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1995 Bar reported as income. This is because the free housing and use of A: None. The P200.

sing and use of A: None. The P200.000 moral and exemplary damages are
the limousine are given partly for the convenience and benefit of compensation for injuries sustained by Mr. Infante. The
the employer (Collector vs. Henderson). P400.000.00 reimbursement for hospitalization expenses and the
1995 Bar, Q. I(1): What is "gross income" for purposes of the
Income tax? P60.000.00 for salaries he failed to receive are ‘amounts of any
Alternative: Remuneration for sendees although not given in the damages received whether by suit or agreement on account of
form of cash constitutes compensation income. Accordingly, the such injuries.’ Section 28(b)(5) of the Tax Code specifically exclude
A: Gross Income means all income from whatever source derived,
value for the use of the residential house is part of his these amounts from the gross income of the individual injured.
including (but not limited to) compensation for services, including
compensation income which he must report for income tax (Section 28(b). NIRC and Sec. 63 Rev. Reg. No. 2)
fees, commissions, and similar items; gross Income from business;
purposes. However, if the residential house given to Mr. Adrian
gains derived from dealings in property; interest: rents: royalties;
for his free use as an executive is also used for the benefit of the Alternative: The income realized from the judgment is only the
dividends; annuities; prizes and winnings; pensions; and partner’s
corporation/employer, such as for entertaining customers of the recovery for lost salaries. This constitutes taxable income because
distributive share of the gross income of general professional
corporation, only 50% of the rental value or depreciation (if the were it not for the injury, he could have received it from his
partnership (Sec. 28, NIRC).
house is owned by the corporation) shall form part of employer as compensation income. All the other amounts
compensation income (RAMO 1-87). received are either compensation for injuries or damages received
Alternative: Gross income means all wealth which flows into the
on account of such injuries’ which are exclusions from gross
taxpayer other than as a mere return of capital. It includes the
The free use of a limousine and the membership in a country dub income pursuant to Section 28(b)(5) of the Tax Code.
forms of income specifically described as gains and profits
is not part of Mr. Adrian's compensation income because they
including gains derived from the sale or other disposition of
were given for the benefit of the employer and are considered to 1995 Bar, Q. III: Mr. Domingo owns a vacant parcel of land. He
capital.
be necessary incidents for the proper performance of his duties as leases the land to Mr. Enriquez for ten years at a rental of
an executive of the corporation. P12,000.00 per year. The condition is that Mr. Enriquez will erect
Alternative: Gross income means Income (in the broad sense) less
income which is, by statutory provision or otherwise, exempt from a building on the land which will become the property of Mr.
The membership fee in the country club needs to be reported as Domingo at the end of the lease without compensation or
the tax imposed by law (Sec. 36, Rev. Reg. No. 2) Gross income
income. It appears that the membership of Mr. Adrian to the reimbursement whatsoever for the value of the building.
from business means total sales, less cost of goods sold, plus any
country club is primarily for the benefit and convenience of the
Income from investments and from incidental or outside
employer. This is to enable Mr. Adrian to entertain company Mr. Enriquez erects the building. Upon completion the building
operations or sources (Sec. 43, Rev. Reg. No. 2).
guests (Collector vs. Henderson). had a fair market value of PI Million. At the end of the lease the
building is worth only P900.000.00 due to depreciation.
1995 Bar, Q. I(2): How does “income" differ from “capital"?
1995 Bar, Q. II(2): Capt. Canuto is a member of the Armed Forces Will Mr. Domingo have income when the lease expires and
Explain.
of the Philippines. Aside from his pay as captain, the government becomes the owner of the building with a fair market value of
gives him free uniforms, free living quarters in whatever military P900.000.00? How much income must he report on the building?
A: Income differs from capital in that income is any wealth which
camp he is assigned, and free meals inside the camp. Explain.
flows into the taxpayer other than a return of capital while capital
constitutes the Investment which is the source of income.
Are these benefits income to Capt. Canuto? Explain. A: When a building is erected by a lessee in the leased premises in
Therefore, capital is fund while income is the flow. Capital is
pursuance of an agreement with the lessor that the building
wealth, while income is the service of wealth. Capital is the tree
A: No, the free uniforms, free living quarters and the free meals becomes the property of the lessor at the end of the lease, the
while income is the fruit (Vicente Madrigal, et al v. James Rafferty,
inside the camp are not income to Capt. Canuto because these are lessor has the option to report income as follows:
38 Phil. 414).
facilities or privileges furnished by the employer for the
employer's convenience which are necessary incidents to proper (a) The lessor may report as income the market value of the
1995 Bar, Q. II(1): Mr. Adrian is an executive of a big business performance of the military personnel's duties. building at the time when such building is completed; or
corporation. Aside from his salary, his employer provides him (b) The lessor may spread over the life of the lease the
with the following benefits: free use of a residential house in an estimated depreciated value of such building at the
1995 Bar, Q. II(3): Mr. Infante was hit by a wayward bus while on
exclusive subdivision, free use of a limousine and membership in termination of the lease and report as income for each year
his way to work. He survived but had to pay P400.000.00 for his
a country club where he can entertain customers of the of the lease an aliquot part thereof (Sec. 49, RR No. 2).
hospitalization. He was unable to work for six months which
corporation.
meant that he did not receive his usual salary of P10,000.00 a
month or a total of P60.000.00. He sued the bus company and was Under the first option, the lessor will have no income when the
Which of these benefits, if any, must Mr. Adrian report as lease expires and becomes the owner of the building. The second
able to obtain a final judgment awarding him P400.000.00 as
income? Explain. option will give rise to an income during the year of lease
reimbursement for his hospitalization, P60.000 for the salaries he
failed to receive while hospitalized, P200.000.00 as moral expiration of P90.000.00 or 1/10 of the depreciated value of the
A: Mr. Adrian must report the imputed rental value of the house building.
damages for his pain and suffering, and P100,000.00 as exemplary
and limousine as income. If the rental value exceeds the personal
damages. He was able to collect in full from the judgment.
needs of Mr. Adrian because he is expected to provide The availment of the first option will require Mr. Domingo to
accommodation in said house for company guests or the car is report an income of P1,000,000.00 during the year when the
How much income did he realize when he collected on the
used partly for business purpose, then Mr. Adrian is entitled only building was completed. A total of P900.000.00 income will be
judgment? Explain.
to a ratable rental value of the house and limousine as exclusion
from gross income and only a reasonable amount should be
reported under the second option but will be spread over the life of the employees is unwarranted. (CIR vs. NLRC et at G.R No.
of the lease or P90.000.00 per year. 74965, November 9, 1994). A: No. Mr. Kintanar did not derive any income when he received
his separation pay because his separation from employment is
Alternative: Mr. Domingo will realize an income when the lease 1995 Bar, Q. VI: Mr. Jacobo worked for a manufacturing firm. due to causes beyond his control. The separation was involuntary
expires and becomes the owner of the building with a fair market Due to business reverses the firm offered voluntary redundancy as it was a consequence of the closure of various unprofitable
value of P900.000.00 because the condition for the lease is the (program in order to reduce overhead expenses. Under the • departments pursuant to the redundancy program.
transfer of the building at the expiration of the lease. The income program an employee who offered to resign would be given
to be realized by Mr. Domingo at the time of the expiration will separation pay equivalent to his three month’s basic salary for 1995 Bar, Q. VII(1): Five years ago Marquez, Peneyra, Jayme,
consist of the value of the building which is P900.000.00 and any every year of service. Mr. Jacobo accepted the offer and received Posadas and Manguiat, all lawyers, formed a partnership which
rental income that has accrued as of said date. P400.000.00 as separation pay under the program. they named Marquez and Peneyra Law Offices. The
Commissioner of Internal Revenue thereafter issued Revenue
1995 Bar, Q. IV: Mr. Francisco borrowed P10,000.00 from his After all the employees who accepted the offer were paid, the Regulation No. 2-93 implementing RA. 7496 known as the
friend Mr. Gutierrez payable in one year without interest. When firm found its overhead still excessive. Hence it adopted another Simplified Net Income Taxation Scheme (SNITS). Revenue
the loan became due Mr. Francisco told Mr. Gutierrez that he redundancy program. Various unprofitable departments were Regulation No. 2-93 provides in part:
(Mr. Francisco) was unable to pay because of business reverses. closed. As a result, Mr. Kintanar was separated from the service.
Mr. Gutierrez took pity on Mr. Francisco and condoned the loan. He also received P400.000.00 as separation pay. Sec. 6. General Professional Partnership – The general
Mr. Francisco was solvent at the time he borrowed the P professional partnership and the partners are covered by RA.
10,000.00 and at the time the loan was condoned. Did Mr. Jacobo derive income when he received his separation 7496. Thus, in determining profit of the partnership, only the
pay? Explain. direct costs mentioned in said law are to be deducted from
Did Mr. Francisco derive any income from the cancellation or partnership income. Also, the expenses paid or incurred by
condonation of his indebtedness? Explain. A: Yes, Mr. Jacobo derived a taxable income when he received his partners in their individual capacities in the practice of their
separation pay because his separation from employment was profession which are not reimbursed or paid by the partnership
A: No, Mr. Francisco did not derive any income from the voluntary on his part in view of his offer to resign. What is but are not considered as direct costs are not deductible from his
cancellation or condonation of his indebtedness. Since it is excluded from gross income is any amount received by an official gross income.
obvious that the creditor merely desired to benefit the debtor in or employee as a consequence of separation of such official or
view of the absence of consideration for the cancellation, the employee from the service of the employer for any cause beyond Marquez and Peneyra Law Offices filed a taxpayer’s suit alleging
amount of the debt is considered as a gift from the creditor to the the control of the said official or employee (Sec 28, NIRC). that Revenue Regulation No. 2-93 violates the principle of
debtor and need not be included in the latter’s gross income. uniformity in taxation because general professional partnerships
Alternative: No, Mr. Jacobo did not derive any taxable income are now subject to payment of income tax and that there is a
1995 Bar, Q. IV: For failure of Oceanic Company, Inc. (OCEANIC), because the separation pay was due to a retrenchment policy difference in the tax treatment between individuals engaged in
to pay deficiency taxes of P20 Million, the Commissioner of adopted by the company so that any employee terminated by the practice of their respective professions and partners in
Internal Revenue issued warrants of distraint on OCEANIC’s virtue thereof is considered to have been separated due to causes general professional partnerships.
personal properties and levied on its real properties. Meanwhile, beyond the employee’s control. The voluntary redundancy
the Department of Labor through the Labor Arbiter rendered a program requiring employees to make an offer to resign is only Is this contention correct? Explain.
decision ordering OCEANIC to pay unpaid wages and other considered as a tool to expedite the lay-off of excess manpower
benefits to its employees. Four barges belonging to OCEANIC whose services are no longer needed by the employer, but is not A: The contention is not correct. General professional
were levied upon by the sheriff and later sold at public auction. the main reason or cause for the termination. partnerships remain to be a non-taxable entity. What is taxable
are the partners comprising the same and they are obligated to
The Commissioner of Internal Revenue filed a motion with the 1995 Bar, Q. VI(2): Mr. Jacobo worked for a manufacturing firm. report as income their share in the income of the general
Labor Arbiter to annul the sale and enjoin the sheriff from Due to business reverses the firm offered voluntary redundancy professional partnership during the taxable year whether
disposing the proceeds thereof. The employees of - OCEANIC program in order to reduce overhead expenses. Under the distributed or not. The SNITS treat professionals as one class of
opposed the motion contending that Art. 110 of the Labor Code program an employee who offered to resign would be given taxpayer so that they shall be treated alike irrespective of
gives first preference to claims for unpaid wages. separation pay equivalent to his three month’s basic salary for whether they practice their profession alone or in association with
every year of service. Mr. Jacobo accepted the offer and received other professionals under a general professional partnership.
Resolve the motion. Explain. P400.000.00 as separation pay under the program. What are taxed differently are individuals and corporations. All
individuals similarly situated are taxed alike under the regulations,
A: The motion filed by the Commissioner should be granted After all the employees who accepted the offer were paid, the therefore, the principle of uniformity in taxation is not violated.
because the claim of the government for unpaid taxes are firm found its overhead still excessive. Hence it adopted another On the contrary, all the requirements of a valid classification have
generally preferred over the claims of laborers for unpaid wages. redundancy program. Various unprofitable departments were been complied with [Tan vs. del Rosario et al G.R No. 109289,
The provision of Article 110 of the Labor Code, which gives closed. As a result, Mr. Kintanar was separated from the service. October 3. 1994).
laborers’ claims for preference applies only in case of bankruptcy He also received P400.000.00 as separation pay.
or liquidation of the employer’s business. In the instant case, 1995 Bar, Q. VII(1): Five years ago Marquez, Peneyra, Jayme,
Oceanic is not under bankruptcy or liquidation at the time the Did Mr. Kintanar derive income when he received his separation Posadas and Manguiat, all lawyers, formed a partnership which
warrants of distraint and levy were issued hence, the opposition pay? Explain. they named Marquez and Peneyra Law Offices. The
Commissioner of Internal Revenue thereafter issued Revenue income from swindling, the Commissioner assessed him a 1995 Bar, Q. IX(1): In 1990, Mr. Naval bought a lot for
Regulation No. 2-93 implementing RA. 7496 known as the deficiency income tax for such income. P1,000,000.00 in a subdivision with the intention of building his
Simplified Net Income Taxation Scheme (SNITS). Revenue residence on it. In 1994, he abandoned his plan to build his
Regulation No. 2-93 provides in part: The lawyer of Mr. Lajojo protested the assessment on the residence on it because the surrounding area became a
following ground: depressed area and land values in the subdivision went down;
Sec. 6. General Professional Partnership – The general instead, he sold it for P800.000.00. At the time of the sale, the
professional partnership and the partners are covered by RA. Mr. Lajojo’s receipts from his swindling did not constitute zonal value was P500.000.00.
7496. Thus, in determining profit of the partnership, only the income because he was under obligation to return the amount
direct costs mentioned in said law are to be deducted from he had swindled, hence, his receipt from swind1 ling was similar Is the land a capital asset or an ordinary asset? Explain.
partnership income. Also, the expenses paid or incurred by to a loan, which is not income, because for every peso borrowed
partners in their individual capacities in the practice of their he has a corresponding liability to pay one peso; and A: The land is a capital asset because it is neither for sale in the
profession which are not reimbursed or paid by the partnership ordinary course of business nor a property used in the trade or
but are not considered as direct costs are not deductible from his How will you rule on each of the three grounds for the protest? business of the taxpayer. (Sec. 33. NIRC).
gross income. Explain.
1995 Bar, Q. IX(2): In 1990, Mr. Naval bought a lot for
Is Revenue Regulation No. 2-93 now considered as having A: The contention that the receipts from his swindling did not
PI,000,000.00 in a subdivision with the intention of building his
adopted a gross income method instead of retaining the net constitute income because of his obligation to return the amount
residence on it. In 1994, he abandoned his plan to build his
income taxation scheme? Explain. swindled is likewise not correct. When a taxpayer acquires
residence on it because the surrounding area became a
earnings, lawfully or unlawfully, without the consensual
depressed area and land values in the subdivision went down;
A: No. Revenue Regulation No. 2-93 implementing RA No. 7496 recognition, express or implied, of an obligation to repay and
instead, he sold it for P800.000.00. At the time of the sale, the
have indeed significantly reduced the items of deduction by without restriction as to their disposition, he has received taxable
zonal value was P500.000.00.
limiting it to direct costs and expenses or the 40% of gross income, even though it may still be claimed that he is not entitled
receipts maximum deduction in cases where the direct costs are to retain the money, and even though he may still be adjudged to
Is there any income tax due on the sale? Explain.
difficult to determine. The allowance of limited deductions restore its equivalent (James us. U.S.,366 U.S. 213, 1961). To treat
however, is still in consonance with the net income taxation the embezzled funds not as taxable Income would perpetuate
A: Yes. Mr. Naval is liable to the 5% capital gains tax imposed
scheme rather than the gross income method. While it is true that injustice by relieving embezzlers of the duty of paying income
under Section 21(e) of the Tax Code based on the gross selling
not all the expenses of earning the income might be allowed, this taxes on the money they enrich themselves with through
price of P800.000.00 which is an amount higher than the zonal
can well be justified by the fact that deductions are not matters of embezzlement, while honest people pay their taxes on every
value.
right but are matters of legislative grace. conceivable type of income. (James us. U.S.)

1995 Bar, Q. X: Mr. Osorio, a bank executive, while playing golf


1995 Bar, Q. VIII(1): Mr. Lajojo is a big-time swindler. In one year 1995 Bar, Q. VIII(3): Mr. Lajojo is a big-time swindler. In one year
with Mr. Perez, a manufacturing firm executive, mentioned to
he was able to earn PI Million from his swindling activities. he was able to earn PI Million from his swindling activities.
the latter that his (Osorio) bank had just opened a business
When the Commissioner of Internal Revenue discovered his When the Commissioner of Internal Revenue discovered his
relationship with a big foreign importer of goods which Perez'
income from swindling, the Commissioner assessed him a income from swindling, the Commissioner assessed him a
company manufactures. Perez requested Osorio to introduce
deficiency income tax for such income. deficiency income tax for such income.
him to this foreign importer and put in a good word for him
The lawyer of Mr. Lajojo protested the assessment on the
(Perez), which Osorio did. As a result, Perez was able to make a
The lawyer of Mr. Lajojo protested the assessment on the following grounds:
profitable business deal with the foreign importer.
following ground:
If he has to pay the deficiency income tax assessment, there will
In gratitude Perez, in behalf of his manufacturing firm, sent
The income tax applies only to legal income, not to illegal be hardly anything left to return to the victims of the swindling.
Osorio an expensive car as a gift. Osorio called Perez and told
income
him that there was really no obligation on the part of Perez or
How will you rule on each of the three grounds for the protest?
his company, to give such an expensive gift. But Perez insisted
How will you rule on each of the three grounds for the protest? Explain.
that Osorio keep the car. The company of Perez deducted the
Explain.
cost of the car as a business expense.
A: The deficiency income tax assessment is a direct tax imposed
A: The contention that the income tax applies to legal income and on the owner which is an excise on the privilege to earn an
The Commissioner of Internal Revenue included the fair market
not to illegal income is not correct. Section 28(a) of the Tax Code income. It will not necessarily be paid out of the same income that
value of the car as income of Osorio who protested that the car
includes within the purview of gross income all income from were subjected to the tax. Mr. Lajojo’s liability to pay the tax is
was a gift and therefore excluded from income.
whatever source derived. Hence, the illegality of the income will based on his having realized a taxable income from his swindling
not preclude the imposition of the income tax thereon. activities and will not affect his obligation to make restitution.
Who is correct, the Commissioner or Osorio? Explain.
Payment of the tax is a civil obligation imposed by law while
1995 Bar, Q. VIII(2): Mr. Lajojo is a big-time swindler. In one year restitution is a civil liability arising from a crime.
A: The Commissioner is correct. The car having been given to Mr.
he was able to earn PI Million from his swindling activities. Osorio in consideration of having introduced Mr. Perez to a
When the Commissioner of Internal Revenue discovered his foreign Importer which resulted to a profitable business deal is
considered to be a compensation for services rendered. The under the BIR-approved retirement plan would not qualify as an The Commissioner of Internal Revenue found that the property
transfer is not a gift because it is not made out of a detached or exclusion from gross income. was transferred to Tetchie Sonora by Mr. Rodrigo because of the
disinterested generosity but for a benefit accruing to Mr. Perez. companionship she was providing him. Accordingly, the
The fact that the company of Mr. Perez takes a business 1995 Bar, Q. XI(2): Mr. Quiroz worked as chief accountant of a Commissioner made a determination that Sonora had
deduction for the payment indicates that it was considered as a hospital for forty-five years. When he retired at 65 he received compensation income of P10 Million in the year the
pay rather than a gift. Hence, the fair market value of the car is retirement pay equivalent to two months’ salary for every year condominium unit was transferred to her and issued a deficiency
includable in the gross Income pursuant to Section 28(a)(1) of the of service as provided in the hospital BIR approved retirement income tax assessment.
Tax Code (See 1974 Federal Tax Handbook, p. 145). A payment plan.
though voluntary, if it is in return for services rendered, or Tetchie Sonora protests the assessment and claims that the
proceeds from the constraining force of any moral or legal duty or The Board of Directors of the hospital felt that the hospital transfer of the condominium unit was a gift and therefore
a benefit to the payor is anticipated, is a taxable income to the should give Quiroz more than what was provided for in the excluded from income.
payee even if characterized as a ‘gift’ by the payor (Commissioner hospital's retirement plan in view of his loyalty and invaluable
vs. Duberstein, 363 U.S. 278). services for forty-five years; hence, it resolved to pay him a How will you rule on the protest of Tetchie Sonora? Explain.
gratuity of P1 Million over and above his retirement pay.
Alternative: Mr. Osorio is correct. The car was not payment for A: I will grant the protest and cancel the assessment. The transfer
services rendered. There was no prior agreement or negotiations The Commissioner of Internal Revenue taxed the P1 Million as of the property by Mr. Rodrigo to Ms. Sonora was gratuitous. The
between Mr. Osorio and Mr. Perez that the former will be part of the gross compensation income of Quiroz who protested deed of sale indicating a P10 million consideration was simulated
compensated for his services. Mr. Perez, in behalf of his company, that it was excluded from income because (a) it was a retirement because Mr. Rodrigo did not-receive anything from the sale. The
gave the car to Mr. Osorio out of gratitude. The transfer having pay, and (b) it was a gift. problem categorically states that the transfer was made in
been made gratuitously should be treated as a gift subject to gratitude to Ms. Sonora’s companionship. The transfer being
donor’s tax and should be excluded from the gross income of the Is Mr. Quiroz correct in claiming that the additional PI Million gratuitous is subject to donor’s tax. Mr. Rodrigo should be
recipient, Mr. Osorio. The Commissioner should cancel the was gift and therefore excluded from income? Explain. assessed deficiency donor’s tax and a 50% surcharge imposed for
assessment of deficiency income tax to Mr. Osorio and instead fraudulently simulating a contract of sale to evade donor’s tax,
assess deficiency donor’s tax on Mr Perez’ company. (Sec. A: No. The amount received was in consideration of his loyalty (Sec. 91(b), NIRC).
28(b)(3), NIRC; Pirovano vs. Commissioner) and invaluable services to the company which is clearly a
compensation income received on account of employment. Under 1995 Bar, Q. XIII(1): Businessman Stephen Yang filed an Income
1995 Bar, Q. XI(1): Mr. Quiroz worked as chief accountant of a the employer’s ‘motivation test,’ emphasis should be placed on tax return for 1993 showing business net income of P350.000.00
hospital for forty-five years. When he retired at 65 he received the value of Mr. Quiroz services to the company as the compelling on which he paid an income tax of P61,000.00. After filing the
retirement pay equivalent to two months’ salary for every year reason for giving him the gratuity, hence it should constitute a return he realized that he forgot to include an item of business
of service as provided in the hospital BIR approved retirement taxable income. The payment would only qualify as a gift if there income in 1993 for P50.000.00. Being an honest taxpayer, he
plan. is nothing but ‘good will, esteem and kindness' which motivated included this income in his return for 1994 and paid the
the employer to give the gratuity. (Stanton vs. U.S., 186 F. Supp. corresponding income tax thereon.
The Board of Directors of the hospital felt that the hospital 393). Such is not the case in the herein problem.
should give Quiroz more than what was provided for in the In the examination of his 1993 return the BIR examiner found
hospital's retirement plan in view of his loyalty and invaluable Alternative: Yes. The 1 million is not compensation income that Stephen Yang failed to report this item of P50.000.00 and
services for forty-five years; hence, it resolved to pay him a subject to income tax but a gift from his employer. There was no assessed him a deficiency income tax on this item, plus a 50%
gratuity of P1 Million over and above his retirement pay. evidence presented to show that he was not fully compensated fraud surcharge.
for his 45 years of service. If his services contributed in a large
The Commissioner of Internal Revenue taxed the P1 Million as measure to the success of the hospital, it did not give rise to a Is the examiner correct? Explain.
part of the gross compensation income of Quiroz who protested recoverable debt. The PI million is purely a gratuity from the
that it was excluded from income because (a) it was a retirement company. It is a taxable gift to the transferor. Under the Tax Code, A: The examiner is correct in assessing a deficiency income tax for
pay, and (b) it was a gift. gifts are excluded from gross income therefore exempt from taxable year 1993but not in imposing the 50% fraud surcharge.
income tax. (Sec. 28(b)(3). NIRC; Pirovano vs. Commissioner) The amount of all items of gross income must be included in gross
Is Mr. Quiroz correct in claiming that the additional PI Million income during the year in which received or realized (Sec. 38,
was retirement pay and therefore excluded from income? 1995 Bar, Q. XII: Mr. Rodrigo, an 80-year old retired NIRC). The 50% fraud surcharge attaches only if a false or
Explain. businessman, fell in love with 20-year old Tetchie Sonora, a night fraudulent return is willfully made by Mr. Yang (Sec.248.NIRC).
club hospitality girl. Although she refused to marry him she The fact that Mr. Yang included the income in his 1994 return
A: No. The additional P1 million is not a retirement pay but a part agreed to be his “live-in" partner. belies any claim of willfulness but is rather indicative of an honest
of the gross compensation income of Mr. Quiroz. This is not a mistake which was sought to be rectified by a subsequent act,
retirement benefit received in accordance with a reasonable In gratitude Mr. Rodrigo transferred to her a condominium unit, that is the filing of the 1994 return.
private benefit plan maintained by the employer as it was not paid where they both live, under a deed of sale for P10 Million. Mr.
out of the retirement plan. Accordingly, the amount received in Rodrigo paid the capital gains tax of 5% of P10 Million. 1995 Bar, Q. XIII(2): Businessman Stephen Yang filed an Income
excess of the retirement benefits that he is entitled to receive tax return for 1993 showing business net income of P350.000.00
on which he paid an income tax of P61,000.00. After filing the
return he realized that he forgot to include an item of business In the examination of his 1993 return the BIR examiner found P20 Million although the zonal value is only P15 Million. He
income in 1993 for P50.000.00. Being an honest taxpayer, he that Stephen Yang failed to report this item of P50.000.00 and donates one- half pro-indiviso interest in the land to his son Dino
included this income in his return for 1994 and paid the assessed him a deficiency income tax on this item, plus a 50% on 31 December 1994, and the other one-half pro-indiviso
corresponding income tax thereon. fraud surcharge. interest to the same son on 2 January 1995.

In the examination of his 1993 return the BIR examiner found What would you advise Stephen Yang to do with regard to the How much is the value of the gifts in 1994 and 1995 for purposes
that Stephen Yang failed to report this item of P50.000.00 and income tax he paid for the P50,000.00 in his 1994 return? In case of computing the gift tax? Explain.
assessed him a deficiency income tax on this item, plus a 50% your remedy fails, what is your other recourse? Explain.
fraud surcharge. A: The value of the gifts for purposes of computing the gift tax
A: Mr. Yang should file a written claim for refund with the shall be P 7.5 million in 1994 and P7.5millionin 1995. In valuing a
If you were the lawyer of Stephen Yang, what would you have Commissioner of Internal Revenue of the taxes paid on the real property for gift tax purposes the property should be
advised your client before he included in his 1994 return the P50.000 income included in 1994 within two years from payment appraised at the higher of two values as of the time of donation
amount of P50.000.00 as 1993 income to avoid the fraud pursuant to Section 204(3) of the Tax Code. Should this remedy which are (a) the fair market value as determined by the
surcharge? Explain. fail in the administrative level, a judicial claim for refund can be Commissioner {which is the zonal value fixed pursuant to Section
instituted before the expiration of the two year period. 16(e) of the Tax Code), or (b) the fair market value as shown in the
A: Mr. Yang should have amended his 1993 Income tax return to schedule of values fixed by the Provincial and City Assessors. The
allow for the inclusion of the P50.000 income during the taxable 1995 Bar, Q. XIV(1): What is a “deficiency interest" for purposes fact that the property is worth P20 million as of the time of
period it was realized. of the income tax? Illustrate. donation is immaterial unless it can be shown that this value is
one of the two values mentioned as provided under Section 81 of
1995 Bar, Q. XIII(3): Businessman Stephen Yang filed an Income A: Deficiency interest for purposes of the income tax is the the Tax Code.
tax return for 1993 showing business net income of P350.000.00 interest due on any amount of tax due or installment thereof
on which he paid an income tax of P61,000.00. After filing the which is not paid on or before the date prescribed for its payment 1995 Bar, Q. XV(2): Kenneth Yusoph owns a commercial lot
return he realized that he forgot to include an item of business computed at the rate of 20% per annum or the Manila Reference which he bought many years ago for PI Million. It is now worth
income in 1993 for P50.000.00. Being an honest taxpayer, he Rate, whichever is higher, from the date prescribed for its P20 Million although the zonal value is only P15 Million. He
included this income in his return for 1994 and paid the payment until it is fully paid. If for example after the audit of the donates one- half pro-indiviso interest in the land to his son Dino
corresponding income tax thereon. books of XYZ Corp. for taxable year 1993 there was found to be on 31 December 1994, and the other one-half pro-indiviso
due a deficiency income tax of PI25,000.00 inclusive of the 25% interest to the same son on 2 January 1995.
In the examination of his 1993 return the BIR examiner found surcharge imposed under Section 248 of the Tax Code, the
that Stephen Yang failed to report this item of P50.000.00 and interest will be computed on the P125.000.00 from April 15, 1994 The Revenue District Officer questions the splitting of the
assessed him a deficiency income tax on this item, plus a 50% up to its date of payment. donations into 1994 and 1995. He says that since there were
fraud surcharge. only two (2) days separating the two donations they should be
1995 Bar, Q. XIV(2): What is a “delinquency interest" for treated as one. having been made within one year. Is he correct?
Considering that Stephen Yang had already been assessed a purposes of the income tax? Illustrate. Explain.
deficiency income tax for 1993 for his failure to report the
P50,000.00 income, what would you advise him to do to avoid A: Delinquency interest is the interest of 20% or the Manila A: The Revenue District Officer is not correct because the
the penalties for tax delinquency? Explain. Reference Rate, whichever is higher, required to be paid in case of computation of the gift tax is cumulative but only insofar as gifts
failure to pay: made within the same calendar year. Therefore, there is no legal
A: Mr. Yang should file a protest questioning the 50% surcharge Justification for treating two gifts effected in two separate
and ask for the abatement thereof. (a) The amount of the tax due on any return required to be calendar years as one gift.
filed; or
Alternative: Mr. Yang should pay the deficiency income tax on or (b) The amount of the tax due for which return is required; or 1995 Bar, Q. XV(3): Kenneth Yusoph owns a commercial lot
before the day prescribed for its payment per notice of demand. (c) The deficiency tax or any surcharge or interest thereon, on which he bought many years ago for PI Million. It is now worth
After payment and within two years thereafter, he should file a the due date appearing in the notice and demand of the P20 Million although the zonal value is only P15 Million. He
claim for refund of taxes erroneously paid to recover the Commissioner of Internal Revenue. donates one- half pro-indiviso interest in the land to his son Dino
excessive surcharge imposed. on 31 December 1994, and the other one-half pro-indiviso
If in the above illustration the assessment notice was released on interest to the same son on 2 January 1995.
1995 Bar, Q. XIII(4): Businessman Stephen Yang filed an Income December 31,1994 and the amount of deficiency tax, inclusive of
tax return for 1993 showing business net income of P350.000.00 surcharge and deficiency interest were computed up to January Dino subsequently sold the land to a buyer for P 20 Million. How
on which he paid an income tax of P61,000.00. After filing the 30, 1995 which is the due date for payment per assessment much did Dino gain on the sale? Explain.
return he realized that he forgot to include an item of business notice, failure to pay on this latter date will render the tax
income in 1993 for P50.000.00. Being an honest taxpayer, he delinquent and will require the payment of delinquency interest. A: Dino gained an income of 19 million from the sale. Dino
included this income in his return for 1994 and paid the acquires a carry-over basis which is the basis of the property in
corresponding income tax thereon. 1995 Bar, Q. XV(1): Kenneth Yusoph owns a commercial lot the hands of the donor or PI million. The gain from the sale or
which he bought many years ago for PI Million. It is now worth other disposition of property shall be the excess of the amount
realized therefrom over the basis or adjusted basis for 1995 Bar, Q. XVI(2)(b): Under the Tariff and Customs Code, what A: Vanishing deductions or property previously taxed in estate
determining gain (Sec. 34(a), NIRC). Since the property was are countervailing duties? taxation refers to the diminishing deductibility/ exemption, at the
acquired by gift, the basis for determining gain shall be the same rate of 20% over a period of five (5) years until it is lost after the
as if it would be in the hands of the donor or the last preceding A: Countervailing duties are special duties imposed by the fifth year, of any property (situated in the Philippines) forming
owner by whom the property was not acquired by gift. Hence, the Secretary of Finance upon prior investigation and report of the part of the gross estate, acquired by the decedent from a prior
gain is computed by deducting the basis of PI million from the Tariff Commission to offset an excise or inland revenue tax upon decedent who died within a period of five (5) years from the
amount realized which is P20 million. articles of the same class manufactured at home or subsidies to decedent’s death.
foreign producers or manufacturers by their respective
1995 Bar, Q. XV(4): Kenneth Yusoph owns a commercial lot governments. 1994 Bar, Q. II(1): What is the principle of mobilia sequuntur
which he bought many years ago for PI Million. It is now worth personamin income taxation?
P20 Million although the zonal value is only P15 Million. He 1995 Bar, Q. XVI(2)(c): Under the Tariff and Customs Code, what
donates one- half pro-indiviso interest in the land to his son Dino are marking duties? A: Principle of mobilia sequuntur personam in income taxation
on 31 December 1994, and the other one-half pro-indiviso refers to the principle that taxation follows the property or person
interest to the same son on 2 January 1995. A: Marking duties are special duties equivalent to 5% ad valorem who shall be subject to the tax.
imposed on articles not properly marked. These are collected by
Suppose, instead of receiving the lot by way of donation, Dino the Commissioner of Customs except when the improperly 1994 Bar, Q. II(2): Are donations inter vivos and donations mortis
received it by inheritance. What would be his gain on the sale of marked articles are exported or destroyed under customs causa subject to estate taxes?
the lot for P20 Million? Explain. supervision and prior to final liquidation of the corresponding
entry. These duties are designed to prevent possible deception of A: Donations inter vivos are subject to donor’s gift tax (Sec. 91 (a).
A: If the commercial lot was received by inheritance the gain from the customers. Tax Code) while donations mortis causa are subject to estate tax
the sale for P20 million is P5 million because the basis is the fair (Sec. 77, Tax Code). However, donations inter vivos, actually
market value as of the date of acquisition. The stepped-up basis of constituting taxable lifetime like transfers in contemplation of
1995 Bar, Q. XVI(2)(d): Under the Tariff and Customs Code, what
P15 million which is the value for estate tax purposes is the basis death or revocable transfers (Sec. 78 (b) and (c). Tax Code) may be
are discriminatory duties?
for determining the gain (Sec. 34(b)(2), NIRC). taxed for estate tax purposes, the theory being that the
A: Discriminatory duties are special duties collected in an amount transferor’s control thereon extends up to the time of his death.
Alternative: If Dino held on to the property as a capital asset in
not exceeding 100% ad valorem, imposed by the President of the
that it is neither for sale in the ordinary course of business nor Alternative: Donations inier vivos are not subject to estate taxes
Philippines against goods of a foreign country which discriminates
used in Dino’s business, then upon sale thereof there is presumed because the transfer of the property take effect during the
against Philippine commerce or against goods coming from the
to be realized an income of P20 million which is the gross selling lifetime of the donor. The transfer is therefore subject to the
Philippines and shipped to a foreign country.
price of the property. (Sec. 21(e), NIRC). The same would be donor’s tax.
subject to the 5% capital gains tax.
1994 Bar
On the other hand, donations mortis causa are subject to estate
1995 Bar, Q. XVI(1): When does importation begin and when taxes since the transfer of the properties takes effect after the
does it end? 1994 Bar, Q. I(1): What are disguised dividends in income death of the decedent. Such donated properties, real or personal,
taxation? Give an example. tangible or intangible, shall form part of the gross estate.
A: Importation begins from the time the carrying vessel or aircraft
enters Philippine territorial jurisdiction with the intention to A: Disguised dividends are those income payments made by a
1994 Bar, Q. III(1): Distinguish a direct from an indirect tax.
unload therein and ends at the time the goods are released or domestic corporation, which is a subsidiary of a non-resident
withdrawn from the customhouse upon payment of the customs foreign corporation, to the latter ostensibly for services rendered
A: A direct tax is one in which the taxpayer who pays the tax is
duties or with legal permit to withdraw (Viduya vs. Berdiago, 73 by the latter to the former, but which payments are
directly liable therefor, that is, the burden of paying the tax falls
SCRA 553). disproportionately larger than the actual value of the services
directly on the person paying the tax.
rendered. In such case, the amount over and above the true value
of the service rendered shall be treated as a dividend, and shall be
1995 Bar, Q. XVI(2)(a): Under the Tariff and Customs Code, what An indirect tax is one paid by a person who is not directly liable
subjected to the corresponding tax of 35% on Philippine sourced
are dumping duties? therefor, and who may therefore shift or pass on the tax to
gross income, or such other preferential rate as may be provided
another person or entity, which ultimately assumes the tax
under a corresponding Tax Treaty.
A: Dumping duties are special duties imposed by the Secretary of burden. (Maceda v. Macaraig. 197 SCRA 771)
Finance upon recommendation of the Tariff Commission when it
Example: Royalty payments under a corresponding licensing
is found that the price of the imported articles is deliberately or 1994 Bar, Q. III(2): Distinction between “schedular treatment"
agreement.
continually fixed at less than the fair market value or cost of and “global treatment’ as used in income taxation.
production, and the importation would cause or likely cause an
injury to local industries engaged in the manufacture or 1994 Bar, Q. I(2): What are vanishing deductions in estate
A: Under a schedular system, the various types/items of income (
production of the same or similar articles or prevent their taxation?
i.e. compensation; business/professional income) are classified
establishment. accordingly and are accorded different tax treatments, in
accordance with schedules characterized by graduated tax rates.
Since these types of income are treated separately, the allowable assets received by the surviving corporation from the absorbed All the three (3) were not qualified to retire under the BIR-
deductions shall likewise vary for each type of income. corporation shall be the original/historical cost of the assets when approved pension plan of the corporation.
still in the hands of the absorbed corporation.
Under the global system, all income received by the taxpayer are Is the separation pay given to Reyes subject to income tax?
grouped together, without any distinction as to the type or nature 1994 Bar, Q. IV(2)(b): In a qualified merger under Section 34 (c)
of the income, and after deducting therefrom expenses and other (2) of the Tax Code, what is the tax basis for computing the A: The separation pay given to Reyes is subject to income tax as
allowable deductions, are subjected to tax at a fixed rate. capital gains on the sale of the shares of stock received by the compensation income because it arises from a service rendered
stockholders from the surviving corporation? pursuant to an employer-employee relationship. It is not
1994 Bar, Q. IV(1)(a): In a qualified tax-free exchange of property considered an exclusion from gross income because the rule in
for shares under Section 34 (c) (2) of the Tax Code, what is the A: In a qualified merger under Section 34 (c) (2) of the Tax Code, taxation is tax construed in strictissimijuris or the rule on strict
tax basis for computing the capital gains on the sale of the assets the tax basis for computing the capital gains on the sale of the interpretation of tax exemptions.
received by the Corporation? shares of stock received by the stockholders from the surviving
corporation shall be the acquisition/historical cost of assets 1994 Bar, Q. VI(1): Pedro Reyes, an official of Corporation X,
A: In a qualified tax free exchange of property for shares under transferred to the surviving corporation. asked for an “earlier retirement” because he was emigrating to
Section 34 (c) (2) of the Tax Code, the tax basis for computing the Australia. He was paid P2,000.000.00 as separation pay in
gain on the: sale of the assets received by the corporation shall be 1994 Bar, Q. V: In smuggling a shipment of garlic, the smugglers recognition of his valuable sendees to the corporation.
the original/historical cost (Le. purchase price plus expenses of used an eight-wheeler truck which they hired for the purpose of
acquisition) of the property/assets given in exchange of the shares taking out the shipment from the customs zone. Danny, the Juan Cruz, another official of the same company, was separated
of stock truck owner, did not have a certificate of public convenience to for occupying a redundant position. He was given PI.000,000.00
operate his trucking business. Danny did not know that the as separation pay.
Alternative: The basis in computing capital gains tax in a qualified shipment of garlic was illegally imported.
tax-free exchange under Sec. 34 (c) (2) is with respect to the asset Jose Bautista was separated due to his failing eyesight. He was
received by the corporation the same as it would be in the hands Can the Collector of Customs of the port seize and forfeit the given P500,000.00 as separation pay.
of the transferor increased by the amount of the gain recognized truck as an instrument in the smuggling?
to the transferor on the transfer. All the three (3) were not qualified to retire under the BIR-
A: Yes, the Collector of Customs of the port can seize and forfeit approved pension plan of the corporation.
1994 Bar, Q. IV(1)(b): In a qualified tax-free exchange of property the truck as an instrument in the smuggling activity, since the
for shares under Section 34 (c) (2) of the Tax Code, what is the same was used unlawfully in the importation of smuggled articles. How about the separation pay received by Cruz, it is subject to
tax basis for computing the capital gains on (b) the sale of the The mere carrying of such articles on board the truck (in income tax?
shares received by the stockholders in exchange of the assets? commercial quantities) shall subject the truck to forfeiture, since
it was not being used as a duly authorized common carrier, which A: The separation pay received by Cruz is not subject to income
A: In a qualified tax free exchange of property for shares under was chartered or leased as such. (Sec. 2530 (a], TCC) tax because his separation from the company was involuntary
Section 34 (c) (2) of the Tax Code, the tax basis for computing the (Sec. 28 b (7), Tax Code).
gain on the sale of the shares of stock received by the Moreover, although forfeiture of the vehicle will not be effected if
stockholders in exchange of the assets shall be the it is established that the owner thereof had no knowledge of or 1994 Bar, Q. VI(1): Pedro Reyes, an official of Corporation X,
original/historical cost of the property given in exchange of the participation in the unlawful act, there arises a prima facie asked for an “earlier retirement” because he was emigrating to
shares of stock. presumption or knowledge or participation if the owner is not in Australia. He was paid P2,000.000.00 as separation pay in
the business for which the conveyance is generally used. Thus, not recognition of his valuable sendees to the corporation.
Alternative: The basis in computing capital gains tax in a qualified having a certificate of public convenience to operate a trucking
tax-free exchange under Sec. 34 (c) (2) is with respect to the business, he is legally deemed not to have been engaged in the Juan Cruz, another official of the same company, was separated
shares received by the stockholders in exchange of the assets - the trucking business. (Sec. 2531, Tariff and Customs Code) for occupying a redundant position. He was given PI.000,000.00
same as the basis of the property, stock or securities exchanged, as separation pay.
decreased by the money received and the fair market value of the 1994 Bar, Q. VI(1): Pedro Reyes, an official of Corporation X,
other property received, and increased by the amount treated as asked for an “earlier retirement” because he was emigrating to Jose Bautista was separated due to his failing eyesight. He was
dividend of the shareholder and the amount of any gain that was Australia. He was paid P2,000.000.00 as separation pay in given P500,000.00 as separation pay.
recognized on the exchange. recognition of his valuable sendees to the corporation.
All the three (3) were not qualified to retire under the BIR-
1994 Bar, Q. IV(2)(a): In a qualified merger under Section 34 (c) Juan Cruz, another official of the same company, was separated approved pension plan of the corporation.
(2) of the Tax Code, what is the tax basis for computing the for occupying a redundant position. He was given PI.000,000.00
capital gains on the sale of the assets received by the surviving as separation pay. How about the separation pay received by Bautista, is it subject
corporation from the absorbed corporation? to income tax?
Jose Bautista was separated due to his failing eyesight. He was
A: In a qualified merger under Section 34 (c) (2) of the Tax Code, given P500,000.00 as separation pay. A: The separation pay received by Bautista is likewise not subject
the tax basis for computing the capital gains on the sale of the to tax. His separation is due to disability, hence involuntary.
Is the Christmas gift of P100.000.00 to Imelda's parents subject A: For the operation of the canteen Inside the campus, the
Under the law, separation pay received through involuntary to tax? income thereon being incidental to the operations of the
causes are exempt from taxation. University as a school, is exempt (Art. XIV (4) (3). Constitution;
A: The Christmas gift of PI00,000.00 given by Imelda to her DECS Regulations No. 137-87, Dec. 16. 1987).
parents is taxable up to P50.000.00because under the law (Sec. 92
1994 Bar, Q. VII(1): In December 1993, the Sangguniang Bayan
(a) of the Tax Code), net gifts not exceeding P50.000.00 are 1994 Bar, Q. IX(2): The University of Bigaa, a non-stock, non-
authorized a Christmas bonus of P3,000.00, a cash gift of
exempt. profit entity, operates a canteen for its students and a bookstore
P5,000.00, and transportation and representation allowance
ofP6,000.00 for each of the municipal employees. Inside the campus. It also operates two dormitories for its
1994 Bar, Q. VIII(2): In 1991. Imelda gave her parents a Christmas students, one of which is in the campus.
Is the Christmas bonus subject to any tax? gift of P 100.000.00 and a donation of P80.000.00 to her parish
church. She also donated a parcel of land for the construction of Is the University liable to pay income taxes for the operation of
A: The Christmas bonus given by the Sangguniang Bayan to the a building to the PUP Alumni Association, a non-stock, non-profit the: bookstore?
municipal employees is taxable as additional compensation (Sec. organization. Portions of the building shall be leased to generate
21 (a). Tax Code). income for the association. A: For the operation of the canteen Inside the campus, the
income thereon being incidental to the operations of the
How about the donation to the parish church, is it subject to tax? University as a school, is exempt (Art. XIV (4) (3). Constitution;
1994 Bar, Q. VII(2): In December 1993, the Sangguniang Bayan
DECS Regulations No. 137-87, Dec. 16. 1987).
authorized a Christmas bonus of P3,000.00, a cash gift of
A: The donation of P80.000.00 to the parish church even assuming
P5,000.00, and transportation and representation allowance
that it is exclusively for religious purposes is not tax-exempt For the same reasons, the University of Bigaa is not liable to pay
ofP6,000.00 for each of the municipal employees.
because the exemption granted under Article VI. Sec. 28(3) of the income taxes for the operation of the bookstore, since this is an
Constitution applies only to real estate taxes [Uadoc v. ancillary activity the conduct of which is carried out within the
How about the cash gift, is it subject to any tax?
Commissioner, 14 SCRA 292). school premises.
A: The cash gift per employee of P5.000.00 being substantial may
considered taxable also. They partake the nature of additional 1994 Bar, Q. VIII(3): In 1991. Imelda gave her parents a Christmas 1994 Bar, Q. IX(3): The University of Bigaa, a non-stock, non-
compensation income as it is highly doubtful if municipal gift of P 100.000.00 and a donation of P80.000.00 to her parish profit entity, operates a canteen for its students and a bookstore
governments are authorized to make gifts in substantial sums church. She also donated a parcel of land for the construction of Inside the campus. It also operates two dormitories for its
such as this. They are not furthermore gifts of “small value” which a building to the PUP Alumni Association, a non-stock, non-profit students, one of which is in the campus.
employers might give to their employees on special occasions like organization. Portions of the building shall be leased to generate
Christmas - items which could be exempt under BIR Revenue income for the association. Is the University liable to pay income taxes for the operation of
Audit Memo No. 1-87. the: two dormitories?
How about the donation to the P.U.P, Alumni Association, is it
subject to tax? A: The University of Bigaa shall not be liable to pay income taxes
1994 Bar, Q. VII(3): In December 1993, the Sangguniang Bayan
for the operation of the dormitory located in the campus, for
authorized a Christmas bonus of P3,000.00, a cash gift of
A: The donation to the P.U.P. Alumni Association does not also same reasons as the foregoing.
P5,000.00, and transportation and representation allowance
qualify for exemption both under the Constitution and the
ofP6,000.00 for each of the municipal employees.
aforecited law because it is not an educational or research However, the latter shall be liable for Income taxes on income
organization, corporation, institution, foundation or trust. from operations of the dormitory located outside the school
How about the transportation and representation allowances, is
premises.
it subject to tax?
Alternative: Donation to the P.U.P. Alumni Association is exempt
from donor's tax if it is proven that the association is a nonstock, 1994 Bar, Q. X(1): Noel Langit and his brother, Jovy, bought a
A: The transportation and representation allowances are actually
non-profit charitable association, paying no dividends, governed parcel of land which they registered in their names as pro
reimbursements for expenses incurred by the employee for the
by trustees who receive no compensation, and devoting all its Indivlso owners (Parcel A). Subsequently, they formed a
employer. Said allowances spent by the employee for the
income to the accomplishment and promotion of the purposes partnership, duly registered with Securities and Exchange
employer are designed to enhance the quality of the service that
enumerated in its articles of incorporation. Not more than 30% of Commission, which bought another parcel of land (Parcel B).
the employer is supposed to perform for its clientele like the
the gift should be used for administration purposes by the donee. Both parcels of land were sold, realizing a net profit of
people of the municipality.
PI,000,000.00 for parcel A and P500.000.00 for parcel B.
1994 Bar, Q. IX(1): The University of Bigaa, a non-stock, non-
1994 Bar, Q. VIII(1): In 1991. Imelda gave her parents a Christmas
profit entity, operates a canteen for its students and a bookstore The BIR claims that the sale of parcel A should be taxed as a sale
gift of P 100.000.00 and a donation of P80.000.00 to her parish
Inside the campus. It also operates two dormitories for its by an unregistered partnership. Is the BIR correct?
church. She also donated a parcel of land for the construction of
students, one of which is in the campus.
a building to the PUP Alumni Association, a non-stock, non-profit
Is the University liable to pay income taxes for the operation of A: The BIR is not correct, since there is no showing that the
organization. Portions of the building shall be leased to generate
the canteen? acquisition of the property by Noel and Jovy Langit as pro indivlso
income for the association.
owners, and prior to the formation of the partnership, was used,
intended for use, or bears any relation whatsoever to the pursuit
or conduct of the partnership business. The sale of parcel A shall 1994 Bar, Q. XII: X-land Condominium Corporation was (b) The Collector gives the importer a written notice of the
therefore not be treated as a sale by an unregistered partnership, organized by the owners of units in X-land Building in seizure and fixes a hearing date to give the importer an
but an ordinary sale of a capital asset, and hence will be subject to accordance with the Master Deed with Declaration of opportunity to be heard: (Sec. 2303, TCC) - A formal hearing
the 5% capital gains tax and documentary stamp tax on transfers Restrictions. The X- land Building Corporation, the developer of is conducted; (Sec. 2312. TCC)
of real property, said taxes to be borne equally by the co-owners. the building, conveyed the common areas in favor of the X-land (c) The Collector renders a declaration of forfeiture; (Sec. 2312,
Condominium Corporation. TCC)
Alternative: The BIR is correct in treating the gain from the sale of (d) The importer aggrieved by the action of the Collector in any
parcel A by Noel and Jovy Langit at a profit of PI,000,000.00. in the Is the conveyance subject to any tax? case of seizure may appeal to the Commissioner for his
case of Pascual and Dragon u. Commissioner, G.R. No. 78133, review within fifteen (15) days from written notice of the
October 18, 1988, the Supreme Court ruled that the sharing of A: The conveyance is not subject to any tax. The same is without Collector’s decision; (Sec. 2313, TCC)
returns does not in itself establish a partnership, whether or not consideration, and not in connection with a sale made to X-land (e) The importer aggrieved by the action or ruling of the
the persons sharing therein have a joint or common right or Condominium Corporation, and the purpose of the conveyance to Commissioner in any case of seizure may appeal to the Court
interest in the property. The decision in said case cannot be the latter is for the management of the common areas for the of Tax Appeals; (Sec. 2402, TCC)
applied here because clearly the parties organized a partnership common benefit of the unit owners. (f) The importer adversely affected by the decision of the Court
duly registered with the Securities and Exchange Commission. of Tax Appeals may appeal to the Court of Appeals within
They pooled their resources together with the purpose of dividing The same is not subject to income tax since no income was fifteen (15) days which may be extended for another fifteen
the profit between them. realized as a result of the conveyance, which was made pursuant (15) days or such period as the Court of Tax Appeals may
to the Condominium Act (R.A. No. 4626, and the purpose of which decide.
1994 Bar, Q. X(2): Noel Langit and his brother, Jovy, bought a was merely to vest title to the common areas in favor of the Land
parcel of land which they registered in their names as pro Condominium Corporation. 1994 Bar, Q. XV: Caledonia Aircargo is an off-line international
Indiviso owners (Parcel A). Subsequently, they formed a carrier without any flight operations in the Philippines. It has,
partnership, duly registered with Securities and Exchange There being no monetary consideration, neither is the conveyance however, a liaison office in the Philippines which is duly licensed
Commission, which bought another parcel of land (Parcel B). subject to the creditable withholding tax imposed under Revenue with the Securities and Exchange Commission, established for
Both parcels of land were sold, realizing a net profit of Regulations 1-90, as amended. the purpose of providing passenger and flight information,
PI,000,000.00 for parcel A and P500.000.00 for parcel B. reservation and ticketing services.
The second conveyance was actually no conveyance at all because
The BIR also claims that the sale of parcel B should be taxed as a when the units were sold to the various buyers, the common Are the revenues of Caledonia Aircargo from tickets reserved by
sale by a corporation. Is the BIR correct? areas were already part and parcel of the sale of said units its Philippine offlce subject to tax?
pursuant to the Condominium Act. However, the Deed of
A: The BIR is correct, since a “corporation” as defined under Conveyance is subject to documentary stamp tax. A: The revenues in the Philippines of Caledonia Aircargo as an
Section 20 (a) of the Tax Code Includes partnerships, no matter “off-line'’ airline from ticket reservation services are taxable
how created or organized, except general professional 1994 Bar, Q. XIV: Maribel Santos, a retired public school teacher, income from “whatever source" under Sec. 28(a) of theTax Code.
partnerships. The business partnership. In the Instant case, shall relies on her pension from the GSIS and the interest income from This case is analogous to Commissioner v. BOAC. G.R No. No.
therefore be taxed in the same manner as a corporation on the a time deposit of P500.000.00 with ABC Bank. 65773-74, April 30, 1987 where the Supreme Court ruled that the
sale of parcel B. The sale shall thus be subject to the creditable income received in the Philippines from the sale of tickets by an
withholding tax under Revenue Regulations 1-90, as amended by Is Miss Santos liable to pay any tax on her income? “off-line" airline is taxable as Income from whatever source.
12-94, on the sale of parcel B, and the partnership shall report the
gain realized from the sale when it files its income tax return. A: Maribel Santos is exempt from tax on the pension from the 1994 Bar, Q. XVI: The Secretary of Finance, upon
GSIS (Sec. 28(b((7)(F), Tax Code). However, as regards her time recommendation of the Commissioner of Internal Revenue,
1994 Bar, Q. XI: Jose Ortiz owns 100 hectares of agricultural land deposit, the interest she receives thereon is subject to 20% final issued a Revenue Regulation using gross Income as the tax base
planted to coconut trees. He died on May30,1994. Prior to his withholding tax. (Sec. 21(a)(c). Tax Code). for corporations doing business in the Philippines
death, the government, by operation of law, acquired under the
Comprehensive Agrarian Reform Law all his agricultural lands 1994 Bar, Q. XIV: The Collector of Customs instituted seizure Is the Revenue Regulation valid?
except five (5) hectares. Upon the death of Ortiz, his widow proceedings against a shipment of motor vehicles for having
asked you how she will consider the 100 hectares of agricultural been mis-declared as second-hand vehicles. State the procedure A: The regulation establishing gross income as the tax base for
land in the preparation of the estate tax return. What advice will for the review of the decision up to the Supreme Court of the corporations doing business in the Philippines (domestic as well as
you give her? Collector of Customs adverse to the importer. resident foreign) is not valid. This is no longer implementation of
the law but actually it constitutes legislation because among the
A: The 100 hectares of land that Jose Ortiz owned but which prior A: The procedure in seizure cases may be summarized as follows: powers that are exclusively within the legislative authority to tax
to his death on May 30, 1994 were acquired by the government is the power to determine the amount of the tax. (See 1 Cooley
under CARP are no longer part of his taxable gross estate, with the (a) The collector issues a warrant for the detention or forfeiture 176-184). Certainly, if the tax is limited to gross income without
exception of the remaining five (5) hectares which under Sec. of the imported articles; (Sec. 2301. Tariff and Customs deductions of these corporations, this is changing the amount of
78(a) of the Tax Code still forms part of “decedent's interest". Code) the tax as said amount ultimately depends on the taxable base.
1994 Bar, Q. XVII: XCEL Corporation filed its quarterly income tax performance of their religious functions and duties, is
return for the first quarter of 1985 and paid an Income tax of taxable income under the last paragraph of Sec. 26, in In the case at bar, the money advanced by Mang Douglas
P500.000.00 on May 15, 1985. In the subsequent quarters, XCEL relation to Sec. 26(e) of the Tax Code. In promoting and Hamburger, Inc. to pay off the civil liability of X, which arose from
suffered losses so that on April 15, 1986 it declared a net loss of operating the Binatra Show, they engaged in an activity the accident after a business deal has been struck for Mang
PI,000,000.00 in its annual income tax return. After failing to get conducted for profit. (Ibid.) Douglas Hamburger, Inc. was in fact reparation/restitution to the
a refund, XCEL filed on March 1, 1988 a case with the Court of (b) The income of Frank Binatra, a non-resident alien under our aggrieved heirs. However, the same cannot be considered as an
Tax Appeals to recover the P500.000.00 in taxes paid on May 15, law is taxable at the rate of 30%, final withholding tax based ordinary and deductible expense, since the law poses as a
1985. on the gross income from the show. Mr. Binatra is not condition for its deductibility that the wrong or tort should have
engaged in any trade or business in the Philippines. been committed in the course of the business.
Is the action to recover the taxes filed timely?
1994 Bar, Q. XX: Cliff Robertson, an American citizen, was a (b) If Mang Douglas Hamburger, Inc. treats the advances as
A: The action for refund was filed in the Court of Tax Appeals on permanent resident of the Philippines. He died in Miami, Florida. salary or compensation of Y who is an employee of Mang
time. In the case of Commissioner v. TMX Sales, Inc., 205 SCRA He left 10.000 shares of Meralco, a condominium unit at the Douglas and withholds the corresponding tax thereon then
184, which is similar to this case, the Supreme Court ruled that in Twin Towers Building at Pasig. Metro Manila and a house and lot there is a possibility of deducting.
the case of overpaid quarterly corporate income tax, the two-year in Los Angeles, California.
period for filing claims for refund In the BIR as well as in the 1993 Bar, Q. II: The Filipinas Hospital for Crippled Children is a
institution of an action for refund in the CTA, the two-year What assets shall be included in the Estate Tax Return to be filed charitable organization. X visited the hospital, on his birthday, as
prescriptive period for tax refunds (Sec. 230, Tax Code) is counted with the BIR? was his custom. He gave P100,000.00 to the hospital and
from the filing of the final, adjustment return under Sec. 67 of the P5.000.00 to a crippled girl whom he particularly pitied. A
Tax Code, and not from the filing of the quarterly return and A: All of Mr. Robertson’s assets consisting of10,000shares in the crippled son of X is in the hospital as one of its patients. X wants
payment of the quarterly tax. The CTA action on March 1,1988 Meralco, a condominium unit in Pasig, and his house and lot in Los to exclude both the P100,000.00 and the P5.000.00 from his
was clearly within the reglementaiy two-year period from the Angeles, California are taxable. The properties of a resident alien gross income. Discuss.
filing of the final adjustment return of the corporation on April decedent like Mr. Robertson are taxable wherever situated (Secs.
15,1986. 77, 78 and 98, Tax Code). A: Under Sec. 29 (h) (1) of the National Internal Revenue Code
charitable contributions to be deductible must be:
1994 Bar, Q. XVIII: Bates Advertising Company is a non-resident 1993 Bar
corporation duly organized and existing under the laws of (a) actually paid or made to domestic corporations or
Singapore. It is not doing business and has no office in the associations organized and operated exclusively for religious.
1993 Bar, Q. I: X is the Advertising Manager of Mang Douglas charitable, scientific, youth and sports development, cultural
Philippines. Pilipinas Garment Incorporated, a domestic
Hamburger, Inc. X had dinner with Y, owner of a chain of or educational purposes or for rehabilitation of veterans or
corporation, retained the services of Bates to do all the
restaurants, to convince the latter to carry Mang Douglas’ to social welfare institutions no part of which inures to the
advertising of its products abroad. For said services. Bates’ fees
hamburger. After Y agreed, both X and Y went their separate benefit of any private individual;
are paid through outward remittances.
ways. X celebrated by going to a single’s bar. He picked up a (b) made within the taxable year;
partner and consumed a bottle of beer. He drove home at 3:00 (c) not more than 6% (for individuals) of 3% (for corporations)
Are the fees received by Bates subject to any withholding tax?
a.m. On his way, he sideswiped a pedestrian who died as a result of the taxpayer’s taxable income to be computed without
of the accident. X settled the case extrajudicially by paying the including the contribution.
A: The fees paid to Bates Advertising Co..a non-resident foreign
heirs of the pedestrian P50.000.00. The money, however, came
corporation are not subject to withholding tax since they are not
from Mang Douglas Hamburger, Inc. Discuss whether the Applying the above-provisions of law to the case at bar, it is clear
subject to Philippine tax. They are exempt because they do not
P50.000.00 can be claimed by Mang Douglas Hamburger, Inc. as therefore that only the PI00,000.00 contribution of X to Filipinas
constitute income from Philippine sources, the same being
an ordinary and necessary expense. Hospital for Crippled Children qualified as a deductible
compensation for labor or personal services performed outside
the Philippines (Sec. 36(c) (3) and Sec. 25(b)(1), Tax Code). contribution.
A: No. As the expenditure had not been incurred in carrying on his
trade or business, the same cannot be considered an ordinary and Sec. 29 (h) (1) of the NIRC expressly provides that the same must
1994 Bar, Q. XIX: Four Catholic parishes hired the services of necessary expense for which deduction may be claimed. Such be actually paid to a charitable organization to be deductible.
Frank Binatra. a foreign non-resident entertainer, to perform for expense is a personal expense which is not deductible from the Note that the law accorded no privilege to similar contributions
four (4) nights at the Folk Arts Theater. Binatra was paid gross income. extended to private individuals. Hence, the P5,000.00 contribution
P200.000.00 a night. The parishes earned PI,000,000.00. which
to the crippled girl cannot be claimed as a deduction.
they used for the support of the orphans in the city. Alternative:
Alternative:
Who are liable to pay taxes? (a) In the case of Helvering vs. Humpton (1935; CCA 9th 79F [2dl
358, it was held that: (a) The P100,000.00 donation may properly be deducted from
A: The following are liable to pay Income taxes: “Restitution is ordinarily expected to be made by a person in the X’s gross income, but not the P5.000.00 donated to the
course of whose business a wrong is committed, so that he may crippled girl, as charitable and other contributions that may
(a) The four catholic parishes because the income received by deduct the amount thereof as an ordinary and necessary’ business be deducted from taxable income do not contemplate those
them, not being income earned “as such” in the expense."
given to individuals. While it may be that X’s son is a patient Further, Sec. 69 of Revenue Regulations No. 2.as amended, (c) telecommunication, electricity, fuel, light and water;
in the hospital, it cannot be said that part of its net income otherwise known as “Income Tax Regulations" reads: (d) business rental;
inures to the benefit of X as to be disallowed as a deduction (e) depreciation;
from taxable income. “Sec. 69. Professional Expenses – A professional may claim as (f) contribution made to the Government and accredited relief
(b) Assuming X is a self-employed Individual, he may not deduct deductions the cost of supplies used by him or in the practice of organizatlons for the rehabilitation of calamity- stricken
the donations made because under Section 29 of the NIRC as his profession, expenses paid in the operation and repair of areas declared by the President.
amended by RA 7496 better known as SNITS, only transportation equipment used in making professional calls, dues
contribution to the government or to an accredited relief to professional societies and subscriptions to professional The deductibility of the contributions is based on two criterias, to
organization for the rehabilitation of calamity stricken areas journals, the rent paid for office rooms, the expenses of the fuel, wit:
declared by the President may be deducted for income tax light, water, telephone, etc. used on such offices, and the hire of
purposes. Clearly, the donees do not qualify as relief office assistants. Amounts currently expended for books, (1) The donee or recipient must be the government or
organizations. furnitures and professional instruments and equipment, the accredited relief organization: and
useful life of which is short, may be deducted. But amounts (2) The contribution must be utilized for the rehabilitation of
Assuming X is receiving purely compensation income, he can only expended for books, furniture and professional instruments and calamity stricken areas declared by the President.
deduct from gross compensation income personal exemption, equipment of a permanent character are not allowable
additional personal exemption and special additional personal deductions." The term “Government" as used in the law refers to the
exemption (Section 29. NIRC as amended). Philippines or any of its agencies or political subdivisions and
From the foregoing provisions of law that ordinary and necessary includes:
Note: The problem does not refer to any particular taxable period, expenses incurred during a taxable year pertaining directly to the
so if the contributions were effected prior to the effectivity of R.A. practice of a profession may be allowed as deductions, it may be (1) Departments, agencies, bureaus, commissions and
7496, then the contribution of P100,000.00 can be allowed, inferred from a keen reading of Sec. 69 of Revenue Regulations authorities, including state colleges and universities:
subject to the limitations prescribed under Sec. 29 (h) (i) of the No. 2 that aside from personal exemptions, only direct costs or (2) Autonomous regions, provincial, city or municipal
NIRC. overhead expenses incurred in the actual practice of a profession governments;
may be claimed, i.e. supplies, fuel, light, electricity, salaries, etc.
1993 Bar, Q. III: X just hurdled the bar examinations and (g) Interest paid or accrued within a taxable year on loans
immediately engaged in the practice of law. In preparing his Applying the above considerations in the case at bar, it appears contracted from accredited financial institutions which must
income tax return, he listed the following as deductible items: that among the expenses incurred by X. only the premiums he be proven to have been paid or incurred in connection with
paid for malpractice insurance qualifies as a deductible expense, the conduct of a taxpayer's profession, trade or business.
(a) fees paid to the Supreme Court to be able to take the bar the same being an ordinary and necessary expense in the pursuit
examinations; of a profession as defined by Sec. 29 of the NIRC and further Alternative: None of the expenses are allowable. With respect to
(b) fees paid to a law school to enroll in its pre- bar review qualified by Revenue Regulations No. 2. The tuition fees for pre- individuals engaged in the practice of a profession, the NIRC limits
classes; bar classes and the bar examination fees paid to the Supreme deductions only to direct costs incurred in the exercise of the
(c) malpractice insurance and Court by X do not qualify as deductible expenses under Revenue profession, which costs do not include the items being claimed by
(d) amount spent to entertain a judge who decided his first Regulations No. 2. As for the amount spent by X to entertain the X.
case. judge who decided his first case, the same may not be claimed as
an expense. A business expense to be deductible must be 1993 Bar, Q. IV: The employees of Travellers, Inc. staged a strike.
Which deductions are allowable? Reasons. sustained by adequate proof and that the same must not be X, a non-union, member joined the strike and volunteered to
against the law or public policy [Consolidated Mines, Inc. us. Court picket the company premises from 8:00 A.M. to 12:00 P.M.,
A: Sec. 29 of the National Internal Revenue Code on deductions, of Tax Appeals, L-18863 29 August 1974). Monday to Friday. Six months into the strike. X ran out of money
among other things provides: and asked financial aid from the union since he has no other
Moreover, it may be worthwhile to note that under Sec. 3 (B) of source of income and needed financial assistance in order to
"(a) Expenses Revenue Regulations No. 2-93, implementing Republic Act No. live. The union gave him PI ,000.00 a month to take care of his
7496, otherwise known as “An Act Adopting The Simplified Net food requirements plus P500.00 to take care of his monthly rent.
(1) Business Expenses (a) In general - All the ordinary and Income Taxation Scheme for the Self-Employed and Professionals When X filed his return, he excluded these benefits from his
necessary expenses paid or incurred during the taxable year in Engaged In the Practice Of Their Profession, amending Section 21 gross income. The exclusion was denied by the BIR Decide.
carrying on any trade or business, including a reasonable and 29 of the National Internal Revenue Code, as amended", only
allowance for salaries or other compensation for personal services the following direct costs are deductible: A: The PI,500.00 is not compensation income because
actually rendered; travelling expenses while away from home in compensation income arises out of employer-employee
the pursuit of a trade, profession or business; rentals or other (a) Raw materials relationship as payment for services without compensation. The
payments required to be made as a condition to the continued (b) Salaries of employees directly performing services for the P1.500.00 is a gift from the labor union. According to Section 28
use or possession, for the purpose of the trade, profession or taxpayer in the course of or pursuant to his business or (b) (3) of the NIRC, gifts are to be excluded from gross income.
business of property to which the taxpayer hasnot taken nor is not practice of his profession. This includes salaries and wages Thus, the BIR's denial is not valid.
taking title or in which he has no equity." paid for janitorial, security, bookkeeping, administrative and
sales personnel, by a self-employed taxpayer or a
professional in the exercise of his profession:
Alternative: Under the law, gross Income consists of all gains, (b) No. With respect to capital gains on sales of realty to the (a) No. With respect to individuals engaged in business, the
profits, and income of the taxpayer during a taxable year of government, X may elect to include the same in his gross NIRC limits deductions only to certain direct costs incurred in
whatever kind and in whatever form derived from any source, compensation income or to pay the corresponding capital connection with the business, which costs, however, do not
whether legal or illegal, except items of gross income subject to gains tax. By withholding the taxes on the just compensation include casualty losses.
final income tax and income exempt from taxation under Sec. 28 (for which the basis should only be P2,000,000.00) excluding (b) No. Section 29 of the NIRC, as amended by RA7496, better
(b) of the NIRC. the interest) DPWH denied such option to X. known as the SNTTS, does not include among the allowable
(c) Assuming the property is an ordinary asset, the items of deductions for selfemployed individuals like X,
Moreover, in the case of Guitierrez vs. Collector of Internal expropriation proceedings in 1980 is not subject to the casualty losses even if the property destroyed is used in
Revenue. CTA Case No. 65. 31 August 1965, it was held that the creditable withholding tax under Revenue Memorandum business. A taxpayer claiming deduction must point to some
phrase income from whatever source derived covers all other Circular 7-90 clarifying Revenue Regulations Nos. 12-89 and specific provision of the statute in which that deduction is
forms of income. It discloses a legislative policy to include all 1 -90 implementing Section 50 (b) of the NIRC, the transfer authorized and must be able to prove that he is entitled to
income not expressly exempted, as within the class of taxable of the property was effected in 1980. The above mentioned the deduction which the law allows (Adas Consolidated
income under our laws, irrespective of the voluntary or revenue rules and regulations are applicable only to sales, Mining, 102 SCRA 246).
involuntary action of the taxpayer in producing the gain. exchange or transfers of real properties consummated on or
after 1 January 1990 (BIR Ruling 040-91). The 6% interest on Note: It depends. If he is an employee of a company, that is not
Therefore based on the foregoing considerations, the benefits the “just compensation" is not in the nature of an interest deductible. On the other hand, if he is a businessman it will be
subject in the case at bar, not expressly exempted by law, are on Philippine currency bank deposit and yield or any other deductible to his gross income provided he can recover only up to
considered as income. monetary benefit from deposit substitutes from trust fund the amount of the casualty loss that does not exceed its book
and similar arrangements, the same is not subject to the value, provided further, that it is not compensated by insurance or
20% final withholding tax under Sec. 21 of the NIRC (BIR otherwise.
1993 Bar, Q. V: X owns a half-hectare property In Bacoor, Cavite
Ruling 040-91).
which In 1980 was expropriated by the national government,
Under the SNITS Law (R-A 7496) losses of any kind are no longer
through the Department of Public Works and Highways. After
1993 Bar, Q. VI: X is a travelling salesman in Jolo, Sulu. In the deductible from gross income of individuals.
ten years, X was paid P2.000.000.00 as just compensation plus
6% annual interest by the DPWH but minus the withholding tax. course of his travel, a band of MNLF seized his car by force and
Is the action of DPWH proper? Reasons. used it to kidnap a foreign missionary. The next day, X learned 1993 Bar, Q. VII: Maria Clara, a Filipino citizen, married Ha Wa, a
that the military and the MNLF band had a chance encounter. Hongkong national in 1988 in Hongkong. In 1989, the two
A: No, the action of DPWH is not proper. In the case of Province of Using heavy weapons, the military fired at the MNLF band that separated and Maria returned to the Philippines. The two lost
Tayabas vs. Perez,66 Phil. 467 Just compensation was defined as tried to escape with the use of X’s car. All the members of the contact with each other. In 1990, Maria filed her income tax
“the just and complete equivalent of the loss which the owner of band died and X’s car was a total wreck. Can X deduct the value return and claimed a personal exemption of P12.000.00 under
a thing expropriated has to suffer by reason of the expropriation". of his car from his income as casualty loss? Reasons. Sec. 21(a) of the Tax Code. Decide.

Further, in BIR Ruling 61-91 just compensation was defined as that A: Sec. 29 (i) (c) of the National Internal Revenue Code provides A: Maria may file a separate return as a married individual
which is paid by the Government equivalent to the value of the that in cases of individual taxpayers, losses to be deductible must because it is impossible to file a consolidated return. However.
property at the time of its taking. It is the fair and full equivalent be: according to Section 29 of the NIRC prior to the eflectivity of R.A.
for the indemnity. 7167. husband and wife electing to compute their income tax
(a) actually sustained and charged off within the taxable year; separately shall be entitled to a personal exemption of P6.000.00
Based in the foregoing it is clear therefore that the amount (b) have been incurred in trade, profession or business or in any each.
received after 10 years as just compensation is not in any way a transaction entered into for profit, though not connected
profit, gain or income on the part of X In the same vein, the 6% with trade, profession, or business; Alternative:
annual interest paid by DPWH is not income. The same partakes (c) Moreover, Sec. 1 of Revenue Regulations No. 12-77, defined
of the nature of a penalty or indemnity due and accruing to X for casualty as complete or partial destruction of property (a) Revenue Regulations No. 1-92. prescribing the implementing
having been deprived of the use and benefit by not being paid of resulting from an Identifiable event of sudden, unexpected, guidelines for R.A. No. 7167. provides that the new basic
the fair market value of the property since its taking 10 years ago. or unusual nature. It denotes accidents, some sudden personal exemptions of individuals taxpayers are as follows:
Hence, the DPWH should not have withheld taxes. Invasion by hostile agency, and excludes progressive
deterioration. (1) For single individual or married individuals but Judicially
Alternative: decreed as legally separated with no qualified dependents -
Based on the above-mentioned laws and the circumstances of the P9.000.00.
(a) No. the withholding tax (presumably on capital gains) should case at bar, the value of the wrecked car is deductible as casualty (2) For married couples with both spouses employed- P9.000.00
have been based on the fair market value of the property at loss, provided the regulations governing substantiation (3) For married couples with only one spouse employed - P
the time of the expropriation. Thus, in this case, for requirements for losses are complied with. 18,000.00.
purposes of computing the withholding tax on capital gains, (4) For head of the family - P 12,000.00. Based on the foregoing
the amount representing the 6% annual interest should have Alternative: provisions of law, Maria's claim of P 12,000.00 as personal
been excluded from the withholding tax base. exemption cannot be allowed. While she is married and not
judicially separated, it does not appear that she has
dependents to qualify her as head of the family and to income which is by statutory provision or otherwise exempt from Customs precludes the RTC from assuming cognizance over
entitle her to the claim of P12,000.00 personal exemption. the tax imposed by law. such matter. The RTC is thus devoid of competence to act on
the matter (Republic v. CF1 of Manila, 213 SCRA 222).
(b) Not being legally separated. Maria may claim a higher Applying the above provision of law to the case at bar, the
personal exemption of PI8.000.00 for married individuals, amount of P 100,000.00 being a loan or an indebtedness is an 1993 Bar, Q. X: X’s favorite charity organization is the Philippine
and not merely PI2,000.00 which applies to the Head of a outlay, not a taxable income or gain. National Red Cross. To raise money, PNRC sponsored a concert
Family. The exemption for the Head of a Family requires that featuring the Austria Boys Choir. X advanced P100,000.(X) to the
one be unmarried or legally separated, which Maria Clara is Alternative: The P100,000.00 may not be considered taxable PNRC for which he was issued a promissory note. Before its
not. income of X. as the same is only a loan that would eventually have maturity, X cancelled and returned the note to PNRC. An
(c) Maria may not claim the PI2,000.00 personal exemption as to be paid. To the extent that X saved in interest payments, the advertising man, X also undertook the promotions of the Austria
head of the family in accordance with Section 29 of the NIRC reasonable value thereof may perhaps be considered as income to Boys Choir. Part of the promotions campaign was to ask
as amended by RA 7167 and RA 7496. The Supreme Court X. but the loan, however, may not strictly be considered interest- prominent personalities to publicly donate blood to the PNRC a
ruled in the case of Umali v. Estanislao (209 SCRA446) that free as value therefor was given by X in return. day before the concert. X himself donated 100 cc of blood. X
the increased personal exemptions shall take effect on intends, to claim as deductions the value of the note, the cash
January 29, 1992 and shall be applied on income earned for 1993 Bar, Q. IX: M/V Floria, a vessel of Philippine registry, was value of the promotions campaign and the cash value of the
taxable year 1991. hired to transport beans from Singapore to India. The vessel was blood he donated. Give your legal advice.
allegedly hijacked at sea and found its way to Bataan. It is also
1993 Bar, Q. VIII: In 1990, X started constructing a commercial alleged that said beans are now with the List Co. and fake A: The value of the note can be claimed as deduction as charitable
building with spaces for lease to the public. X required Y, a documents were used to show that the beans were imported contribution. While the amount was originally a loan, it can be
prospective lessee to sign a pre-lease agreement, which from Japan. The Collector of Customs seized the M/V Floria and considered to have become a gift or contribution when X
principally provided: (a) that the lessee shall extend to the lessor its cargo. The owner of M/V Floria filed a complaint in the cancelled and returned the note to PNRC. a charitable
a noninterest bearing loan of P100,000.00 payable within twelve Regional Trial Court to obtain possession of the vessel and the organization.
(12) months: and (b) that in consideration of the loan, the lessee beans. Does the RTC have jurisdiction over the case?
shall be given preference in the lease and his rentals shall not be On the other hand, the cash value of the promotions campaign
increased while the loan remains unpaid. Upon completion of A: The RTC has no jurisdiction. The Collector of Customs sitting in cannot be claimed as a deduction. Advertising expenses can only
the building. Y extended the loan ofP100.000.00 to X and he was seizure and forfeiture proceedings has exclusive jurisdiction to be deducted from the revenues where the expenses was incurred.
given a space in its ground floor. May the BIR consider the hear and determine all questions touching on the seizure and In the case at hand, PNRC is the revenue-producing entity not X. X
P100,000.00 as taxable income of X. Reasons. forfeiture of dutiable goods. The RTC has no jurisdiction to pass did not derive any revenue. Thus, the cash value of his promotions
upon the validity or regularity of the seizure and forfeiture campaign cannot be claimed as deduction.
A: Sec. 28 of the NIRC defines gross income as all income from proceedings conducted by the Bureau of Customs. [Commissioner
whatever source derived including but not limited to the following of Customs vs. Makasiar. 177 SCRA 27, 33-34 (1989) citing Pacis Finally, the cash value of the blood donated by X cannot be
items: vs. Averin, 18 SCRA 9071966)] claimed as deduction. Blood has no monetary value in this case as
it is not disbursed in the form of expense.
(a) Compensation for services, including fees, commissions, and Neither has RTC review powers over actions concerning seizure
similar items; and forfeiture proceedings conducted by the Collector of Customs Alternative:
(b) Gross income derived from business; which is reviewable by the Commissioner of Customs whose
(c) Gains derived from dealings in property: decision, in turn, is reviewable by the Court of Tax Appeals, (ibid) (a) The value of the note qualifies as a contribution to a
(d) Interest; charitable institution which may be deducted from gross
(e) Rents; Alternative: income but only to the extent that it does not exceed 6% of
(f) Royalties; his taxable income derived from business.
(g) Dividends; (a) No. The owner must have first appealed the decision of the
(h) Annuities Collector to the Commissioner of Customs, and if the X cannot claim deductions for the other items. Charitable and
(i) Prizes and winnings; decision was adverse, then to the Court of Tax Appeals, other contributions, to be deductible, must actually have been
(j) Pensions; and consistent with the principle of exhaustion of administrative paid, which is not true of the value of the advertising promotions,
(k) Partner’s distributive share of the gross income of general remedies. and must represent some economic benefit to the recipient,
professional partnership. (b) No. The question of seizure and forfeiture is for the Collector which is not true of the blood donation.
of Customs to determine in the first instance and then the
Further, under Sec. 36 of Revenue Regulations No. 2, taxable Commissioner of Customs. This is a field where the doctrine (b) Section 29 as amended by RA 7496 allows the deduction of
income in a broad sense, means all wealth which flows into the of primary jurisdiction controls. The Collector of Customs donation to an accredited relief organization for the
taxpayer other than as a mere return of capital. It includes the when sitting in forfeiture proceedings, constitutes a tribunal rehabilitation of calamity stricken areas declared by the
forms of the income specifically described as gains and profits, upon which the law confers jurisdiction to hear and President. Clearly, the PNRC will qualify as donee relief
including gains derived from the sale or other disposition of determine all questions touching the forfeiture and further organization. The P100,000.00 - note maybe allowed to the
assets. Gross income, means income (in the broad sense) less disposition of the subject matter. The exclusive jurisdiction extent of its cash value considering that the maker of the
in seizure and forfeiture cases vested in the Collector of note is the donee itself. The rule is, donation made in kind
shall be determined at its fair market value as of the date is contrary to law, public policy or for immoral purposes (Zamora same to whoever will succeed him as consultant. When X’s
such donations or gifts are made. (Section 10 BIR-NEDA vs. Collector, SCRA 163; Roxas vs. CTA, 23 SCRA 276). contract with Oriental, Inc. expired, he left the Philippines and
Regulation 1-81) The services rendered by the taxpayer to assigned for free the share to Y, his successor in office. What tax,
promote the show and the 100 cc. blood may not be allowed Alternative: if any, can be imposed by the BIR on the transaction?
because of the difficulty in getting the fair-market value of
these noncash donations. (a) No. The money given to the director was paid merely “to A: The BIR cannot Impose any tax because there was no real
please" him and was not paid for services actually rendered transfer of the ownership of the subject Capitol Golf Club, Inc.
Note: If the donation is made before the efiectivity of RA. 7496. It and therefore does not qualify as compensation for services (“Capitol”) proprietary share from X to Y. Oriental. Inc. is the true
is deductible but subject to limitations under Sec. 29 h (i) of the deductible as ordinary and necessary expense. Moreover, owner of the Capitol proprietary share. It remained the true
NIRC. deductions are allowable only if incurred for legal purposes. owner from the time of the Capitol share’s use by X, to the
(b) No. A taxpayer may not deduct a business expense which is transfer of the Capitol share’s use to Y. Oriental remained the
1993 Bar, Q. XI: X is employed as security guard of Excel against the law or public policy. The payment made to the legal owner thereof all throughout, while X and Y are only the
Supermarket, Inc. X lives in a room within the compound of Excel director is a bribe given to a government employee. Bribery beneficial owners.
but he is not charged any rent. The rental value of the room is is a crime punishable under the Revised Penal Code.
P300.00 a month. X wants your opinion on whether BIR can tax Alternative:
the value of the free use of his room. 1993 Bar, Q. XII: X sold a piece of land to the United Church of
Christ of Quezon City, Inc. The land is to be devoted strictly for (a) The value of the use of the share may be considered
A: The rental value of the room is not taxable. Section 2.2 of the religious purposes by the Church. When the Church tried to compensation income to both X and Y subject to income tax.
Revenue Audit Memo Order No. 1-87 provides that if the lodging register the title of the land, the Register of Deeds refused The revocable trust may not be considered a disposition of a
is furnished in the business premises of the employer and the claiming that the capital gains tax was not paid. Is the share of stock subject to capital gains tax.
employee is required to accept such lodging as a condition of his transaction exempt from the capital gains tax? Reasons. (b) Since the transfer does not involve any consideration, X is
employment, then the value of said lodging will be not taxable. It not subject to income tax. While the transfer is gratuitous,
is merely for the convenience, comfort and pleasure of the A: No. Under Section 21 (e) in relation to Section 49 (a) (4) of the there is no donative intent. Thus, the transaction is not
employer. National Internal Revenue Code, the seller is the one liable for the subject to donor’s tax. However, since the certificate is
payment of the capital gains tax from the sale of real property by evidence of interest in the Property of a corporation, the
Alternative: an individual taxpayer. Meanwhile, the Church in this instant case transfer of the said certificate is subject to the documentary
is the buyer. Hence, Section 28 (4) of the 1987 Constitution, which stamp tax of P0.20 on each P200 or fractional part thereof,
(a) The BIR may not tax the value of the free use of the room, as exempts church lands, buildings, and improvements, does not of the face value of such certificate, in accordance with
the same may not strictly be considered compensation apply because the obligation to pay the capital gains tax herein is Section 178 of the NIRC (BIR Ruling 23589).
income. Considering the nature of X’s employment and the imposed on X, the seller, and not on the Church. Since payment of (c) If the BIR puts value to the playing rights, then the transfer
fact that free lodging was furnished within the business the capital gains tax is a condition precedent for the registration to the expatriate, that value could be treated as
premises, it may reasonably be said that the benefit of the transfer certificate of title to real property, the nonpayment compensation to the expatriate, hence, taxable.
therefrom inured to the employer more than toX and thus herein by the seller is a valid reason for the Registry of Deeds to
may not actually be considered remuneration for services deny the transfer of title to the subject land. 1993 Bar, Q. XV: Pacific, Inc. is engaged in overseas shipping. It
included in the computation of taxable income. time chartered one of its ships to a Japanese company on a five-
(b) It depends. If the lodging furnished to employee-X is within Alternative: year term. The charter was consummated through the efforts of
the business premises of the employer and the employee is Kamino Moto, a Tokyo based broker. The negotiation took place
required to accept the lodging as condition for employment (a) Assuming that in the hands of X, the piece of land is a capital in Tokyo. The agreement calls for Pacific, Inc. to pay Kamino
the imputed rental value of the room used by X shall be asset, then the sale to the Church is subject to capital gains Moto $50,000.00. Your opinion is sought whether Pacific, Inc.
excluded from X's compensation income (BIR Audit Memo 1- tax for which X is liable. It is immaterial that the land will be should withhold the tax before sending the compensation of
87). used exclusively for religious purposes; if there is any Kamino Moto.
exemption, then it applies to Church, and not to X, the
1993 Bar, Q. XII: X is the proprietor of Vanguard, which is a vendor. A: The compensation of Kamino Moto is not subject to
security and detective agency. X was able to get the contract to (b) No. The tax exemption granted to churches in the withholding tax. Compensation for labor or personal services
provide the security services of a government agency. He signed Constitution refers to property tax and not to capital gains performed outside the Philippines are considered as income from
the Security Agreement with the director of the government tax which is an income tax. Besides, the capital gains tax is sources without the Philippines (Sec. 36 (c) (3) and (a) (3). Kamino
agency calling for the deployment of 100 security guards on a 24 the liability of the seller X and not the purchaser. Moto’s efforts in consummating the Charter is a form of labor or
hour basis. The contract was revocable at the will of the director. services.
To please the director, X gives him at the end of the month 1993 Bar, Q. XIV: Oriental, Inc. holds a proprietary share of
P100,000.00 per guard hired. May X deduct from his income the Capital Gold Club, Inc. It assigned without any consideration this Considering further than Kamino Moto is a Tokyo based broker,
money he paid to the director? Reasons. share to X, one of its foreign consultants, to enable him to use its presumably a non-resident foreign corporation, it is taxable only
facilities for the duration of his stay in the Philippines. X signed a on income within the Philippines. Since the contract was
A: The money paid to please the director is not deductible. This is Declaration of Trust where he acknowledged that the share is consummated in Japan. Kamino Moto’s compensation, therefore,
a form of bribery. Deductions shall not be allowed if the expense owned by Oriental, Inc. and where he promised to transfer the is not subject to withholding tax.
Alternative: Fitness. Inc. was not satisfied and on January 18.1980, it filed a (b) The right of the BIR to collect the deficiency taxes has not
petition for review of the decision in the CTA to enjoin the prescribed, as the prescriptive period is reckoned from the
(a) Taxes should not be withheld as the income was derived enforcement of the assessment. On February 7, 1980, the BIR date of the reduced assessment, which is December 10,
from an activity outside the country and. therefore, from issued a warrant of distraint against Fitness. Inc. The CTA 1979. The BIR has three (3) years from said date to collect.
sources outside the Philippines. It has been held in enjoined the collection of the deficiency taxes by virtue of the
Commissioner v. Japan Air Lines, 202 SCRA 450 that for the warrant of distraint. It was argued by Fitness, Inc. that the right The reduced assessment is in the nature of a compromise
source of income to be considered as coming from the of the BIR to collect its alleged deficiency taxes had already assessment, the first assessment received by Fitness on December
Philippines, it is sufficient that the income is derived from prescribed. Rule on the argument. 19,1974, and protested only on February 8,1975, having already
activities within the country. The time chartering of the ship become final and binding on Fitness. Applying the present
occurred outside the Philippine territory. Therefore, income A: The warrant of distraint was served on the taxpayer within the provisions of the NIRC. Fitness should have protested the
derived therefrom is not subject to income taxes that may prescriptive period (then 5 years, now three (3) years). In assessment within thirty (30) days from receipt of the same.
be withheld at source. Commissioner v. Wyeth Suaco (202 SCRA125), the court ruled that Failing to do so, the assessment became final and was presumably
(b) Kamino Moto is a non-resident alien not engaged in trade or the prescriptive period provided by law to make collection by merely compromised. The date of such compromise assessment
business in the Philippines. According to Section 25 of the distraint and/or levy or by a proceeding in court is interrupted should then be the basis for computing the prescriptive period of
NIRC, he is liable to pay income tax if the compensation paid once a taxpayer protests the assessment and requests for its three (3) years.
by Pacific is compensation income derived from sources cancellation. Thus, when the taxpayer protested the assessment
within, the Philippines. However, the brokerage service of on 8 February 1975, the prescriptive period to collect was Note: Beginning 1984, the prescriptive period of the right of the
Kamino Moto was rendered in Tokyo. Applying the source- interrupted and resumed on 10 December 1979. When the government to assess and collect internal revenue taxes was
rule in Section 36 of the NIRC, the income derived by the Commissioner issued the warrant of distraint on 7 February 1980 reduced from five (5) to three (3) years.
taxpayer is income derived from sources outside the it was well within the five-year (now 3 years) prescriptive period
Philippines. Thus, the compensation of Kamino Moto is not to collect. 1993 Bar, Q. XVIII: On September 19, 1973, the BIR sent a notice
subject to Philippine income tax. Pacific Inc. should not of assessment to X to pay P300.000.00 as forest charges for the
withhold income tax on the payment. Alternative: year 1970-73. X made a partial payment of P100.000.00 on
September 28,1973. X died in November, 1977. On July 29, 1979,
(a) The Bureau of Internal Revenue (“BIR") shall assess internal the BIR filed in the Testate Estate Proceedings of X a claim for
1993 Bar, Q. XVI: Juan Panalo won a damage suit for
revenue taxes within three (3) years after the last day P200.000.00the unpaid forest charges left by X. the
P500,000.00against Juana Talo. Panalo got a writ of execution
prescribed by law for the filing of return, and no proceeding administrator of the estate opposed the claim on the ground of
and made a levyon the lot of Talo. The lot was sold at public
in court without assessment for the collection of such taxes prescription. Decide.
auction where Panalo was the highest bidder for P500.000.00.
shall be begun after the expiration of such period (Section
Panalo refused to pay any capital gains tax on his purchase of
203 of the National Internal Revenue Code [“NIRC"). A: Where assessment was made, the tax may be collected within
said lot. Your opinion.
However, this three (3)-year prescriptive period shall be five (5) years (now 3 years) from the date of assessment
suspended when the taxpayer requests for a reinvestigation [Collection of Internal Revenue v. Pineda, 2 SCRA 401; Umali,
A: The capital gains tax from sales of real property is payable by
and which is granted by the Commission (Section 224 of Roman A., Reviewer in Taxation, 1985. pp. 486-487; Vitug, JoseC.,
the seller (Section 21 (e) in relation to Section 49 (a) (4) of the
NIRC). In case an assessment was made, the tax may be Compendium of Tax Law and Jurisprudence, 2nd Rev., Ed.. 1986,
NIRC). Hence, Panalo cannot refuse to pay the capital gains tax on
collected within three (3) years from the date of assessment p. 255). In the case at bar, X on the basis of the notice of
his purchase of said lot.
(Collector of Internal Revenue v. Pineda,2 SCRA 401; Umali, assessment, voluntarily made a partial payment to the Bureau of
Roman A, Reviewer in Taxation,1985, pp. 486-487; Vitug, Internal Revenue in the amount of One Hundred Thousand Pesos
Alternative: Panalo is not liable for capital gains tax as only the
Jose C., Compendium of Tax Law and Jurisprudence, 2nd (P100,000.00). However, it took the BIR almost more than five (5)
vendor, in this case, Talo, is liable therefor, if at all.
Rev., Ed., 1989, p. 255). If the taxpayer asks for a years to take the necessary legal action to collect the remaining
reinvestigation of the assessment and such reinvestigation is amount of taxes due.
1993 Bar, Q. XVII: Fitness, Inc. is a domestic corporation engaged made, and on the basis of which the BIR makes another
in the manufacture and sale of nutritional products. It pays assessment, the three (3)-year period for collection is to be This is clearly beyond the five (5) now three (3) year period for the
royalties to its foreign licensor. After investigation, the BIR on counted from the last assessment (Rep. v. Lopez,7 SCRA 566; collection of taxes. Hence, the claim filed by the BIR against the
December 17, 1974, sent a notice of assessment to Fitness, Inc. Rep. v. Acebedo, 22 SCRA 1356; Umali, Roman A., Reviewer Estate of X for the payment of Two Hundred Thousand Pesos
for allegedly failing to remit withholding tax at source for the in Taxation,1985, pp. 486-487; Vitug, Jose C., Compendium (P200.000.00) has prescribed.
fourth quarter of 1973 on its royalties. It demanded payment of of Tax Law and Jurisprudence, 2nd Rev., Ed., 1989, p. 255).
P3,000,000.00. The notice was received by Fitness, Inc. on
Alternative:
December 19, 1974. In the case at bar, the running of the three (3)-year prescriptive
period for the BIR to collect taxes started to run only on 10 (a) The claim has prescribed as the BIR has only three (3) years
On February 8,1975, Fitness, Inc., through its counsel, protested December 1979, when a final assessment was made by the BIR from the date of the assessment to collect.
the assessment and requested its cancellation or withdrawal on reducing the tax due to One Million Five Hundred Thousand Pesos (b) Taxes are money claims that must be filed with the probate
the ground that it lacked factual and legal bases. On December (PI,500,000.00). The distraint against Fitness, Inc. Hence, the court within the period provided for in the Rules of Court
10, 1979, the Commissioner of the BIR rendered a decision action of the BIR to collect the deficiency taxes was clearly within (Sections 1 and 2. Rule 86). In the case of Domingo v.
reducing the assessment to PI.500.000.00. the three (3)- year prescriptive period.
Garlttos (8 SCRA 443), the court ruled that the claims shall sixty (60) days from the receipt of the decision (Section 30 of the A: Gross income includes prizes and winnings (Section 27 of the
be barred if filed beyond the prescribed period Just like any Real Property Tax Code). National Internal Revenue Code [“NIRC"), except those stated in
other money claims. But the ruling in Garlitos was Section 28 B, (8), (E) of the NIRC, to wit:
superseded by Vera v. Fernandez which ruled that estate If the owner is not satisfied with the decision of the Board of
taxes are payable even if presented beyond the period in the Assessment Appeals, he may appeal the said decision to the “(E) Prizes and awards made primarily in recognition of religious,
statute of non-claims in the Rules of Court. Central Board of Assessment Appeals within thirty (30) days after charitable, scientific, educational, artistic, literary, or civil
the receipt of the decision (Sections 34 and 36 of the Real achievement but only if:
1993 Bar, Q. XIX: On February 13, 1969, X, obtained a loan of Property Tax Code).
P800.000.00 from the GSIS secured by the mortgage of a parcel (1) The recipient was selected without any action on his part to
of land including its improvements. X failed to pay the loan. The As enunciated in the case of Victorias Milling Co., Inc., vs. Court of enter the contest or proceeding: and
lot was foreclosed and sold at public auction to the GSIS as the Tax Appeals 22 SCRA 1008, 1001 (1968): (2) The recipient is not required to render substantial future
highest bidder. X failed to redeem the lot and the GSIS services as a condition to receiving the prize or award.
consolidated its title to the lot in 1977. In 1979, however, the "It Is settled in our Jurisdiction that where an assessment is illegal
GSIS allowed X to repurchase the lot. and void, the remedy of a taxpayer, who has already paid the The first award granted to Evelyn was a Palanca award. This kind
realty tax under protest, is to sue for refund in the competent of award requires submission of literary works. Hence, this is
After assessment by the City Assessor, the City Treasurer of court of first instance. On the other hand, where the assessment included in the gross income because it fails to meet the legal
Manila required X to pay the real estate taxes due on the lot for is merely erroneous, his recourse is to file an appeal in the requisites provided for in the aforequoted provisions of law
the years 1977 and 1978. X paid under protest. On September 5, Provincial Board of Assessment Appeals within 60 days from specifically item (i).
1979, X sent a demand letter to the City Treasurer for refund. receipt of the assessment."
The demand was refused. 2 The second award granted to Evelyn was the Most Valuable
In view of the foregoing, the legal recourse of X is to appeal the Player Award. In this kind of award, Evelyn did not file any
X then filed with the Regional Trial Court a complaint against the decision of the City Treasurer to the Board of Assessment appeal, application to enter into any contest. The award was given to her
City of Manila for a “sum of money and/or recovery of real and not to file an action for sum of money and/or recovery of real in recognition for her outstanding performance in the field of
estate taxes paid under protest." The City questioned the estate taxes. Hence, the Regional Trial Court has jurisdiction over sports. However, the recognition in the field of sports is not
jurisdiction of the Court. Decide. the complaint filed by X. among those stated in the aforequoted provision of law. Thus, the
award granted to her does not fall under the aforequoted
A: Section 62 of the Real Property Tax Code provides that: Alternative: provision of law.

"Sec. 62. Payment under protest. — (a) The Regional Trial Court has Jurisdiction. It has been held The last award granted to her was the Fellowship Award. This
that the regular courts have jurisdiction over actions for requires also submission of application to qualify for such award.
(a) When a taxpayer desires for any reason to pay his tax under refund of real estate taxes paid under protest on the ground Hence, it fails to meet the necessary requisites of the aforequoted
protest, he shall indicate the amount or portion thereof he is of solution indebiti provision of law specifically item (i).
contesting and such protest shall be annotated on the tax (b) The RTC does not have jurisdiction over the matter. Section
receipts by writing thereon the words ‘paid under protest.' 30 of PD. No. 464 (The Real Property Tax Code) prescribes Alternative:
Verbal protests shall be confirmed in writing, with a the proper remedy of the taxpayer. It requires X, who is not
statement of the ground, therefor, within thirty days. The satisfied with the action of the city assessor, to appeal his (a) The award of P25.000.00 should be Included in Evelyn's
tax may be paid under protest, and in such case it shall be case to the Local Board of Assessment Appeal within sixty gross Income for while it was earned as a prize for literaiy
the duty of the Provincial, City or Municipal Treasurers to days from date or receipt by X of the written notice denying achievement, it cannot be said that she won without any
annotate the ground or grounds therefor on the receipt. his request for refund of real property taxes paid. action on her part to enter the contest. Her P100.000.00
(b) In case of payments under protest, the amount or portion of prize as Most Valuable Player cannot be excluded for the
the tax contested shall be held in trust by the treasurer and 1993 Bar, Q. XX: Evelyn is a graduate student of U.P. In January, same reason. Both awards, however, may be considered
the difference shall be treated as revenue. 1991, she won the Palanca Award for an outstanding short story income subject to income tax.
(c) In the event that the protest is finally decided in favor of the she wrote. The award was P25.000.00 in cash. In February, 1991,
government the amount or portion of the tax held in trust by she was also named most Valuable Player of the Varsity The fellowship award of $10,000.00 is, however, excluded from
the treasurer shall accrue to the revenue account, but if the volleyball team and she was given a trophy plus P10.000.00. her income as she was selected therefor without any action on
protest shall be decided finally in favor of the protestant. the Finally, in March, 1991, she received a Fellowship Award from her part and the same was given to her in recognition of literaiy
amount or portion of the tax protested or applied as tax the University of California to pursue a master's degree in and educational achievement, presumably without her being
credit to any other existing or future tax liability of the said American literature. The fellowship is for $10,000.00 plus required to render future services for the grantor.
protestant." freeboard and lodging for two (2) semesters. Should Evelyn
include these awards and fellowship in her gross income? (b) It depends. Section 28 (b) (8,E) of the NIRC enumerates the
If the owner is not satisfied with the action of the provincial orcity Reasons. requirements in order to exclude the item from taxation.
assessors in the assessment of his property, he may file an appeal The Tax Code requires that the prizes and awards are given
to the Board of Assessment Appeals of the province on city, within primarily in recognition of religious, charitable, scientific,
educational, artistic, literary or civil achievements. The
awards mentioned were given to the taxpayer in recognition
of her literary achievement in the case of the Palanca Award,
the most valuable player award for civic/educational
achievement and the fellowship award'for educational
achievement.

Section 28(b) further requires that the recipient must be selected


without any action on his part to enter the contest or proceeding
and the taxpayer-recipient is not required to render substantial
future services as a condition to receiving the prize or award. If
these two requirements are met, then the items should not be
included in the gross income.

Note: Under BIR 131-91 addressed to the University of Sto.


Tomas, stipends to scholars are not deductible.