *hilippine tax
law an regulations coul not reach out to foreign
2urisictions&
9#
'he tax shall be withhel by the =eaerAs +igest or
local agent who has control over the payment of the
pri)e&
,#
:ny person reCuire to withhol or who willfully
fails to withhol% shall% in aition to the other
penalties provie uner the Coe% be liable upon
conviction to a penalty eCual to the total amount of
tax not withhel "Sec& 9-4% 7$=C#& $n case of failure
to withhol the tax or in
the
case of uner
withholing% the eficiency tax shall be collecte
from the payorLwithholing agent "4st par&& Sec&
9&-IN:O% =&=& 7o& 9-G<#&
promoting an operating the @inatra
Show% they engage in an activity
conucte for profit& "$bi&#
"b# 'he income of Fran( @inatra% a non-
resient alien uner our law is taxable at the
rate of ,1.% final withholing tax base on
the gross income from the show& ;r& @inatra
is not engage in any trae or business in the
*hilippines&
Ait00olin7 Tax) =onF5esient
*or$oration (199') @ates :vertising Company is a non-resient
corporation uly organi)e an existing uner
the laws of Singapore& $t is not oing business
an has no office in the *hilippines& *ilipinas
/arment $ncorporate% a omestic corporation%
retaine the services of @ates to o all the
avertising of its proucts abroa& For sai
services% @atesA fees are pai through outwar
remittances& :re the fees receive by @ates
sub2ect to any withholing tax?
S6??#ST#D A=SA#5:
'he fees pai to @ates :vertising Co&% a non-
resient foreign corporation are not sub2ect to
withholing tax since they are not sub2ect to
*hilippine tax& 'hey are exempt because they
o not constitute income from *hilippine
sources% the same being compensation for
labor or personal services performe outsie
the *hilippines "Sec& ,EDc# ",# an Sec& 9-"b#
"l#% 'ax Coe#&
Ait00olin7 Tax) 5eaerLs
Di7est Awar (199/) $s the pri)e of one million pesos aware by
the =eaerAs +igest sub2ect to withholing of
final tax? Who is responsible for withholing
the tax? What are the liabilities for failure to
withhol such tax? N-.O
SUGGESTED ANSWER)
Any !erson re6"ired "nder the Ta/ Code or by r"les
and re."lations to withhold ta/es at the time or
times re6"ired by law or r"les and re."lations shall#
in addition to other !enalties !ro$ided by law# "!on
on$ition be !"nished by a fine of not less than
Ten tho"sand !esos 7%h! 83.3OO9 and s"ffer
im!risonment of not less than one 789
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26 of 73
year but not more than ten "41# years
"4st par&% Sec& 9--% 7$=C#&
*1;;#=T: $t is suggeste that any of the
following answers to the Cuestion% "What are the
liabilities for failure to withhol such a tax?" be
given full creit! 4# 'he payor shall be liable for
the payment of the tax which
was not withhel& 9# 'he payerLwithholing agent
shall be liable to both civil
an criminal penalties impose by the 'ax
Coe&
Ait00olin7 Tax) Time De$osit Interest)
?SIS Pension (199')
;aribel Santos% a retire public school
teacher% relies on her pension from the /S$S
an the $nterest $ncome from a time eposit
of *-11&111&11 with :@C @an(& $s ;iss Santos
liable to pay any tax on her $ncome?
SUGGESTED ANSWER)
;aribel Santos is exempt from tax on the
pension from the /S$S (+ec. %/(b((&)(<), Tax
ode). >owever% as regars her time eposit%
the interest she receives thereon is sub2ect to
91. final withholing tax& (+ec. %$(a)(c), Tax
ode).
DEDUCTIONS, EXEMPTIONS,
EXC+USIONS - INC+USIONS
Deuction: Facilitation Fees or
-.ic.bac.- (199/) ;C /arcia% a contractor who won the bi for
the construction of a public highway% claims
as expenses% facilitation fees which accoring
to him is stanar operating proceure in
transactions with the government& :re these
expenses allowable as euction from gross
income? N-.O
SUGGESTED ANSWER)
7o& 'he allege facilitation fees which he
claims as stanar operating proceure in
transactions with the government comes in
the form of bribes or "(ic(bac(" which are not
allowe as euctions from gross income
(+ection 5!(A)(l)(c), N6#)&
Deuctions: 1rinary Business
#x$enses (%&&') O?6 is the presient an chief executive
officer of :++ Computers% $nc& When O?6 was
as(e to 2oin the government service as
irector of a bureau uner the +epartment of
'rae an $nustry% he too( a leave of
absence from :++& @elieving that its business
outloo(% goowill an opportunities improve
with O?6 in the government% :++ propose to
obtain a policy of insurance on his life& On
ethical grouns% O?6 ob2ecte to the
insurance purchase but :++ purchase the
policy anyway& $ts annual premium amounte
to *411%111& $s sai premium euctible by
:++ Computers% $nc&? =eason& "-.#
SUGGESTED ANSWER)
7o& 'he premium is not euctible because it
is not an orinary business expense& 'he term
"orinary" is use in the income tax law in its
common significance an it has the
connotation of being normal% usual or
customary (De$uty !" Du Pont@ 2&/ 6S '//
C19'&D)& *aying premiums for the insurance of
a person not connecte to the company is not
normal% usual or customary&
:nother reason for its non-euctibility is the
fact that it can be consiere as an illegal
compensation mae to a government
employee& 'his is so because if the insure%
his estate or heirs were mae as the
beneficiary (because of the re7uirement of
insurable interest)% the payment of premium
will constitute bribes which are not allowe
as euction from gross income (+ection
5!AA@Al@Ac@, N6#).
On the other han% if the company was mae
the beneficiary% whether irectly or inirectly%
the premium is not allowe as a euction
from gross income (+ection 5-AAF$!@, N6#).
Deuctions: Amount (or
Bribe (%&&1) $n orer to facilitate the processing of its
application for a license from a government
office% Corporation : foun it necessary to
pay the amount of *hp 411%111 as a bribe to
the approving official& $s the *hp 411%111
euctible from the gross income of
Corporation :? On the other han% is the *hp
411%111 taxable income of the approving
official? 3xplain your answers& "-.#
SUGGESTED ANSWER)
Since the amount of *hpl11&111 constitutes a
bribe% it is not allowe as a euction from gross
income of Corporation :% (+ection 5!(A)(l)(c),
N6#)& >owever% to the recipient government
official% the same constitutes a taxable income& :ll
income from legal or illegal sources are taxable
absent any clear provision of law exempting the
same& 'his is the reason why gross income ha
been efine to inclue income from whatever
source erive& (+ection 5%(A), N6#). $llegally
acCuire income constitutes reali)e income uner
the claim of right octrine (5ut.in
!" 6S@ 2'2 6S 12&)"
Deuctions: *a$ital +osses)
Pro0ibitions (%&&2) What is the rationale for the rule prohibiting
the euction of capital losses from orinary
gains? 3xplain&
SUGGESTED ANSWER)
$t is to insure that only costs or expenses
incurre in earning the income shall be
euctible for income tax purposes
consonant with the reCuirement of the law
that only necessary expenses are allowe as
euctions from gross income& 'he term
"N44++A#G 4H94N+4+" presupposes that in
orer to be allowe as euction% the
expense must be business connecte% which
is not the case insofar as capital losses are
concerne& 'his is also the reason why all
non-business connecte expenses li(e
personal% living an family expenses% are not
allowe as euction from gross income
(+ection 5-(A)($) of the $))& Tax ode).
'he prohibition of euction of capital losses
from orinary gains is esigne to forestall
the shifting of euctions from an area
sub2ect to lower taxes to an area sub2ect to
higher taxes% thereby unnecessarily resulting
in lea(age of tax revenues& Capital gains are
generally taxe at a lower rate to prevent%
among others% the bunching of income in one
taxable year which is a liberality in the law
begotten from motives of public policy (#ule
on =olding 9eriod)& $t stans to reason
therefore% that if the transaction results in
loss% the same shoul be allowe only from
an to the extent of capital gains an not to
be eucte from
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22 of 73
orinary gains which are sub2ect to a higher
rate of income tax& (hirelstein, <ederal
6ncome Taxation, $)&& 4d.)
Deuctions: Deuctible Items (rom
?ross Income (1999) 3xplain if the following items are euctible
from gross income for income tax purposes&
+isregar who is the person claiming the
expense& "-.# 4# $nterest on loans use to
acCuire capital eCuipment
or machinery& 9#
+epreciation of
goowill&
SUGGESTED ANSWER)
4# Interest on loans use to acEuire
ca$ital eEui$ment or mac0inery is a
euctible item from gross income& 'he law
gives the taxpayer the option to claim as a
euction or treat as capital expeniture
interest incurre to acCuire property use in
trae% business or exercise of a profession&
(+ection 5!(3) (5), N6#).
9# De$reciation (or 7oowill is not allowe
as euction from gross income& While
intangibles maybe allowe to be epreciate
or amorti)e% it is only allowe to those
intangibles whose use in the business or trae
is efinitely limite in uration& "Basilan
#states@ Inc" !@ *I5@ %1 S*5A 18#& Such is
not the case with goowill&
A+TERNATI1E ANSWER)
+epreciation of goowill is allowe as a
euction from gross income if the goowill is
acCuire through capital outlay an is (nown
from experience to be of value to the
business for only a limite perio& (+ection
$'&, #evenue #egulations No. %)& $n such
case% the goowill is allowe to be amorti)e
over its useful life to allow the euction of
the current portion of the expense from gross
income% thereby paving the way for a proper
matching of costs against revenues which is
an essential feature of the income tax
system&
Deuctions: Income Tax: Donation:
5eal Pro$erty (%&&%) On +ecember 1E% 9114% L57 Corporation
onate a piece of vacant lot situate in
;analuyong City to an accreite an uly
registere non-stoc(% non-profit eucational
institution to be use by the latter in builing
a sports complex for stuents&
:& ;ay the onor claim in full as
euction from its gross income for the
taxable year 9114 the amount of the onate
lot eCuivalent to its fair mar(et valueL)onal
value at the time of the onation? 3xplain
your answer& "9.#
SUGGESTED ANSWER)
:& 7o& +onations anLor contributions
mae to Cualifie onee institutions
consisting of property other than money
shall be base on the acCuisition cost of
the property& 'he onor is not entitle to
claim as full euction the fair mar(et
valueL)onal value of the lot onate& "Sec&
,0">#% 7$=C#&
@& $n orer that onations to non-stoc(%
non-profit eucational institution may be
exempt from the onorAs gift tax% what
conitions must be met by the onee? ",.#
SUGGESTED ANSWER)
@& $n orer that onations to non-stoc(%
non-profit eucational institution may be
exempt from the onorAs gift tax% it is
reCuire that not more than ,1. of the
sai gifts shall be use by the onee-
institution for aministration purposes&
"Sec& 414":#",#% 7$=C#&
Deuctions: =onFDeuctible Items)
?ross Income (1999) 3xplain if the following items are euctible
from gross income for income tax purposes&
+isregar who is the person claiming the
euction& "-.#
4& =eserves for ba
ebts& 9& Worthless
securities
SUGGESTED ANSWER)
85#S#54# F15 BAD D#BTS are not allowe as
euction from gross income& @a ebts must be
charge off uring the taxable year to be allowe
as euction from gross income& 'he mere setting
up of reserves will not give rise to any euction&
"Section ,0"3#& 7'=C#&
2A15T<+#SS S#*65ITI#S% which are orinary
assets% are not allowe as euction from gross
income because the loss is not reali)e& >owever%
if these worthless securities are capital assets% the
owner is consiere to have incurre a capital loss
as of the last ay of the taxable year an%
therefore% euctible to the extent of capital gains&
(+ection 5!(B)(!), N6#). 'his euction% however%
is not allowe to a ban( or trust company& (+ection
5!(4)(%), N6#).
Deuctions: 5eEuisites) Deucibility
o( a +oss (199/) /ive the reCuisites for eucibility of a loss&
"-.4
SUGGESTED ANSWER)
'he reCuisites for eucibility of a loss are 4#
loss belongs to the taxpayerB 9# actually
sustaine an charge off uring the taxable
yearB ,# evience by a close an complete
transactionB 0# not compensate by
$nsurance or other forms of
inemnityB -# not claime as a euction for
estate tax purposes in case of iniviual
taxpayersB an E# if it is a casualty loss it is
evience by a eclaration of loss file within
0- ays with the @$=&
COMMENT)
'he Cuestion is vague& 'here are ifferent (ins of
losses recogni)e as euctible uner the 'ax
Coe& 'hese are losses% in general "Sec& ,0N+O"4#B
net operating loss carryover "Sec& ,0N+O",#B capital
losses "Sec& ,0N+O"0#B Losses from wash sales of
stoc(s or securities "Sec& ,0N+O"-# in relation to
Sec& ,<#B wagering losses "Sec& ,0N+O"E#B an
abanonment losses "Sec& ,0"+O"I#& Losses are
also euctible from the gross estate "Sec& <EN:O"l#
"e#% 7$=C#&
Consiering the time allotte for a five "-# point
Cuestion is only nine "G# minutes% the caniates
woul not be able to write own a complete
answer& $t is suggeste that any answer which
states the reCuisites for the eucibility of any of
the above losses be given full creit&
Deuctions) Income Tax: Allowable
Deuctions (%&&1) 'axpayers whose only income consists of
salaries an wages from their employers
have long been complaining
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24 of 73
that they are not allowe to euct any item
from their gross income for purposes of
computing their net taxable income& With the
passage of the Comprehensive 'ax =eform :ct
of 4GGI% is this complaint still vali? 3xplain
your answer& "-.#
SUGGESTED ANSWER)
7o more& /ross compensation income earners
are now allowe at least an item of euction
in the form of premium payments on health
anLor hospitali)ation insurance in an amount
not exceeing *9%011 per annum NSection
,0";#O& 'his euction is allowe if the
aggregate family income o not excee
*9-1&111 an by the spouse% in case of
marrie iniviual% who claims aitional
personal exemption for epenents&
Deuctions) 4anis0in7 Deuction)
Pur$ose (%&&6) 5anishing euction is availe of by
taxpayers to! Correct his accounting recors to reflect the
actual euctions mae
=euce his gross income
=euce his output value-ae tax liability
=euce his gross estate Choose the correct
answer& 3xplain& "-.#
SUGGESTED ANSWER)
"+# reuce his gross estate& 5anishing
euction or property previously taxe is one
of the items of euction allowe in
computing the net estate of a eceent
(+ection /-AA@A%@ and /-A3@A%@, N6#).
#xclusion H Inclusion) ?ross
5ecei$ts (%&&6) Congress enacts a law imposing a -. tax on
gross receipts of common carriers& 'he law
oes not efine the term "gross receipts&"
3xpress 'ransport% $nc&% a bus company plying
the ;anila-@aguio route% has time eposits
with :@C @an(& $n 911-% 3xpress 'ransport
earne *4 ;illion interest% after eucting the
91. final withholing tax from its time
eposits with the ban(& 'he @$= wants to
collect a -. gross receipts tax on the interest
income of 3xpress 'ransport without
eucting the 91. final withholing tax& $s
the @$= correct? 3xplain& "-.#
A+TERNATI1E ANSWER)
6es& 'he term "/ross =eceipts" is broa enough to
inclue income constructively receive by the
taxpayer& 'he amount withhel is pai to the
government on its behalf% in satisfaction of
withholing taxes& 'he fact that it i not actually
receive the amount oes not alter the fact that it is
remitte in satisfaction of its tax obligations& Since
the income withhel is an income owne by 3xpress
'ransport% the same forms part of its gross receipts
(*I5 !" Soliban. *or$"@ ?"5" =o" 1'/191@ =o!ember
%,@ %&&2)"
A+TERNATI1E ANSWER)
7o& 'he term "gross receipts%" as applie to
the business of a common carrier consists of
revenues from carriage of goos% cargoes%
an passengers& $t oes not comprehen or
inclue interest income which is properly
escribe as "Other $ncome&"
(=1TA B#=#: This 7uestion pertains to a
percentage tax on "ross #eceipts which is
excluded from the 3ar coverage)
#xclusion !s" Deuction (rom ?ross
Income (%&&1)
+istinguish "3xclusion from /ross $ncome"
from "+euctions From /ross $ncome"& /ive
an example of each& "9.#
SUGGESTED ANSWER)
#>*+6SI1=S (rom 7ross income refer to a
flow of wealth to the taxpayer which are not
treate as part of gross income% for purposes
of computing the taxpayerPs taxable income%
ue to the following reasons! "4# $t is
exempte by the funamental lawB "9# $t is
exempte by statuteB an ",# $t oes not
come within the efinition of income& "Section
E4% == 7o& 9#& D#D6*TI1=S (rom 7ross
income% on the other han% are the amounts%
which the law allows to be eucte from
gross income in orer to arrive at net income&
3xclusions pertain to the computation of
gross income% while euctions pertain to the
computation of net income& 3xclusions are
something receive or earne by the
taxpayer which o not form part of gross
income while euctions are something spent
or pai in earning gross income&
3xample of an exclusion from gross income is
procees of life insurance receive by the
beneficiary upon the eath of the insure
which is not an income or 4,th month pay of
an employee not exceeing *,1&111 which is
an income not recogni)e for tax purposes&
3xample of a euction is business rental&
#xclusions H Inclusions: Bene(its on
Account o( InKury (199,)
;r& $nfante was hit by a waywar bus while on
his way to wor(& >e survive but ha to pay
*011&111&11 for his hospitali)ation& >e was
unable to wor( for six months which meant
that he i not receive his usual salary of *
41%111&11 a month or a total of *E1&111&11&
>e sue the bus company an was able to
obtain a final 2ugment awaring him
*011&111&11 as reimbursement for his
hospitali)ation% *E1&111 for the salaries he
faile to receive while hospitali)e%
*911%111&11 as moral amages for his pain
an suffering% an * 411%111&11 as exemplary
amages& >e was able to collect in full from
the 2ugment& >ow much income i he
reali)e when he collecte on the 2ugment?
3xplain&
SUGGESTED ANSWER)
7one& 'he *911&111 moral an exemplary
amages are compensation for in2uries
sustaine by ;r& $nfante& 'he *011&111&11
reimbursement for hospitali)ation expenses
an the *E1&111&11 for salaries he faile to
receive are Aamounts of any amages
receive whether by suit or agreement on
account of such in2uries&A Section 9<"b#"-# of
the 'ax Coe specifically exclue these
amounts from the gross income of the
iniviual in2ure& "Section 9<"b#% 7$=C an
Sec& E, =ev& =eg& 7o& 9#
A+TERNATI1E ANSWER)
'he income reali)e from the 2ugment is
only the recovery for lost salaries& 'his
constitutes taxable income because were it
not for the in2ury% he coul have receive it
from his employer as compensation income&
:ll the other amounts receive are either
compensation for in2uries or amages
receive on account of such in2uriesA
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29 of 73
which are exclusions from gross income
pursuant to Section 9<"b#"-# of the 'ax
Coe&
#xclusions H Inclusions: #xecuti!e
Bene(its (199,) ;r& :rian is an executive of a big business
corporation& :sie from his salary% his
employer provies him with the following
benefits! free use of a resiential house in an
exclusive subivision% free use of a limousine
an membership in a country club where he
can entertain customers of the corporation&
Which of these benefits% if any% must ;r&
:rian report as income? 3xplain&
SUGGESTED ANSWER)
;r& :rian must report the impute rental
value of the house an limousine as income&
$f the rental value excees the personal
nees of ;r& :rian because he is expecte
to provie accommoation in sai house for
company guests or the car is use partly for
business purpose% then ;r& :rian is entitle
only to a ratable rental value of the house
an limousine as exclusion from gross
income an only a reasonable amount shoul
be reporte as income& 'his is because the
free housing an use of the limousine are
given partly for the convenience an benefit
of the employer (*ollector !s" <enerson)"
A+TERNATI1E ANSWER)
=emuneration for services although not given
in the form of cash constitutes compensation
income& :ccoringly% the value for the use of
the resiential house is part of his
compensation income which he must report
for income tax purposes& >owever% if the
resiential house given to ;r& :rian for his
free use as an executive is also use for the
benefit of the corporationLemployer% such as
for entertaining customers of the corporation%
only -1. of the rental value or epreciation
"if the house is owne by the corporation#
shall form part of compensation income
"=:;O 4-<I#&
'he free use of a limousine an the
membership in a country club is not part of
;r& :rianAs compensation income because
they were given for the benefit of the
employer an are consiere to be necessary
incients for the proper performance of his
uties as an executive of the corporation&
'he membership fee in the country club nees
to be reporte as income& $t appears that the
membership of ;r& :rian to the country club
is primarily for the benefit an convenience of
the employer& 'his is to enable ;r& :rian to
entertain company guests (*ollector !s"
<enerson)"
#xclusions H Inclusions) Assets)
5esient Alien (%&&,) =alph +onal% an :merican citi)en% was a top
executive of a U&S& company in the *hilippines
until he retire in 4GGG& >e came to li(e the
*hilippines so much that following his
retirement% he ecie to spen the rest of
his life in the country& >e applie for an was
grante a permanent resient status the
following year& $n the spring of 9110% while
vacationing in Orlano% Floria% US:% he
suffere a heart attac( an ie& :t the time
of his eath% he left the following properties!
"a# ban( eposits with Citiban( ;a(ati an
Citiban( Orlano% FloriaB "b# a resthouse in
Orlano% FloriaB "c# a conominium unit in
;a(atiB "# shares of stoc( in the *hilippine
subsiiary of the U&S& Company where he
wor(eB "e# shares of stoc( in San ;iguel
Corp& an *LO'B "f# shares of stoc( in +isney
Worl in FloriaB "g# U&S& treasury bonsB an
"g# procees from a life insurance policy
issue by a U&S& corporation& Which of the
foregoing assets shall be inclue in the
taxable gross estate in the *hilippines?
3xplain& "-.#
SUGGESTED ANSWER)
:ll of the properties enumerate except "g#%
the procees from life insurance% are inclue
in the taxable gross estate in the *hilippines&
=alph +onal is consiere a resient alien
for tax purposes since he is an :merican
Citi)en an was a permanent resient of the
*hilippines at the time of his eath& 'he value
of the gross estate of a resient alien
eceent shall be etermine by incluing
the value at the time of his eath of all
property% real or personal% tangible or
intangible% wherever situate& "Sec& <-% 7$=C#
'he other item% "g# procees from a life
insurance policy% may also be inclue on the
assumption that it was =alph +onal who
too( out the insurance upon his own life%
payable upon his eath to his estate& "Sec&
<-N3O% 7$=C#
#xclusions H Inclusions) Bene(its on
Account o( Deat0 (1996)
?% an employee of :@C Corporation ie& :@C
Corporation gave ?Ps wiow an amount
eCuivalent to ?Ps salary for one year& $s the
amount consiere taxable income to the
wiow? Why?
SUGGESTED ANSWER)
7o& 'he amount receive by the wiow from
the eceentAs employer may either be a gift
or a separation benefit on account of eath&
@oth are exclusions from gross income
pursuant to provisions of Section 9<"b# of the
'ax Coe&
A+TERNATI1E ANSWER)
7o& Since the amount was given to the wiow
an not to the estate% it becomes obvious that
the amount is more of a gift& $n one U&S& tax
case "#state o( <ellstrom !s" *ommissioner@
%' T"*" 916#% it was hel that payments to the
wiow of the presient of a corporation of the
amount the presient woul have receive in
salary if he live out the year constitute a
gift an not an income&
'he controlling facts which woul lea to the
conclusion that the amount receive by the
wiow is not an income are as follows! I# the
gift was mae to the wiow rather than the
estate! <# there was no obligation for the
corporation to ma(e
further payments to the eceaseB G# the
wiow ha never wor(e for the corporationB
41# the corporation receive no economic
benefitB an 44# the ecease ha been fully
compensate for his
services "#state o( Syney *arter !s"
*ommissioner@ ',2 F" % 61 (%*ir"
1981#&
#xclusions H Inclusions) Bene(its on
Account o( InKury (%&&,)
J= was a passenger of an airline that crashe&
>e survive the accient but sustaine serious
physical in2uries which reCuire hospitali)ation
for , months& Following negotiations with the
airline an its insurer% an agreement
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was reache uner the terms of which J= was
pai the following amounts! *-11%111&11 for
his hospitali)ationB *9-1%111&11 as moral
amagesB an *,11%111&11 for loss of income
uring the perio of his treatment an
recuperation& $n aition% J= receive from his
employer the amount of *911%111&11
representing the cash eCuivalent of his earne
vacation an sic( leaves& Which% if any% of the
amounts he receive are sub2ect to income
tax? 3xplain& "-.#
SUGGESTED ANSWER)
:ll amounts receive from the airline
company are exclue from gross income&
Uner Sec& ,9"@#"0# of the 7$=C% amounts of
amages receive% whether by suit or
agreement% on account of personal in2uries or
sic(ness are exclue from gross income&
Since the amounts receive from the airline
company were receive as amages by
agreement on account of personal in2uries% all
shall be exclue from J=As gross income&
'he amount of *911%111&11% less the
eCuivalent of not more than 41 ays of
vacation leave% receive by J= from his
employer% is sub2ect to income tax uner Sec&
9&I<&4 "a#
"I# of =&=& 7o& 9-G<&
#xclusions H Inclusions) *om$ensation
(or $ersonal inKuries or sic.ness (%&&2)
?% while riving home from his office% was
seriously in2ure when his automobile was
bumpe from behin by a bus riven by a
rec(less river& :s a result% he ha to pay
*911%111&11 to his octor an *411% 111&11
to the hospital where he was confine for
treatment& >e file a suit against the bus
river an the bus company an was aware
an pai actual amages of *,11% 111&11 (for
his doctor and hospitaliIation bills),
*411%111&11 by way of moral amages% an
*-1%111&11 for what he ha to pay his
attorney for bringing his case to court& Which%
if any% of the foregoing awars are taxable
income to ? an which are not? 3xplain& "<.#
SUGGESTED ANSWER)
7othing is taxable& Uner the 'ax Coe% any
amount receive as compensation for
personal in2uries or sic(ness% plus the
amounts for any amages receive whether
by suit or agreement% on account of such
in2uries or sic(ness shall be exclue from
gross income& Since the entire amount of
*0-1% 111&11 receive are awar of amages
on account of the in2uries sustaineB all shall
be exclue from his gross income&
Obviously% these amages are consiere by
law as mere return of capital& "Section ,9"@#
"0#% 4GGI 'ax Coe#
#xclusions H Inclusions) Facilities or
Pri!ile7es) ;ilitary*am$ (199,)
Capt& Canuto is a member of the :rme Forces
of the *hilippines& :sie from his pay as
captain% the government gives him free
uniforms% free living Cuarters in whatever
military camp he is assigne% an free meals
insie the camp& :re these benefits income to
Capt& Canuto? 3xplain&
SUGGESTED ANSWER)
7o% the free uniforms% free living Cuarters an
the free meals insie the camp are not
income to Capt& Canute because these are
facilities or privileges furnishe by the
employer for the employerAs convenience
which are necessary incients to proper
performance of the military personnelAs
uties&
#xclusions H Inclusions) ?i(ts o!er an
abo!e t0e 5etirement Pay (199,)
;r& Kuiro) wor(e as chief accountant of a
hospital for forty-five years& When he retire
at E- he receive retirement pay eCuivalent
to two monthsA salary for every year of
service as provie in the hospital @$=
approve retirement plan& 'he @oar of
+irectors of the hospital felt that the hospital
shoul give Kuiro) more than what was
provie for in the hospitalAs retirement plan
in view of his loyalty an invaluable services
for forty-five yearsB hence% it resolve to pay
him a gratuity of *4 ;illion over an above his
retirement pay&
'he Commissioner of $nternal =evenue taxe
the *4 ;illion as part of the gross
compensation income of Kuiro) who
proteste that it was exclue from income
because
"a# it was a retirement pay% an "b# it was a
gift& 4# $s ;r& Kuiro) correct in claiming that the
aitional *4 ;illion was retirement pay an therefore
exclue from income? 3xplain&
9# $s ;r& Kuiro) correct in claiming that
the aitional *4 ;illion was gift an
therefore exclue from income? 3xplain&
SUGGESTED ANSWERS)
4# 7o& 'he aitional *4 million is not a
retirement pay but a part of the gross
compensation income of ;r& Kuiro)& 'his is
not a retirement benefit receive in
accorance with a reasonable private benefit
plan maintaine by the employer as it was not
pai out of the retirement plan& :ccoringly%
the amount receive in excess of the
retirement benefits that he is entitle to
receive uner the @$=-approve retirement
plan woul not Cualify as an exclusion from
gross income&
9# 7o& 'he amount receive was in
consieration of his loyalty an invaluable
services to the company which is clearly a
compensation income receive on account of
employment& Uner the employerAs
Amotivation test%A emphasis shoul be place
on the value of ;r& Kuiro) services to the
company as the compelling reason for giving
him the gratuity% hence it shoul constitute a
taxable income& 'he payment woul only
Cualify as a gift if there is nothing but Agoo
will% esteem an (innessA which motivate
the employer to give the gratuity& (Stonton
!s" 6"S"@ 1/6 F" Su$$" 292)" Such is not the
case in the herein problem&
A+TERNATI1E ANSWER)
6es& 'he 4 million is not compensation
income sub2ect to income tax but a gift from
his employer& 'here was no evience
presente to show that he was not fully
compensate for his 0- years of service& $f his
services contribute in a large measure to
the success of the hospital% it i not give rise
to a recoverable ebt& 'he *4 million is purely
a gratuity from the company& $t is a taxable
gift to the transferor& Uner the 'ax Coe%
gifts are exclue from gross income
therefore exempt from income tax& "Sec&
9<Db#",#% 7$=CB Piro!ano !s"
*ommissioner#
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*1 of 73
#xclusions H Inclusions) IT5) 12t0
mont0 $ay an e minimis
bene(its (%&&,) State with reasons the tax treatment of the
following in the preparation of annual income
tax returns! 4,th month pay an de minimis
benefitsB
SUGGESTED ANSWER)
'he 12t0 mont0 $ay not exceeing
*,1%111&11 shall not be reporte in the
income tax return because it is exclue
from gross income "+ec. 5%A3@A&@, Ae@, N6##
'he amount of the 4,th month pay in excess
of *,1%111&11 shall be reporte in the annual
income tax return&
De minimis bene(its which o not excee
the ceilings are exclue from gross income%
an not to be consiere for etermining the
*,1%111&11 ceiling hence not reportable in the
annual income tax return& (+ec. %.&/.$AA@A5@,
#.#. %.)/ as amended by +ec. %.55 A@ and
further amended by #.#. No. /.%''')
#xclusions H Inclusions) IT5) Di!iens
recei!e by a omestic cor$oration
(%&&,) State with reasons the tax treatment of the
tax returns! +iviens receive by a omestic
corporation from "i# another omestic
corporationB an "ii# a foreign corporationB
SUGGESTED ANSWER)
"i# +iviens receive by a omestic
corporation from a omestic corporation shall
not be sub2ect to tax "Sec& 9IN+ON0O% 7$=C#%
hence% exclue from the income tax return&
"ii# +iviens receive by a omestic
corporation from a foreign corporation form
part of the gross income an are accoringly
sub2ect to net income tax% hence inclue in
the annual $'= "Sec& 09N:ON9ONbO% 7$=C#%
hence% must be inclue in the income tax
return&
#xclusions H Inclusions) IT5) Income
realiJe (rom sale (%&&,)
State with reasons the tax treatment of the
tax returns! $ncome reali)e from sale of! "i#
capital assetsB an "ii# orinary assets&
SUGGESTED ANSWER)
"i# $ncome reali)e from sale of capital assets
is sub2ect to the final withholing tax at
source an therefore exclue from the
$ncome 'ax =eturn "Sec& 90NCO an N+O%
7$=C#B
"ii# $ncome reali)e from sale of orinary
assets is part of /ross $ncome% inclue in
the $ncome 'ax =eturn& "Sec& ,9N:ON,O% 7$=C#
#xclusions H Inclusions) IT5) Interest
on e$osits (%&&,) State with reasons the tax treatment of the
tax returns! $nterest on eposits with! "i# @*$
Family @an(B an "ii# a local offshore ban(ing
unit of a foreign ban(B
SUGGESTED ANSWER)
@oth items are exclue from the income tax
return! "i# $nterest income from any currency ban(
eposit is consiere passive income from
sources within the *hilippines an sub2ect to
final tax& Since it is sub2ect to
final tax it is not to be inclue in the annual
$'=& "Sec& 90N@ON4O% 7$=C# "u# Same as 7o& "2#&
#xclusions H Inclusions) IT5) Procees
o( li(e insurance (%&&,)
State with reasons the tax treatment of the
tax returns! *rocees of life insurance
receive by a chil as irrevocable beneficiaryB
SUGGESTED ANSWER)
7ot to be reporte in the annual income tax
returns because the procees of the life
insurance are exclue from gross income&
*rocees of Life insurance policies pai to the
heirs or beneficiaries upon the eath of the
insure is an exclusion from gross income&
(+ec.5%A3@Al@,N6#)
#xclusions H Inclusions) +i(e
Insurance Policy (%&&2) On ,1 June 9111% ? too( out a life insurance
policy on his own life in the amount of
*9%111%111&11& >e esignate his wife% 6% as
irrevocable beneficiary to *4%111%111&11 an
his son% H% to the balance of *4%111%111&11
but% in the latter esignation% reserving his
right to substitute him for another& On 14
September 911,% ? ie an his wife an son
went to the insurer to collect the procees of
?As life insurance policy& "<.#
"a# :re the procees of the insurance
sub2ect to income tax on the part of 6 an H
for their respective shares? 3xplain&
"b# :re the procees of the insurance to
form part of the gross estate of ?? 3xplain&
SUGGESTED ANSWERS)
"a# 7o& 'he law explicitly provies that
procees of life insurance policies pai to the
heirs or beneficiaries upon the eath of the
insure are exclue from gross income an
is exempt from taxation& 'he procees of life
insurance receive upon the eath of the
insure constitute a compensation for the loss
of life% hence a return of capital% which is
beyon the scope of income taxation& (+ection
5%(3)($) $))& Tax ode)
"b# Only the procees of *4%111%111&11 given
to the son% H% shall form part of the /ross
3state of ?& Uner the 'ax Coe% procees of
life insurance shall form part of the gross
estate of the eceent to the extent of the
amount receivable by the beneficiary
esignate in the policy of the insurance
except when it is expressly stipulate that the
esignation of the beneficiary is irrevocable&
:s state in the problem% only the esignation
of 6 is irrevocable while the insureLeceent
reserve the right to substitute H as
beneficiary for another person& :ccoringly%
the procees receive by 6 shall be exclue
while the procees receive by H shall be
inclue in the gross estate of ?& (+ect;on
/,(4), $))& Tax ode)
4#
'he Christmas gift of *411%111&11 given by $mela to her parents is taxable up to *-1%111&11 because uner the law (+ec. )% (a) of the Tax ode), net gifts not exceeing *-1%111&11 are exempt&
%)
'he onation of *-1%111&11 to the parish church even assuming that it is exclusively for religious purposes is not tax-exempt because the exemption grante uner :rticle 5$% Sec& 9<",# of the Constitution applies only to real estate taxes (+laoc !" *ommissioner@ 1'S*5A%9%)"
,#
'he onation to the *&U&*& :lumni :ssociation oes not also Cualify for exemption both uner the Constitution an the aforecite law because it is not
an eucational or research organi)ation% corporation% institution% founation or trust&
#xem$tions: *0aritable
Institutions (%&&&) :rticle 5$% Section 9< ",# of the 4G<I *hilippine
Constitution provies that charitable
institutions% churches an personages or
covenants appurtenant thereto% mosCues% non-
profit cemeteries an all lans% builings an
improvements actually% irectly an
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exclusively use for religious% charitable or
eucational purposes shall be exempt from
taxation& a# 'o what (in of tax oes this
exemption apply? "9.# S6??#ST#D A=SA#5:
'his exemption applies only to property taxes&
What is exempte is not the institution itself
but the lans% builings an improvements
actually% irectly an exclusively use for
religious% charitable an eucational purposes&
(*ommissioner o( Internal 5e!enue !" *ourt o(
A$$eals@ et al@ ?"5" =o" 1%'&'2@ 1ctober 1'@
199/)"
b# $s proof of actual use necessary for tax
exemption purposes uner the Constitution?
",.#
SUGGESTED ANSWER)
6es% because tax exemptions are strictly
construe against the taxpayer& 'here must
be evience to show that the taxpayer has
complie with the reCuirements for
exemption& Furthermore% real property
taxation is base on use an not on
ownership% hence the same rule must also be
applie for real property tax exemptions&
#xem$tions: *0aritable Institutions)
*0urc0es (1996) 'he Constitution exempts from taxation
charitable institutions% churches% parsonages
or convents appurtenant thereto% mosCues
ari non-profit cemeteries an lans%
builings an improvements actually% irectly
an exclusively use for religious% charitable
an eucational purposes& ;ercy >ospital is a
411-be hospital organi)e for charity
patients& Can sai hospital claim exemption
from taxation uner the above-Cuote
constitutional provision? 3xplain&
SUGGESTED ANSWER)
6es& ;ercy >ospital can claim exemption
from taxation uner the provision of the
Constitution% but only with respect to real
property taxes provie that such real
properties are use actually% irectly an
exclusively for charitable purposes&
#xem$tions: #ucational
institution (%&&') Suppose that ?6H Colleges is a proprietary
eucational institution owne by the
:rchbishopAs family% rather than the
:rchiocese% which of those above cite
income an onation woul be exempt from
taxation? 3xplain briefly& "-.#
SUGGESTED ANSWER)
$f ?6H Colleges is a proprietary eucational
institution% all of its income from school
relate an non-school relate activities will
be sub2ect to the income tax base on its
aggregate net income erive from both
activities "Section 9I"@#% 7;C#& :ccoringly%
all of the income enumerate in the problem
will be taxable&
'he onation of lot an builing will li(ewise
be sub2ect to the onorAs tax because a
onation to an eucational institution is
exempt only if the school is incorporate as a
non-stoc( entity paying no iviens&
Since the onee is a proprietary eucational
institution% the onation is taxable "Section
414":?,#% 7J=C#&
#xem$tions: ?i(ts H
Donations (199') $n 4GG4% $mela gave her parents a Christmas
gift of * 411%111&11 an a onation of
*-1%111&11 to her parish
church& She also onate a parcel of lan for
the construction of a builing to the *U*
:lumni :ssociation% a non-stoc(% non-profit
organi)ation& *ortions of the builing shall be
lease to generate income for the association&
4# $s the Christmas gift of * 411%111&11 to
$melaAs parents sub2ect to tax? 9# >ow about
the onation to the parish church? ,# >ow
about the onation to the *&U&*% :lumni :sso-
ciation?
SUGGESTED ANSWER)
A+TERNATI1E ANSWER)
+onation to the *&U&*& :lumni :ssociation is
exempt from onorAs tax if it is proven that the
association is a nonstoc(% non-profit charitable
association% paying no iviens% governe by
trustees who receive no compensation% an
evoting all its income to the accomplishment
an promotion of the purposes enumerate in
its articles of incorporation& 7ot more than
,1. of the gift shoul be use for
aministration purposes by the onee&
#xem$tions: <ea o( t0e
Family: (199/) :rnol% who is single% cohabits with 5ilma%
who is legally marrie to Hachary& :rnol an
5ilma have six minor chilren who live an
epen upon :rnol for their chief support&
'he chilren are not marrie an not gainfully
employe& 4# For income tax purposes% may
:rnol be consiere
as "hea of a family?" N,.O
9# $s :rnol entitle to euct from his
gross income% an aitional exemption for
each of his illegitimate chil? N9.O
SUGGESTED ANSWER)
$) 6es& :n unmarrie man who has
illegitimate minor chilren who live with him
an epen upon him for their chief support
is consiere as "hea of the family" "## No.
%.)/ implementing +ection 5,, N6#).
9# 7o& :rnol is only entitle to euct
aitional personal exemption for four "0# out
of the six "E# illegitimate chilren& 'he
maximum number of epenents for purposes
of the aitional personal exemption is four&
"Sec& ,-% 7$=C#&
#xem$tions: =onFPro(it #ucational
Institutions (%&&&)
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Uner :rticle ?'5% Section 0 ",# of the 4G<I
*hilippine Constitution% all revenues an
assets of non-stoc(% nonprofit eucational
institutions% use actually% irectly an
exclusively for eucational purposes% are
exempt from taxes an uties& :re income
erive from ormitories% canteens an
boo(stores as well as interest income on ban(
eposits an yiels from eposit substitutes
automatically exempt from taxation? 3xplain&
"-.#
SUGGESTED ANSWER)
7o& 'he interest income on ban( eposits an
yiels from eposit substitutes are not
automatically exempt from taxation& 'here
must be a showing that the incomes are
inclue in the schoolAs annual information
return an uly auite financial statements
together with!
4Certifications from epository ban(s as to
the amount of interest income earne from
passive investments not sub2ect to the 91.
final withholing taxB
9Certification of actual% irect an exclusive
utili)ation of sai income for eucational
purposesB
:@oar resolution on propose pro2ect to be
fune out of the money eposite in ban(s
or place in money mar(et placements
(<inance Bepartment Crder No. $!).), issued
November %!, $)),), which must be use
actually% irectly an exclusively for
eucational purposes&
'he income erive from ormitories%
canteens an boo(stores are not also
automatically exempt from taxation& 'here is
still the reCuirement for evience to show
actual% irect an exclusive use for
eucational purposes& $t is to be note that
the 4G<I *hilippine Constitution oes not
istinguish with respect to the source or origin
of the income& 'he istinction is with respect
to the use which shoul be actual% irect an
exclusive for eucational purposes&
ConseCuently% the provisions of Sec& ,1 of the
7$=C of 4GGI% that a non-stoc( an nonprofit
eucational institution is exempt from
taxation only "in respect to income receive
by them as such" coul not affect the
constitutional tax exemption& Where the
Constitution oes not istinguish with respect
to source or origin% the 'ax Coe shoul not
ma(e istinctions&
#xem$tions: =onFPro(it #ntity) Ancillary
Acti!ity H Inciental 1$erations (199')
'he University of @igaa% a non-stoc(% non-
profit entity% operates a canteen for its
stuents an a boo(store insie the campus&
$t also operates two ormitories for its
stuents% one of which is in the campus& $s
the University liable to pay income taxes for
the operation of the! 4# canteen? 9#
boo(store? ,# two ormitories?
SUGGESTED ANSWER)
4# For the operation of the canteen insie the
campus% the income thereon being inciental
to the operations of the University as a
school% is exempt (Art. H62 (!) (5),
onstitution: B4+ #egulations No. $5&./&,
Bec. $-, $)/&).
9# For the same reasons% the University of
@igaa is not liable to pay income taxes for the
operation of the
boo(store% since this is an ancillary activity
the conuct of which is carrie out within the
school premises&
,# 'he University of @igaa shall not be liable
to pay income taxes for the operation of the
ormitory locate in the campus% for same
reasons as the foregoing& >owever% the latter
shall be liable for income taxes on income
from operations of the ormitory locate
outsie the school premises&
#xem$tions: =onFStoc.M =onFPro(it
Association (%&&%) ?6H Founation is a non-stoc(% non-profit
association uly organi)e for religious%
charitable an social welfare purposes& Last
January ,% 9111 it sol a portion of its lot use
for religious purposes an utili)e the entire
procees for the construction of a builing to
house its free +ay an 7ight Care Center for
chilren of single parents& $n orer to
subsii)e the expenses of the +ay an 7ight
Care Center an to support its religious%
charitable an social welfare pro2ects% the
Founation lease the ,11sCuare meter area
of the secon an thir floors of the builing
for use as a boaring house& 'he Founation
also operates a canteen an a gift shop within
the premises% all the income from which is
use actually% irectly% an exclusively for the
purposes for which the Founation was
organi)e&
:& Consiering the constitutional
provision granting tax exemption to non-
stoc( corporations such as those forme
exclusively for religious% charitable or social
welfare purposes% explain the meaning of the
last paragraph of sai Sec& ,1 of the 4GGI
'ax Coe which states that J6ncome of
whatever >ind and character of the foregoing
organiIations from any of their properties,
real or personal, or from any of their
activities conducted for profit regardless of
the disposition made of such income shall be
sub1ect to tax imposed under this ode.0 "-.#
SUGGESTED ANSWER)
:& 'he exemption contemplate in the
Constitution covers real estate tax on real
properties actually% irectly an exclusively
use for religious% charitable or social welfare
purposes& $t oes not cover exemption from
the imposition of the income tax which is
within the context of Section ,1 of the 'ax
Coe& :s a rule% non-stoc( nonprofit
corporations organi)e for religious%
charitable or social welfare purposes are
exempt from income tax on their income
receive by them as such& >owever% if these
religious% charitable or social welfare
corporations erive income from their
properties or any of their activities conucte
for profit% the income tax shall be impose on
sai items of income irrespective of their
isposition& "Sec" 2&@ =I5*) *I5 !@ I;*A@
?5 =o" 1%'&'2@ 199/#&
@& $s the income erive by ?6H
Founation from the sale of a portion of its
lot% rentals from its boaring house an the
operation of its canteen an gift shop sub2ect
to tax? 3xplain& "-.#
SUGGESTED ANSWER)
@& 6es& 'he income erive from the sale
of lot an rentals from its boaring house are
consiere as income from properties which
are sub2ect to tax& Li(ewise% the income from
the operation of the canteen an gift shop
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are income from its activities conucte for
profit which are sub2ect to tax& 'he income
tax attaches irrespective of the isposition of
these incomes& "Sec" 2&@ =I5*) *I5 !"
I;*A@ ?5 =o" 1%'&'2@ 199/#&
#xem$tions: PriJe o( Peace Poster
*ontest (%&&&) Jose ;irana% a young artist an esigner%
receive a pri)e of *411%111&11 for winning in
the on-the-spot peace poster contest
sponsore by a local Lions Club& Shall the
rewar be inclue in the gross income of the
recipient for tax purposes? 3xplain& ",.#
SUGGESTED ANSWER)
7o& $t is not incluable in the gross income of
the recipient because the same is sub2ect to a
final tax of 91.% the amount thereof being in
excess of *41&111 (+ec. %!(3)K$), N6# of
$))&). 'he pri)e constitutes a taxable income
because it was mae primarily in recognition
of artistic achievement which he won ue to
an action on his part to enter the contest&
A+ec. 5% (3) (&) (c), N6# of $))&@ Since it is
an on-the-spot contest% it is evient that he
must have 2oine the contest in orer to earn
the pri)e or awar&
#xem$tions: PriJes H Awars)
At0letes (1996) Onyoc% an amateur boxer% won in a boxing
competition sponsore by the /ol Cup
@oxing Council% a sports association uly
accreite by the *hilippine @oxing
:ssociation& Onyoc receive the amount of
*-11%111 as his pri)e which was onate by
:yala Lan Corporation& 'he @$= trie to
collect income tax on the amount receive by
Onyoc an onorAs tax from :yala Lan
Corporation% which taxes% Onyoc an :yala
Lan Corporation refuse to pay& +ecie&
SUGGESTED ANSWER)
'he pri)e will not constitute a taxable income
to Onyoc% hence the @$= is not correct in
imposing the income tax& =&:& 7o& I-0G explicitly provies that A:ll
pri)es an awars grante to athletes in local
an international sports tournaments an
competitions hel in the *hilippines or abroa
an sanctione by their respective national
sports associations shall be exempt from
income tax"&
7either is the @$= correct in collecting the
onorAs tax from :yala Lan Corporation& 'he
law is clear when it categorically state "'hat
the onorAs of sai pri)es an awars shall be
exempt from the payment of the onorAs
tax&"
#xem$tions: 5etirement Bene(its: Aor.
Se$aration (1999) : Co&% a *hilippine corporation% has two
ivisions 8 manufacturing an construction&
+ue to the economic situation% it ha to close
its construction ivision an layoff the
employees in that ivision& : Co& has a
retirement plan approve by the @$=% which
reCuires a minimum of -1 years of age an
41 years of service in the same employer at
the time of retirement& 'here are 9 groups of
employees to be lai off! 4# 3mployees who
are at least -1 years of age an has
at 41 years of service at the time of termination
of employment& 9# 3mployees who o no meet
either the age or length
of service : Co& plans to give the
following!
For category ":# employees - the benefits
uner the @$= approve plan plus an ex gratia
payment of one month of every year of
service&
For category "@# employees - one month for
every year of service& For both
categories% the cash eCuivalent of
unuse vacation an sic( leave
creits&
: Co& see(s your avice as to whether or not
it will sub2ect any of these payments to W'&
3xplain your avice& "-.#
SUGGESTED ANSWER)
For category A employees% all the benefits
receive on account of their separation are
not sub2ect to income tax% hence no
withholing tax shall be impose& 'he benefits
receive uner the @$=-approve plan upon
meeting the service reCuirement an age
reCuirement are explicitly exclue from
gross income& 'he ex gratia payment also
Cualifies as an exclusion from gross income
being in the nature of benefit receive on
account of separation ue to causes beyon
the employeesA control& "Section ,9"@#% 7$=C#&
'he cash eCuivalent of unuse vacation an
sic( leave creits Cualifies as part of
separation benefits exclue from gross
income "*I5 !" *ourt o( A$$eals@ ?5 =o"
96116@ 1ctober 18@ 1991#&
For category @ employees% all the benefits
receive by them will also be exempt from
income tax% hence not sub2ect to withholing
tax& 'hese are benefits receive on account of
separation ue to causes beyon the
employeesA control% which are specifically
exclue from gross income& (+ection 5%(3),
N6#).
A+TERNATI1E ANSWER6
:ll of the payments are not sub2ect to income
tax an shoul not also be sub2ect to
withholing tax& 'he employees were lai off%
hence separate for a cause beyon their
control& ConseCuently% the amounts to be pai
by reason of such involuntary separation are
exclue from gross income% irrespective of
whether the employee at the time of
separation has renere less than ten years of
service anLor is below fifty years of age&
(+ection 5%(3), N6#).
#xem$tions: Se$aration
Pay (199') *ero =eyes% an official of Corporation ?%
as(e for an "earlier retirement" because he
was emigrating to :ustralia& >e was pai
*9&111&111&11 as separation pay in
recognition of his valuable services to the
corporation&
Juan Cru)% another official of the same
company% was separate for occupying a
reunant position& >e was given
*4%111&111&11 as separation pay&
Jose @autista was separate ue to his failing
eyesight& >e was given *-11&111&11 as
separation pay& :ll the three ",# were not
Cualifie to retire uner the @$=-approve
pension plan of the corporation& 4# $s the
separation pay given to =eyes sub2ect to
income tax? 9# >ow about the separation pay
receive by Cru)? ,# >ow about the
separation pay receive by @autista?
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SUGGESTED ANSWER)
4# 'he separation pay given to =eyes is
sub2ect to income tax as compensation
income because it arises from a service
renere pursuant to an employer-employee
relationship& $t is not consiere an exclusion
from gross income because the rule in
taxation is tax construe in strictissimi 1uris or
the rule on strict $nterpretation of tax
exemptions&
9# 'he separation pay receive by Cru) is not
sub2ect to income tax because his separation
from the company was involuntary "Sec& 9< b
"I#% 'ax Coe#&
,# 'he separation pay receive by @autista is
li(ewise not sub2ect to tax& >is separation is
ue to isability% hence involuntary& Uner the
law% separation pay receive through
involuntary causes are exempt from taxation&
Pay (199,) ;r& Jacobo wor(e for a manufacturing firm&
+ue to business reverses the firm offere
voluntary reunancy program in orer to
reuce overhea expenses& Uner the
program an employee who offere to resign
woul be given separation pay eCuivalent to
his three monthAs basic salary for every year
of service& ;r& Jacobo accepte the offer an
receive *011&111&11 as separation pay
uner the program&
:fter all the employees who accepte the offer
were pai% the firm foun its overhea still
excessive& >ence it aopte another
reunancy program& 5arious unprofitable
epartments were close& :s a result% ;r&
Qintanar was separate from the service& >e
also receive *011&111&11 as separation pay&
4# +i ;r& Jacobo erive income when he
receive his separation pay? 3xplain& 9# +i ;r&
Qintanar erive income when he receive his
separation pay? 3xplain&
SUGGESTED ANSWER)
4# 6es% ;r& Jacobo erive a taxable income
when he receive his separation pay because
his separation from employment was
voluntary on his part in view of his offer to
resign& What is exclue from gross income is
any amount receive by an official or
employee as a conseCuence of separation of
such official or employee from the service of
the employer for any cause beyon the
control of the sai official or employee "Sec
9<% 7$=C#&
A+TERNATI1E ANSWER)
7o% ;r& Jacobo i not erive any taxable
income because the separation pay was ue
to a retrenchment policy aopte by the
company so that any employee terminate by
virtue thereof is consiere to have been
separate ue to causes beyon the
employeeAs control& 'he voluntary
reunancy program reCuiring employees to
ma(e an offer to resign is only consiere as
a tool to expeite the lay-off of excess
manpower whose services are no longer
neee by the employer% but is not the main
reason or cause for the termination
SUGGESTED ANSWER)
9# 7o% ;r& Qintanar i not erive any income
when he receive his separation pay because
his separation from
employment is ue to causes beyon his
control& 'he separation was involuntary as it
was a conseCuence of the closure of various
unprofitable epartments pursuant to the
reunancy program&
Pay (%&&,) Company : ecies to close its operations
ue to continuing losses an to terminate the
services of its employees& Uner the Labor
Coe% employees who are separate from
service for such cause are entitle to a
minimum of one-half month pay for every
year of service& Company : pai the
eCuivalent of one month pay for every year of
service an the cash eCuivalent of unuse
vacation an sic( leaves as separation
benefits& :re such benefits taxable an
sub2ect to withholing tax uner the 'ax
Coe? +ecie with reasons& "-.#
SUGGESTED ANSWER)
:ll of the benefits are not taxable% hence they
are not sub2ect to withholing tax uner the
'ax Coe& @enefits receive as a
conseCuence of separation for any cause
beyon the control of the employees such as
closure of business are exclue from gross
income. (+ec. 5%A3@A-@Ab@, N6# in relation to
+ec. %Ab@A%@, #.#. %.)/)
#xem$tions: Stoc.
Di!iens (%&&2) On 1, January 4GG<% ?% a Filipino citi)en
resiing in the *hilippines% purchase one
hunre "411# shares in the capital stoc( of 6
Corporation% a omestic company& On 1,
January 9111% 6 Corporation eclare% out of
the profits of the company earne after 14
January 4GG<% a hunre percent "411.# stoc(
iviens on all stoc(holers of recor as of
,4 +ecember 4GGG as a result of which ?
holing in 6 Corporation became two hunre
"911# shares& :re the stoc( iviens receive
by ? sub2ect to income tax? 3xplain& "<.#
SUGGESTED ANSWER)
7o& Stoc( iviens are not reali)e income&
:ccoringly% the ifferent provisions of the
'ax Coe imposing a tax on ivien income
only inclues within its purview cash an
property iviens ma(ing stoc( iviens
exempt from income tax& >owever% if the
istribution of stoc( iviens is the
eCuivalent of cash or property% as when the
istribution results in a change of ownership
interest of the shareholers% the stoc(
iviens will be sub2ect to income tax&
(+ection %!(3)(%): +ection %,(A)L(3): +ection
%/(3)(,)(b), $))& Tax ode)
#xem$tions: Strictly
*onstrue (1996) Why are tax exemptions strictly construe
against the taxpayer?
SUGGESTED ANSWER)
'ax exemptions are strictly construe against
the taxpayer because such provisions are
highly isfavore an may almost be sai to
be oious to the law ";anila #lectric
*om$any !s" 4era@ 68 S*5A 2,1#& 'he
exception containe in the tax statutes must
be strictly construe against the one claiming
the exemption because the law oes not loo(
with favor on tax exemptions they being
contrary to the life-bloo theory which is the
unerlying basis for taxes&
#xem$tions: Terminal
+ea!e Pay (1996)
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:% an employee of the Court of :ppeals%
retire upon reaching the compulsory age of
E- years& Upon compulsory retirement% :
receive the money value of his accumulate
leave creits in the amount of *-11&111&11& $s
sai amount sub2ect to tax? 3xplain&
SUGGESTED ANSWER)
7o& 'he commutation of leave creits% more
commonly (nown as terminal leave pay% i&e&%
the cash eCuivalent of accumulate vacation
an sic( leave creits given to an officer or
employee who retires% or separate from the
service through no fault of his own% is exempt
from income tax& "BI5 5ulin7 %2/F91 ate
=o!ember /@ 1991) *ommissioner !" *A an
#(ren *astanea@ ?5 =o" 96&16@ 1ctober 18@
1991#&
#xem$tions) *0aritable
Institutions (%&&6) 'he Constitution provies "charitable
institutions% churches% personages or convents
appurtenant thereto% mosCues% an non-profit
cemeteries an all lans% builings% an
improvements actually irectly an exclusively
use for religious% charitable or eucational
purposes shall be exempt from taxation&" 'his
provision exempts charitable institutions an
religious institutions from what (in of taxes?
Choose the best answer& 3xplain& "-.#
from all (ins of taxes% i&e&% income% 5:'%
customs uties% local taxes an real property
tax
from local tax only
from value-ae tax
from real property tax only
from capital gains tax only
SUGGESTED ANSWER)
'he provision exemptions charitable
institutions an religious institutions from "#
=3:L *=O*3='6 ':?3S only& 'he exemption is
only for taxes assesse as property taxes% as
istinguishe from excise taxes (*I5 !" *A@
*TA H I;*A@ ?"5" =o" 1%'&'2@ 1ctober 1'@
199/)
+laoc !" *ommissioner o( Internal 5e!enue@
+F19%&1@ Gune 16@196,)"
#xem$tions) #ucational
institution (%&&') ?6H Colleges is a non-stoc(% non-profit
eucational institution run by the :rchiocese
of @* City& $t collecte an receive the
following!
"a# 'uition
fees "b# +ormitory
fees "c# =entals from canteen
concessionaires "# $nterest from money-mar(et placements
of the tuition fees
"e# +onation of a lot an builing by school
alumni Which of these above cite income
an onation woul not be exempt from
taxation? 3xplain briefly& "-.#
SUGGESTED ANSWER)
:& :ll of the income erive by the non-stoc(%
nonprofit eucational institution will be
exempt from taxation provie they are use
actually% irectly an exclusively for
eucational purposes& 'he Constitution
provies that all revenues an assets of non-
stoc(% non-profit eucational institution which
are actually% irectly an exclusively use for
eucational purposes are exempt from
taxation (+ection ! par. 5, Article H62, $)/&
onstitution).
'he onation is% li(ewise% exempt from the
onorAs tax if actually% irectly an exclusively
use for eucational purposes% provie not
more than ,1. of the onation is use by the
onee for aministration purposes& 'he onee%
being a non-stoc(% non-profit eucational
institution% is a Cualifie entity to receive an
exempt onation sub2ect to conitions
prescribe by law (+ection ! par. !, Art. H62,
$)/& onstitution, in relation to +ection
$'$(AH5), N(#).
:ccoringly% none of the cite income an
onation collecte an receive by the non-
stoc(% non-profit eucational institution woul
not be exempt from taxation&
A+TERNATI1E ANSWER)
'he following receipts by the non-stoc(%
nonprofit eucational institution are not
exempt from taxation% vi)! "c# 5entals (rom *anteen
*oncessionaires& =ental income is
consiere as unrelate to the school
operationsB hence% taxable (BC< Crder No.
$5&./&, Bec. $-, $)/&)
"# Interest (rom moneyFmar.et
$lacements o( t0e tuition (ees" 'he
interest on the placement is taxable (BC<
Crder No. $5&./&). $f however% the sai
interest is use actually% irectly an
exclusively for eucational purposes as proven
by substantial evience% the same will be
exempt from taxation (*I5 !" *A@ %9/ S*5A /2
1199/DN"
'he other items of income which were all
erive from school-relate activities will be
exempt from taxation in the hans of the
recipient if use actually% irectly an
exclusively for eucational purposes "Section
0 par& ,% :rticle ?'5% 4G<I Constitution#&
'he onation to a non-stoc(% non-profit
eucational institution will be exempt from
the onorAs tax if use actually% irectly an
exclusively for eucational purposes an
provie% that% not more than ,1. of the
onation is use for aministration purposes
"Section 0% par& 0% :rt& ?J5% 4G<I Constitution%
in relation to Section 414":;,#% 7J=C#&
#xem$tions) #xem$tions are
6nilateral in =ature (%&&') : law was passe granting tax exemption to
certain inustries an investments for a
perio of five years& @ut three years later% the
law was repeale& With the repeal% the
exemptions were consiere revo(e by the
@$=% which assesse the investing companies
for unpai taxes effective on the ate of the
repeal of the law&
7*C an Q'= companies Cuestione the
assessments on the groun that% having
mae their investments in full reliance with
the perio of exemption grante by the law%
its repeal violate their constitutional right
against the impairment of the obligations an
contracts& $s the contention of the companies
tenable or not? =eason briefly& "-.#
SUGGESTED ANSWER)
'he contention is not tenable& 'he exemption
grante is in the nature of a unilateral tax
exemption& Since the exemption given is
spontaneous on the part of the
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legislature an no service or uty or other
remunerative conitions have been impose
on the taxpayers receiving the exemption% it
may be revo(e at will by the legislature
"*0rist *0urc0 !" P0ilael$0ia@ %' <ow"
2&& C1/6&D#& What constitutes an impairment
of the obligation of contracts is the revocation
of an exemption which is foune on a
valuable consieration because it ta(es the
form an essence of a contract "*asano!as
!" <or% / P0il" 1%, C19&8D) ;anila
5ailroa *om$any !" Insular *ollector o(
*ustoms@ 1% P0il" 1'6 C191,D)
#xem$tions) ?o!3t Bonus@ ?i(ts@ H
Allowances (199') $n +ecember 4GG,% the Sangguniang @ayan
authori)e a Christmas bonus of *,%111&11% a
cash gift of *-%111&11 an transportation an
representation allowance of *E%111&11 for
each of the municipal employees& 4# $s the
Christmas bonus sub2ect to any tax? 9# >ow
about the cash gift? ,# >ow about the
transportation an representation
allowances?
SUGGESTED ANSWER)
4# 'he C>=$S';:S @O7US given by the
Sangguniang @ayan to the municipal
employees is taxable as aitional
compensation "Sec& 94 "a#& 'ax Coe#&
9# 'he cash gift per employee of
*-&111&11 being substantial may be
consiere taxable also& 'hey parta(e the
nature of aitional compensation income as
it is highly oubtful if municipal governments
are authori)e to ma(e gifts in substantial
sums such as this& 'hey are not furthermore
gifts of "small value" which employers might
give to their employees on special occasions
li(e Christmas - items which coul be exempt
uner @$= =evenue :uit ;emo 7o& 4-<I&
,# 'he transportation an representation
allowances are actually reimbursements for
expenses incurre by the employee for the
employer& Sai allowances spent by the
employee for the employer are esigne to
enhance the Cuality of the service that the
employer is suppose to perform for its
clientele li(e the people of the municipality&
#xem$tions) Personal H Aitional
#xem$tion (%&&6) Charlie% a wiower% has two sons by his
previous marriage& Charlie lives with Jane
who is legally marrie to ;ario& 'hey have a
chil name Jill& 'he chilren are all minors
an not gainfully employe& 1" <ow muc0 $ersonal exem$tion can
*0arlie claimB #x$lain" (%",O)
SUGGESTED ANSWER)
Charlie can claim the personal exemption of a
>ea of a Family or *9-%111&11 provie
that% at least one of his minor an not
gainfully employe chilren is unmarrie an
living with an epenent upon him for chief
support
(Tax #eform Act, #A /!%!, hapter 266,
+ection 5,AA@: 36# #evenue #egulation '%.
)/).
%" <ow muc0 aitional exem$tion can
*0arlie claimB #x$lain" (%",O)
SUGGESTED ANSWER)
>is chilren from his previous marriage who
are legitimate chilren an his illegitimate
chil with Jane will all entitle him to aitional
personal exemption of *<%111&11 for each
epenent% if apart from being minor an not
gainfully employe% they are unmarrie% living
with an epenent upon Charlie for their
chief support (Tax #eform Act, #A/!%!,
hapter 2=, +ection 5,(A): 36# #evenue
#egulation '%.)/).
#xem$tions) 5oman *at0olic *0urc0)
+imitations (%&&,) 'he =oman Catholic Church owns a 9-hectare
lot% in a town in 'arlac province& 'he southern
sie an mile part are occupie by the
Church an a convent% the eastern sie by a
school run by the Church itself% the
southeastern sie by some commercial
establishments% while the rest of the property%
in particular the northwestern sie% is ile or
unoccupie& ;ay the Church claim tax
exemption on the entire lan? +ecie with
reasons&
SUGGESTED ANSWER)
7o& 'he Church cannot claim tax exemption on
the entire lan& Only the southern sie an
mile part that are occupie by the Church
an a convent an the eastern sie occupie
by a school run by the Church itself are
exempt% because such parts of the 9-hectare
lot are actually% irectly an exclusively use
for religious an eucational purposes& (+ec.
%/A5@, Art. 26, $)/& onstitution: +ec. %5!,
?ocal "overnment ode)
'he southeastern sie occupie by some
commercial establishment is not tax exempt&
$f real property is use for one or more
commercial purposes% it is not exclusively
use for the exempte purpose but is sub2ect
to taxation& ASolelyA is synonymous with
Aexclusively&A (+un7 *enter o( t0e P0ili$$ines
!" PueJon *ity@ ?"5" =o" 1''1&'@ Gune %9@
%&&') 'he property must be exclusively
"solely# use for religious or eucational
purposes&
Of course% it is apparent that the
northwestern sie% which is ile or unoccupie
is not "actually% irectly an exclusively" use
for religious or eucational purposes% hence
not exempt from taxation&
CAPITA+ GAIN TAX
*a$ital Asset !s" 1rinary
Asset (%&&2) +istinguish a "capital asset" from an "orinary
asset"&
SUGGESTED ANSWER)
"a# 'he term "capital asset" regars all
properties not specifically exclue in the
statutory efinition of capital assets% the
profits or loss on the sale or the exchange of
which are treate as capital gains or capital
losses& Conversely% all those properties
specifically exclue are consiere as
orinary assets an the profits or losses
reali)e must have to be treate as orinary
gains or orinary losses& :ccoringly%
"*a$ital Assets" inclues property hel by
the taxpayer whether or not connecte with
his trae or business% but the term oes not
inclue any of the following% which are
conseCuently consiere "orinary assets"!
"4# stoc( in trae of the taxpayer or
other property of a (in which woul
properly be inclue in the
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inventory of the taxpayer if on han at
the close of the taxable yearB
"9# property hel by the taxpayer
primarily for sale to customers in the
orinary course of trae or businessB
",# property use in the trae or
business of a character which is sub2ect to
the allowance for epreciation provie in
Section ,0 "F# of the 'ax CoeB or
"0# real property use in trae or
business of the taxpayer&
'he statutory efinition of "capital assets"
practically exclues from its scope% it will be
note% all property hel by the taxpayer if
use in connection with his trae or business&
*a$ital ?ain Tax)
=ature (%&&1) :% a octor by profession% sol in the year
9111 a parcel of lan which he bought as a
form of investment in 4GG1 for *hp 4 million&
'he lan was sol to @% his colleague% at a
time when the real estate prices ha gone
own an so the lan was sol only for *hp
<11%111 which was then the fair mar(et value
of the lan& >e use the procees to finance
his trip to the Unite States& >e claims that
he shoul not be mae to pay the E. final
tax because he i not have any actual gain
on the sale& $s his contention correct? Why?
"-.#
SUGGESTED ANSWER)
7o& 'he E. capital gains tax on sale of a real
property hel as capital asset is impose on
the income presume to have been reali)e
from the sale which is the fair mar(et value
or selling price thereof% whichever is higher&
"Section 90"+#% 7$=C#& :ctual gain is not
reCuire for the imposition of the tax but it is
the gain by fiction of law which is taxable&
1rinary Sale o( a *a$ital
Asset (199') 7oel Langit an his brother% Jovy% bought a
parcel of lan which they registere in their
names as pro-iniviso owners "*arcel :#&
SubseCuently% they forme a partnership% uly
registere with Securities an 3xchange
Commission% which bought another parcel of
lan "*arcel @#& @oth parcels of lan were sol%
reali)ing a net profit of *4%111%111&11 for
parcel : an *-11&111&11 for parcel @&
'he @$= claims that the sale of parcel :
shoul be taxe as a sale by an unregistere
partnership& $s the @$= correct?
SUGGESTED ANSWER)
'he @$= is not correct% since there is no
showing that the acCuisition of the property
by 7oel an Jovy Langit as pro iniviso
owners% an prior to the formation of the
partnership% was use% intene for use% or
bears any relation whatsoever to the pursuit
or conuct of the partnership business& 'he
sale of parcel : shall therefore not be treate
as a sale by an unregistere partnership% but
an orinary sale of a capital asset% an hence
will be sub2ect to the -. capital gains tax an
ocumentary
stamp tax on transfers of real property% sai
taxes to be borne eCually by the co-owners&
A+TERNATI1E ANSWER)
'he @$= is correct in treating the gain from the
sale of parcel of lan by 7oel an Jovy Langit
at a profit of *4%111%111&11& $n the case of
Pascual an Dra7on !" *ommissioner@ ?"5"
=o" 8/122@ 1ctober 1/@ 19//% the Supreme
Court rule that the sharing of returns oes
not in itself establish a partnership% whether or
not the persons sharing therein have a 2oint or
common right or interest in the property& 'he
ecision in sai case cannot be applie here
because clearly the parties organi)e a
partnership uly registere with the Securities
an 3xchange Commission& 'hey poole their
resources together with the purpose of
iviing the profit between them&
Sales o( S0are o( Stoc.s: *a$ital ?ains
Tax 5eturn (1999) >Q Co& is a >ong Qong corporation not oing
business in the *hilippines& $t hols 01. of
the shares of : Co&% a *hilippine company%
while the E1. is owne by * Co&% a Filipino-
owne *hilippine corporation& >Q Co& also
owns 411. of the shares of @ Co&% an
$nonesian company which has a uly
license *hilippine branch& +ue to worlwie
restructuring of the >Q Co& group% >Q Co&
ecie to sell all its shares in : an @ Cos&
'he negotiations for the buy-out an the
signing of the :greement of Sale were all
one in the *hilippines& 'he :greement
provies that the purchase price will be pai
to >Q CoAs ban( account in the U& S& an that
little to : an @ Cos& Shares will pass from >Q
Co& to * Co& in >Q where the stoc( certificates
will be elivere& * Co& see(s your avice as
to whether or not it will sub2ect the payments
of purchase price to Withholing 'ax& 3xplain
your avice& "41.#
SUGGESTED ANSWER)
* Co& shoul not sub2ect the payments of the
purchase price to withholing tax& While the
seller is a non-resient foreign corporation
which is not normally reCuire to file returns
in the *hilippines% therefore% orinarily all its
income earne from *hilippine sources is
taxe via the withholing tax system% this is
not the proceure availing with respect to
sales of shares of stoc(& 'he capital gains tax
on the sale of shares of stoc( of a omestic
corporation is always reCuire to be pai
through a capital gains tax return file& 'he
sale of the shares of stoc( of the $nonesian
Corporation is not sub2ect to income tax uner
our 2urisiction because the income erive
there from is consiere as a foreign-source
income&
A+TERNATI1E ANSWER)
6es% but only on the shares of stoc(s of : Co&
an only on the portion of the purchase price%
which constitutes capital gains& Uner the
'ax Coe of 4GGI% the capital gains tax
impose uner Section 9<"@#"-#"c# is
collectible via the withholing of tax at
source pursuant to Section -I of the same
Coe&
"7ote! 'he bar caniate might have relie on the
provision of the 'ax Coe of 4GGI which provies
that the capital gains tax is impose as
withholing taxes "Section -I% 7$=C#& 'his proceure is
impractical an% therefore% not followe in practice
because the buyerL withholing agent will not be
in a position to etermine how much income is
reali)e by
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*9 of 73
the seller from the sale& For this reason%
any of the foregoing suggeste answers
shoul be given full creit#&
Tax Basis: *a$ital ?ains: ;er7er o(
*or$orations (199') $n a Cualifie merger uner Section ,0 "c# "9#
of the 'ax Coe% what is the tax basis for
computing the capital gains on! "a# the sale of
the assets receive by the surviving
corporation from the absorbe corporationB
an "b# the sale of the shares of stoc(
receive by the stoc(holers from the
surviving corporation?
SUGGESTED ANSWER)
$n a Cualifie merger uner Section ,0 "c# "9#
of the 'ax Coe% the tax basis for computing
the capital gains on!
"a# the sale of the assets receive by the
surviving corporation from the absorbe
corporation shall be the originalLhistorical cost
of the assets when still in the hans of the
absorbe corporation&
"b# the sale of the shares of stoc(
receive by the stoc(holers from the
surviving corporation shall be the
acCuisitionLhistorical cost of assets
transferre to the surviving corporation&
Tax Basis: *a$ital ?ains: TaxFFree
#xc0an7e o( Pro$erty (199')
$n a Cualifie tax-free exchange of property
for shares uner Section ,0 "c# "9# of the 'ax
Coe% what is the tax basis for computing the
capital gains on! "a# the sale of the assets
receive by the CorporationB an "b# the sale
of the shares receive by the stoc(holers
in exchange of the assets?
SUGGESTED ANSWER)
$n a Cualifie tax free exchange of property
for shares uner Section ,0 "c# "9# of the 'ax
Coe% the tax basis for computing the gain on
the!
"a# sale of the assets receive by the
corporation shall be the originalLhistorical cost
"purchase price plus expenses of acCuisition#
of the propertyL assets given in exchange of
the shares of stoc(&
"b# sale of the shares of stoc( receive by
the stoc(holers in exchange of the assets
shall be the originalLhistorical cost of the
property given in exchange of the shares of
stoc(&
A+TERNATI1E ANSWER)
'he basis in computing capital gains tax in a
Cualifie tax-free exchange uner Sec& ,0
"c# "9# is! "a# With respect to the asset receive by
the corporation the same as it woul be in
the hans of the transferor increase by the
amount of the gain recogni)e to the
transferor on the transfer&
"b# With respect to the shares receive by
the stoc(holers in exchange of the assets -
the same as the basis of the property% stoc( or
securities exchange% ecrease by the
money receive an the fair mar(et value of
the other property receive% an increase by
the amount treate as ivien of the
shareholer an the amount of any gain that
was recogni)e on the exchange&
CORPORATION - PARTNERS/IP
Ba Debts) Factors) #lements
t0ereo( (%&&')
*K= Corp& claime as a euction in its tax
returns the amount of *4%111%111 as ba
ebts& 'he corporation was assesse by the
Commissioner of $nternal =evenue for
eficiency taxes on the groun that the ebts
cannot be consiere as "worthless%" hence
they o not Cualify as ba ebts& 'he
company as(s for your avice on "What
factors will hel in etermining whether or
not the ebts are ba ebts?" :nswer an
explain briefly& "-.#
SUGGESTED ANSWER)
$n orer that ebts be consiere as ba
ebts because they have become worthless%
the taxpayer shoul establish that uring the
year for which the euction is sought% a
situation evelope as a result of which it
became evient in the exercise of soun%
ob2ective business 2ugment that there
remaine no practical% but only vaguely
theoretical% prospect that the ebt woul ever
be pai (*ollector o( Internal 5e!enue !"
?ooric0 International 5ubber *o"@ %1 S*5A
1226 C1968D)" "Worthless" is not etermine
by an inflexible formula or slie rule
calculation% but upon the exercise of soun
business 2ugment& 'he factors to be
consiere inclue% but are not limite to% the
following!
4'he ebtor has no property nor visible incomeB
9'he ebtor has been a2uge ban(rupt or
insolventB
,Collateral shares have become worthlessB an
0'here are numerous ebtors with small amounts
of ebts an further action on the accounts woul
entail expenses exceeing the amounts sought to
be collecte&
A+TERNATI1E ANSWER)
'he following are the factors to be consiere
in etermining whether or not the ebts are
ba ebts! 4'he ebt must be vali an subsistingB
9'he ebt is connecte with the taxpayerAs trae
or business% an is not between relate partiesB
,'here is an actual ascertainment that the ebt is
worthlessB an
0'he ebt is charge-off within the taxable year&
(P5* !" *A@ %,6 S*5A 668 C1996D)
5e!enue 5e7s" =o" ,F99)"
*onominium *or$") Sale o(
*ommon Areas (199') ?-lan Conominium Corporation was
organi)e by the owners of units in ?-lan
@uiling in accorance with the ;aster +ee
with +eclaration of =estrictions& 'he ?-lan
@uiling Corporation% the eveloper of the
builing% conveye the common areas in favor
of the ?-lan Conominium Corporation& $s
the conveyance sub2ect to any tax?
SUGGESTED ANSWER)
'he conveyance is not sub2ect to any tax& 'he
same is without consieration% an not in
connection with a sale mae to ?-lan
Conominium Corporation% an the purpose of
the conveyance to the latter is for the
management of the common areas for the
common benefit of the unit owners&
'he same is not sub2ect to income tax since
no income was reali)e as a result of the
conveyance% which was mae pursuant to the
Conominium :ct "=&:& 7o& 0E9E% an the
purpose of which was merely to vest title to
the common areas in favor of the Lan
Conominium Corporation&
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40 of 73
'here being no monetary consieration%
neither is the conveyance sub2ect to the
creitable withholing tax impose uner
=evenue =egulations 4-G1% as amene&
'he secon conveyance was actually no
conveyance at all because when the units
were sol to the various buyers% the common
areas were alreay part an parcel of the sale
of sai units pursuant to the Conominium
:ct& >owever% the +ee of Conveyance is
sub2ect to ocumentary stamp tax&
N.3. Bocumentary stamps tax and
ondominium ?aw are excluded from the
coverage of the 3ar 4xaminations.
*or$oration) Sale) *reitable
Ait00olin7 Tax (199') 7oel Langit an his brother% Jovy% bought a
parcel of lan which they registere in their
names as pro-iniviso owners "*arcel :#&
SubseCuently% they forme a partnership% uly
registere with Securities an 3xchange
Commission% which bought another parcel of
lan "*arcel @#& @oth parcels of lan were sol%
reali)ing a net profit of *4%111%111&11 for
parcel : an *-11&111&11 for parcel @&
'he @$= also claims that the sale of parcel @
shoul be taxe as a sale by a corporation& $s
the @$= correct?
SUGGESTED ANSWER)
'he @$= is correct% since a "corporation" as
efine uner Section 91 "a# of the 'ax Coe
inclues partnerships% no matter how create
or organi)e% except general professional
partnerships& 'he business partnership% in the
instant case% shall therefore be taxe in the
same manner as a corporation on the sale of
parcel @& 'he sale shall thus be sub2ect to the
creitable withholing tax uner =evenue
=egulations 4-G1% as amene by 49-G0% on
the sale of parcel @% an the partnership shall
report the gain reali)e from the sale when it
files its income tax return&
Di!iens: Ait00olin7
Tax (1999) >Q Co&% is a >ong Qong company% which has a
uly license *hilippine branch% engage in
traing activities in the *hilippines& >Q Co&
also investe irectly in 01. of the shares of
stoc( of : Co&% a *hilippine corporation& 'hese
shares are boo(e in the >ea Office of >Q
Co& an are not reflecte as assets of the
*hilippine branch& $n 4GG<% : Co& eclare
iviens to its stoc(holers& @efore remitting
the iviens to >Q Co&% : Co& see(s your
avice as to whether it will sub2ect the
remittance to W'& 7o nee to iscuss W'
rates% if applicable& Focus your iscussion on
what is the issue& "41.#
SUGGESTED ANSWER)
$ will avise : Co& to withhol an remit the
withholing tax on the iviens& While the
general rule is that a foreign corporation is the
same 2uriical entity as its branch office in the
*hilippines% when% however% the corporation
transacts business in the *hilippines irectly
an inepenently of its branch% the taxpayer
woul be the foreign corporation itself an
sub2ect to the ivien tax similarly impose
on non-resient foreign corporation& 'he
iviens attributable to the >ome Office
woul not Cualify as iviens earne by a
resient foreign corporation% which is exempt
from tax& (;arubeni *or$oration !"
*ommissioner@ ?5 =o" 86,82@ Se$tember
1'@ 19/9)"
#((ect: Dissolution) *or$orate
#xistence (%&&') For failure to comply with certain corporate
reCuirements% the stoc(holers of :@C Corp&
were notifie by the Securities an 3xchange
Commission that the corporation woul be
sub2ect to involuntary issolution& 'he
stoc(holers i not o anything to comply
with the reCuirements% an the corporation
was issolve& Can the stoc(holers be hel
personally liable for the unpai taxes of the
issolve corporation? 3xplain briefly& "-.#
SUGGESTED ANSWER)
7o& :s a general rule% stoc(holers cannot be
hel personally liable for the unpai taxes of a
issolve corporation& 'he rule prevailing
uner our 2urisiction is that a corporation is
veste by law with a personality that is
separate an istinct from those of the
persons composing it (Sunio !" =+5*@ 1%8
S*5A 29&Q19/'DN"
7O'3! aitional point shoul be given to the
examinee if he answers in the following that!
>owever% stoc(holers may be hel liable for
the unpai taxes of a issolve corporation if it
appears that the corporate assets have
passe into their hans (Tan Tion7 Bio !" *F5@ ' S*5A
9/6 C196%D)" Li(ewise% when stoc(holers
have unpai subscriptions to the capital of the
corporation they can be mae liable for
unpai taxes of the corporation to the extent of their
unpai subscriptions&
;inimum *or$orate
Income Tax (%&&1) What is the rationale of the law in imposing
what is (nown as the ;inimum Corporate
$ncome tax on +omestic Corporations? ",.#
SUGGESTED ANSWER)
'he imposition of the ;inimum Corporate
$ncome 'ax ";C$'# is esigne to forestall the
prevailing practice of corporations of over
claiming euctions in orer to reuce their
income tax payments& 'he filing of income
tax returns showing a tax loss every year
goes against the business motive which
impelle the stoc(holers to form the
corporation& 'his is the reason why omestic
corporations "an resient foreign
corporations# after the recovery perio of four
years from the time they commence business
operations% they become liable to the ;C$'
whenever this tax impose at 9. of gross
income excees the normal corporate income
tax impose on net income& "Sponsorship
Speech% Chairman of Senate Ways an ;eans
Committee#&
;inimum *or$orate Income Tax)
#xem$tion (%&&1) $s a corporation which is exempte from the
minimum corporate income tax automatically
exempte from the regular corporate income
tax? 3xplain your answer& "9.#
SUGGESTED ANSWER)
7o& 'he minimum corporate income tax is a
proxy for the normal corporate income tax%
not the regular corporate income tax pai by
a corporation& For instance% a proprietary
eucational institution may be sub2ect to a
regular corporate income tax of 41.
"epening on its ominant income#% but it is
exempt from the imposition of ;C$' because
the latter is not intene to substitute
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41 of 73
special tax rates& So is with *3H:
enterprises% C+: enterprises etc&
N7ote! $f what is meant by regular income
tax is the ,9. tax rate impose on taxable
income of corporations% the answer woul
be in the affirmative% because omestic
corporations an resient foreign
corporations are either liable for the 9. of
gross income ";C$'# or ,9. of net income
"the normal corporate income tax#
whichever is higher&O
A+TERNATI1E ANSWER)
7o& : corporation which is exempte from the
minimum corporate income tax is not
automatically exempte from the regular
corporate income tax& 'he reason for this is
that ;C$' is impose only beginning on the
fourth taxable year immeiately following the
year in which such corporation commence its
business operations& 'hus% a corporation may
be exempt from ;C$' because it is only on its
thir year of operations following its
commencement of business operations&
ESTATE - DONOR0S TAXES
Donor3s Tax: #lection
*ontributions (199/) :re contributions to a caniate in an
election sub2ect to onorAs tax? On the part
of the contributor% is it allowable as a
euction from gross income? N-.J
SUGGESTED ANSWER)
4# 7o% provie the recipient caniate
ha complie with the reCuirement for filing
of returns of contributions with the
Commission on 3lections as reCuire uner
the Omnibus 3lection Coe&
9# 'he contributor is not allowe to euct
the contributions because the sai expense is
not irectly attributable to% the evelopment%
management% operation anLor conuct of a
trae% business or profession K+ec. 5!AA((l)(a),
N6#)& Furthermore% if the caniate is an
incumbent government official or employee% it
may even be consiere as a bribe or a
(ic(bac( "Sec& ,0N:J"l#"c#% 7$=C#&
*1;;#=T: $t is suggeste that full creit
shoul be given for any answer to the first
Cuestion because the answer reCuires an
interpretation of the 3lection Coe&
*ursuant to the provisions of Section GG"C#
of the 7$=C% the taxability of this type of
contributionsLonations is governe by the
3lection Coe&
Donor3s Tax) Basis (or
Determinin7 ?ain (199,) "4# Qenneth 6usoph owns a commercial lot
which he bought many years ago for *4
;illion& $t is now worth *91 ;illion although
the )onal value is only *4- ;illion& >e onates
one-half pro-iniviso interest in the lan to his
son +ino on ,4 +ecember 4GG0% an the other
one-half pro-iniviso interest to the same son
on 9 January 4GG-&
>ow much is the value of the gifts in 4GG0
an 4GG- for purposes of computing the gift
tax? 3xplain&
SUGGESTED ANSWER)
4# 'he value of the gifts for purposes of
computing the gift tax shall be *I&-million in
4GG0 an *I&-million in
4GG-& $n valuing a real property for gift tax
purposes the property shoul be appraise at
the higher of two values as of the time of
onation which are "a# the fair mar(et value
as etermine by the Commissioner "which is
the )onal value fixe pursuant to Section
4E"e# of the 'ax Coe#% or "b# the fair mar(et
value as shown in the scheule of values
fixe by the *rovincial an City :ssessors&
'he fact that the property is worth *91 million
as of the time of onation is immaterial unless
it can be shown that this value is one of the
two values mentione as provie uner
Section <4 of the 'ax Coe&
"9# 'he =evenue +istrict Officer Cuestions
the splitting of the onations into 4GG0 an
4GG-& >e says that since there were only two
"9# ays separating the two onations they
shoul be treate as one% having been mae
within one year& $s he correct? 3xplain&
SUGGESTED ANSWER)
9# 'he =evenue +istrict Officer is not correct
because the computation of the gift tax is
cumulative but only insofar as gifts mae
within the same calenar year& 'herefore%
there is no legal 2ustification for treating two
gifts effecte in two separate calenar years
as one gift&
",# +ino subseCuently sol the lan to a
buyer for * 91 ;illion& >ow much i +ino
gain on the sale? 3xplain&
SUGGESTED ANSWER)
,# +ino gaine an income of 4G million from
the sale& +ino acCuires a carry-over basis
which is the basis of the property in the
hans of the onor or *4 million& 'he gain
from the sale or other isposition of property
shall be the excess of the amount reali)e
therefrom over the basis or a2uste basis for
etermining gain "Sec& ,0"a#% 7$=C#& Since the
property was acCuire by gift% the basis for
etermining gain shall be the same as if it
woul be in the hans of the onor or the last
preceing owner by whom the property was
not acCuire by gift& >ence% the gain is
compute by eucting the basis of *4
million from the amount reali)e which is *91
million&
"0# Suppose% instea of receiving the lot by
way of onation% +ino receive it by
inheritance& What woul be his gain on the
sale of the lot for *91 ;illion? 3xplain&
SUGGESTED ANSWER)
0# $f the commercial lot was receive by
inheritance the gain from the sale for *91
million is *- million because the basis is the
fair mar(et value as of the ate of acCuisition&
'he steppe-up basis of *4- million which is
the value for estate tax purposes is the basis
for etermining the gain "Sec& ,0"b#"9#% 7$=C#&
A+TERNATI1E ANSWER)
$f +ino hel on to the property as a capital
asset in that it is neither for sale in the
orinary course of business nor use in +inoAs
business% then upon sale thereof there is
presume to be reali)e an income of *91
million which is the gross selling price of the
property& "Sec& 94"e#% 7$=C#& 'he same woul
be sub2ect to the -. capital gains tax&
Donor3s Tax) Dacion en Pa7o) #((ect:
Taxation (1998)
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42 of 73
:n insolvent company ha an outstaning
obligation of * l11%111&11 from a creitor&
Since it coul not pay the ebt% the creitor
agree to accept payment through acion en
pago a property which ha a mar(et value of
*,1&111&11& $n the acion en pago ocument%
the balance of the ebt was conone&
:& What is the tax effect on the
ischarge of the unpai balance of the
obligation on the ebtor corporation? @& $nsofar as the creitor is concerne%
how is he effecte tax-wise as a conseCuence
of the transaction?
SUGGESTED ANSWERS)
"a# 'he cononation of the unpai balance of
the obligation has the effect of a onation
mae on the part of the creitor& $t is obvious
that the creitor merely esires to benefit the
ebtor an without any consieration
therefore cancels the ebt% the amount of the
ebt cancelle is a gift from the creitor to the
ebtor an nee not be inclue in the latterAs
gross income "Sec& -1% == 7o& 9#B
"b# For the ifference of *I1%111 the creitor
shall be sub2ect to onorAs tax at the
applicable rates provie for uner the
7ational $nternal =evenue Coe&
A+TERNATI1E ANSWER)
"a# $f the ischarge was prompte by the
insolvency of the ebtor company% then it is
a clear case of a write-off of a ba ebts
which has no tax conseCuence to the ebtor&
"b# 'he write-off of the ba ebt will entitle
the creitor to claim the same as a euction
from its gross income&
Donor3s Tax) Donation to a
Siblin7 (%&&1) 6our bachelor client% a Filipino resiing in
Kue)on City% wants to give his sister a gift of
*hp 911%111&11& >e see(s your avice% for
purposes of reucing if not eliminating the
onorAs tax on the gift% on whether it is better
for him to give all of the *hp 911%111&11 on
Christmas 9114 or to give *hp 411%111&11 on
Christmas9114 an the other *hp 411%111&11
on January 4% 9119& *lease explain your
avice& "-.#
SUGGESTED ANSWER)
$ woul avice him to split the onation&
/iving the *hp911%111 as a one-time onation
woul mean that it will be sub2ect to a higher
tax brac(et uner the grauate tax structure
thereby necessitating the payment of onorAs
tax& On the other han% splitting the onation
into two eCual amounts of *hp 411%111 given
on two ifferent years will totally relieve the
onor from the onorPs tax because the first
*hpl11&111 onation in the grauate
brac(ets is exempt& "Section GG% 7$=C#& While
the onorPs tax is compute on the
cumulative onations% the aggregation of all
onations mae by a onor is allowe only
over one calenar year&
Donor3s Tax) Donation to =onFStoc.@
=onFPro(it Pri!ate #ucational
Institutions (%&&&) What conitions must occur in orer that all
grants% onations an contributions to non-
stoc(% non-profit private eucational
institutions may be exempt from the onorAs
tax uner Section 414 "a# of the 'ax Coe?
",.#
SUGGESTED ANSWER)
'he following are the conitions!
47ot more than thirty percent ",1.# of sai gifts
shall be use by such onee for aministration
purposesB
9'he eucational institution is incorporate as a
non-stoc( entity%
,paying no iviens%
0governe by trustees who receive no
compensation% an
-evoting all its income% whether stuentsA fees or
gifts% onations% subsiies or other forms of
philanthropy% to the accomplishment an
promotion of the purposes enumerate in its
:rticles of $ncorporation& "Sec& 414 ":# ",#% 7$=C of
4GGIO
Donor3s Tax) Donation to Political
*aniate (%&&2) ? is a frien of 6% the chairman of *olitical
*arty H% who wants to run for *resient in the
9110 elections& Qnowing that 6 nees funs
for posters an streamers% ? is thin(ing of
onating to 6 *4-1%111&11 for his campaign&
>e as(s you whether his intene onation to
6 will be sub2ect to the onorAs tax& What
woul your answer be? Will your answer be
the same if he were to onate to *olitical
*arty H instea of to 6 irectly? "<.#
SUGGESTED ANSWER)
'he onation to 6% once he becomes a
caniate for an elective post% is not sub2ect
to onorAs tax provie that he complies with
the reCuirement of filing returns of
contributions with the Commission on
3lections as reCuire uner the Omnibus
3lection Coe&
'he answer woul be the same if ? ha
onate the amount to *olitical *arty H
instea of to 6 irectly because the law
places in eCual footing any contribution to
any caniate% political party or coalition of
parties for campaign purposes& (+ection ))()
of the $))& Tax ode).
Donor3s Tax) Donee or Bene(iciary)
Stran7er (%&&&) When the onee or beneficiary is a stranger%
the tax payable by the onor shall be ,1. of
the net gifts& For purposes of this tax% who is
a stranger? "9.#
SUGGESTED ANSWER)
: S'=:7/3= is a person who is not a!
:& @rother% sister "whether by whole or
half-bloo#% spouse% ancestor an lineal
escenantB or @& =elative by consanguinity in the
collateral line within the fourth egree of
relationship&" NSec& G< "@#% 7$=C of 4GGIO
Donor3s Tax) Sale o( s0ares o( Stoc. H
Sale o( 5eal Pro$erty (1999)
:% an iniviual% sol to @% his brother-in-law%
his lot with a mar(et value of *4%111%111 for
*E11&111& :As cost in the lot is *411&111& @ is
financially capable of buying the lot&
: also owns ? Co&% which has a fast growing
business& : sol some of his shares of stoc(
in ? Co& to his (ey executives in ? Co& 'hese
executives are not relate to :& 'he selling
price is *,%111%111% which is the boo( value
of the shares sol but with a mar(et value of
*-%111%111& :As cost in the shares sol is
*4%111%111& 'he purpose of : in selling the
shares is to enable his (ey executives to
acCuire a propriety interest in the business
an have a personal
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4* of 73
sta(e in its business& 3xplain if the
above transactions are sub2ect to
onorAs tax& "-.#
SUGGESTED ANSWER)
'he first transaction where a lot was sol by :
to his brother-in-law for a price below its fair
mar(et value will not be sub2ect to onorAs
tax if the lot Cualifies as a capital asset& The
transfer for less than ade7uate and full
consideration, which gives rise to a deemed
gift, does not apply to a sale of property
sub1ect to capital gains tax. "Section 411%
7$=C#& >owever% if the lot sol is an orinary
asset% the excess of the fair mar(et value
over the consieration receive shall be
consiere as a gift sub2ect to the onorAs
tax&
'he sale of shares of stoc( below the fair
mar(et value thereof is sub2ect to the onorAs
tax pursuant to the provisions of Section 411
of the 'ax Coe& 'he excess of the fair
mar(et value over the selling price is a
eeme gift&
A+TERNATI1E ANSWER)
'he sale of shares of stoc( below the fair
mar(et value will not give rise to the
imposition of the onorAs tax& $n etermining
the gain from the transfer% the selling price of
the shares of stoc(s shall be the fair mar(et
value of the shares of stoc(s transferre&
"Section E% == 7o& 9-<9#& $n which case% the
reason for the imposition of the onorAs tax
on sales for inaeCuate consieration oes
not exist&
#state Tax: *om$re0ensi!e A7rarian
5e(orm +aw (199') Jose Orti) owns 411 hectares of agricultural
lan plante to coconut trees& >e ie on ;ay
,1% 4GG0& *rior to his eath% the government%
by operation of law% acCuire uner the
Comprehensive :grarian =eform Law all his
agricultural lans except five "-# hectares&
Upon the eath of Orti)% his wiow as(e you
how she will consier the 411 hectares of
agricultural lan in the preparation of the
estate tax return& What avice will you give
her?
SUGGESTED ANSWER)
'he 411 hectares of lan that Jose Orti)
owne but which prior to his eath on ;ay
,1% 4GG0 were acCuire by the government
uner C:=* are no longer part of his taxable
gross estate% with the exception of the
remaining five "-# hectares which uner Sec&
I<Da# of the 'ax Coe still forms part of
"eceentAs interest"&
#state Tax: Donation ;ortis
*ausa (%&&1) :% age G1 years an suffering from incurable
cancer% on :ugust 4% 9114 wrote a will an%
on the same ay% mae several inter-vivos
gifts to his chilren& 'en ays later% he ie&
$n your opinion% are the inter-vivos gifts
consiere transfers in contemplation of
eath for purposes of etermining properties
to be inclue in his gross estate? 3xplain
your answer& "-.#
SUGGESTED ANSWER)
6es& When the onor ma(es his will within a
short time of% or simultaneously with% the
ma(ing of gifts% the gifts are consiere as
having been mae in contemplation of eath&
"5oces !" Posaas@ ,/ P0il" 1&/#&
Obviously% the intention of the onor in
ma(ing the inter-vivos gifts is to avoi the
imposition of the estate tax an since the
onees are li(ewise his force heirs who are
calle upon to inherit% it will create a
presumption 1uris tantum that sai onations
were mae mortis causa% hence% the
properties onate shall be inclue as part
of :As gross estate&
#state Tax: Donation ;ortis *ausa !s"
Inter 4i!os (199') :re onations inter vivos an onations
mortis causa sub2ect to estate taxes?
SUGGESTED ANSWER)
+onations inter vivos are sub2ect to onorAs
gift tax "Sec& G4 "a#& 'ax Coe# while
onations mortis causa are sub2ect to estate
tax "Sec& II% 'ax Coe#& >owever% onations
inter vivos% actually constituting taxable
lifetime li(e transfers in contemplation of
eath or revocable transfers "Sec& I< "b# an
"c#% 'ax Coe# may be taxe for estate tax
purposes% the theory being that the
transferorAs control thereon extens up to the
time of his eath&
A+TERNATI1E ANSWER)
+onations inter vivos are not sub2ect to estate
taxes because the transfer of the property
ta(e effect uring the lifetime of the onor&
'he transfer is therefore sub2ect to the
onorAs tax&
On the other han% onations mortis causa
are sub2ect to estate taxes since the transfer
of the properties ta(es effect after the eath
of the eceent& Such onate properties%
real or personal% tangible or intangible% shall
form part of the gross estate&
#state Tax: ?ross #state: Allowable
Deuction (%&&1) On the first anniversary of the eath of 6% his
heirs hoste a sumptuous inner for his
octors% nurses% an others who attene to 6
uring his last illness& 'he cost of the inner
amounte to *hp -1%111&11& Compare to his
gross estate% the *hp -1%111&11 i not
excee five percent of the estate& $s the sai
cost of the inner to commemorate his one
year eath anniversary euctible from his
gross estate? 3xplain your answer& "-.#
SUGGESTED ANSWER)
7o& 'his expense will not fall uner any of the
allowable euctions from gross estate&
Whether viewe in the context of either
funeral expenses or meical expenses% the
same will not Cualify as a euction& Funeral
expenses may inclue meical expenses of
the last illness but not expenses incurre
after burial nor expenses incurre to
commemorate the eath anniversary& (De
?uJman 4" De ?uJman@ /2 S*5A %,6)"
;eical expenses% on the other han% are
allowe only if incurre by the eceent
within one year prior to his eath& "Section
<E":#"E#% 7$=C#&
#state Tax: ?ross #state:
Deuctions (%&&&) ;r& Felix e la Cru)% a bachelor resient
citi)en% suffere from a heart attac( while on a
business trip to the US:& >e ie intestate on
June 4-% 9111 in 7ew 6or( City% leaving behin
real properties situate in 7ew 6or(B his family
home in 5alle 5ere% *asig CityB an office
conominium in ;a(ati CityB shares of stoc(s
in San ;iguel CorporationB cash in ban(B an
personal belongings& 'he eceent is heavily
insure with $nsular Life& >e ha no (nown
ebts at the time of his eath& :s the sole heir
an appointe :ministrator% how woul you
etermine the gross estate of the eceent?
What euctions may be claime by the
estate an when an where shall the return be
file an estate tax pai? ",.#
SUGGESTED ANSWER)
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44 of 73
'he gross estate shall be etermine by
incluing the value at the time of his eath all
o( t0e $ro$erties mentione% to the extent
of the interest he ha at the time of his eath
because he is a <ilipino citiIen& NSec& <- ":#%
7$=C of 4GGIO
With respect to the li(e insurance
$rocees% the amount incluible in the gross
estate for *hilippine tax purposes woul be to
the extent of the amount receivable by the
estate of the ecease% his executor% or
aministrator% uner policies ta(en out by
eceent upon his own life% irrespective of
whether or not the insure retaine the
power of revocation% or to the extent of the
amount receivable by any beneficiary
esignate in the policy of insurance% except
when it is expressly stipulate that the
esignation of the beneficiary is irrevocable&
NSec& <- "3# 7$=C of 4GGIO
'he D#D6*TI1=S that may be claime by
the estate are! 4# 'he actual funeral
expenses or in an amount eCual to
five percent "-.# of the gross estate%
whichever is lower% but in no case to
excee two hunre thousan pesos
"*911&111&11#& NSec& <E ":# "4# "a#& 7$=C of
4GGIO
9# 'he 2uicial expenses in the testate or
intestate proceeings&"Sec& <E":#"4#
,# 'he value of the eceentAs family
home locate in 5alle 5ere% *asig City in an
amount not exceeing one million pesos
"*4%111%111&11#% an upon presentation of a
certification of the barangay captain of the
locality that the same have been the
eceentAs family home& NSec& <E ":# "0#% $biO
0# 'he stanar euction of *4%111%111& "Sec&
<E":#"-#
-# ;eical expenses incurre within one
year from eath in an amount not exceeing
*-11%111&"Sec& <E":#"E#
'he #STAT# TA> 5#T65= shall be file within six
"E# months from the eceentAs eath "Sec&
G1 "@#% 7$=C of 4GGIO% provie that the
Commissioner of $nternal =evenue shall have
authority to grant in meritorious cases% a
reasonable extension not exceeing thirty
",1# ays for filing the return "Sec& G1 "c#%
$biO
3xcept in cases where the Commissioner of
$nternal =evenue otherwise permits% the
estate tax return shall be file with an
authori)e agent ban(% or =evenue +istrict
Officer% Collection Officer% or uly authori)e
'reasurer of *asig City% the City in which the
eceent ;r& e la Cru) was omicile at the
time of his eath& NSec& G1 "+#& 7$=C of 4GGIO
#state Tax: Inclusion:
5esient Alien (199') Cliff =obertson% an :merican citi)en% was a
permanent resient of the *hilippines& >e
ie in ;iami% Floria& >e left 41%111 shares
of ;eralco% a conominium unit at the
'win 'owers @uiling at *asig% ;etro ;anila
an a house an lot in Los :ngeles%
California& What assets shall be inclue in
the 3state 'ax =eturn to be file with the
@$=?
SUGGESTED ANSWER)
:ll of ;r& =obertsonAs assets consisting of
41%111 shares in the ;eralco% a conominium
unit in *asig% an his house an lot in Los
:ngeles% California are taxable& 'he
properties of a resient alien eceent li(e
;r& =obertson are taxable wherever situate
"Sees& II% I< an G<% 'ax Coe#&
#state Tax: Payment !s" Probate
Proceein7s (%&&') 5CC is the aministrator of the estate of his
father 7/C% in the estate proceeings pening
before the ;; =egional 'rial Court& Last year%
he receive from the Commissioner of $nternal
=evenue a eficiency tax assessment for the
estate in the amount of *4%111%111& @ut he
ignore the notice& Last month% the @$=
effecte a levy on the real properties of the
estate to pay the elinCuent tax& 5CC file a
motion with the probate court to stop the
enforcement an collection of the tax on the
groun that the @$= shoul have secure first
the approval of the probate court% which ha
2urisiction over the estate% before levying on
its real properties& $s 5CCAs contention
correct? "-.#
SUGGGESTED ANSWER)
7o& 5CCAs contention is not correct& 'he
approval of the probate court is not
necessary& *ayment of estate taxes is a
conition preceent for the istribution of the
properties of the eceent an the collection
of estate taxes is executive in nature for
which the court is evoi of any 2urisiction&
>ence% the approval of the court% sitting in
probate% or as a settlement tribunal is not a
manatory reCuirement in the collection of
estate taxes ";arcos < !" *ourt o( A$$eals@
%82 S*5A '8 C1998O#&
#state Tax: Situs o( Taxation: =onF
5esient Deceent (%&&&)
+iscuss the rule on situs of taxation with
respect to the imposition of the estate tax on
property left behin by a non-resient
eceent& "9.#
SUGGESTED ANSWER)
'he value of the gross estate of a non-
resient eceent who is a Filipino citi)en at
the time of his eath shall be etermine by
incluing the value at the time of his eath of
all property% real or personal% tangible or
intangible% wherever situate to the extent of
the interest therein of the eceent at the
time of his eath NSec& <- ":#% 7$=C of 4GGI#&
'hese properties shall have a situs of
taxation in the *hilippines hence sub2ect to
*hilippine estate taxes&
On the other han% in the case of a non-
resient eceent who at the time of his
eath was not a citi)en of the *hilippines%
only that part of the entire gross estate which
is situated in the 9hilippines to the extent of
the interest therein of the decedent at the
time of his death shall be included in his
taxable estate. *rovie% that% with respect to
intangible personal property% we apply the
rule of reciprocity& "$bi#
#state Tax: 4anis0in7
Deuctions (199') 5anishing euctions in estate-
taxation?
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4. of 73
SUGGESTED ANSWER)
5anishing euctions or property previously
taxe in estate taxation refers to the
iminishing eucibilityL exemption% at the
rate of 91. over a perio of five "-# years
until it is lost after the fifth year% of any
property "situate in the *hilippines# forming
part of the gross estate% acCuire by the
eceent from a prior eceent who ie
within a perio of five "-# years from the
eceentAs eath&
#state Tax) Payment !s" Probate
Proceein7s (%&&,) $s the approval of the court% sitting as probate
or estate settlement court% reCuire in the
enforcement an collection of estate tax?
3xplain&
SUGGESTED ANSWER)
7o% the approval of the court% sitting in probate%
or as a settlement tribunal over the ecease is
not a manatory reCuirement in the collection
of estate taxes& 'here is nothing in the 'ax
Coe% an in the pertinent remeial laws that
implies the necessity of the probate or estate
settlement courtAs approval of the stateAs claim
for estate taxes% before the same can be
enforce an collecte&
(;arcos !" *ourt o( A$$eals@ ?"5" =o" 1%&//&@ Gune
,@ 1998)
BUSINESS TAXES
4AT: Basis o( 4AT
(1996)
A0at is t0e basis o( t0e 4alueFAe Tax
on taxable sales o( real $ro$ertyB
SUGGESTED ANSWER)
'he basis of the 5alue-:e 'ax on taxable
sale of real property is "/=OSS S3LL$7/
*=$C3" which is either selling price state in
the sale ocument or the "Honal 5alue"%
whichever is higher& $n the absence of )onal
values% the gross selling price shall refer to
the mar(et value as shown in the latest tax
eclaration or the consieration% whichever is
higher&
4AT: *0aracteristics o(
4AT (1996)
A0at are t0e c0aracteristics o( t0e 4alueF
Ae TaxB
SUGGESTED ANSWER)
'he value-ae tax is an inirect tax an
the amount of tax may be shifte or passe
on to the buyer% transferee or lessee of the
goos% properties or services&
A+TERNATI1E ANSWER)
'he value-ae tax has the following
characteristics! 4# $t is an inirect tax where
tax shifting is always presume! 9# $t is consumption-baseB ,# $t is
impose on the value-ae in each stage of
istributionB 0# $t is a creit-invoice
metho value-ae taxB an -# $t is not
a cascaing tax&
4AT: #xem$te
Transactions (1996) /ive at least three ",# real estate
transactions which are not sub2ect to the
5alue-:e 'ax&
SUGGESTED ANSWER)
=eal estate transactions which are exempt
from the value-ae tax are!
"a# Sale of real property not primarily
hel for sale or lease in the orinary course
of trae or businessB
"b# Sale of real property utili)e for
sociali)e housing uner =:& 7o& I9IGB
"c# Sale of real property utili)e uner
the low-cost housing uner @* @ig& 991&
=ote: 'he other real estate transactions
which are exempt from the value-ae tax
which may be cite by the bar caniates are
as follows!
"a# 'ransfer of real property to a trustee
if the property is to be hel merely in trust
for the trustor& "b# 'ransfer of real property to a corporation
in exchange for its shares of stoc( uner
Section ,0"c#"9# an "E#"9# of the 'ax Coe&
"c# :vance payment by the lessee in a
lease contract% when the same is actually a
loan to the lessor from the lessee&
"# Security eposits for lease
arrangements to insure the faithful
performance of certain obligations of the
lessee to the lessor&
"e# Lease of resiential units% boaring
houses% ormitories% rooms an be spaces
offere for rent by their owners at a monthly
rental not exceeing *,%G-1&11 per unit&
4AT: +iable (or
Payment (1996)
A0o are liable (or t0e $ayment o( 4alueFAe
TaxB
SUGGESTED ANSWER)
'he persons liable for the value-ae tax
are! Sellers of goos an properties in the course of
trae or businessB
Sellers of services in the course of trae or
business% incluing lessors of goos an
propertiesB
$mporters of taxable goos% whether in the course
of business or not
4AT: Transactions -Deeme
Sales: (1998) Uner the 5alue :e tax "5:'#% the tax is
impose on sales% barter% or exchange of
goos an services& 'he 5:' is also impose
on certain transactions "eeme-sales"& What
are these so-calle transactions "eeme
salesA?
SUGGESTED ANSWER)
'he following transactions shall be eeme
sale! a# 'ransfer% use% or consumption not in
the course of business of goos originally
intene for sale or for use in the course of
businessB
b# +istribution or transfer
to! "4# Shareholers or investors as share
in the profits of 5:'-registere
personsB or "9# Creitors in payment
of ebtB
c# Consignment of goos if actual sale
is not mae within E1 ays following the
ate such goos were consigneB an
# =etirement from or cessation of
business% with respect to inventories of
taxable goos existing as of such retirement
or cessation&
4AT) *o!ere
Transactions (199/)
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46 of 73
State whether the following transactions are
a# 5:' 3xempt% b# sub2ect to 5:' at 41.B or c# sub2ect
to 5:' at 1.!
4# Sale of fresh vegetables by :ling $ning
at the *amilihang @ayan ng 'rece ;artire)&
N4.O 9# Services renere by Ja(eAs
Construction Company% a contractor to the
Worl >ealth Organi)ation in the renovation
of its offices in ;anila& N4.O
,# Sale of tractors an other agricultural
implements by @ung(al $ncorporate to local
farmers& N4.O 0# Sale of ='W by CelyAs @outiCue% a
Filipino ress esigner% in her ress shop an
other outlets& N4.O -# Fees for loging pai by stuents to
@ahay-@ahayan +ormitory% a private entity
operating a stuent ormitory "monthly fee
*$%-11#& N4.O
SUGGESTED ANSWER)
4# 5:' exempt& Sale of agricultural
proucts% such as fresh vegetables% in their
original state% of a (in generally use as% or
proucing foos for human consumption is
exempt from 5:'& "Section 41G"c#% 7$=C#&
9# 5:' at 1.& Since Ja(eAs Construction
Company has renere services to the Worl
>ealth Organi)ation% which is an entity
exempte from taxation uner international
agreements to which the *hilippines is a
signatory% the supply of services is sub2ect to
)ero percent "1.# rate& "Sec& 41<N@4",#%
7$=C#&
,# 5:' at 41.& 'ractors an other
agricultural implements fall uner the
efinition of goos which inclue all tangible
ob2ects which are capable of pecuniary
estimation "Sec& 41EN:4"4#% 7$=C% the sales of
which are sub2ect to 5:' at 41.&
0# 'his is sub2ect to 5:' at 41.& 'his
transaction also falls uner the efinition of
goos which inclue all tangible ob2ects which
are capable of pecuniary estimation "Sec&
41EN:4"4#% 7$=C% the sales of which are
sub2ect to 5:' at 41.&
-# 5:' 3xempt& 'he monthly fee pai by
each stuent falls uner the lease of
resiential units with a monthly rental per unit
not exceeing *hp <%111% which $s exempt
from 5:' regarless of the amount of
aggregate rentals receive by the lessor
uring the year& "Sec& 41G"x#% 7$=C#& 'he term
unit shall mean per person in the case of
ormitories% boaring houses an be spaces
"Sec& 0&41,-4% ==7o& I-G-#&
*1;;#=T: 'he problems o not call for a yes or
no answer& :ccoringly% a bar caniate who
answere only 5:' exempt& 5:' at 41. or 5:' at
1.& as calle for in the problem without further
reasons% shoul be given full creit&
4AT) #xem$tion:
*onstitutionality (%&&') : law was passe exempting octors an
lawyers from the operation of the value
ae tax& Other professionals complaine
an file a suit Cuestioning the law for being
iscriminatory an violative of the eCual
protection clause of the Constitution since
complainants were not given the
same exemption& $s the suit meritorious or
not? =eason briefly& "-.#
SUGGESTED ANSWER)
@& 6es% the suit is meritorious& 'he 5:' is
esigne for economic efficiencyB hence%
shoul be neutral to those who belong to the
same class& *rofessionals are a class of
taxpayers by themselves who% in compliance
with the rule of eCuality of taxation% must be
treate ali(e for tax purposes& 3xempting
lawyers an octors from a buren to which
other professionals are sub2ecte will ma(e the
law iscriminatory an violative of the eCual
protection clause of the Constitution& While
singling out a class for taxation purposes will
not infringe upon this constitutional limitation
"S0ell !" 4ano@ 9' P0il" 2/9 C19,'D#%
singling out a taxpayer from a class will no
oubt transgress the constitutional limitation
"1rmoc Su7ar *o" Inc"@ !" Treasurer o(
1rmoc *ity@ %% S*5A 6&2 C196/O#& 'reating
octors an lawyers as a ifferent class of
professionals will not comply with the
reCuirements of a reasonable% hence vali
classification% because the classification is not
base upon substantial istinction which
ma(es real ifferences& 'he classification oes
not comply with the reCuirement that it shoul
be germane to the purpose of the law either&
"Pe$siF*ola Bottlin7 *o"@ Inc" !" *ity o(
Butuan@ %' S*5A 8/9 C196/D#&
ANOT/ER ANSWER)
7o& 'he suit is not meritorious& 'he eCual
protection clause of the Constitution merely
reCuires that all persons sub2ecte to
legislation shall be treate ali(e% uner li(e
circumstances an conitions% both in the
privileges conferre an in the liabilities
impose& 'he eCuality in taxation rule is not
violate if classifications or istinctions are
mae as long as the same are base on
reasonable an substantial ifferences&
DPe$siF*ola Bottlin7 *o"@ Inc"
!" *ity o( Butuan@ %' S*5A 8/9
C196/O#&
$n the instant case% the professions of octors
an lawyers are not principally aime at
earning money but for the service of the
people& 'he exemption grante to octors
an lawyers from the operation of the 5:' is
2ustifie% as it is not iscriminatory against
the other professionals because they have
reasonable an substantial ifferences in the
conuct of their professions&
4AT) =onF4AT tax$ayer) *laim (or
5e(un (%&&6) LilyAs Fashion% $nc& is a garment manufacturer
locate an registere as a Subic @ay
Freeport 3nterprise uner =epublic :ct 7o&
I99I an a non-5:' taxpayer& :s such% it is
exempt from payment of all local an national
internal revenue taxes& +uring its operations%
it purchase various supplies an materials
necessary in the conuct of its manufacturing
business& 'he suppliers of these goos shifte
to LilyAs Fashion% $nc& the 41. 5:' on the
purchase items amounting to * -11%111&11&
LilyAs Fashion% $nc& file with the @$= a claim
for refun for the input tax shifte to it by the
suppliers& $f you were the Commissioner of
$nternal =evenue% will you allow the refun?
"-.#
A+TERNATI1E ANSWER)
7o% $ will not allow the refun& Only 5:'-
=egistere taxpayers are entitle to a refun
of their
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42 of 73
unapplieLunuse $nput 5:' "'ax
=eform :ct% Section 449N:O N4GGIO#&
A+TERNATI1E ANSWER)
7o& 'he exemption of LilyAs Fashion% $nc& is
only for taxes for which it is irectly liable&
>ence% it can not claim exemption for a tax
shifte to it% which is not at all consiere a
tax to the buyer but a part of the purchase
price& LilyAs fashion is not the taxpayer in so
far as the passe-on tax is concerne an
therefore% it can not claim for a refun of a
tax merely shifte to it "*hil& :cetylene Co&%
$nc& v& C$=% L-4GI1I%:ug& 4I% 4G<I#&
(NCTA 34N4: This concept pertains to the
2AT law which is excluded from the 3ar
coverage, "uidelines for %''- 3ar
4xaminations, (une $,, %''-)
REMEDIES IN INTERNA+
RE1ENUE TAXES
BI5: Assessment: 6nre7istere
Partners0i$ (1998) ;r& Santos ie intestate in 4G<G leaving his
spouse an five chilren as the only heirs&
'he estate consiste of a family home an a
four-oor apartment which was being rente
to tenants& Within the year% an extra2uicial
settlement of the estate was execute from
the heirs% each of them receiving hisLher ue
share& 'he surviving spouse assume
aministration of the property& 3ach year% the
net income from the rental property was
istribute to all% proportionately% on which
they pai respectively% the corresponing
income tax&
$n 4GG0% the income tax returns of the heirs
were examine an eficiency income tax
assessments were issue against each of
them for the years 4G<G to 4GG,% inclusive% as
having entere into an unregistere
partnership& Were the assessments 2ustifie?
SUGGESTED ANSWER)
6es% the assessments were 2ustifie because
for income tax purposes% the co-ownership of
inherite property is automatically converte
into an unregistere partnership from the
moment the sai properties are use as a
common fun with intent to prouce profits
for the heirs in proportion to their shares in
the inheritance&
From the moment of such partition% the heirs
are entitle alreay to their respective
efinite shares of the estate an the income
thereof% for each of them to manage an
ispose of as exclusively his own without the
intervention of the other heirs% an%
accoringly% he becomes liable iniviually
for all taxes in connection therewith& $f after
such partition% he allows his shares to be hel
in common with his co-heir uner a single
management to be use with the intent of
ma(ing profit thereby in proportion to his
share% there can be no oubt that% even if no
ocument or instrument were execute for
the purpose% for tax purposes% at least% an
unregistere partnership is forme "+orenJo
1na@ et al !" *I5@ ', S*5A 8'#&
A+TERNATI1E ANSWER)
7o% the assessments are not 2ustifie& 'he
mere sharing of income oes not of itself
establish a partnership absent any clear
intention of the co-owners who are only
awaiting liCuiation of the estate&
BI5: *ollection o( Tax
De(iciency (1999)
: ie% survive by his wife an three
chilren& 'he estate tax was properly pai
an the estate settle an ivie an
istribute among the four heirs& Later% the
@$= foun out that the estate faile to report
the income receive by the estate uring
aministration& 'he @$= issue a eficiency
income tax assessment plus interest%
surcharges an penalties& Since the ,
chilren are resiing abroa% the @$= sought
to collect the full tax eficiency only against
the wiow& $s the @$= correct? "41.#
SUGGESTED ANSWER)
6es% the @$= is correct& $n a case where the
estate has been istribute to the heirs% the
collection remeies available to the @$= in
collecting tax liabilities of an estate may
either "4# sue all the heirs an collect from
each of them the amount of tax proportionate
to the inheritance receive or "9# by virtue of
the lien create uner Section 94G% sue only
one heir an sub2ect the property he receive
from the estate to the payment of the estate
tax& 'he @$=% therefore% is correct in pursuing
the secon remey although this will give rise
to the right of the heir who pays to see(
reimbursement from the other heirs& (*I5 !"
Pinea@ %1 S*5A 1&,)" $n no case% however%
can the @$= enforce the tax liability in excess
of the share of the wiow in the inheritance&
BI5: *om$romise)
*onitions (%&&&) Uner what conitions may the
Commissioner of $nternal =evenue be
authori)e to! A" Compromise the payment of any
internal revenue tax? "9.#
SUGGESTED ANSWER)
'he Commissioner of $nternal =evenue may be
authori)e to compromise the payment of any
internal revenue tax where! 4# : reasonable
oubt as to the valiity of the claim
against the taxpayer existsB or 9# the
financial position of the taxpayer
emonstrates a clear inability to pay the assesse
tax&
B" :bate or cancel a tax liability?
",.#
SUGGESTED ANSWER)
'he Commissioner of $nternal =evenue may
abate or cancel a tax liability when! 4# 'he
tax or any portion thereof appears to be
un2ustly
or excessively assesseB or 9# 'he
aministration an collection costs involve
o not 2ustify the collection of the amount ue&
NSec& 910 "@#% 7$=C of 4GGIO
BI5: *om$romise) #xtent o(
Aut0ority (1996) 3xplain the extent of the authority of the
Commissioner of $nternal =evenue to
compromise an abate taxes?
SUGGESTED ANSWER)
'he authority of the Commissioner to
compromise encompasses both civil an
criminal liabilities of the taxpayer& 'he civil
compromise is allowe only in cases 49#
where the tax assessment is of oubtful
valiity% or 4,# when the financial position of
the taxpayer
emonstrates a clear inability to pay the
tax&
'he compromise of the tax liability is possible
at any stage of litigation an the amount of
compromise is left to the iscretion of the
Commissioner except with respect to
sirdondee@gmail.com
44 of 73
final assessments issue against large
taxpayers wherein the Commissioner cannot
compromise for less than fifty percent "-1.#&
:ny compromise involving large taxpayers
lower than fifty percent "-1.# shall be
sub2ect to the approval of the Secretary of
Finance&
:ll criminal violations except those involving
frau% can be compromise by the
Commissioner but only prior to the filing of
the information with the Court& 'he
Commissioner may also abate or cancel a tax
liability when
4the tax or any portion thereof appears to
have been un2ustly or excessively assesseB
or
9the aministrative an collection costs
involve o not Justify collection of the
amount ue& "Sec& 910% 7$=C#
BI5: *om$romise) Ait00olin7
A7ent (199/) ;ay the Commissioner of the $nternal
=evenue compromise the payment of
withholing tax (tax deducted and withheld at
source) where the financial position of the
taxpayer emonstrates a clear inability to pay
the assesse tax? N-.4
SUGGESTED ANSWER)
7o& : taxpayer who is constitute as
withholing agent who has eucte an
withhel at source the tax on the income
payment mae by him hols the taxes as
trust funs for the government "Sec& -<N+O#
an is obligate to remit them to the @$=& 'he
subseCuent inability of the withholing agent
to payLremit the tax withhel is not a groun
for compromise because the withholing tax
is not a tax upon the withholing agent but it
is only a proceure for the collection of a tax&
BI5: *or$oration: Distraint
H +e!y (%&&%) On ;arch 4-% 9111% the @$= issue a
eficiency income tax assessment for the
taxable year 4GGI against the 5alera /roup of
Companies "5alera# in the amount of *41
million& Counsel for 5alera proteste the
assessment an reCueste a reinvestigation
of the case& +uring the investigation% it was
shown that 5alera ha been transferring its
properties to other persons& :s no aitional
evience to ispute the assessment ha been
presente% the @$= issue on June 4E% 9111
warrants of istraint an levy on the
properties an orere the filing of an action
in the =egional 'rial Court for the collection of
the tax& Counsel for 5alera file an in2unctive
suit in the =egional 'rial Court to compel the
@$= to hol the collection of the tax in
abeyance until the ecision on the protest was
renere&
:& Can the @$= file the civil action for
collection% pening ecision on the
aministrative protest? 3xplain& ",.#
SUGGESTED ANSWER)
:& 6es% because there is no prohibition for this
proceure consiering that the filing of a civil
action for collection uring the penency of an
aministrative protest constitutes the final
ecision of the Commissioner on the protest
"*I5 !" 6nion S0i$$in7 *or$"@ /, S*5A
,'/ C199&D#&
@& :s counsel for 5alera% what action
woul you ta(e in orer to protect the interest
of your client? 3xplain your answer& "9.#
SUGGESTED ANSWER)
@& $ will wait for the filing of the civil action for
collection an consier the same as an
appealable ecision& $ will not file an in2unctive
suit because it is not an available remey& $
woul then appeal the case to the Court of
'ax :ppeals an move for the ismissal of the
collection case with the ='C& Once the appeal
to the C': is file on time% the C': has
exclusive 2urisiction over the case& >ence%
the collection case in the ='C shoul be
ismisse "Tabes !" FloKo@ 11, S*5A %8/
C19/%D#&
BI5: *ourt o( Tax A$$eals: *ollection o(
Taxes) ?rouns (or *om$romise (1996)
4& ;ay the Court of 'ax :ppeals issue an
in2unction to en2oin the collection of taxes by
the @ureau of $nternal =evenue? 3xplain&
SUGGESTED ANSWER)
6es& When a ecision of the Commissioner on
a tax protest is appeale to the C': pursuant
to +ec. $$ of #A. No. $$%, (law creating the
TA) in relation to +ec. %%) of the N6#% such
appeal oes not suspen the payment% levy%
istraint anLor sale of any of the taxpayerAs
property for the satisfaction of his tax liability&
>owever% when in the opinion of the C': the
collection of the tax may 2eopari)e the
interest of the /overnment anLor the
taxpayer% the Court at any stage of the
proceeings may suspen or restrain the
collection of the tax an reCuire the taxpayer
either to eposit the amount claime or to file
a surety bon for not more than ouble the
amount with the Court&
9& ;ay the tax liability of a taxpayer be
compromise uring the penency of an
appeal? 3xplain&
SUGGESTED ANSWER)
6es& +uring the penency of the appeal% the
taxpayer may still enter into a compromise
settlement of his tax liability for as long as
any of the grouns for a compromise i&e&B
doubtful validity of assessment an financial
incapacity of taxpayer% is present& :
compromise of a tax liability is possible at
any stage of litigation% even uring appeal%
although legal propriety emans that prior
leave of court shoul be obtaine "Pasueco
!s" *I5 +F292/8@ Gune %9@ 19/%#&
BI5: *riminal Prosecution: Tax
#!asion (199/) $s assessment necessary before a taxpayer
may be prosecute for willfully attempting in
any manner to evae or efeat any tax
impose by the $nternal =evenue Coe? N-.#
SUGGESTED ANSWER)
7o& :ssessment is not necessary before a
taxpayer maybe prosecute if there is a prima
facie showing of a willful attempt to evae
taxes as in the taxpayerAs failure to eclare a
specific item of taxable income in his income
tax returns "6n7ab !" *usi 98 S*5A /88#&
On the contrary% if the taxes allege to have
been evae is compute base on reports
approve by the @$= there is a presumption of
regularity of the previous payment of taxes%
so that unless an until the @$= has mae a
final etermination of what is suppose to be
the correct taxes% the taxpayer shoul not be
place in the crucible of
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49 of 73
criminal prosecution "*I5 !" Fortune
Tobacco *or$"@ ?5 =o" 1192%%@
Gune '@ 1996#&
BI5: #xtinction) *riminal +iability o(
t0e Tax$ayer (%&&%) ;r& Chan% a manufacturer of garments% was
investigate for failure to file tax returns an
to pay taxes for the taxable year 4GGI&
+espite the subpoena duces tecum issue to
him% he refuse to present an submit his
boo(s of accounts an allie recors&
$nvestigators% therefore% raie his factory an
sei)e several bunles of manufacture
garments% supplies an unpai importe
textile materials& :fter his apprehension an
base on the testimony of a former employee%
eficiency income an business taxes were
assesse against ;r& Chan on :pril 4-% 9111&
$t was then that he pai the taxes& Criminal
action was nonetheless institute against him
in the =egional 'rial Court for violation of the
'ax Coe& ;r& Chan move to ismiss the
criminal case on the groun that he ha
alreay pai the taxes assesse against him&
>e also emane the return of the garments
an materials sei)e from his factory& >ow will
you resolve ;r& ChanAs motion? "-.#
SUGGESTED ANSWER)
'he motion to ismiss shoul be enie& 'he
satisfaction of the civil liability is not one of the
grouns for the extinction of criminal action
"Peo$le !" Ile(onso Tierra@ 1% S*5A 666
C196'D#& Li(ewise% the payment of the tax ue
after apprehension shall not constitute a vali
efense in any prosecution for violation of any
provision of the 'ax Coe "Sec& 9-,NaO% 7$=C#&
>owever% the garments an materials sei)e
from the factory shoul be orere returne
because the payment of the tax ha release
them from any lien that the /overnment has
over them&
*ustoms) Gurisiction) Assessment)
6n$ai *ustomsDutiesMTaxes (%&&6)
'he Collector of Customs issue an
assessment for unpai customs uties an
taxes on the importation of your client in the
amount of *G<1%111&11& Where will you file
your case to protect your clientAs right?
Choose the correct courtsL agencies%
observing their proper hierarchy& "-.#
4& Court of 'ax
:ppeals 9& Collector of
Customs ,& Commissioner of
Customs 0& =egional 'rial
Court -& ;etropolitan 'rial
Court E& Court of
:ppeals I& Supreme
Court
SUGGESTED ANSWER)
8. *rotest with the Collector of Customs (+ec.
%5'/, T)
2. :ppeal to the Commissioner of Customs
(+ec. %5$5, T).
:. :ppeal to the C': (#A )%/%)
;. *etition for =eview on Certiorari Supreme
Court (#ule !, of the $))& #ules of ivil
9rocedure (#A )%/%).
Tax$ayer) Prescri$ti!e Perio)
Assessment) De(iciencyIncome Tax
(%&&6) 'he Commissioner of $nternal =evenue issue
an assessment for eficiency income tax for
taxable year 9111 last July ,4% 911E in the
amount of * 41 ;illion inclusive of
surcharge an interests& $f the elinCuent
taxpayer is your client% what steps will you
ta(e? What is your efense? "41.#
A+TERNATI1E ANSWER)
:s Counsel% $ shall move to cancel the
:ssessment because of prescription& 'he
three ",# year perio of assessment for the
$ncome 'ax =eturns of 9111 starts on :pril 4-%
9114 an ens on :pril 4E% 9110& 'he
assessment of July ,4% 911E is beyon the
three ",# year prescriptive perio an can no
longer have any legal% bining effect (Tax
#eform Act, Title 2666, hapter 6, +ection %'5
A$))&@).
A+TERNATI1E ANSWER)
Since my client has lost his right to protest% $
will avise him to wait for a collection action
by the Commissioner& 'hen% $ will file a
petition for review with the C': to Cuestion
the collection& Since the assessment was
issue beyon the prescriptive perio to
assess% the action to collect an invali
assessment is not warrante (P0il" GourF
nalists@ Inc" !" *I5@ ?"5" =o" 16%/,%@
December 16@ %&&')"
Tax$ayer) Assessment)
De(iciency Tax (%&&6) On June 4% 911,% /lobal @an( receive a final
notice of assessment from the @$= for
eficiency ocumentary stamp tax in the
amount of *- ;illion& On June ,1% 911,%
/lobal @an( file a reCuest for
reconsieration with the Commissioner of
$nternal =evenue& 'he Commissioner enie
the reCuest for reconsieration only on ;ay
,1% 911E% at the same time serving on /lobal
@an( a warrant of istraint to collect the
eficiency tax& $f you were its counsel% what
will be your avice to the ban(? 3xplain& "-.#
A+TERNATI1E ANSWER)
'he enial for the reCuest for reconsieration
is the final ecision of the C$=&& $ woul avise
/lobal @an( to appeal the enial to the Court
of 'ax :ppeals "C':# within ,1 ays from
receipt& $ will further avise the ban( to file a
motion for in2unction with the Court of 'ax
:ppeals to en2oin the Commissioner from
enforcing the assessment pening resolution
of the appeal& While an appeal to the C': will
not suspen the payment% levy% istraint%
anLor sale of any property of the taxpayer for
the satisfaction of its tax liability% the C': is
authori)e to give in2unctive relief if the
enforcement woul 2eopari)e the interest of
the taxpayer% as in this case% where the
assessment has not become final (+ascona
+an *o" !@ *I5@ *TA *ase =o" ,888@ Ganuary
'@ %&&&) See also 5e!ise
*TA 5ules@ a$$ro!e by t0e Su$reme *ourt
on December 1,@ %&&,)"
A+TERNATI1E ANSWER)
$ will avice the @an( to promptly pay the
eficiency ocumentary stamp tax an the
interest charges to avoi any further increase
in the tax liability& 'he @an( shoul have
appeale to the Court of 'ax :ppeals when
the @$= faile to ecie on its =eCuest for
=econsieration within thirty ",1# ays after
the inaction of the @$= for one hunre eighty
"4<1# ays or on +ecember ,4% 911,& 'he 'ax
:ssessment has alreay become final%
executory an unappealable at that point (BPI
!" *I5@ ?"5" =o" 129826@ 1ctober 18@ %&&,)"
Tax$ayer) 4ATFre7istere) *laim (or
Tax 5e(un (%&&6)
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.0 of 73
=oyal ;ining is a 5:'-registere omestic
mining entity& One of its proucts is silver
being sol to the @ang(o Sentral ng *ilipinas&
$t file a claim with the @$= for tax refun on
the groun that uner Section 41E of the 'ax
Coe% sales of precious metals to the @ang(o
Sentral ng *ilipinas are consiere export
sales sub2ect to )ero-rate 5:'& $s =oyal
;iningAs claim meritorious? 3xplain& "-.#
SUGGESTED ANSWER)
7o% =oyal ;iningAs claim is not meritorious
because it is the sale to the @ang(o Sentral
ng *ilipinas of gol an not silver which is
consiere export sales at Hero-rate 5:'
(Tax #eform Act, Title 62, +ection $'-A%@Aa@
A!@). (=1TA B#=#: 42AT is excluded from the
3ar coverage, "uidelines for %''- 3ar
4xaminations, (une $,, %''-)
BI5: Frauulent 5eturn) Prima Facie
#!ience (199/) What constitutes prima facie evience of a
false or frauulent return? N9.O
SUGGESTED ANSWER)
'here is prima facie evience of a false or
frauulent return when the taxpayer has
willfully an (nowingly file it with the intent
to evae a part or all of the tax legally ue
from him "6n7ab !" *usi@@ 98 S*5A /88#&
'here must appear a esign to mislea or
eceive on the part of the taxpayer% or at
least culpable negligence& : mista(e not
culpable in respect of its value woul not
constitute a false return& (*ords and 9hrases,
2ol. $-, page $&5).
BI5: Frauulent 5eturn) Prima Facie
#!ience (%&&%) What constitutes prima facie evience of a
false or frauulent return to 2ustify the
imposition of a -1. surcharge on the
eficiency tax ue from a taxpayer? 3xplain&
"-.#
SUGGESTED ANSWER)
'here is a prima facie evience of false or
frauulent return when the taxpayer
+E3+TANT6A??G ENB4#B4?A#4B his taxable
sales% receipts or income% or +E3+TANT6A??G
C24#+TAT4B his euctions% the taxpayerAs
failure to report sales% receipts or income in
an amount exceeing ,1. of that eclare
per return% an a claim of euction in an
amount exceeing ,1. of actual euction
shall rener the taxpayer liable for substantial
unereclaration an overeclaration%
respectively% an will 2ustify the imposition of
the -1. surcharge on the eficiency tax ue
from the taxpayer& (+ec. %!/, N6#).
BI5: ?arnis0ment: Ban. Account o( a
Tax$ayer (199/) $s the @$= authori)e to issue a warrant of
garnishment against the ban( account of a
taxpayer espite the penency of his protest
against the assessment with the @$= or appeal
with the Court of 'ax :ppeals? N-.O
SUGGESTED ANSWER)
'he @$= is authori)e to issue a warrant of
garnishment against the ban( account of a
taxpayer espite the penency of protest
"Iabes !" FloKo@ 1, S*5A %8/#& 7owhere in
the 'ax Coe is the Commissioner reCuire to
rule first on the protest before he can institute
collection proceeings on the tax assesse&
'he legislative policy is to give the
Commissioner much latitue in the speey
an prompt collection of taxes because it is in
taxation that the /overnment epens to
obtain the
means to carry on its operations "5e$ublic u"
Tim Tian Ten7 Sons@ Inc"@ 16 S*5A ,/'#&
A+TERNATI1E ANSWER)
7o% because the assessment has not yet
become final% executory an emanable&
'he basic consieration in the collection of
taxes is whether the assessment is final an
unappealable or the ecision of the
Commissioner is final% executory an
emanable% the @$= has legal basis to collect
the tax liability by either aministrative or
2uicial action&
BI5: PreFAssessment =otice not
=ecessary (%&&%) $n the investigation of the withholing tax
returns of :H ;eina Security :gency ":H
;eina# for the taxable years 4GGI an 4GG<%
a iscrepancy between the taxes withhel
from its employees an the amounts actually
remitte to the government was foun&
:ccoringly% before the perio of prescription
commence to run% the @$= issue an
assessment an a eman letter calling for
the immeiate payment of the eficiency
withholing taxes in the total amount of
*9-1%111&11& Counsel for :H ;eina
proteste the assessment for being null an
voi on the groun that no pre-assessment
notice ha been issue& >owever% the protest
was enie& Counsel then file a petition for
prohibition with the Court of 'ax :ppeals to
restrain the collection of the tax&
:& $s the contention of the counsel
tenable? 3xplain "9.#
SUGGESTED ANSWER)
:& 7o% the contention of the counsel is
untenable& Section 99< of the 'ax Coe
expressly provies that no pre-assessment
notice is reCuire when a iscrepancy has
been etermine between the tax withhel
an the amount actually remitte by the
withholing agent& Since the amount
assesse relates to eficiency withholing
taxes% the @$= is correct in issuing the
assessment an eman letter calling for the
immeiate payment of the eficiency
withholing taxes& "Sec& 99<% 7$=C#&
@& Will the special civil action for
prohibition brought before the C': uner
Sec& 44 of =&:% 7o& 449- prosper? +iscuss
your answer& ",.#
SUGGESTED ANSWER)
@& 'he special civil action for prohibition will
not prosper% because the C': has no
2urisiction to entertain the same& 'he power
to issue writ of in2unction provie for uner
Section 44 of =: 449- is only ancillary to its
appellate 2urisiction& 'he C': is not veste
with original 2urisiction to issue writs of
prohibition or in2unction inepenently of an
apart from an appeale case& 'he remey is
to appeal the ecision of the @$=& "*ollector
!" Iuseco@ 2 S*5A 212 C1961D#&
BI5: Prescri$ti!e Perio: *i!il
Action (%&&%) On :ugust -% 4GGI% :amson Co&% $nc&
":amson# file a reCuest for reconsieration
of the eficiency withholing tax assessment
on July 41% 4GGI% covering the taxable year
4GG0& :fter aministrative hearings% the
original assessment of *4-1%111&11 was
reuce to *I-&111&11 an a moifie
assessment was thereafter issue on :ugust
1-% 4GGG& +espite repeate emans%
:amson faile an
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.1 of 73
refuse to pay the moifie assessment&
ConseCuently% the @$= brought an action for
collection in the =egional 'rial Court on
September 4-% 9111& :amson move to
ismiss the action on the groun that the
governmentAs right to collect the tax by
2uicial action has prescribe& +ecie the
case& "-.#
SUGGESTED ANSWER)
'he right of the /overnment to collect by
2uicial action has not prescribe& 'he filing of
the reCuest for reconsieration suspene the
running of the prescriptive perio an
commence to run again when a ecision on
the protest was mae on :ugust -% 4GGG& $t
must be note that in all cases covere by an
assessment% the perio to collect shall be five
"-# years from the ate of the assessment but
this perio is suspene by the filing of a
reCuest for reconsieration which was acte
upon by the Commissioner of $nternal
=evenue "*I5 !" Ayet0 Suaco +aboratories@
Inc"@ %&% S*5A 1%, C1991D#&
BI5: Prescri$ti!e Perio) Assessment H
*ollection (1999) : Co&% a *hilippine Corporation% file its 4GG-
$ncome 'ax =eturn "$'=# on :pril 4-% 4GGE
showing a net loss& On 7ovember 41% 4GGE% it
amene its 4GG- $'= to show more losses&
:fter a tax investigation% the @$= isallowe
certain euctions claime by : Co&% putting
: Co& in a net income position& :s a result% on
:ugust -% 4GGG% the @$= issue a eficiency
income assessment against : Co& : Co&
proteste the assessment on the groun that
it has prescribe! +ecie& "-.#
SUGGESTED ANSWER)
'he right of the @$= to assess the tax has not
prescribe& The rule is that internal revenue taxes shall
be assessed within three years after the last
day prescribed by law for the filing of the
return. "+ection %'5, N6##% >owever% if the
return originally file is amene
substantially% the counting of the three-year
perio starts from the ate the amene
return was file& "*I5 !" P0oenix Assurance
*o"@ +t"@ 1' S*5A ,%#& 'here is a substantial
amenment in this case because a new
return was file eclaring more losses% which
can only be one either "4# in reucing gross
income or "9# in increasing the items of
euctions% claime&
BI5: Prescri$ti!e Perio)
*riminal Action (%&&%) '6 Corporation file its final a2uste income
tax return for 4GG, on :pril 49% 4GG0 showing
a net loss from operations& :fter investigation%
the @$= issue a pre-assessment notice on
;arch ,1% 4GGE& : final notice an eman
letter ate :pril 4-% 4GGI was issue%
personally elivere to an receive by the
companyAs chief accountant& For willful refusal
an failure of '6 Corporation to pay the tax%
warrants of istraint an levy on its properties
were issue an serve upon it& On January
41% 9119% a criminal charge for violation of the
'ax Coe was institute in the =egional 'rial
Court with the approval of the Commissioner&
'he company move to ismiss the criminal
complaint on the groun that an act for
violation of any provision of the 'ax Coe
prescribes after five "-# years an% in this
case% the perio commence to run on ;arch
,1% 4GGE when the pre-assessment was
issue& >ow will you resolve the motion?
3xplain your answer& "-.#
4#
a eceent to etermine his gross estateB
9#
any taxpayer who has file an application for compromise of his tax liability by means of financial incapacity to pay his tax liability "Sec& E"F#& 7$=C#&
5)
Where the taxpayer has signe a waiver authori)ing the Commissioner or his uly authori)e representatives to $nCuire into the ban( eposits& (Note: This answer was not part of the answers enumerated in the E9 ?aw Answers to the 3ar in this but was later
added in the recent E9 ?aw Answers to the 3ar as a result
of A8?A ?aw of %''$)
SUGGESTED ANSWER)
'he motion to ismiss shoul not be grante&
$t is only when the assessment has become
final an unappealable that the --year perio
to file a criminal action commences to run
"Tu$aJ !" 6lo$@ 216 S*5A 11/ C1999D#&
'he pre-assessment notice issue on ;arch
,1% 4GGE is not a final assessment which is
enforceable by the @$=& $t is the issuance of
the final notice an eman letter ate :pril
4-% 4GGI an the failure of the taxpayer to
protest within ,1 ays from receipt thereof
that mae the assessment final an
unappealable& 'he earliest ate that the
assessment has become final is ;ay 4E% 4GGI
an since the criminal charge was institute
on January 41% 9119% the same was timely
file&
BI5: Secrecy o( Ban.
De$osits +aw (199/) Can the Commissioner of $nternal =evenue
inCuire into the ban( eposits of a taxpayer?
$f so% oes this power of the Commissioner
conflict with =&:& 401- "Secrecy of @an(
+eposits Law# N-.O
SUGGESTED ANSWER)
'he Commissioner of $nternal =evenue is
authori)e to inCuire into the ban( eposits
of!
'he limite power of the Commissioner oes
not conflict with =&:& 7o& 401- because the
provisions of the 'ax Coe granting this
power is an exception to the Secrecy of @an(
+eposits Law as emboie in a later
legislation&
Furthermore% in case a taxpayer applies for
an application to compromise the payment of
his tax liabilities on his claim that his financial
position emonstrates a clear inability to pay
the tax assesse% his application shall not be
consiere unless an until he waives in
writing his privilege uner =&:& 7o& 401-% an
such waiver shall constitute the authority of
the Commissioner to inCuire into the ban(
eposits of the taxpayer&
BI5) *onseEuence) Tax$ayer 7uilty o(
Tax #!asion (%&&,) Josel agree to sell his conominium unit to
Jess for *9&- ;illion& :t the time of the sale%
the property ha a )onal value of *9&1 ;illion&
Upon the avice of a tax consultant% the
parties agree to execute two ees of sale%
one inicating the )onal value of *9&1 ;illion
as the selling price an the other showing the
true selling price of *9&- ;illion& 'he tax
consultant file the capital gains tax return
using the ee of sale showing the )onal
value of
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.2 of 73
*9&1 ;illion as the selling price&
+iscuss the tax implications an
conseCuences of the action& "-.#
A+TERNATI1E ANSWER)
'he action of the parties constitutes tax
evasion an exposes Josel to!
"4# +3F$C$37C6 F$7:L $7CO;3 ':? on the
sale of real property in the *hilippines
classifie as a capital asset& Uner Sec& 90"+#
of the 7$=C% the final tax of six percent "E.#
shall be base on the gross selling price of
*9&- ;illion or )onal value of *9&1 ;illion%
whichever is higher% i&e&% *9&- ;illionB
"9# F=:U+ *37:L'6 amounting to -1.
surcharge on the amount evae "Sec&
90<N@O 7$=C#B an ",# +3F$C$37C6 $7'3=3S' of 91. per
annum on the eficiency& "Sec& 90GN:ON@O%
7$=C#
A+TERNATI1E ANSWER)
'here is tax evasion because of the concurrence of
the following factors! 4# 'he payment of less than
that (nown by the taxpayer to be legally ue% or the
non-payment of tax when it is shown that a tax is
ue& $t is evient that the parties that the tax ue
shoul be compute base on the valuation of *9&-
million an not *9&1 millionB 9# :n accompanying
state of min which is escribe as being "evil" on
"ba faith%" "willful%" or "eliberate an not
acciental&" +espite the above (nowlege% the
parties eliberately misrepresente the true basis of
the saleB an ,# : course of action or failure of
action which is unlawful& 'his is shown by the
preparation of the two ees of sale which showe
ifferent values&
(*ommissioner o( Internal 5e!enue !" T0e
#state o(Beni7no P@ Tba@ Gr"@ ?"5" =o" 1'81//@
Se$tember 1'@ %&&')
'he tax evasion committe shoul result to
the imposition of a -1. frau surcharge on
the amount evae (+ec. %!/A3@, N6#)
payment of the +eficiency 'ax% an interest of
91. per annum on the eficiency& (+ec.
%!)AA@A3@, N6#) 'he parties may li(ewise be
sub2ect to criminal prosecution for willfully
failing to pay the tax% as well as for filing a
false an frauulent return&
(+ees. %,!, %,, and %,&,
N6#)
BI5: Summary 5emey: #state Tax
De(iciencies (199/) $s the @$= authori)e to collect estate tax
eficiencies by the summary remey of levy
upon an sale of real properties of the
eceent without first securing the authority
of the court sitting in probate over the
suppose will of the eceent?
SUGGESTED ANSWER)
6es& 'he @$= is authori)e to collect estate tax
eficiency through the summary remey of
levying upon an sale of real properties of a
eceent% without the cognition an authority
of the court sitting in probate over the
suppose will of the ecease% because the
collection of estate tax is executive in
character& :s such the estate tax is exempte
from the application of the statute of non-
claims% an this is 2ustifie by the necessity of
government funing% immortali)e in the
maxim that taxes are the lifebloo of the
government ";arcos !" *I5@ ?"5" =o"
1%&//&@ Gune ,@ 1998#&
A+TERNATI1E ANSWER)
6es% if the tax assessment has alreay
become final% executory an enforceable& 'he
approval of the court sitting in probate over
the suppose will of the ecease is not a
manatory reCuirement for the collection of
the estate tax& 'he probate court is
etermining issues which are not against the
property of the eceent% or a claim against
the estate as such% but is against the interest
or property right which the heir% legatee%
evisee% etc& has in the property formerly hel
by the eceent& ";arcos !" *I5@ ?"5@ =o"
1%&//&@ Gune ,@ 199I#&
BI5: 6n$ai Taxes !s" *laims (or
6n$ai Aa7es (199,) For failure of Oceanic Company% $nc&
"OC3:7$C#% to pay eficiency taxes of *91
;illion% the Commissioner of $nternal =evenue
issue warrants of istraint on OC3:7$CAs
personal properties an levie on its real
properties& ;eanwhile% the +epartment of
Labor through the Labor :rbiter renere a
ecision orering OC3:7$C to pay unpai
wages an other benefits to its employees&
Four barges belonging to OC3:7$C were levie
upon by the sheriff an later sol at public
auction&
'he Commissioner of $nternal =evenue file a
motion with the Labor :rbiter to annul the sale
an en2oin the sheriff from isposing the
procees thereof& 'he employees of OC3:7$C
oppose the motion contening that :rt& 441
of the Labor Coe gives first preference to
claims for unpai wages& =esolve the motion&
3xplain&
SUGGESTED ANSWER)
'he motion file by the Commissioner shoul
be grante because the claim of the
government for unpai taxes are generally
preferre over the claims of laborers for
unpai wages& 'he provision of :rticle 441 of
the Labor Coe% which gives laborersA claims
for preference applies only in case of
ban(ruptcy or liCuiation of the employerAs
business& $n the instant case% Oceanic is not
uner ban(ruptcy or liCuiation at the time
the warrants of istraint an levy were issue
hence% the opposition of the employees is
unwarrante& (*I5 !s" =+5* et al ?"5" =o"
8'96,@ =o!ember 9@ 199')"
BI5) Assessment) *riminal
*om$laint (%&&,) $n 4GG-% the @$= file before the +epartment
of Justice "+OJ# a criminal complaint against a
corporation an its officers for allege evasion
of taxes& 'he complaint was supporte by a
sworn statement of the @$= examiners
showing the computation of the tax liabilities
of the erring taxpayer& 'he corporation file a
motion to ismiss the criminal complaint on
the groun that there has been% as yet% no
assessment of its tax liabilityB hence% the
criminal complaint was premature& 'he +OJ
enie the motion on the groun that an
assessment of the tax eficiency of the
corporation is not a preconition to the filing
of a criminal complaint an that in any event%
the 2oint affiavit of the @$= examiners may
be consiere as an assessment of the tax
liability of the corporation& $s the ruling of the
+OJ correct? 3xplain& "-.#
SUGGESTED ANSWER)
'he +OJ is correct in ruling that an
assessment of the tax eficiency of the
corporation is not a preconition to the filing
of a criminal complaint& 'here is no nee for
an
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assessment so long as there is a prima facie
showing of violation of the provisions of the
'ax Coe& :fter all% a criminal charge is
institute not to eman payment% but to
penali)e the tax payer for violation of the 'ax
Coe& (*ommissioner o( Internal 5e!enue !"
Pascor 5ealty an De!elo$ment *or$oration@
?"5" =o" 1%/21,@ Gune %9@ 1999# Furthermore%
there is nothing in the problem that shows
that the @$= in filing the case is also intereste
in collecting the tax eficiency&
>owever% it is in error when it rule that the
2oint affiavit of the @$= examiners may be
consiere as an assessment of the tax liability
of the corporation& 'he 2oint affiavit showing
the computation of the tax liabilities of the
erring taxpayer is not a tax assessment
because it was not sent to the taxpayer% an
oes not eman payment of the tax within a
certain perio of time& :n assessment is
eeme mae only when the @$= releases%
mails or sens such notice to the taxpayer&
(*ommissioner o( Internal 5e!enue
!" Pascor 5ealty an De!elo$ment *or$oration@ ?"5"
=o" 1%/21,@ Gune %9@ 1999) =otes an
*omments: A plea is made for liberality in
correcting the examinees answers because the
examination is very long.
BI5) Aut0ority) 5e(un or *reit
o( Taxes (%&&,) State the conitions reCuire by the 'ax Coe
before the Commissioner of $nternal =evenue
coul authori)e the refun or creit of taxes
erroneously or illegally receive&
SUGGESTED ANSWER)
Uner Sec& 910"C#% 7$=C% the following
conitions must be met!
4& 'here must be a written claim for refun
file by the taxpayer with the Commissioner&
9& 'he claim for refun must be a
categorical eman for reimbursement&
,& 'he claim for refun must be file within
two "9# years from ate of payment of the tax
or penalty regarless of any supervening
cause&
BI5) *om$romise
(%&&') :fter the tax assessment ha become final
an unappealable% the Commissioner of
$nternal =evenue initiate the filing of a civil
action to collect the tax ue from 7?& :fter
several years% a ecision was renere by the
court orering 7? to pay the tax ue plus
penalties an surcharges& 'he 2ugment
became final an executory% but attempts to
execute the 2ugment awar were futile&
SubseCuently% 7? offere the Commissioner a
compromise settlement of -1. of the
2ugment awar% representing that this
amount is all he coul really affor& +oes the
Commissioner have the power to accept the
compromise offer? $s it legal an ethical?
3xplain briefly& "-.#
SUGGESTED ANSWER)
6es& 'he Commissioner has the power to
accept the offer of compromise if the financial
position of the taxpayer clearly emonstrates
a clear inability to pay the tax "Section 910%
7$=C#&
:s represente by 7? in his offer% only -1. of
the 2ugment awar is all he coul really
affor& 'his is an offer for compromise base
on financial incapacity which the
Commissioner shall not accept unless
accompanie by a waiver of the secrecy of
ban( eposits "Section ENFR% 7$=C#& 'he
waiver will enable the Commissioner to
ascertain the financial position of the
taxpayer% although the inCuiry nee not be
limite only to the ban( eposits of the
taxpayer but also as to his financial position
as reflecte in his financial statements or
other recors upon which his property
holings can be ascertaine&
$f inee% the financial position of 7? as
etermine by the Commissioner
emonstrates a clear inability to pay the tax%
the acceptance of the offer is legal an
ethical because the groun upon which the
compromise was anchore is within the
context of the law an the rate of
compromise is well within an far excees
the minimum prescribe by law which is only
41. of the basic tax assesse&
BI5) *om$romise
(%&&,) State an iscuss briefly whether the
following cases may be compromise or may
not be compromise! a# +elinCuent accountsB
b# Cases uner aministrative protest% after
issuance of
the final assessment notice to the taxpayer%
which are still peningB c# Criminal tax frau casesB #
Criminal violations alreay file in courtB e#
Cases where final reports of reinvestigation or
reconsieration have been issue resulting in the
reuction of the original assessment agree to
by the taxpayer when he signe the reCuire
agreement form& "-.#
SUGGESTED ANSWERS)
'he following cases may still be compromise
(#.#. 5'.'% A%''%@) because of the taxpayerAs
financial incapacity to pay the tax ue or the
assessmentAs oubtful valiity! a#
+3L$7KU37' :CCOU7'S may be compromise
because there is no showing that there is a
uly-approve scheule of installment
paymentsB an b# Cases uner
aministrative protest% after issuance of the
final assessment notice to the taxpayer% which
are still pening&
'he following cases 8AG NC ?CN"4# 34
C89#O;$S3+ (#.#. 5'.'% A%''%@) because
the taxpayer has not pai his taxes for reasons
other than his financial incapacity or the
oubtful valiity of the assessment! a#
C=$;$7:L ':? F=:U+ cases as may be
etermine by the Commissioner or his
authori)e agents may not be compromiseB
b# C=$;$7:L 5$OL:'$O7S :L=3:+6 F$L3+ $7
COU=' so that the taxpayer will not profit from
his frau which woul encourage tax evasionB
an c# Cases where final reports of
reinvestigation or reconsieration have been
issue resulting in the reuction of the original
assessment agree to by the taxpayer when
he signe the reCuire agreement form& 'he
taxpayer is estoppe from applying for a
compromise&
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.4 of 73
BI5) De(iciency Tax Assessment !s" Tax
5e(un M Tax *reit (%&&,)
$s a eficiency tax assessment a bar to a
claim for tax refun or tax creit? 3xplain&
SUGGESTED ANSWER)
6es% the eficiency tax assessment is a bar to a
tax refun or creit& 'he 'axpayer cannot be
entitle to a refun an at the same time liable
for a tax eficiency assessment for the same
year& 'he eficiency assessment creates a
oubt as to the truth an accuracy of the 'ax
=eturn& Sai =eturn cannot therefore be the
basis of the refun
(*ommissioner o( Internal 5e!enue !" Alltel
C%&&%D@ citin7 *ommissioner o( Internal
5e!enue !" *ourt o( A$$eals@ *ity Trust
Ban.in7 *or$oration an *ourt o( Tax
A$$eals@
?"5" =o" 1&6611@ Guly %1@
199')
BI5) Distraint) Prescri$tion o(
t0e Action (%&&%) ;r& Sebastian is a Filipino seaman employe
by a 7orwegian company which is engage
exclusively in international shipping& >e an
his wife% who manages their business% file a
2oint income tax return for 4GGI on ;arch 4-%
4GG<& :fter an auit of the return% the @$=
issue on :pril 91% 9114 a eficiency income
tax assessment for the sum of *9-1&111&11%
inclusive of interest an penalty& For failure of
;r& an ;rs& Sebastian to pay the tax within
the perio state in the notice of assessment%
the @$= issue on :ugust 4G% 9114 warrants of
istraint an levy to enforce collection of the
tax&
:& What is the rule of income taxation with
respect to ;r& SebastianAs income in 4GGI as a
seaman on boar the 7orwegian vessel
engage in international shipping? 3xplain
your answer& "9.#
SUGGESTED ANSWER)
:& 'he income of ;r& Sebastian as a seaman
is consiere as income of a non-resient
citi)en erive from without the *hilippines&
'he total gross income% in US ollars "or if in
other foreign currency% its ollar eCuivalent#
from without shall be eclare by him for
income tax purposes using a separate income
tax return which will not inclue his income
from business erive within "to be covere
by another return#& >e is entitle to euct
from his ollar gross income a personal
exemption of S0%-11 an foreign national
income taxes pai to arrive at his a2uste
income uring the year& >is a2uste income
will be sub2ect to the grauate tax rates of
4. to ,.& (+ec. %$ (b), Tax ode of $)/-A9B
$$,/@, as amended by 9B $))!).
N7ote! 'he bar caniates are not expecte to be
familiar with tax history& Consiering that this is
alreay the fourth year of implementation of the
'ax Coe of 4GGI% bar caniates were taught an
prepare to answer Cuestions base on the
present law& $t is therefore reCueste that the
examiner be more lenient in chec(ing the answers
to this Cuestion& *erhaps% an answer base on the
present law be given full creit&O
@& $f you are the lawyer of ;r& an ;rs&
Sebastian% what possible efense or efenses
will you raise in behalf of your clients against
the action of the @$= in enforcing collection of
the tax by the summary remeies of warrants
of istraints an levy? 3xplain your answer&
",.#
SUGGESTED ANSWER)
@& $ will raise the efense of prescription& 'he
right of the @$= to assess prescribes after
three years counte from the last ay
prescribe by law for the filing of the income
tax returns when the sai return is file on
time& "Section 91,% 7$=C#& 'he last ay for
filing the 4GGI income tax return is :pril 4-%
4GG<& Since the assessment was issue only
on :pril 91% 9114% the @$=As right to assess
has alreay prescribe&
BI5) False !s" Frauulent
5eturn (1996) +istinguish a false return from a frauulent
return&
SUGGESTED ANSWER)
'he istinction between a false return an a
frauulent return is that the first merely
implies a eviation from the truth or fact
whether intentional or not% whereas the
secon is intentional an eceitful with the
sole aim of evaing the correct tax ue
"AJnar us" *ommissioner@ +F%&,69@
Au7ust %2@ 198'#&
A+TERNATI1E ANSWER)
: false return contains eviations from the
truth which may be ue to mista(es%
carelessness or ignorance of the person
preparing the return& : frauulent return
contains an intentional wrongoing with the
sole ob2ect of avoiing the tax an it may
consist in the intentional unereclaration of
income% intentional overeclaration of
euctions or the recurrence of both& : false
return is not necessarily tainte with frau
because the frau contemplate by law is
actual an not constructive& :ny eviation from
the truth on the other han% whether
intentional or not% constitutes falsity& "AJnar
!s" *ommissioner@ +F%&,69@ Au7ust %2@
198'#
BI5) Gurisiction) 5e!iew 5ulin7s o( t0e
*ommissioner (%&&6)
;r& :braham 3ugenio% a pawnshop operator%
after having been reCuire by the =evenue
+istrict Officer to pay value ae tax
pursuant to a =evenue ;emoranum Orer
"=;O# of the Commissioner of $nternal
=evenue% file with the =egional 'rial Court
an action Cuestioning the valiity of the =;O&
$f you were the 2uge% will you ismiss the
case? "-.#
SUGGESTED ANSWER)
6es& 'he =;O is in reality a ruling of the
Commissioner in implementing the provisions
of the 'ax Coe on the taxability of
pawnshops& Jurisiction to review rulings of
the Commissioner is loge with the Court of
'ax :ppeals an not with the =egional 'rial
Court (*I5 !" Gose(ina +eal@ ?"5" =o" 112',9@
=o!ember 1/@ %&&%) Tax
5e(orm Act@ 5A /'%'@ Title I@ Sec" '
C1998D)"
(=1TA B#=#: This concept pertains to the 2AT
law which is excluded from the bar coverage,
"uidelines for %''- 3ar 4xaminations, (une $,,
%''-)
BI5) Prescri$ti!e Perio) Assessment)
Frauulent 5eturn (%&&%)
;r& Castro inherite from his father% who ie
on June 41% 4GG0% several pieces of real
property in ;etro ;anila& 'he estate tax
return was file an the estate tax ue in the
amount of *9-1&111&11 was pai on
+ecember 1E% 4GG0& 'he 'ax Frau +ivision
of the @$= investigate the case on the basis
of confiential information given by ;r&
Santos on January 1E% 4GG< that the return
file by ;r& Castro was frauulent an that he
faile to eclare all
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.. of 73
properties left by his father with intent to
evae payment of the correct tax& :s a result%
a eficiency estate tax assessment for
*4%9-1%111&11% inclusive of -1. surcharge for
frau% interest an penalty% was issue
against him on January 41% 9114& ;r& Castro
proteste the assessment on the groun of
prescription&
:& +ecie ;r& CastroAs protest&
"9.#
SUGGESTED ANSWER)
:& 'he protest shoul be resolve against ;r&
Castro& What was file is a frauulent return
ma(ing the prescriptive perio for assessment
ten "41# years from iscovery of the frau
"Section 999% 7$=C#& :ccoringly% the
assessment was issue within that
prescriptive perio to ma(e an assessment
base on a frauulent return&
@& What legal reCuirementLs must ;r&
Santos comply with so that he can claim his
rewar? 3xplain& ",.#
SUGGESTED ANSWER)
'he legal reCuirements that must be
complie by ;r& Santos to entitle him to
rewar are as follows! 4# >e shoul
voluntarily file a confiential information
uner oath with the Law +ivision of the @ureau of
$nternal =evenue alleging therein the specific
violations constituting frauB 9# 'he
information must not yet be in the
possession of the @ureau of $nternal =evenue% or refer to a case
alreay pening or previously investigate by the
@ureau of $nternal =evenueB ,# ;r& Santos
shoul not be a government employee or
a relative of a government employee within the
sixth egree of consanguinityB an 0# 'he
information must result to collections of
revenues anLor fines an penalties& "Sec& 9<9%
7$=C#
BI5) Prescri$ti!e Perio)
*riminal Action (%&&6) /erry was being prosecute by the @$= for
failure to pay his income tax liability for
Calenar 6ear 4GGG espite several emans
by the @$= in 9119& 'he $nformation was file
with the ='C only last June 911E& /erry file a
motion to Cuash the $nformation on the
groun of prescription% the $nformation having
been file beyon the --year reglementary
perio& $f you were the 2uge% will you ismiss
the $nformation? Why? "-.#
SUGGESTED ANSWER)
7o& 'he trial court can exercise 2urisiction&
*rescription of a criminal action begins to run
from the ay of the violation of the law& 'he
crime was committe when /erry willfully
refuse to pay espite repeate emans in
9119& Since the information was file in June
911E% the criminal case was institute within
the five-year perio reCuire by law (Tu$aJ !"
6le$@ ?"5" =o" 1%8888@ 1ctober 1@ 1999)
Section %/1@ =I5*)"
BI5) Tax$ayer: *i!il Action H
*riminal Action (%&&%) ;inolta *hilippines% $nc& ";inolta# is an 3*H:-
registere enterprise en2oying preferential tax
treatment uner a special law& :fter
investigation of its withholing tax returns for
the taxable year 4GGI% the @$= issue a
eficiency withholing tax assessment in the
amount of *4-1&111&11& On ;ay 4-% 4GGG%
because of financial ifficulty% the eficiency
tax remaine unpai% as a result of which the
assessment became final an executory& 'he
@$= also foun that% in violation of the
provisions of the 7ational $nternal =evenue
Coe% ;inolta i not file its final corporate
income tax return for the taxable year 4GG<%
because it allegely incurre net loss from its
operations& On ;ay 4I% 9119% the @$= file
with the =egional 'rial Court an action for
collection of the eficiency withholing tax for
4GGI&
:& Will the @$=As action for collection
prosper? :s counsel of ;inolta% what action
will you ta(e? 3xplain your answer& "-.#
SUGGESTED ANSWER)
:& 6es% @$=As action for collection will prosper
because the assessment is alreay final an
executory% it can alreay be enforce through
2uicial action&
:s counsel of ;inolta% $ will introuce
evience that the income payment was
reporte by the payee an the income tax
was pai thereon in 4GGI so that my client
may only be allowe to pay the civil penalties
for non-withholing pursuant to =;O 7o& ,<-
<,&
N=ote: 6t is not clear whether this is a
case of non.withholding;
underwithholding or non.remittance of
tax withheld. As such, the tax counsel
may be open to other remedies against
the assessment&O
@& ;ay criminal violations of the 'ax
Coe be compromise? $f ;inolta ma(es a
voluntary offer to compromise the criminal
violations for non-filing an non-payment of
taxes for the year 4GG<% may the
Commissioner accept the offer? 3xplain "-.#
SUGGESTED ANSWER)
@& :ll criminal violations of the 'ax Coe
may be compromise except those alreay
file in court or those involving frau "Section
910% 7$=C#& :ccoringly% if ;inolta ma(es a
voluntary offer to compromise the criminal
violations for non-filing an non-payment of
taxes for the year 4GG<% the Commissioner
may accept the offer which is allowe by law&
>owever% if it can be establishe that a tax
has not been pai as a conseCuence of non-
filing of the return% the civil liability for taxes
may be ealt with inepenently of the
criminal violations& 'he compromise
settlement of the criminal violations will not
relieve the taxpayer from its civil liability& @ut
the civil liability for taxes may also be
compromise if the financial position of the
taxpayer emonstrates a clear inability to pay
the tax&
*ustom: 4iolation o( Tax H
*ustom Duties (%&&%) 'he Collector of Customs of the *ort of Cebu
issue warrants of sei)ure an etention
against the importation of machineries an
eCuipment by LL+ $mport an 3xport Co&
"LL+# for allege nonpayment of tax an
customs uties in violation of customs laws&
LL+ was notifie of the sei)ure% but% before it
coul be hear% the Collector of Customs
issue a notice of sale of the articles& $n orer
to restrain the Collector from carrying out the
orer to sell% LL+ file with the Court of 'ax
:ppeals a petition for review with application
for the issuance of a writ of prohibition& $t also
file with the C': an appeal for refun of
overpai taxes on its other importations of
raw materials which has been pening
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.6 of 73
with the Collector of Customs& 'he @ureau of
Customs move to ismiss the case for lac(
of 2urisiction of the Court of 'ax :ppeals&
:& +oes the Court of 'ax :ppeals have
2urisiction over the petition for review an
writ of prohibition? 3xplain ",.#
SUGGESTED ANSWER)
:& 7o% because there is no ecision as yet by
the Commissioner of Customs which can be
appeale to the C':& 7either the remey of
prohibition woul lie because the C': has not
acCuire any appellate 2urisiction over the
sei)ure case& 'he writ of prohibition being
merely ancillary to the appellate 2urisiction%
the C': has no 2urisiction over it until it has
acCuire 2urisiction on the petition for review&
Since there is no appealable ecision% the C':
has no 2urisiction over the petition for review
an writ of prohibition& "*ommissioner o(
*ustoms !" Ali.$ala@ 26 S*5A %&/ C198&D#&
@& Will an appeal to the C': for tax
refun be possible? 3xplain "9.#
SUGGESTED ANSWER)
@& 7o% because the Commissioner of Customs
has not yet renere a ecision on the claim
for refun& 'he 2urisiction of the
Commissioner an the C': are not
concurrent in so far as claims for refun are
concerne& 'he only exception is when the
Collector has not acte on the proteste
payment for a long time% the continue
inaction of the Collector or Commissioner
shoul not be allowe to pre2uice the
taxpayer& "7estle *hils&% $nc& v& Court of
:ppeals% /= 7o& 4,0440% July E% 9114#&
*ustoms) Basis) Automatic
5e!iew (%&&%) Whenever the ecision of the Collector of
Customs is averse to the government% it is
automatically elevate to the Commissioner
for review an% if it is affirme by him% it is
automatically elevate to the Secretary of
Finance for review& What is the basis of the
automatic review proceure in the @ureau of
Customs? 3xplain your answer& "-.#
SUGGESTED ANSWER)
:utomatic review is intene to protect the
interest of the /overnment in the collection of
taxes an customs uties in sei)ure an
protest cases& Without such automatic review%
neither the Commissioner of Customs nor the
Secretary of Finance woul (now about the
ecision lai own by the Collector favoring
the taxpayer& 'he power to ecie sei)ure an
protest cases may be abuse if no chec(s are
institute& :utomatic review is necessary
because noboy is expecte to appeal the
ecision of the Collector which is favorable to
the taxpayer an averse to the /overnment&
'his is the reason why whenever the ecision
of the Collector is averse to the /overnment%
the sai ecision is automatically elevate to
the Commissioner for reviewB an if such
ecision is affirme by the Commissioner% the
same shall be automatically elevate to an
be finally reviewe by the Secretary of
Finance "Iao.asin !" *ommissioner o(
*ustoms@ 1/& S*5A ,91 C19/9D#&
DelinEuent Tax
5eturn (199/) When is a revenue tax consiere elinCuent?
N,.#
SUGGESTED ANSWER)
: revenue tax is consiere elinCuent when
it is unpai after the lapse of the last ay
prescribe by law for its payment& Li(ewise% it
coul also be consiere as elinCuent where
an assessment for eficiency tax has become
final an the taxpayer has not pai it within
the perio given in the notice of assessment&
Gurisiction: *ustoms !s"
*TA (%&&&) a# On the basis of a warrant of sei)ure an
etention issue by the Collector of Customs
for the purpose of enforcing the 'ariff an
Customs Laws% assorte brans of cigarettes
sai to have been illegally importe into the
*hilippines were sei)e from a store where
they were openly offere for sale& +issatisfie
with the ecision renere after hearing by
the Collector of Customs on the confiscation
of the articles% the importer file a petition for
review with the Court of 'ax :ppeals& 'he
Collector move to ismiss the petition for
lac( of Jurisiction& =ule on the motion& "9.#
SUGGESTED ANSWER)
;otion grante& 'he Court of 'ax :ppeals has
2urisiction only over ecisions of the
Commissioner of Customs in cases involving
sei)ures% etention or release of property
affecte& "Sec& I% =&:& 7o& 449-#& 'here is no
ecision yet of the Commissioner which is
sub2ect to review by the Court of 'ax :ppeals&
A+TERNATI1E ANSWER)
;otion grante& 'he Court of 'ax :ppeals has
no 2urisiction because there is no ecision
renere by the Commissioner of Customs on
the sei)ure an forfeiture case& 'he taxpayer
shoul have appeale the ecision renere
by the Collector within fifteen "4-# ays from
receipt of the ecision to the Commissioner of
Customs& 'he CommissionerPs averse
ecision woul then be the sub2ect of an
appeal to the Court of 'ax :ppeals&
b# Uner the same facts% coul the importer
file an action in the =egional 'rial Court for
replevin on the groun that the articles are
being wrongfully etaine by the Collector of
Customs since the importation was not illegal
an therefore exempt from sei)ure? 3xplain&
",.#
SUGGESTED ANSWER)
7o& 'he legislators intene to ivest the
=egional 'rial Courts of the 2urisiction to
replevin a property which is a sub2ect of
sei)ure an forfeiture proceeings for
violation of the 'ariff an Customs Coe
otherwise% actions for forfeiture of property for
violation of the Customs laws coul easily be
unermine by the simple evice of replevin&
"De la Fuente !" De 4eyra@ et" al@ 1%&
S*5A ',,#
'here shoul be no unnecessary hinrance on
the governmentAs rive to prevent smuggling
an other fraus upon the Customs&
Furthermore% the =egional 'rial Court o not
have Jurisiction in orer to rener effective
an efficient the collection of $mport an
export uties ue the State% which enables
the government to carry out the
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functions $t has been $nstitute to perform&
"Gao@ et al@ *ourt o( A$$eals@ et al@ an
com$anion case@ %'9 S*5A 2,@ '2#
+?6: *ollection o( Taxes@ Fees H
*0ar7es (1998) /ive the remeies available to local
government units to enforce the collection of
taxes% fees% an charges?
SUGGESTED ANSWER)
'he remeies available to the local
government units to enforce collection of
taxes% fees% an charges are! 4#
:+;$7$S'=:'$53 =3;3+$3S of istraint of
personal property of whatever (in whether
tangible or intangible% an levy of real property an
interest thereinB an 9# JU+$C$:L =3;3+6 by
institution of an orinary
civil action for collection with the regular courts
of proper 2urisiction&
Tax Amnesty !s" Tax
#xem$tion (%&&1) +istinguish a tax amnesty from a tax exemption&
",.#
SUGGESTED ANSWER)
'ax amnesty is an immunity from all criminal%
civil an aministrative liabilities arising from
nonpayment of taxes& $t is a general paron
given to all taxpayers& $t applies only to past
tax perios% hence of retroactive application&
"Peo$le !" *ostoneo@ ?"5" =o" +F'6//1@
19//#&
'ax exemption is an immunity from the civil
liability only& $t is an immunity or privilege% a
freeom from a charge or buren to which
others are sub2ecte& "Florer !" S0erian@
128 In" %/@ 26 ;# 26,#& $t is generally
prospective in application&
Tax$ayer: Aministrati!e H Guicial
5emeies (%&&&) +escribe separately the proceures on the
legal remeies uner the 'ax Coe available
to an aggrieve taxpayer both at the
aministrative an 2uicial levels& "-.#
SUGGESTED ANSWER)
'he legal remeies of an aggrieve taxpayer
uner the 'ax Coe% both at the
aministrative an 2uicial levels% may be
classifie into those for assessment%
collection an re(un&
'he proceures for the AD;I=IST5ATI4#
5#;#DI#S for ASS#SS;#=T are as follows!
a& :fter receipt of the *re-:ssessment
7otice% he must within fifteen "4-# ays from
receipt explain why no aitional taxes
shoul be assesse against him&
b& $f the Commissioner of $nternal
=evenue issues an assessment notice% the
taxpayer must aministratively protest or
ispute the assessment by filing a motion for
reconsieration or reinvestigation within
thirty
",1# ays from receipt of the notice of
assessment& "0th par&& Sec& 99<% 7$=C of
4GGI#
c& Within sixty "E1# ays from filing of the
protest% the taxpayer shall submit all relevant
supporting ocuments&
a&
Where the Commissioner of $nternal =evenue has
not acte on the taxpayerAs protest within a perio of
one hunre eighty "4<1# ays from submission of all
relevant ocuments% then the taxpayer has a perio of
thirty ",1# ays from the lapse of sai 4<1 ays within
which to interpose a petition for review with the
Court of 'ax :ppeals&
b&
Shoul the Commissioner eny the taxpayerAs protest%
then he has a perio of thirty ",1# ays from receipt
of sai enial within which to interpose a petition for
review with the Court of 'ax :ppeals&
'he G6DI*IA+ 5#;#DI#S of an aggrieve
taxpayer relative to an ASS#SS;#=T
=1TI*# are as follows!
In both ases the ta/!ayer m"st a!!ly with the
Co"rt of Ta/ A!!eals for the Iss"ane of an
In1"nti$e writ to en1oin the )"rea" of Internal
Re$en"e from olletin. the dis!"ted ta/ d"rin. the
!endeny of the !roeedin.s.
=1T#: : 9110 :menment - 'he ecision of
the ivision of C': is in turn appeallable
within fifteen "4-# ays to the C': en banc&
'he ecision of the C': en banc is irectly
appeallable to the Supreme Court on Cuestion
of law on certiorari&
'he employment by the @ureau of $nternal
=evenue of any of the Aministrati!e
5emeies for the collection o( t0e tax li(e
istraint% levy% etc& may be aministratively
appeale by the taxpayer to the
Commissioner whose ecision is appealable
to the Court of 'ax :ppeals uner other
matter arising uner the provisions of the
7ational $nternal =evenue Coe&
'he 2uicial appeals starts with the Court of
'ax :ppeals% an continues in the same
manner as shown above&
Shoul the @ureau of $nternal =evenue ecie
to utili)e its Juicial tax remeies for collecting
the taxes by means of an orinary suit file
with the regular courts for the collection of a
sum of money% the taxpayer coul oppose the
same going up the laer of 2uicial processes
from the ;unicipal 'rial Court "as the case
may be# to the =egional 'rial Court% to the
Court of :ppeals% thence to the Supreme
Court&
'he remeies of an aggrieve taxpayer on a
claim for refun is to appeal the averse
ecision of the Commissioner to the C': in
the same manner outline above&
Tax$ayer: Assessment: Protest: *laims
(or re(un (%&&&) On June 4E% 4GGI% the @ureau of $nternal
=evenue "@$=# issue against the 3state of
Jose e la Cru) a notice of eficiency estate
tax assessment% inclusive of surcharge%
interest an compromise penalty& 'he
3xecutor of the 3state of Jose e la Cru)
"3xecutor# file a timely protest against the
assessment an reCueste for waiver of the
surcharge% interest an penalty& 'he protest
was enie by the Commissioner of $nternal
=evenue "Commissioner# with finality on
September 4,% 4GGI& ConseCuently% the
3xecutor was mae to pay the eficiency
assessment on October 41% 4GGI& 'he
following ay% the 3xecutor file a *etition
with the Court of 'ax :ppeals "C':# praying
for
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.4 of 73
the refun of the surcharge% interest an
compromise penalty& 'he C': too(
cogni)ance of the case an orere the
Commissioner to ma(e a refun& 'he
Commissioner file a *etition for =eview with
the Court of :ppeals assailing the 2urisiction
of the C': an the Orer to ma(e refun to
the 3state on the groun that no claim for
refun was file with the @$=&
A" $s the stan of the Commissioner
correct? =eason& "9.#
SUGGESTED ANSWER)
6es& 'here was no claim for refun or creit
that has been uly file with the
Commissioner of $nternal =evenue which is
reCuire before a suit or proceeing can be
file in any court "Sec& 99G& 7$=C of 4GGI#&
'he enial of the claim by the Commissioner
is the one which will vest the Court of 'ax
:ppeals 2urisiction over the refun case
shoul the taxpayer ecie to appeal on time&
B" Why is the filing of an aministrative
claim with the @$= necessary? ",.#
SUGGESTED ANSWER)
'he filing of an aministrative claim for
refun with the @$= is necessary in orer! 4#
'o affor the Commissioner an opportunity to
consier the claim an to have a chance to
correct the errors of suborinate officers "?onJales !"
*TA@ et al@ 1' S*5A 89#B an 9# 'o notify
the /overnment that such taxes have
been Cuestione an the notice shoul be borne
in min in estimating the revenue available for
expenitures& "BermeKo !" *ollector@ ?"5" =o"
+ 2&%/" Guly %9@ 19,&#
Tax$ayer: Assessment)
InKunction (%&&') == ispute a eficiency tax assessment an
upon receipt of an averse ecision by the
Commissioner of $nternal =evenue% file an
appeal with the Court of 'ax :ppeals& While
the appeal is pening% the @$= serve a
warrant of levy on the real properties of == to
enforce the collection of the ispute tax&
/ranting arguendo that the @$= can legally
levy on the properties% what coul == o to
stop the process? 3xplain briefly& "-.#
SUGGESTED ANSWER)
== shoul file a motion for in2unction with the
Court of 'ax :ppeals to stop the aministrative
collection process& :n appeal to the C': shall
not suspen the enforcement of the tax
liability% unless a motion to that effect shall
have been presente in court an grante by it
on the basis that such collection will 2eopari)e
the interest of the taxpayer or the /overnment
"Piro!ano !" *I5@ 1' S*5A /2% C196,D#&
'he C': is empowere to suspen the
collection of internal revenue taxes an
customs uties in cases pening appeal only
when! "4# in the opinion of the court the
collection by the @$= will 2eopari)e the
interest of the /overnment anLor the
taxpayerB an "9# the taxpayer is willing to
eposit the amount being collecte or to file a
surety bon for not more than ouble the
amount of the tax to be fixe by the court
(+ection $$, (#.A. No. $$%,).
Tax$ayer: BI5 Auit or
In!esti7ation (1999)
: Co&% a *hilippine corporation% is a big
manufacturer of consumer goos an has
several suppliers of raw materials& 'he @$=
suspects that some of the suppliers are not
properly reporting their income on their sales
to : Co& 'he C$= therefore! 4# $ssue an
access letter to : Co& to furnish the @$=
information on sales an payments to its
suppliers& 9# $ssue an access letter to a ban(
"C? @an(# to furnish the @$= on eposits of some suppliers of
: Co& on the allege groun that the suppliers are
committing tax evasion&
: Co&% ? @an( an the suppliers have not
been issue by the @$= letter of authority to
examine& : Co& an ? @an( believe that the
@$= is on a "fishing expeition" an come to
you for counsel& What is your avice? "41.#
SUGGESTED ANSWER)
$ will avise : Co& an @ Co& that the @$= is
2ustifie only in getting information from the
former but not from the latter& 'he @$= is
authori)e to obtain information from other
persons other than those whose internal
revenue tax liability is sub2ect to auit or
investigation& >owever% this power shall not be
construe as granting the Commissioner the
authority to inCuire into ban( eposits&
(+ection ,. N6#).
Tax$ayer: *ity Boar o( Assessment
Decision) A0ere to a$$eal (1999)
: Co&% a *hilippine corporation% is the owner of
machinery% eCuipment an fixtures locate at
its plant in ;untinlupa City& 'he City :ssessor
characteri)e all these properties as real
properties sub2ect to the real property tax& :
Co& appeale the matter to the ;untinlupa
@oar of :ssessment :ppeals& 'he @oar
rule in favor of the City& $n accorance with
=: 449- ":n :ct creating the Court of 'ax
:ppeals#& : Co& brought a petition for review
before the C': to appeal the ecision of the
City @oar of :ssessment :ppeals& $s the
*etition for =eview proper? 3xplain& "-.#
SUGGESTED ANSWER)
7o& 'he C':Ps evoi of 2urisiction to
entertain appeals from the ecision of the
City @oar of :ssessment :ppeals& Sai
ecision is instea appealable to the Central
@oar of :ssessment :ppeals% which uner
the Local /overnment Coe% has appellate
2urisiction over ecisions of Local @oar of
:ssessment :ppeals& "*altex P0ils@ (oe" !"
*entral Boar o( Assessment A$$eals@ +F
,&'66@ ;ay 21@ 19/%#&
Tax$ayer: *laim (or 5e(un)
Proceure (%&&%) :& What must a taxpayer o in orer to claim
a refun of% or tax creit for% taxes an
penalties which he alleges to have been
erroneously% illegally or excessively assesse
or collecte? ",.#
SUGGESTED ANSWER)
'he taxpayer must comply with the following
proceures in claiming a refun of% or tax
creit for% taxes an penalties which he
alleges to have been erroneously% illegally or
excessively assesse or collecte!
9& >e shoul file a written claim for
refun with the Commissioner within two
years after the ate of payment of the tax or
penalty "Sec& 910% 7$=C#B
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8'he claim file must state a categorical
eman for reimbursement (BermeKo !"
*ollector@ /8 P0il" 96 C19,&D)"
9'he suit or proceeing for recovery must be
commence in court within two years from
ate of payment of the tax or penalty
regarless of any supervening event that will
arise after payment "Sec& 99G% 7$=C#&
ANote: 6f the answer given is only number $, it
is suggested that the same shall be given full
credit considering that this is the only
re7uirement for the ommissioner to ac7uire
1urisdiction over the claim.@
@& Can the Commissioner grant a refun or
tax creit even without a written claim for it?
"9.#
SUGGESTED ANSWER)
@& 6es& When the taxpayer files a return which
on its face shows an overpayment of the tax
an the option to refunL claim a tax creit
was chosen by the taxpayer% the Commissioner
shall grant the refun or tax creit without the
nee for a written claim& 'his is so% because a
return file showing an overpayment shall be
consiere as a written claim for creit or
refun& "+ees. &- and %'!, N6##& ;oreover%
the law provies that the Commissioner may%
even without a written claim therefor% refun
or creit any tax where on the face of the
return upon which payment was mae% such
payment appears clearly to have been
erroneously pai& "+ec. %%), N6##&
Tax$ayer: De(iciency
Income Tax (199,) @usinessman Stephen 6ang file an income
tax return for 4GG, showing business net
income of *,-1%111&11 on which he pai an
income tax of *E4%111&11& :fter filing the
return he reali)e that he forgot to inclue an
item of business income in 4GG, for
*-1&111&11& @eing an honest taxpayer% he
inclue this income in his return for 4GG0
an pai the corresponing income tax
thereon& $n the examination of his 4GG,
return the @$= examiner foun that Stephen
6ang faile to report this item of *-1&111&11
an assesse him a eficiency income tax on
this item% plus a -1. frau surcharge& 4# $s
the examiner correct? 3xplain& 9# $f you were
the lawyer of Stephen 6ang% what woul
you have avise your client before he
inclue in his 4GG0 return the amount
of *-1&111&11 as 4GG, income to avoi
the frau surcharge? 3xplain&
,# Consiering that Stephen 6ang ha
alreay been assesse a eficiency income
tax for 4GG, for his failure to report the
*-1&111&11 income% what woul you avise
him to o to avoi the penalties for tax
elinCuency? 3xplain&
0# What woul you avise Stephen 6ang
to o with regar to the income tax he pai
for the *-1&111&11 in his 4GG0 return? $n case
your remey fails% what is your other
recourse? 3xplain&
SUGGESTED ANSWERS)
4# 'he examiner is correct in assessing a
eficiency income tax for taxable year 4GG,
but not in imposing the -1. frau surcharge&
'he amount of all items of gross income must
be inclue in gross income uring the year
in which receive or reali)e "Sec& ,<% 7$=C#&
'he -1.
frau surcharge attaches only if a false or
frauulent return is willfully mae by ;r& 6ang
"Sec&90<% 7$=C#& 'he fact that ;r& 6ang
inclue the income in his 4GG0 return belies
any claim of willfulness but is rather
inicative of an honest mista(e which was
sought to be rectifie by a subseCuent act%
that is the filing of the 4GG0 return&
9# ;r& 6ang shoul have amene his 4GG,
$ncome tax return to allow for the inclusion of
the *-1&111 income uring the taxable
perio it was reali)e&
,# ;r& 6ang shoul file a protest Cuestioning
the -1. surcharge an as( for the
abatement thereof&
A+TERNATI1E ANSWER)
;r& 6ang shoul pay the eficiency income
tax on or before the ay prescribe for its
payment per notice of eman& :fter
payment an within two years thereafter% he
shoul file a claim for refun of taxes
erroneously pai to recover the excessive
surcharge impose&
0# ;r& 6ang shoul file a written claim for
refun with the Commissioner of $nternal
=evenue of the taxes pai on the *-1&111
income inclue in 4GG0 within two years
from payment pursuant to Section 910",# of
the 'ax Coe& Shoul this remey fail in the
aministrative level% a 2uicial claim for
refun can be institute before the expiration
of the two year perio&
Tax$ayer: #x0austion o( Aministrati!e
5emeies (1998) "a# : taxpayer receive% on 4- January
4GGE an assessment for an internal revenue
tax eficiency& On 41 February 4GGE% the
taxpayer forthwith file a petition for review
with the Court of 'ax :ppeals& Coul the 'ax
Court entertain the petition?
"b# Uner the above factual setting% the
taxpayer% instea of Cuestioning the
assessment he receive on 4- January 4GGE
pai% on 14 ;arch 4GGE the "eficiency tax"
assesse& 'he taxpayer reCueste a refun
from the Commissioner by submitting a
written claim on 14 ;arch 4GGI& $t was
enie& 'he taxpayer% on 4- ;arch 4GGI%
file a petition for review with the Court of
:ppeals& Coul the petition still be
entertaine?
SUGGESTED ANSWER)
"a# 7o& @efore taxpayer can avail of Juicial
remey he must first exhaust aministrative
remeies by filing a protest within ,1 ays
from receipt of the assessment& $t is the
CommissionerAs ecision on the protest that
give the 'ax Court 2urisiction over the case
provie that the appeal is file within ,1
ays from receipt of the CommissionerAs
ecision& :n assessment by the @$= is not the
CommissionerAs ecision from which a petition
for review may be file with the Court of 'ax
:ppeals& =ather% it is the action ta(en by the
Commissioner in response to the taxpayerAs
protest on the assessment that woul
constitute the appealable ecision "Section I%
=: 449-#&
"b# 7o% the petition for review can not be
entertaine by the Court of :ppeals% since
ecisions of the
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60 of 73
Commissioner on cases involving claim for
tax refuns are within the exclusive an
primary 2urisiction of the Court of 'ax
:ppeals "Section I&=:449-#&
Tax$ayer: Failure to Ait00el H
5emit Tax (%&&&) : omestic corporation faile to withhol an
remit the tax on income receive from
*hilippine sources by a nonresient foreign
corporation& $n aition to the civil penalties
provie for uner the 'ax Coe% a
compromise penalty was impose for
violation of the withholing tax provisions&
;ay the Commissioner of $nternal =evenue
legally enforce the collection of compromise
penalty? "-.#
SUGGESTED ANSWER)
7o& 'here is no showing that the compromise
penalty was impose by the Commissioner of
$nternal =evenue with the agreement an
conformity of the taxpayer& "Aoner
;ec0anical #n7ineerin7 *or$oration u"
*ourt o( Tax A$$eals@ et" al"@ 6' S*5A
,,,#&
Tax$ayer: =I5* !s" T**
5emeies (1996) Compare the taxpayerAs remeies uner the
7ational $nternal =evenue Coe an the 'ariff
an Customs Coe&
SUGGESTED ANSWER)
'he taxpayerAs remeies uner the
=ATI1=A+ I=T#5=A+ 5#4#=6# *1D# may
be categori)e into remeies before payment
an remeies after payment& 'he remey
B#F15# PAI;#=T consists of
"a# Aministrati!e 5emey which is the
filing of protest within ,1 ays from receipt of
assessment% an
"b# Guicial 5emey which is the appeal
of the averse ecision of the Commissioner
on the protest with the Court of 'ax :ppeals%
an finally with the Supreme Court&
'he remey AFT#5 PAI;#=T is
availe of "c# by paying the assesse tax within ,1
ays from receipt of assessment an
"# the filing of a claim for refun or tax
creit of these taxes on grouns that they are
erroneously pai within two years from ate
of payment&
"e# 6f there is a denial of the claim% appeal
to the C': shall be mae within ,1 ays from
enial but within two years from ate of
payment& T $f the Commissioner fails to act
on the claim for
refun or tax creit an the two-year
perio is about to expire% the taxpayer
shoul consier the continuous
inaction of the Commissioner as a
enial an elevate the case to the C':
before the expiration of the two-year
perio&
Uner the Tari(( an *ustoms *oe%
taxpayerAs remeies arise only after payment
of uties& 0# 'he aministrative remeies
consist of filing a claim
for refun which may ta(e the form of
abatement or rawbac(&
-# 'he taxpayer can also file a protest
within 4- ays from payment if he isagrees
with the ruling or ecision of the Collector of
Customs regaring the legality or correctness
of the assessment of customs uties&
E# $f the ecision of the Collector is averse to
the taxpayer% he can notify the Collector within 4-
ays from receipt of sai ecision of his esire to have
his case reviewe by the
Commissioner& T 'he ecision of the Collector on the
taxpayerAs protest% if averse to the /overnment% is
automatically elevate to the Commissioner
for reviewB an if such ecision is affirme by the
Commissioner% the same shall be
automatically elevate to an finally reviewe by the
Secretary of Finance&
T =esort to 2uicial relief can be ha
by the taxpayer by appealing the ecision
of the Commissioner or of the Secretary of
Finance "for cases sub2ect to automatic
review# within ,1 ays from the
promulgation of the averse ecision to
the C':&
Tax$ayer: 1!erwit0olin7 *laim
(or 5e(un (1999) : Co& is the wholly owne subsiiary of @ Co&%
a nonresient /erman company& : Co& has a
traemar( licensing agreement with @ Co& On
Feb& 41% 4GG-% : Co& remitte to @ Co&
royalties of * 41%111%111% which : Co&
sub2ecte to a withholing tax of 9-. or
*9%-11%111& Upon avice of counsel% : Co&
reali)e that the proper withholing tax rate
is 41.& On ;arch 91% 4GGE% : Co& file a claim
for refun of *9&-11&111 with the @$=& 'he @$=
enie the claim on 7ov& 4-% 4GGE& On 7ov&
9<% 4GGE% : Co& file a petition for review with
the C':& 'he @$= attac(e the capacity of :
Co&% as agent% to bring the refun case&
+ecie the issue& "-.#
SUGGESTED ANSWER)
: Co&% the withholing agent of the non-
resient foreign corporation is entitle to
claim the refun of excess withholing tax
pai on the income of sai corporation in the
*hilippines& @eing a withholing agent% it is
the one hel liable for any violation of the
withholing tax law shoul such a violation
occur& $n the same vein% it shoul be allowe
to claim a refun in case of overwitholing&
"*I5 !" Aaner P0ils" Inc"@ ?5 =o" 6/28/@
A$ril 1,@ 19//@ 16& S*5A ,82) *I5 !" Procter
H ?amble P;*@ %1' S*5A 288#&
Tax$ayer: Prescri$ti!e Perio:
Sus$ene (%&&&) ;r& =eyes% a Filipino citi)en engage in the
real estate business% file his 4GG0 income tax
return on ;arch 91% 4GG-& On +ecember 4-%
4GG-% he left the *hilippines as an immigrant
to 2oin his family in Canaa& :fter the
investigation of sai returnLthe @$= issue a
notice of eficiency income tax assessment
on :pril 4-% 4GG<& ;r& =eyes returne to the
*hilippines as a bali(bayan on +ecember <%
4GG<& Fining his name to be in the list of
elinCuent taxpayers% he file a protest
against the assessment on the groun that he
i not receive the notice of assessment an
that the assessment ha prescribe& Will the
protest prosper? 3xplain& "-.#
SUGGESTED ANSWER)
7o& *rescription has not set in because the
perio of limitations for the @ureau of $nternal
=evenue to issue an assessment was
S6SP#=D#D uring the time that ;r& =eyes
was out of the *hilippines or from the perio
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61 of 73
+ecember 4-% 4GG- up to +ecember <% 4GG<&
(+ec. %%5 in relation to +ec. %'5, both of the
N6# of $))&)
Tax$ayer: Prescri$ti!e Perio) *laim
(or 5e(un (1998) : corporation files its income tax return on a
calenar year basis& For the first Cuarter of
4GG,% it pai on ,1 ;ay 4GG, its Cuarterly
income tax in the amount of *,&1 million& On
91 :ugust 4GG,% it pai the secon Cuarterly
income tax of *1&- million& 'he thir Cuarter
resulte in a net loss% an no tax was pai&
For the fourth an final return for 4GG,% the
company reporte a net loss for the year% an
the taxpayer inicate in the income tax
return that it opte to claim a refun of the
Cuarterly income tax payments& On 41
January 4GG0% the corporation file with the
@ureau of $nternal =evenue a written claim
for the refun of *,&- million&
@$= faile to act on the claim for refunB
hence% on 19 ;arch 4GGE% the corporation
file a petition for review with the Court of
'ax :ppeals on its claim for refun of the
overpayment of its 4GG, Cuarterly income
tax& @$=% in its answer to the petition% allege
that the claim for refun was file beyon the
reglementary perio& +i the claim for refun
prescribe?
SUGGESTED ANSWER)
'he claim for refun has prescribe& 'he counting of
the twoFyear $rescri$ti!e $erio (or (ilin7 a
claim (or re(un is counte not from the
ate when the Cuarterly income taxes were
pai but on the ate when the final
a2ustment return or annual income tax return
was file "*I5 !" T;> Sales Inc"@ ?"5" =o"
/2826@ Ganuary 1,@ 199%) *I5 !" P0iMAm +i(e
Insurance *o"@ Inc"@ ?"5" =o" 1&,%&/@ ;ay %9@
199,#& $t is obvious that the annual income tax
return was file before January 41% 4GG0
because the written claim for refun was file
with the @$= on January 41% 4GG0& Since the
two-year prescriptive perio is not only a
limitation of action in the aministrative stage
but also a limitation of action for bringing the
case to the 2uicial stage% the petition for
review file with the C': on ;arch 19% 4GGE is
beyon the reglementary perio&
Tax$ayer: Prescri$ti!e Perio) *laims
(or 5e(un (199') ?C3L Corporation file its Cuarterly income
tax return for the first Cuarter of 4G<- an
pai an income tax of *-11&111&11 on ;ay
4-% 4G<-& $n the subseCuent Cuarters% ?C3L
suffere losses so that on :pril 4-% 4G<E it
eclare a net loss of *4%111%111&11 in its
annual income tax return& :fter failing to get
a refun% ?C3L file on ;arch 4% 4G<< a case
with the Court of 'ax :ppeals to recover the
*-11&111&11 in taxes pai on ;ay 4-% 4G<-&
$s the action to recover the taxes file timely?
SUGGESTED ANSWER)
'he action for refun was file in the Court of
'ax :ppeals on time& $n the case of
*ommissioner !" T;> Sales@ Inc"@ %&, S*5A
1/'% which is similar to this case% the Supreme
Court rule that in the case of overpai
Cuarterly corporate income tax% the two-year
perio for filing claims for refun in the @$= as
well as in the institution of an action for
refun in the C':% the two-year prescriptive
perio for tax refuns "Sec& 9,1% 'ax Coe# is
counte from the filing of the final%
a2ustment return uner Sec& EI of the 'ax
Coe% an not from the filing of the
Cuarterly return an payment of the Cuarterly
tax& 'he C': action on ;arch 4% 4G<< was
clearly within the reglementary two-year
perio from the filing of the final a2ustment
return of the corporation on :pril 4-% 4G<E&
Tax$ayer: Prescri$ti!e Perio) *laims
(or 5e(un (%&&') On ;arch 49% 9114% =37 pai his taxes& 'en
months later% he reali)e that he ha overpai
an so he immeiately file a claim for refun
with the Commissioner of $nternal =evenue&
On February 9I% 911,% he receive the
ecision of the Commissioner enying =37As
claim for refun& On ;arch 90% 911,% =37
file an appeal with the Court of 'ax :ppeals&
Was his appeal file on time or not? =eason&
"-.#
SUGGESTED ANSWER)
'he appeal was not file on time& 'he two-
year perio of limitation for filing a claim for
refun is not only a limitation for pursuing the
claim at the aministrative level but also a
limitation for appealing the case to the Court
of 'ax :ppeals& 'he law provies that "no suit
or proceeing shall be file after the
expiration of two years from the ate of the
payment of the tax or penalty regarless of
any supervening cause that may arise after
payment "Section 99G% J5H=CJ& Since the
appeal was only mae on ;arch 90% 911,%
more than two years ha alreay elapse
from the time the taxes were pai on ;arch
49% 911,& :ccoringly% =37 ha lost his
2uicial remey because of prescription&
Tax$ayer: Protest a7ainst
Assessment (199/) CF@ Corporation% a omestic corporation
engage in foo processing an other allie
activities% receive a letter from the @$=
assessing it for elinCuency income taxes&
CF@ file a letter of protest& One month after%
a warrant of istraint an levy was serve on
CF@ Corporation& $f you were the lawyer
engage by CF@ Corporation to contest the
assessment mae by the @$=% what steps will
you ta(e to protect your client? "-.#
SUGGESTED ANSWER)
$ shall immeiately file a motion for
reconsieration of the issuance of the
warrant of istraint an levy an see( from
the @$= Commissioner a enial of the protest
"in clear an uneCuivocal language&" 'his is
so because the issuance of a warrant of
istraint an levy is not consiere as a
enial by the @$= of the protest file by CF@
Corporation "*I5 !" 6nion S0i$$in7 *or$"@
1/, S*5A ,'8#&
Within thirty ",1# ays from receipt of such
enial "in clear an uneCuivocal language%" $
shall then file a petition for review with the
Court of 'ax :ppeals& A+T#5=ATI4# A=SA#5:
Within thirty ",1# ays from receipt of the
warrant of istraint an levy% $ shall file a
petition for review with the Court of 'ax
:ppeals with an application for issuance of a
writ of preliminary in2unction to en2oin the
@ureau of $nternal =evenue from enforcing
the warrant&
'his is the action $ shall ta(e because $ shall
consier the issuance of the warrant as a final
ecision of the Commissioner of $nternal
=evenue which coul be the
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62 of 73
sub2ect of appeal to the Court of 'ax :ppeals
"Iobes u" FloKo@ 1, S*5A %8/#& 'he C':
may% however% reman the case to the @$=
an reCuire the Commissioner to specifically
rule on the protest& 'he ecision of the
Commissioner% if averse to my client% woul
then constitute an appealable ecision&
Assessment (1999) : Co&% a *hilippine corporation% receive an
income tax eficiency assessment from the
@$= on ;ay -% 4GG-& On ;ay ,4% 4GG-% : Co&
file its protest with the @$=& On July ,1%
4GG-% : Co& submitte to the @$= all relevant
supporting ocuments& 'he C$= i not
formally rule on the protest but on January
9-% 4GGE% : Co& was serve a summons an a
copy of the complaint for collection of the tax
eficiency file by the @$= with the =egional
'rial Court "='C#& On February 91% 4GGE% :
Co& brought a *etition for =eview before the
C':& 'he @$= contene that the *etition is
premature since there was no formal enial
of the protest of : Co& an shoul therefore
be ismisse&
4& >as the C': 2urisiction over the
case?
SUGGESTED ANSWER6
6es% the C': has 2urisiction over the case
because this Cualifies as an appeal from the
CommissionerAs ecision on ispute
assessment& When the Commissioner ecie
to collect the tax assesse without first
eciing on the taxpayerAs protest% the effect
of the CommissionerPs action of filing a 2uicial
action for collection is a ecision of enial of
the protest% in which event the taxpayer may
file an appeal with the C':& "5e$ublic !" +im
Tian Ten7 H Sons@ Inc"@ 16 S*5A ,/')
Dayrit !" *ruJ@ +F2991&@ Se$t" %6@ 19//#&
9& >as the ='C 2urisiction over the
collection case file by the @$=? 3xplain&
SUGGESTED ANSWER6
'he ='C has no 2urisiction over the collection
case file by the @$=& 'he filing of an appeal
with the C': has the effect of ivesting the
='C of 2urisiction over the collection case& :t
the moment the taxpayer appeals the case to
the Court of 'ax :ppeals in view of the
CommissionerAs filing of the collection case
with the ='C which was consiere as a
ecision of enial% it gives a 2ustifiable basis
for the taxpayer to move for ismissal in the
='C of the /overnmentAs action to collect the
tax liability uner ispute& "Iabes !" FloKo@ 1,
S*5A %8/) San Guan !" 4asEueJ@ 2 S*5A 9%#&
'here is no final% executory an emanable
assessment which can be enforce by the @$=%
once a timely appeal is file&
Assessment (1999) : Co&% a *hilippine corporation% receive an
income tax eficiency assessment from the
@$= on 7ovember 9-% 4GGE& On +ecember 41%
4GGE% : Co& file its protest with the @$= On
;ay 91% 4GGI% the @$= issue a warrant of
istraint to enforce the assessment& 'his
warrant was serve on : Co& on ;ay 9-%
4GGI& $n a letter ate June 0% 4GGI an
receive by : Co& - ays later% the C$=
formally enie : Co&As protest stating that it
constitutes his final ecision on the matter&
On July E% 4GGI% : Co& file a *etition for
=eview with the C':& 'he @$= move to
ismiss the *etition on the groun that the
C': has no 2urisiction over the case& +ecie&
"41.#
SUGGESTED ANSWER)
'he C': has 2urisiction over the case& 'he
appealable ecision is the one which
categorically state that the CommissionerAs
action on the ispute assessment is final
an% therefore% the rec(oning of the ,1-ay
perio to appeal was on June G% 4GGG& 'he
filing of the petition for review with the C':
was timely mae& 'he Supreme Court has
rule that the C$= must categorically state
that his action on a ispute assessment is
finalB otherwise% the perio to appeal will not
commence to run& 'hat final action cannot be
implie from the mere issuance of a warrant
"of istraint an levy& "*I5 !" 6nion
S0i$$in7 *or$oration@ 1/, S*5A ,'8#&
Tax$ayer: Protest) *laim o(
5e(un (1996) $s protest at the time of payment of taxes an
uties a reCuirement to preserve the
taxpayersA right to claim a refun? 3xplain&
SUGGESTED ANSWER)
For TA>#S impose uner the =I5*@ protest
at the time of payment is not reCuire to
preserve the taxpayersA right to claim refun&
'his is clear uner +ection %5' of the N6#
which provies that a suit or proceeing
maybe maintaine for the recovery of
national internal revenue tax or penalty
allege to have been erroneously assesse or
collecte% whether such tax or penalty has
been pai uner protest or not&
For D6TI#S impose uner the Tari(( an
*ustoms *oe% a protest at the time of
payment is reCuire to preserve the
taxpayersA claim for refun& 'he proceure
uner the 'CC is to the effect that when a
ruling or ecision of the Collector of Customs
is mae whereby liability for uties is
etermine% the party aversely affecte may
protest such ruling or ecision by presenting
to the Collector% at the time when payment is
mae% or within 4- ays thereafter% a written
protest setting forth his ob2ections to the
ruling or ecision in Cuestion "Sec& 9,1<&
'CC#&
Tax$ayer) A$$eal to t0e *ourt o(
Tax A$$eals (%&&,) : taxpayer receive a tax eficiency
assessment of *4&9 ;illion from the @$=
emaning payment within 41 ays%
otherwise% it woul collect through summary
remeies& 'he taxpayer reCueste for a
reconsieration stating the grouns therefor&
$nstea of resolving the reCuest for
reconsieration% the @$= sent a Final 7otice
before Sei)ure to the taxpayer& ;ay this
action of the Commissioner of $nternal
=evenue be eeme a enial of the reCuest
for reconsieration of the taxpayer to entitle
him to appeal to the Court of 'ax :ppeals?
+ecie with reasons& "-.#
SUGGESTED ANSWER)
6es% the final notice before sei)ure was in
effect a enial of the taxpayerAs reCuest for
reconsieration% not only was the notice the
only response receive% its nature% content
an tenor supports the theory that it was the
@$=As final act regaring the reCuest for
reconsieration& (*I5 !" Isabela *ultural
*or$oration@ ?"5" =o" 12,%1&@ Guly 11@
%&&1)
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6* of 73
Tax$ayer) *laim (or Tax
*reits (%&&6) Congress enacts a law granting grae school
an high school stuents a 41. iscount on
all school-prescribe textboo(s purchase
from any boo(store& 'he law allows
boo(stores to claim in full the iscount as a
tax creit&
4& $f in a taxable year a boo(store has no tax
ue on which to apply the tax creits% can the
boo(store claim from the @$= a tax refun in
lieu of tax creit? 3xplain& "9&-.#
SUGGESTED ANSWER)
7o% the boo(store cannot claim from the @$= a
tax refun in lieu of tax creit& 'here is
nothing in the law that grants a refun when
the boo(store has no tax liability against
which the tax creit can be use (*I5 !"
*entral +uJon Dru7@ ?"5" =o 1,96'8@ A$ril 1,@
%&&,)& : tax creit is in the nature of a tax
exemption an in case of oubt% the oubt
shoul be resolve in strictissimi 1uris against
the claimant&
9& Can the @$= reCuire the boo(stores to
euct the amount of the iscount from their
gross income? 3xplain& "9&-.#
SUGGESTED ANSWER)
7o& 'ax creit which reuces the tax liability is
ifferent from a tax euction which merely
reuces the tax base& Since the law allowe
the boo(stores to claim in full the iscount as
a tax creit% the @$= is not allowe to expan
or contract the legislative manate (*I5 !"
Bicolania Dru7 *or$"@ ?"5" =o" 1'/&/2@ Guly
%1@ %&&6) *I5 !" *entral
+uJon Dru7 *or$"@ ?"5" =o" 1,96'8@ A$ril 1,@
%&&,)"
,& $f a boo(store closes its business ue to
losses without being able to recoup the
iscount% can it claim reimbursement of the
iscount from the government on the groun
that without such reimbursement% the law
constitutes ta(ing of private property for
public use without 2ust compensation?
3xplain& "-.#
SUGGESTED ANSWER)
: boo(store% closing its business ue to losses%
cannot claim reimbursement of the iscount
from the government& $f the business
continues to operate at a loss an no other
taxes are ue% thus compelling it to close shop%
the creit can never be applie an will be lost
altogether (*I5 !" *entral +uJon Dru7@ ?"5" =o"
1,96'8@ A$ril 1,@ %&&,)" 'he grant of the
iscount to the taxpayer is a mere privilege
an can be revo(e anytime&
Tax$ayer) *om$romise a(ter
*riminal Action (199/) :n information was file in court for willful
non-payment of income tax the assessment
of which has become final& 'he accuse%
through counsel% presente a motion that he
be allowe to compromise his tax liability
sub2ect of the information& 'he prosecutor
inicate his conformity to the motion& $s this
proceure correct? N-.O
SUGGESTED ANSWER)
7o& Criminal violations% if alreay file in
court% may not be compromise (+ec. %'!A3@,
N6#). Furthermore% the payment of the tax
ue after apprehension shall not constitute a
vali efense in any prosecution for violation
of any provisions of the 'ax Coe (+ec.
%!&(a), N6#). Finally% there is no showing
that the prosecutor in the problem is a legal
officer of the @ureau of $nternal
=evenue to whom the conuct of criminal
actions are loge by the 'ax Coe&
A+TERNATI1E ANSWER)
7o& $f the compromise referre to is the civil
aspect% the proceure followe is not correct&
Compromise for the payment of any internal
revenue tax shall be mae only by the
Commissioner of $nternal =evenue or in a
proper case the 3valuation @oar of the @$=
"Sec& 910% 7$=C#& :pplying the law to the case
at bar% compromise settlement can only be
effecte by leave of Court&
Tax$ayer) Protest a7ainst Assessment)
Donor3s Tax (199,)
;r& =origo% an <1-year ol retire
businessman% fell in love with 91-year ol
'etchie Sonora% a night club hospitality girl&
:lthough she refuse to marry him she
agree to be his "live-in" partner& $n gratitue%
;r& =origo transferre to her a conominium
unit% where they both live% uner a ee of
sale for *41 ;illion& ;r& =origo pai the
capital gains tax of -. of *41 ;illion&
'he Commissioner of $nternal =evenue foun
that the property was transferre to 'etchie
Sonora by ;r& =origo because of the
companionship she was proviing him&
:ccoringly% the Commissioner mae a
etermination that Sonora ha compensation
income of *41 ;illion in the year the
conominium unit was transferre to her an
issue a eficiency income tax assessment&
'etchie Sonora protests the assessment an
claims that the transfer of the conominium
unit was a gift an therefore exclue from
income& >ow will you rule on the protest of
'etchie Sonora? 3xplain&
SUGGESTED ANSWER)
$ will grant the protest an cancel the
assessment& 'he transfer of the property by
;r& =origo to ;s& Sonora was gratuitous& 'he
ee of sale inicating a *41 million
consieration was simulate because ;r&
=origo i not receive anything from the
sale& 'he problem categorically states that
the transfer was mae in gratitue to ;s&
SonoraAs companionship& 'he transfer being
gratuitous is sub2ect to onorAs tax& ;r&
=origo shoul be assesse eficiency
onorAs tax an a -1. surcharge impose for
frauulently simulating a contract of sale to
evae onorAs tax& (+ec. )$(b), N6#).
Tax$ayer) Ait00olin7 A7ent) *laim o(
Tax 5e(un (%&&,) +oes a withholing agent have the right to
file an application for tax refun? 3xplain&
SUGGESTED ANSWER)
6es& : taxpayer is "any person sub2ect to tax&"
Since% the withholing tax agent who is
"reCuire to euct an withhel any tax" is
mae "personally liable for such tax" shoul
the amount of the tax withhel be finally
foun to be less than that reCuire to be
withhel by law% then he is a taxpayer& 'hus%
he has sufficient legal interest to file an
application for refun% of the amount he
believes was illegally collecte from him&
(*ommissioner o( Internal 5e!enue !" Procter
H ?amble@ ?"5" =o" 66/2/@ December
%@ 1991)
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64 of 73 +OCA+ - REA+ PROPERTY
TAXES
+ocal Taxation: Actual 6se o(
Pro$erty (%&&%) 'he real property of ;r& an ;rs :ngeles%
situate in a commercial area in front of the
public mar(et% was eclare in their 'ax
+eclaration as resiential because it ha been
use by them as their family resience from
the time of its construction in 4GG1& >owever%
since January 4GGI% when the spouses left for
the Unite States to stay there permanently
with their chilren% the property has been
rente to a single proprietor engage in the
sale of appliances an agri-proucts& 'he
*rovincial :ssessor reclassifie the property
as commercial for tax purposes starting
January 4GG<& ;r& an ;rs& :ngeles appeale
to the Local @oar of :ssessment :ppeals%
contening that the 'ax +eclaration
previously classifying their property as
resiential is bining& >ow shoul the appeal
be ecie? "-.#
SUGGESTED ANSWER)
'he appeal shoul be ecie against ;r& an
;rs& :ngeles& 'he law focuses on the actual
use of the property for classification% valuation
an assessment purposes regarless of
ownership& Section 94I of the Local
/overnment Coe provies that "real property
shall be classifie% value% an assesse on
the basis of its actual use regarless of where
locate% whoever owns it% an whoever uses
it"&
+ocal Taxation:
*o!era7e (%&&%) :sie from the basic real estate tax% give
three ",# other taxes which may be impose
by provincial an city governments as well as
by municipalities in the ;etro ;anila area&
",.#
SUGGESTED ANSWER)
'he following real property taxes asie from
the basic real property tax may be impose
by provincial an city governments as well as
by municipalities in the ;etro ;anila area!
4:itional levy on real property for the
Special 3ucation Fun "Sec& 9,-% L/C#B
9:itional :-valorem tax on $le lans "Sec&
9,U% L/C#B an
,Special levy "Sec& 901#&
N=ote: 'he Cuestion is susceptible to ual
interpretation because it is as(ing for three
other taxes an not three other real property
taxes& :ccoringly% an alternative answer
shoul be consiere an given full creitO
:& 'he following taxes% asie from basic
real estate tax% may be impose by!
4& *rovincial /overnment
*rinterAs or publisherAs tax
Franchise 'ax
*rofessional tax
9& City /overnment - may levy taxes which
the province or municipality are authori)e
to levy "Sec& 4-4% L/C# *rinterAs or publisherAs tax
Franchise tax
*rofessional tax
,& ;unicipalities in the ;etro ;anila :rea -
may levy taxes at rates which shall not
excee by -1. the maximum rates
prescribe in the Local /overnment Coe&
:nnual fixe tax on manufacturers% assemblers%
repac(ers% processors% brewers% istillers% rectifiers
an compouners of liCuors% istille spirits% an
wines or manufacture of any article of commerce
of whatever (in or natureB
:nnual fixe tax on wholesalers% istributors% or
ealers in any article of commerce of whatever
(in or natureB
*ercentage tax on retailers
N7ote! Other taxes may comprise the enumeration
because many other taxes are authori)e to be
impose by L/Us&O
+ocal Taxation: #xem$tion) 5eal
Pro$erty Taxes (%&&%) Uner the Local /overnment Coe% what
properties are exempt from real property
taxes? "-.#
SUGGESTED ANSWER)
'he following properties are exempt from
real property taxes! "Sec& 9,0% L/C#&
4=eal property owne by the =epublic of the
*hilippines or any of its political subivisions
except when the beneficial use thereof has been
grante% for consieration or otherwise% to a
taxable personB
9:ll lans% builings an improvements actually%
irectly% an exclusively use for religious%
charitable or eucational purposes by charitable
institutions% churches% parsonages or convents
appurtenant thereto% mosCues% nonprofit or
religious cemeteriesB
,:ll machineries an eCuipment that are actually%
irectly an exclusively use by local water
istricts an government-owne or controlle
corporations engage in the supply an istribution
of water anLor generation an transmission of
electric powerB
0:ll real property owne by uly registere
cooperatives as provie for uner =&:& 7o& EG,<B
an
-;achinery an eCuipment use for pollution
control an environmental protection&
+ocal Taxation: Im$osition o( A
4alorem Tax (%&&&) ;ay local governments impose an annual
realty tax in aition to the basic real property
tax on ile or vacant lots locate in resiential
subivisions within their respective territorial
2urisictions? ",.#
SUGGESTED ANSWER)
7ot all local government units may o so& Only
provinces% cities% an municipalities within the
;etro ;anila area (+ec. %5%, ?ocal
"overnment ode) may impose an a
!alorem tax not exceeing five percent "-.#
of the assesse value (+ec. %5-, 6bid.) of ile
or vacant resiential lots in a subivision% uly
approve by proper authorities regarless of
area& (+ec.%5&, 6bid.)
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6. of 73
+ocal Taxation: +e7alityM
*onstitutionality) Tax 1rinance
(%&&2) ?% a taxpayer who believes that an orinance
passe by the City Council of *asay is
unconstitutional for being iscriminatory
against him% want to (now from you% his tax
lawyer% whether or not he can file an appeal&
$n the affirmative% he as(s you where such
appeal shoul be mae! the Secretary of
Finance% or the Secretary of Justice% or the
Court of 'ax :ppeals% or the regular courts&
What woul your avice be to your client% ??
"<.#
SUGGESTED ANSWER)
'he appeal shoul be mae with the Secretary of
Justice& :ny Cuestion on the constitutionality or
legality of a tax orinance may be raise on
appeal with the Secretary of Justice within ,1
ays from the effectivity thereof& (Sec" 1/8@ +?*)
<a7onoy ;ar.et 4enor Association !"
;unici$ality o( <a7onoy@ 286 S*5A 286
C%&&%D)&
+ocal Taxation: +e7ality) Im$osition o(
5eal Pro$erty Tax 5ate (%&&%)
:n Orinance was passe by the *rovincial
@oar of a *rovince in the 7orth% increasing
the rate of basic real property tax from
1&11E. to 4 . of the assesse value of the
real property effective January 4% 9111&
=esients of the municipalities of the sai
province proteste the Orinance on the
groun that no public hearing was conucte
an% therefore% any increase in the rate of real
property tax is voi& $s there merit in the
protest? 3xplain your answer& "9.#
SUGGESTED ANSWER)
'he protest is evoi of merit& 7o public
hearing is reCuire before the enactment of a
local tax orinance levying the basic real
property tax ":rt& ,90% L/C =egulations#&
A+TERNATI1E ANSWER)
6es% there is merit in the protest provie that
sufficient proof coul be introuce for the
non-observance of public hearing& @y
implication% the Supreme Court recogni)e
that public hearings are reCuire to be
conucte prior to the enactment of an
orinance imposing real property taxes&
:lthough it was conclue by the highest
tribunal that presumption of valiity of a tax
orinance can not be overcome by bare
assertions of proceural efects on its
enactment% it woul seem that if the taxpayer
ha presente evience to support the
allegation that no public hearing was
conucte% the Court shoul have rule that
the tax orinance is invali& (Belen
Fi7uerres !" *ourt o( A$$eals@ ?5=o"
11918%@ ;arc0 %,@ 1999)&
+ocal Taxation: Power to
Im$ose (%&&2) $n orer to raise revenue for the repair an
maintenance of the newly constructe City
>all of ;a(ati% the City ;ayor orere the
collection of *4&11% calle "elevator tax"%
every time a person ries any of the high-
tech elevators in the city hall uring the hours
of <!11 a&m& to
41!11 a&m& an 0!11 p&m& to E!11 p&m& $s the
"elevator tax" a vali imposition? 3xplain&
"<.#
SUGGESTED ANSWER)
7o& 'he imposition of a tax% fee or charge or
the generation of revenue uner the Local
/overnment Coe% shall be exercise by the
S:7/U7$:7 of the local government unit
concerne through an appropriate
orinance (+ection $5% of the ?ocal
"overnment ode). 'he city mayor alone
coul not orer the collection of the taxB as
such% the "elevator tax" is an invali
imposition&
+ocal Taxation:
5emissionM*ononation o( Taxes
(%&&')
=C is a law-abiing citi)en who pays his real
estate taxes promptly& +ue to a series of
typhoons an averse economic conitions%
an orinance is passe by ;; City granting a
-1. iscount for payment of unpai real
estate taxes for the preceing year an the
cononation of all penalties on fines resulting
from the late payment& :rguing that the
orinance rewars elinCuent taxpayers an
iscriminates against prompt ones% =C
emans that he be refune an amount
eCuivalent to one-half of the real taxes he
pai& 'he municipal attorney renere an
opinion that =C cannot be reimburse
because the orinance i not provie for
such reimbursement& =C files suit to eclare
the orinance voi on the groun that it is a
class legislation& Will his suit prosper? 3xplain
your answer briefly& "-.#
SUGGESTED ANSWER)
'he suit will not prosper& 'he remission or
cononation of taxes ue an payable to the
exclusion of taxes alreay collecte oes not
constitute unfair iscrimination& 3ach set of
taxes is a class by itself an the law woul be
open to attac( as class legislation only if all
taxpayers belonging to one class were not
treate ali(e (Guan +una Subi!ision@ Inc"@ !"
Sarmiento@ 91 P0il" 281 C19,%D)"
+ocal Taxation: 5ule o( 6ni(ormity
an #Euality (%&&2) 'he City of ;a(ati% in orer to solve the traffic
problem in its business istricts% ecie to
impose a tax% to be pai by the river% on all
private cars entering the city uring pea(
hours from <!11 a&m& to G!11 a&m& from
;onays to Friays% but exempts those cars
carrying more than two occupants% excluing
the river& $s the orinance vali? 3xplain&
"<.#
SUGGESTED ANSWER)
'he orinance is in violation of the =ule of
Uniformity an 3Cuality% which reCuires that
all sub2ects or ob2ects of taxation% similarly
situate must be treate ali(e in eCual
footing an must not classify the sub2ects in
an arbitrary manner& $n the case at bar% the
orinance exempts cars carrying more than
two occupants from coverage of the sai
orinance& Furthermore% the orinance only
imposes the tax on private cars an exempts
public vehicles from the imposition of the tax%
although both contribute to the traffic
problem& 'here exists no substantial stanar
use in the classification by the City of
;a(ati&
:nother issue is the fact that the tax is
impose on the river of the vehicle an not
on the registere owner of the same& 'he tax
oes not only violate the reCuirement of
uniformity% but the same is also un2ust
because it places the buren on someone
who has no control over the route of the
vehicle& 'he orinance is% therefore% invali
for violating the rule of uniformity an
eCuality as well as for being un2ust&
+ocal Taxation) Situs o(
Pro(essional Taxes (%&&,) ;r& Fermin% a resient of Kue)on City% is a
Certifie *ublic :ccountant-Lawyer engage
in the practice of his
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66 of 73
two professions& >e has his main office in
;a(ati City an maintains a branch office in
*asig City& ;r& Fermin pays his professional
tax as a C*: in ;a(ati City an his
professional tax as a lawyer in *asig City&
"-.# a# ;ay ;a(ati City% where he has his
main office% reCuire him to pay his
professional tax as a lawyer? 3xplain&
SUGGESTED ANSWER)
7o& ;a(ati City where ;r& Fermin has his main
office may not reCuire him to pay his
professional tax as a lawyer& ;r& Fermin has
the option of paying his professional tax as a
lawyer in *asig City where he practices law or
in ;a(ati City where he maintains his principal
office& (+ec. $5)Ab@, ?ocal "overnment ode)
b# ;ay Kue)on City% where he has his
resience an where he also practices his two
professions% go after him for the payment of
his professional tax as a C*: an a lawyer?
3xplain&
SUGGESTED ANSWER)
7o% the situs of the professional tax is the city
where the professional practices his
profession or where he maintains his principal
office in case he practices his profession in
several places& 'he local government of
Kue)on City has no right to collect the
professional tax from ;r& Fermin as the place
of resience of the taxpayer is not the proper
situs in the collection of the professional tax&
+ocal Taxation) S$ecial +e!y on
Ile +ans (%&&,) : city outsie of ;etro ;anila plans to enact
an orinance that will impose a special levy
on ile lans locate in resiential
subivisions within its territorial 2urisiction in
aition to the basic real property tax& $f the
lot owners of a subivision locate in the sai
city see( your legal avice on the matter%
what woul your avice be? +iscuss& "-.#
SUGGESTED ANSWER)
$ woul avise the lot owners that a city% even
if it is outsie ;etro ;anila% may levy an
annual tax on ile lans at the rate not
exceeing five percent "-.# of the assesse
value of the property which shall be in
aition to the basic real property tax& (+ec.
%5-, ?ocal "overnment ode) $ woul
li(ewise avise them that the levy may apply
to resiential lots% regarless of lan area% in
subivisions uly approve by proper
authorities% the ownership of which has been
transferre to iniviual owners who shall be
liable for the aitional tax& "Last par&% Sec&
9,I#
'he term "$le Lans" means% lan not
evote irectly to any crop or to any efinite
purpose for at least one year prior to the
notice of expropriation% except for reasons
other than force ma1eure or any fortuitous
event% but use to be evote or is suitable
to such crop or is contiguous to lan evote
irectly to any crop an oes not inclue lan
evote permanently or regularly to other
essential an more prouctive purpose.
(9hilippine ?egal 4ncyclopedia, by +ibal, $)/-
4d.)
Finally% $ woul avise them to construct or
place improvements on their ile lans by
ma(ing valuable aitions to the property or
ameliorations in the lanAs
conitions so the lans woul not be
consiere as ile& "Sec& 4GGNmO# $n this
manner their properties woul not be sub2ect
to the ad valorem tax on ile lans&
5eal Pro$erty Tax: 6ner7roun
?asoline Tan.s (%&&2) Uner :rticle 04- of the Civil Coe% in orer
for machinery an eCuipment to be
consiere real property% the pieces must be
place by the owner of the lan an% in
aition% must ten to irectly meet the nees
of the inustry or wor(s carrie on by the
owner& Oil companies install unergroun
tan(s in the gasoline stations locate on lan
lease by the oil companies from the owners
of the lan where the gasoline stations NareO
locate& :re those unergroun tan(s% which
were not place there by the owner of the
lan but which were instea place there by
the lessee of the lan% consiere real
property for purposes of real property
taxation uner the local /overnment Coe?
3xplain& "<.#
SUGGESTED ANSWER)
6es& 'he properties are consiere as necessary
fixtures of the gasoline station% without which
the gasoline station woul be useless&
;achinery an eCuipment installe by the
lessee of lease lan is not real property for
purposes of execution of a final 2ugment only&
'hey are consiere as real property for real
property tax purposes as "other improvements
to affixe or attache real property uner the
:ssessment Law an the =eal *roperty 'ax
Coe&
(*altex !" *entral Boar o( Assessment
A$$eals@ 11' S*5A %96 C19/%D)"
5eal Pro$erty Tax) 5eEuirements)
Auction Sales o( Pro$erty (or Tax
DelinEuency (%&&6) Kue)on City publishe on January ,1% 911E a
list of elinCuent real property taxpayers in 9
newspapers of general circulation an poste
this in the main lobby of the City >all& 'he
notice reCuires all owners of real properties in
the list to pay the real property tax ue within
,1 ays from the ate of publication%
otherwise the properties liste shall be sol at
public auction&
Joachin is one of those name in the list& >e
purchase a real property in 4GGE but faile
to register the ocument of sale with the
register of +ees an secure a new real
property tax eclaration in his name& >e
allege that the auction sale of his property is
voi for lac( of ue process consiering that
the City 'reasurer i not sen him personal
notice& For his part% the City 'reasurer
maintains that the publication an posting of
notice are sufficient compliance with the
reCuirements of the law&
4& $f you were the 2uge% how will you resolve
this issue? "9&-.#
SUGGESTED ANSWER)
$ will resolve the issue in favor of Joachin& $n
auction sales of property for tax elinCuency%
notice to elinCuent lanowners an to the
public in general is an essential an
inispensable reCuirement of law% the non-
fulfillment of which vitiates the same (Tion7co
!" P0il" 4eterans Ban.@
?"5" =o" /%8/%@ Au7" ,@ 199%)" 'he failure to
give notice to the right person i&e&% the real
owner% will rener an auction sale voi (Tan !"
Bante7ui@ ?"5" =o@ 1,'&%8@ 1ctober %'@ %&&,)
*ity Treasurer o( P"*" !" *A@ ?"5" =o" 1%&98'@
Dec"
%%@ 1998)"
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62 of 73
9& :ssuming Joachin is a registere owner%
will your answer be the same? "9&-.#
SUGGESTED ANSWER)
6es& 'he law reCuires that a notice of the
auction sale must be properly sent to Joachin
an not merely through publication (Tan !"
Bante7ui@ ?"5" =o@ 1,'&%8@ 1ctober %'@%&&,)
#state o( ;ercees Gacob !" *A@ ?"5" =o"
1%&'2,@
Dec" %%@ 1998)"
5eal Pro$erty Taxation: *a$ital Asset
!s" 1rinary Asset (199,)
$n 4GG1% ;r& 7aval bought a lot for
*4%111%111&11 $n a subivision with the
intention of builing his resience on it& $n
4GG0% he abanone his plan to buil his
resience on it because the surrouning area
became a epresse area an lan values in
the subivision went ownB instea% he sol it
for *<11&111&11& :t the time of the sale% the
)onal value was *-11&111&11& 4# $s the lan a
capital asset or an orinary asset? 3xplain& 9#
$s there any income tax ue on the sale?
3xplain&
SUGGESTED ANSWERS)
4# 'he lan is a capital asset because it is
neither for sale in the orinary course of
business nor a property use in the trae or
business of the taxpayer& "Sec& ,,& 7$=C#&
9# 6es% ;r& 7aval is liable to the -. capital
gains tax impose uner Section 94"e# of the
'ax Coe base on the gross selling price of
*<11&111&11 which is an amount higher than
the )onal value&
5eal Pro$erty Taxation: *a$ital ?ains
!s" 1rinary ?ains(199/)
What is the ifference between capital gains
an orinary gains? N,.O
SUGGESTED ANSWER)
C:*$':L /:$7S are gains reali)e from the
sale or exchange of capital assets% while
O=+$7:=6 /:$7S refer to gains reali)e from
the sale or isposition of orinary assets&
5eal Pro$erty Taxation: *o!era7e o(
1rinary Income(199/)
What oes the term "orinary income" inclue?
N9.O
SUGGESTED ANSWER)
'he term orinary income inclues any gain
from the sale or exchange of property which
is not a capital asset& 'hese are the gains
erive from the sale or exchange of property
such as stoc( in trae of the taxpayer or
other property of a (in which woul properly
be inclue in the inventory of the taxpayer if
on han at the close of the taxable year% or
property hel by the taxpayer primarily for
sale to customers in the course of his trae or
business% or property use in trae or
business of a character which is sub2ect to the
allowance for epreciation% or real property
use in trae or business of the taxpayer&
(+ec. %% AM@ in relation to +ec. 5)AA@($), both
of the N6#).
A+TERNATI1E ANSWER)
'he term orinary income inclues income
from performance of services% whether
professional or personal% gains accruing from
business% an profit arising from the sale or
exchange of orinary assets&
5eal Pro$erty Taxation: #xc0an7e o(
+ot) *a$ital ?ain Tax (1998)
: corporation% engage in real estateA
evelopment% execute ees of sale on
various subivie lots& One buyer% after
going aroun the subivision% bought a corner
lot with a goo view of the surrouning
terrain& >e pai *4&9 million% an the title to
the property was issue& : year later% the
value of the lot appreciate to a mar(et value
of *4&E million% an the buyer ecie to buil
his house thereon& Upon inspection% however%
he iscovere that a huge tower antennae
ha been erecte on the lot frontage totally
bloc(ing his view& When he complaine% the
realty company exchange his lot with
another corner lot with an eCual area but
afforing a better view& $s the buyer liable for
capital gains tax on the exchange of the lots?
SUGGESTED ANSWER)
6es% the buyer is sub2ect to capital gains tax
on the exchange of lots on the basis of
prevailing fair mar(et value of the property
transferre at the time of the exchange or the
fair mar(et value of the property receive%
whichever is higher (+ection %$(e), N6#).
=eal property transactions sub2ect to capital
gains tax are not limite to sales but also
exchanges of property unless exempte by a
specific provision of law&
A+TERNATI1E ANSWER)
7o& 'he exchange is not sub2ect to capital
gains tax because it is merely one to comply
with the intentions of the parties to the
previous contract regaring the sale an
acCuisition of a property with a goo view&
'his is a simple substitution of the ob2ect of
sale an since the previous transaction was
alreay sub2ecte to tax% no new tax shoul
be impose on the exchange (36# #uling No.
%$(e) ',5./) ''/.),).
5eal Pro$erty Taxation:
#xem$tionMDeuctions) Donor3s Tax
(199/) :ce 'obacco Corporation bought a parcel of
lan situate at *ateros an onate it to the
;unicipal /overnment of *ateros for the sole
purpose of evoting the sai lan as a
relocation site for the less fortunate
constituents of sai municipality& $n
accorance therewith% the ;unicipal /ov-
ernment of *ateros issue to the
occupantsLbeneficiaries Certificates of :war
giving to them the respective areas where
their houses are erecte& 'hrough Orinance
7o& 9% Series of 4GG<% the sai municipal
government oraine that the lots aware to
the awareesLonees be finally transferre
an onate to them& +etermine the tax
conseCuence of the foregoing ispositions
with respect to :ce 'obacco Corporation% the
;unicipal /overnment of *ateros% an the
occupantsLbeneficiaries& N-.O
SUGGESTED ANSWER)
'he onation by :ce 'obacco Corporation is
exem$t (rom t0e onorLs tax because it
Cualifies as a gift to or for the use of any
political subivision of the 7ational
/overnment "Section 414"9#% 7$=C#& 'he
conveyance is li(ewise exempt from
ocumentary stamp tax because it is a
transfer without consieration&
Since the onation is to be use as a
relocation site for the less fortunate
constituents of the municipality& $t may be
consiere as an unerta(ing for human
settlements%
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64 of 73
hence the value of the lan may be
euctible in (ull (rom t0e 7ross income
of :ce 'obacco Corporation if in accorance to
a 7ational *riority *lan etermine by the
7ational 3conomic +evelopment :uthority&
(+ec. 5!K=@(%)(a), N6#). $f the utili)ation is
not in accorance to a 7ational *riority *lan
etermine by the 7ational 3conomic
+evelopment :uthority% then :ce 'obacco
Corporation may euct the value of the lan
onate only to the extent of five "-.#
percent of its taxable income erive from
trae or business as compute without the
benefit of the onation& (+ec. 5!A=@(%)(a) in
relation to +ec. 5!A=@($), N6#).
'he ;unicipality of *ateros is not sub2ect to
any onorAs tax on the value of lan it
subseCuently onate% it being exempt from
taxes as a political subivision of the 7ational
/overnment&
'he occupantsLbeneficiaries are sub2ect to
real property taxes because they now own
the lan&
A+TERNATI1E ANSWER on Taxability of 8unicipality
and Awardees:
'he awaring by the ;unicipal /overnment of
lots to specific awarees or onees is li(ewise
exempt from the onorAs tax because it is
only an implementation of the purpose for
which the property was given by :ce 'obacco
Corporation& 'he purpose of the first onation
is to evote the lan as a relocation site for
the less fortunate constituents& $f later on the
;unicipality gives out Certificates of :war
over specific lots occupie by the Cualifie
occupantsLbeneficiaries% this is intene to
perpetuate the purpose of the previous onor%
the ;unicipality acting merely as a conuit
an not the true onor& 'his is simply a
onation by the ;unicipality in form but not in
substance&
'he receipt by the occupant beneficiaries of
their respective lots through the Certificate of
:war has no tax implications& 'hey are%
however% liable for real property taxes&
5eal Pro$erty Taxation: #xem$tion:
AcEuirin7 =ew Princi$al 5esience
(%&&&) Last July 49% 9111% ;r& V ;rs& *eter Camacho
sol their principal resience situate in
'anang Sora% Kue)on City for 'en ;illion
*esos "*41%111%111&11# with the intention of
using the procees to acCuire or construct a
new principal resience in :urora >ills%
@aguio City& What conitions must be met in
orer that the capital gains presume to have
been reali)e from such sale may not be
sub2ect to capital gains tax? "-.#
SUGGESTED ANSWER)
'he conitions are!
4& 'he procees are fully utili)e in
acCuiring or constructing a new principal
resience within eighteen "4<# calenar
months from the sale or isposition of the
principal resience or eighteen "4<# months
from July 49% 9111&
4'he historical cost or a2uste basis of the real
property sol or ispose shall be carrie over to
the new principal resience built or acCuire&
9'he Commissioner of $nternal =evenue must have
been informe by ;r& V ;rs& *eter Camacho within
thirty ",1# ays from the ate of sale or isposition
on July 49% 9111 through a prescribe return of
their intention to avail of the tax exemption&
,'hat the sai exemption can only be availe of
once every ten "41# years&
;$f there is no full utili)ation of the procees of
sale or isposition% the portion of the gain
presume to have been reali)e from the sale or
isposition shall be sub2ect to capital gains tax
A+ec. %! (B) (%), N6# of $))&@
5eal Pro$erty Taxation: Funamental
Princi$les (1998) State the funamental principles unerlying
real property taxation in the *hilippines&
SUGGESTED ANSWER)
'he following are the funamental principles
governing real property taxation! 4# =eal
property shall be appraise at its current an
fair mar(et valueB 9# =eal property shall be
classifie for assessment purposes on the
basis of its actual use!
,# =eal property shall be assesse on the
basis of a uniform classification within each
local government unitB
0# 'he appraisal% assessment% levy% an
collection of real property tax shall not be let
to any private personB an
-# 'he appraisal an assessment of real
property shall be eCuitable&
5eal Pro$erty Taxation: Princi$les H
+imitations: +?6 (%&&&)
/ive at least two "9# funamental principles
governing real property taxation% which are
limitations on the taxing power of local
governments insofar as the levying of the
realty tax is concerne& "9.#
SUGGESTED ANSWER)
'wo "9# funamental principles governing
real property taxation are! 4# 'he appraisal
must be at the current an fair mar(et
valueB an 9# Classification for assessment
must be on the basis of actual use& (+ec. $)/,
?ocal "overnment ode)
A+TERNATI1E ANSWER)
'he examinee shoul be given creit if he
chooses the above two "9# or any two "9# of
those enumerate below! 4# :ssessment
must be on the basis of uniform classificationB
9# :ppraisal% assessment% levy an collection
shall not be let to private personsB an ,#
:ppraisal an assessment must be eCuitable&
(+ec. $)/, ?ocal "overnment ode)
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69 of 73
5eal Pro$erty Taxation: Pro$erty
Sol is an 1rinary Asset (199/)
:n iniviual taxpayer who owns a ten "41#
oor apartment with a monthly rental of
*41%111 each resiential unit% sol this
property to another iniviual taxpayer& $s
the seller liable to pay the capital gains tax?
N-.O
SUGGESTED ANSWER)
7o& 'he seller is not liable to pay the capital
gains tax because the property sol is an
orinary asset% i&e& real property use in trae
or business& $t is apparent that the taxpayer
is engage in the real estate business%
regularly renting out the ten "41# oor
apartment&
5eal Pro$erty Taxation: 6ner7roun
?asoline Tan.s (%&&1)
Uner :rticle 04- of the Civil Coe% in orer
for machinery an eCuipment to be
consiere real property% they must be place
by the owner of the lan an% in aition%
must ten to irectly meet the nees of the
inustry or wor(s carrie on by the owner& Oil
companies% such as Caltex an Shell% install
unergroun tan(s in the gasoline stations
locate on lan lease by the oil companies
from others& :re those unergroun tan(s
which were not place there by the owner of
the lan but which were instea place there
by the lessee of the lan% consiere real
property for purposes of real property
taxation uner the Local /overnment Coe?
3xplain your answer& "-.#
SUGGESTED ANSWER)
6es& 'he unergroun tan(s although installe
by the lessee% Shell an Caltex% are consiere
as real property for purposes of the imposition
of real property taxes& $t is only for purposes of
executing a final 2ugment that these
machinery an eCuipment% installe by the
lessee on a lease lan% woul not be
consiere as real property& @ut in the
imposition of the real property tax% the
unergroun tan(s are taxable as necessary
fixtures of the gasoline station without which
the gasoline station woul not be operational&
"*altex P0ils"@ Inc !" *BAA@ 11' S*5A"
%96#&
5eal Pro$erty Taxation) #xem$te
Pro$erties (%&&6) What properties are exempt from the real
property tax? "-.#
SUGGESTED ANSWER)
'he following properties are exempt from the
real property tax "Section 9,0% Local
/overnment Coe#! "4# =eal property owne by the =3*U@L$C OF
'>3 *>$L$**$73S or any of its political
subivisions except when the beneficial use
thereof has been grante for consieration or
otherwise to a taxable personB
"9# C>:=$':@L3 $7S'$'U'$O7S% churches%
parsonages or convents appurtenant thereto%
mosCues% non-profit or religious cemeteries% an
all lans% builings% an improvements actually%
irectly an exclusively use for religious%
charitable or eucational purposesB
",# :ll machineries an eCuipment that
are actually% irectly an exclusively use by
LOC:L W:'3= U'$L$'$3S an government-
owne or controlle corporations engage in
the supply an istribution
of water anLor generation an
transmission of electric powerB
"0# :ll real property owne by uly
=3/$S'3=3+ COO*3=:'$53S as provie for
uner =&:& EG,<B an
(,) ;achinery an eCuipment use for
9C??ET6CN CNT#C? an 4N26#CN84NTA?
9#CT4T6CN.
TARI33 AND CUSTOMS DUTIES
*ustoms: 9Flexible Tari((
*lause: (%&&1) What o you unerstan by the term "flexible
tariff clause" as use in the 'ariff an
Customs Coe? "-.# S6??#ST#D A=SA#5: 'he term "(lexible
tari(( clause "refers to the authority given to
the *resient to a2ust tariff rates uner
Section 014 of the 'ariff an Customs Coe%
which is the enabling law that mae effective
the elegation of the taxing power to the
*resient uner the Constitution&
N=ote! 6t is suggested that if the
examinee cites the entire provision of
+ec. !'$ of the Tariff L, ustoms
ode, he should also be given full
credit&O
*ustoms: Aministrati!e !s" Guicial
5emeies (1998) 'he 'ariff an Customs Coe allows the
@ureau of Customs to resort to the
aministrative remey of sei)ure% such as by
enforcing the tax lien on the importe article%
an to the 2uicial remey of filing an action
in court& When oes the @ureau of Customs
normally avail itselfB
"a# of the aministrative% instea of the
2uicial remey% or
"b# of the latter% instea of the
former% remey?
SUGGESTED ANSWER)
"a# 'he @ureau of Customs normally avails
itself of the :+;$7$S'=:'$53 =3;3+6 of
sei)ure% such as by enforcing the tax lien on
the importe articles% instea of the 2uicial
remey when the goos to which the tax lien
attaches% regarless of ownership% is still in
the custoy or control of the /overnment& $n
the case% however% of importations which are
prohibite or uneclare% the remey of
sei)ure an forfeiture may still be exercise
by the @ureau of Customs even if the goos
are no longer in its custoy&
"b# On the other han% when the goos are
properly release an thus beyon the reach
of tax lien% the government can see(
payment of the tax liability through 2uicial
action since the tax liability of the importer
constitutes a personal ebt to the
government% therefore% enforceable by
action& $n this case 2uicial remey is
normally availe of instea of the
aministrative remey&
*ustoms:
Im$ortation (199,) When oes importation begin an when oes it
en?
SUGGESTED ANSWER)
$;*O=':'$O7 begins from the time the
carrying vessel or aircraft enters *hilippine
territorial 2urisiction with the intention to
unloa therein an ens at the time the
goos are release or withrawn from the
customhouse upon
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20 of 73
payment of the customs uties or with legal
permit to withraw "4iuya !s" Beria7o@
82 S*5A ,,2#&
*ustoms: Gurisiction) SeiJure H
For(eiture Proceein7s (1996)
On January 4% 4GGE% arme with warrants of
sei)ure an etention issue by the @ureau of
Customs% members of the customs
enforcement an security services coorinate
with the Kue)on City police to search the
premises owne by a certain ;r& >o along
Qalayaan :venue% Kue)on City% which allegely
containe untaxe vehicles an parts& While
insie the premises% the member of the
customs enforcement an security services
note articles which were not inclue in the
list containe in the warrant& >ence% on
January 4-% 4GGE% an amene warrant an
sei)ure was issue&
On January 9-% 4GGE% the customs personnel
starte hauling the articles pursuant to the
amene warrant& 'his prompte ;r& >o to
file a case for in2unction an amages with a
prayer for a restraining orer before the
=egional 'rial Court of Kue)on City against
the @ureau of Customs on January 9I% 4GGE&
On the same ate% the 'rial Court issue a
temporary restraining orer&
: motion to ismiss was file by the @ureau
of Customs on the groun that the =egional
'rial Court has no 2urisiction over the sub2ect
matter of the complaint claiming that it was
the @ureau of Customs that has exclusive
2urisiction over it& +ecie&
SUGGESTED ANSWER)
'he motion to ismiss shoul be grante&
Sei)ure an forfeiture proceeings are within
the exclusive 2urisiction of the Collector of
Customs to the exclusion of regular Courts&
=egional 'rial Courts are evoi of
competence to pass upon the valiity or
regularity of sei)ure an forfeiture
proceeings conucte by the @ureau of
Customs an to en2oin or otherwise interfere
with these proceeings "5e$ublic !s" *FI o(
;anila CBranc0 >>IID@ ?"5" =o" '28'8@
Se$tember %@ 199%) Gao !s" *A@
?"5" =o" 1&'6&'@ 1ctober 6@
199,#&
*ustoms: Rins o( *ustom
Duties (199,) Uner the 'ariff an Customs Coe%
what are a# umping uties b#
countervailing uties c# mar(ing
uties # iscriminatory uties?
SUGGESTED ANSWER)
E# Dum$in7 uties are special uties
impose by the Secretary of Finance upon
recommenation of the 'ariff Commission
when it is foun that the price of the importe
articles is eliberately or continually fixe at
less than the fair mar(et value or cost of
prouction% an the importation woul cause
or li(ely cause an in2ury to local inustries
engage in the manufacture or prouction of
the same or similar articles or prevent their
establishment&
I# *ounter!ailin7 uties are special
uties impose by the Secretary of Finance
upon prior investigation an report of the
'ariff Commission to offset an excise or inlan
revenue tax upon articles of the same class
manufacture at home or subsiies to foreign
proucers or manufacturers by their
respective governments&
<# ;ar.in7 uties are special uties
eCuivalent to -. a valorem impose on
articles not properly mar(e& 'hese are
collecte by the Commissioner of Customs
except when the improperly mar(e articles
are exporte or estroye uner customs
supervision an prior to final liCuiation of the
corresponing entry& 'hese uties are
esigne to prevent possible eception of the
customers&
G# Discriminatory uties are special
uties collecte in an amount not exceeing
411. a valorem% impose by the *resient
of the *hilippines against goos of a foreign
country which iscriminates against *hilippine
commerce or against goos coming from the
*hilippines an shippe to a foreign country&
*ustoms: Rins o( *ustom
Duties (1998) 3xplain briefly each of the special customs
uties authori)e uner the 'ariff an
Customs Coe&
SUGGESTED ANSWER)
'he following are the S$ecial Duties
impose uner the 'ariff an Customs Coe!
"a# Dum$in7 Duty - 'his is a uty levie
on importe goos where it appears that a
specific (in or class of foreign article is
being importe into or sol or is li(ely to be
sol in the *hilippines at a price less than its
fair valueB
"b# *ounter!ailin7 Duty - 'his is a uty
eCual to the ascertaine or estimate amount
of the subsiy or bounty or subvention
grante by the foreign country on the
prouction% manufacture% or exportation into
the *hilippines of any article li(ely to in2ure an
inustry in the *hilippines or retar or
consierable retar the establishment of such
inustryB
"c# ;ar.in7 Duty - 'his is a uty on an
a valorem basis impose for improperly
mar(e articles& 'he law reCuires that foreign
importations must be mar(e in any official
language of the *hilippines the name of the
country of origin of the articleB
"# Discriminatory or 5etaliatory Duty
- 'his is a uty impose on importe goos
whenever it is foun as a fact that the country
of origin iscriminates against the commerce
of the *hilippines in such a manner as to
place the commerce of the *hilippines at a
isavantage compare with the commerce
of any foreign country&
*ustoms: 5emeies o( an
Im$orter (1996) +iscuss briefly the remeies of an importer
uring the penency of sei)ure proceeings&
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21 of 73
SUGGESTED ANSWER)
+uring the penency of sei)ure proceeings
the importer may secure the release of the
importe property for legitimate use by
posting a bon in an amount to be fixe by
the Collector% conitione for the payment of
the appraise value of the article anLor any
fine% expenses an costs which may be
a2uge in the caseB provided, that articles
the importation of which is prohibited by law
shall not be released under bond.
'he importer may also offer to pay to the
collector a fine impose by him upon the
property to secure its release or in case of
forfeiture% the importer shall offer to pay for
the omestic mar(et value of the sei)e
article% which offer sub2ect to the approval of
the Commissioner may be accepte by the
Collector in settlement of the sei)ure case%
except when there is frau& Upon payment of
the fine or omestic mar(et value% the
property shall be forthwith release an all
liabilities which may or might attach to the
property by virtue of the offense which was
the occasion of the sei)ure an all liability
which might have been incurre uner any
bon given by the importer in respect to such
property shall thereupon be eeme to be
ischarge&
*ustoms: 5eturnin7 5esients:
TouristMTra!elers (%&&2) ? an his wife% 6% Filipinos living in the
*hilippines% went on a three-month pleasure
trip aroun the worl uring the months of
June% July an :ugust 9119& $n the course of
their trip% they accumulate some personal
effects which were necessary% appropriate
an normally use in leisure trips% as well as
souvenirs in non-commercial Cuantities& :re
they "returning resients" for purposes of
Section 41- of the 'ariff an Customs Coe?
3xplain& "<.#
SUGGESTED ANSWER)
7o& 'he term "returning resients" refers to
nationals who have staye in a foreign
country for a perio of at least six "E# months&
(+ection $',(f) of the Tariff and ustoms
ode). +ue to their limite uration of stay
abroa ? an 6 are not consiere as
"returning resients" but they are merely
consiere as travelers or tourists who en2oy
the benefit of conitionally free importation&
ANote: redit must li>ewise be given if the
candidate answered in the affirmative,
considering that travelers or tourists are
given the same tax treatment as that of
returning residents, treating their personal
effects, not in commercial 7uantities, as
conditionally free importation.@ *ustoms: SeiJure H For(eiture:
#((ects (199') $n smuggling a shipment of garlic% the
smugglers use an eight-wheeler truc( which
they hire for the purpose of ta(ing out the
shipment from the customs )one& +anny% the
truc( owner% i not have a certificate of
public convenience to operate his truc(ing
business& +anny i not (now that the
shipment of garlic was illegally importe& Can
the Collector of Customs of the port sei)e an
forfeit the truc( as an instrument in the
smuggling?
SUGGESTED ANSWER)
6es% the Collector of Customs of the port can
sei)e an forfeit the truc( as an instrument in
the smuggling activity% since the same was
use unlawfully in the importation of
smuggle articles& 'he mere carrying of such
articles on boar the truc( "in commercial
Cuantities# shall sub2ect the truc( to
forfeiture% since it was not being use as a
uly authori)e common carrier% which was
chartere or lease as such& "Sec& 9-,1 NaO%
'CC#
;oreover% although forfeiture of the vehicle
will not be effecte if it is establishe that the
owner thereof ha no (nowlege of or
participation in the unlawful act% there arises a
prima facie presumption or (nowlege or
participation if the owner is not in the
business for which the conveyance is
generally use& 'hus% not having a certificate
of public convenience to operate a truc(ing
business% he is legally eeme not to have
been engage in the truc(ing business& (+ec.
%,5$, Tariff and ustoms ode)
*ustoms: Ste$s in!ol!in7
Protest *ases (199') 'he Collector of Customs institute sei)ure
proceeings against a shipment of motor
vehicles for having been miseclare as
secon-han vehicles& State the proceure
for the review of the ecision up to the
Supreme Court of the Collector of Customs
averse to the importer&
SUGGESTED ANSWER)
'he proceure in sei)ure cases may be
summari)e as follows!
"a# 'he collector issues a warrant for the
etention or forfeiture of the importe
articlesB "Sec& 9,14% 'ariff an Customs Coe#
"b# 'he Collector gives the importer a
written notice of the sei)ure an fixes a
hearing ate to give the importer an
opportunity to be hearB "Sec& 9,1,% 'CC#
"c# : formal hearing is conucteB
"Sec& 9,49% 'CC# "# 'he Collector reners a eclaration of
forfeitureB "Sec& 9,49% 'CC#
"e# 'he $mporter aggrieve by the action
of the Collector in any case of sei)ure may
appeal to the Commissioner for his review
within fifteen "4-# ays from written notice of
the CollectorAs ecisionB "Sec& 9,4,% 'CC#
"f# 'he importer aggrieve by the action
or ruling of the Commissioner in any case of
sei)ure may appeal to the Court of 'ax
:ppealsB "Sec& 9019% 'CC#
"g# 'he importer aversely affecte by
the ecision of the Court of 'ax :ppeals
"+ivision# may appeal to the Court of 'ax
:ppeals "en banc# within fifteen
"4-# ays which may be extene for
another fifteen "4-# ays or such perio as the Court of
'ax :ppeals may ecie&
*ustoms) Basis o( Dutiable 4alue)
Im$orte Article (%&&,) State an explain the basis of utiable value
of an importe article sub2ect to an a
valorem tax uner the 'ariff an Customs
Coe&
A+TERNATI1E ANSWER)
'he basis of utiable value of an importe
article sub2ect to an ad valorem tax uner the
'ariff an Customs Coe is its '=:7S:C'$O7
5:LU3& "+ec. %'$AA@, Tariff and ustoms ode,
as amended by #.A. No. )$5,) $f such value
coul not be etermine% then the following
values are to be utili)e in their seCuence!
Transaction !alue o( ientical 7oos (+ec.
%'$A3@): Transaction !alue o(
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22 of 73
similar 7oos (+ec. %'$A@): Deucti!e
!alue (+ec. 66.4.$, A.C. No. !.%''!):
*om$ute !alue "+ec., 66.<.l, .A.C. No. $.
%''!'# an Fallbac. !alue& "+ec. %'$A<@#
A+TERNATI1E ANSWER)
'he basis of utiable value of an importe
article sub2ect to an a valorem tax uner the
'ariff an Customs Coe is its transaction
value% which shall be the price actually pai
or payable for the goos when sol for export
to the *hilippines% a2uste by aing certain
cost elements to the extent that they are
incurre by the buyer but are not inclue in
the price actually pai or payable for the
importe goos& (+ec. %'$AA@, Tariff and
ustoms ode, as amended by #.A. )$5,)
$f such value coul not be etermine% then
the following values are to be utili)e in their
seCuence! 'ransaction value of ientical
goos "Sec& 914N@O#B 'ransaction value of
similar goos "Sec& 914NCO#B +euctive value
"Sec& $$&3&4% C:&O& 7o& 0-9110#B Compute
value "Sec& $$&F&l%
C&:&O& 7o& 4-91101# an Fallbac( value& "Sec&
914NFO#
*ustoms) *ounter!ailin7 Duty !s"
Dum$in7 Duty (%&&,) +istinguish countervailing uty from umping uty&
"-.#
SUGGESTED ANSWER)
'he istinctions between countervailing uty
an umping uty are the following!
"4# @asis! 'he countervailing uty is impose
whenever there is grante upon the importe
article by the country of origin a specific
subsiy upon its prouction% manufacture or
exportation an this results or threatens in2ury
to local inustry while the basis for the
imposition of umping uty is the importation
an sale of importe items at below their
normal value causing or li(ely to cause in2ury
to local inustry&
"9# :mount! 'he countervailing uty impose
is eCuivalent to the value of the specific
subsiy while the umping uty is eCuivalent
to the margin of umping which is eCual to the
ifference between the export price to the
*hilippines an the normal value of the
importe article&

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